DIGITAL LIGHTWAVE INC, S-1, 1999-04-19

DIGITAL LIGHTWAVE INC
S-1, 1999-04-19
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 1999

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DIGITAL LIGHTWAVE, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 3663 95-4313013
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

15550 LIGHTWAVE DRIVE
CLEARWATER, FL 33760
(727)442-6677
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
---------------------
STEVEN H. GRANT
EXECUTIVE VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER
DIGITAL LIGHTWAVE, INC.
15550 LIGHTWAVE DRIVE
CLEARWATER, FL 33760
(727)442-6677
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:

<TABLE>
<S> <C>
SCOTT D. LESTER GAIL CLAYTON HUSICK
ELIZABETH H. LEFEVER MARTIN A. WELLINGTON
ANGELA C. HILT KELLY S. BOYD
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
ONE MARKET, SPEAR STREET TOWER 650 PAGE MILL ROAD
SAN FRANCISCO, CA 94105 PALO ALTO, CA 94304
(415) 442-0900 (650) 493-9300
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SECURITY OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Convertible Subordinated Notes due
2004.................................. $23,000,000 -- $23,000,000 $6,394
- --------------------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par value.......... (2) (2) (2) (2)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes $3,000,000 aggregate principal amount of % Convertible
Subordinated Notes due 2004 that the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) We are also registering an indeterminate number of shares of Common Stock as
may be required for issuance upon conversion of the Notes. We will not
receive any additional consideration upon conversion of the Notes. Under
Rule 457, no additional registration fee for these shares is required.
---------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
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<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED APRIL 19, 1999

PROSPECTUS
$20,000,000
(Logo Digital Lightwave, Inc.)

% Convertible Subordinated Notes due 2004
Issue Price: Par

THE TERMS

- We will pay interest on the Notes twice a year on and
, beginning on , 1999.

- Your right to payment under the Notes will be junior in right of payment
to our Senior Indebtedness which is more fully described in this
prospectus. The Notes are unsecured.

- The Notes are convertible into shares of our common stock initially at
the price of $ per share. The conversion price will change if certain
events occur.

- We have the right to redeem the Notes after , 2002 at a
redemption price that is described more fully in this prospectus.

- You may require us to repurchase all or a portion of the Notes following
a Repurchase Event, which is more fully described in this prospectus.

- We intend to list the Notes on the Nasdaq National Market under the
proposed trading symbol " ."

- The trading format of the Notes will be book-entry form through the
same-day funds of the Depository Trust Company.

- The trading symbol of our common stock on the Nasdaq National Market is
"DIGL." On April 16, 1999 the closing price for the common stock was
$3 7/16 per share.

- For more details, see the section "Description of Notes."
-------------------------
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the disclosures in this prospectus. Any representation
to the contrary is a criminal offense.
-------------------------
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
-------------------------

<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- -----------
<S> <C> <C>
Public Offering Price....................................... $1,000 $20,000,000
Underwriting Discounts and Commissions......................
Proceeds to Digital Lightwave...............................
</TABLE>

-------------------------
Digital Lightwave has granted the underwriter the right to purchase up to
an additional $3,000,000 in principal amount of Notes to cover over-allotments.
The underwriter expects to deliver the Notes against payment in New York, New
York, on or about , 1999.
-------------------------
(C.E. UNTERBERG, TOWBIN UNDERWRITER)
, 1999
<PAGE> 3

[GRAPHIC SHOWING WHERE DIGITAL LIGHTWAVE'S PRODUCTS
ARE DEPLOYED IN A NETWORK]

Network Information Computer(TM), ASA 312(R) and Network Access Agent(TM)
are trademarks of Digital Lightwave, Inc. This Prospectus also includes
trademarks of companies other than Digital Lightwave.

i
<PAGE> 4

PROSPECTUS SUMMARY

This is a summary, and, therefore, it may not contain all of the
information that may be important to you. For a more complete understanding of
this offering, we encourage you to read this entire document and the documents
we refer you to. You should read the following summary together with the more
detailed information and consolidated financial statements and the notes to
those statements appearing elsewhere in this prospectus. Certain terms contained
herein have the respective meanings set forth in the glossary at page G-1. The
words "Digital Lightwave," "we," "our," and "us" refer to Digital Lightwave,
Inc., its predecessors and subsidiaries, but not to the underwriter. Except as
otherwise specified, all information in this prospectus assumes no exercise of
the underwriter's over-allotment option.

DIGITAL LIGHTWAVE

Digital Lightwave provides the telecommunications industry with network
analysis equipment for monitoring, maintaining and managing fiber optic
networks. Telecommunications service providers utilize fiber optics to provide
increased network bandwidth to transmit Internet, voice, data and multimedia
video traffic. Our customers use our products to cost-effectively verify and
qualify service during network installation and to monitor and manage deployed
networks to ensure their optimal performance. Our customers include
telecommunications service providers, such as AT&T, GTE, MCI WorldCom, Qwest
Communications and Sprint, and telecommunications equipment manufacturers, such
as Alcatel Network Systems, Northern Telecom and Tellabs.

Increasing consumer demands and a changing regulatory environment have
created new challenges for the telecommunications industry. The dramatic growth
in data traffic, including the Internet, e-commerce, fax and video, has created
capacity constraints on legacy networks that were originally designed to
transmit voice traffic. The telecommunications industry has responded to the
need for increased network capacity by installing new fiber optic transmission
lines, increasing data transmission rates and employing new technologies such as
Dense Wave Division Multiplexing (DWDM), a process which increases the carrying
capacity of existing fiber. Enhanced transmission speeds and new technologies
magnify the complexity of telecommunications networks while continuing demands
for greater bandwidth stress their capacity, resulting in a heightened risk of
network interruptions or failures. The increased use of telecommunications
networks for data and voice communications, together with the increased number
of entrants in the industry as a result of deregulation, have heightened the
need to provide uninterrupted service while creating new competitive pressures
to improve operational efficiencies. To meet these challenges,
telecommunications service providers require sophisticated network analysis
equipment to effectively manage new and existing network assets and reduce the
possibility of network downtime.

The network test equipment historically available was originally designed
for legacy networks. We believe that our network analysis equipment provides a
more cost-effective solution capable of meeting the challenges of the new and
increasingly complex network environment. Our products, which are based on
modular and scaleable hardware and software platforms with a flexible
architecture, allow customers to readily upgrade existing systems to accommodate
new technologies as they develop. Our initial product, the Network Information
Computer, is designed to provide technicians with a truly portable, more
compact, easy-to-use product with increased functionality compared to other
products
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<PAGE> 5

currently available. Utilizing the technology of the Network Information
Computer, in 1998, we introduced our first Network Access Agent. Our Network
Access Agents are software controlled, performance monitoring and diagnostic
equipment permanently installed at multiple access points throughout a network
to provide real-time analysis and network management from a centralized
location. The Company plans to utilize the core technology of its Network
Information Computers and Network Access Agents to continue to develop products
that address the evolving needs of the optical networking industry.

Digital Lightwave's strategy is to increase our market share and expand
distribution across a wide range of customers. Key elements of this strategy
include:

- Penetrating new and existing markets and broadening our customer base by
marketing to Regional Bell Operating Companies (RBOCs), Interexchange
Carriers (IXCs), Competitive Local Exchange Carriers (CLECs) and other
telecommunications service providers and equipment suppliers;

- Developing new products and enhancements by leveraging technology and
product design expertise to offer advanced, easy-to-use products with
flexible platforms that can be readily upgraded to include advanced
features and functionality;

- Entering into strategic relationships to enhance our marketing and
distribution capabilities and to promote future development of new
products and technologies; and

- Developing and marketing international products to take advantage of the
significant opportunities which exist outside the United States for
optical networking products.

We were incorporated in California on October 12, 1990 and reincorporated
in Delaware on March 18, 1996. We are ISO 9001 certified. Our principal
executive offices are located at 15550 Lightwave Drive, Clearwater, Florida
33760. Our telephone number is (727) 442-6677.
2
<PAGE> 6

THE OFFERING

Total Amount of Notes Offered... $20,000,000

Trustee.........................

Maturity........................ , 2004

Issue Price..................... Par

Interest........................ Annual Rate -- %

Payment Frequency -- every six months on
and
First Payment --

Ranking......................... The Notes are subordinated in right of
payment to all Senior Indebtedness.

Conversion Rights............... Our Notes may be converted in whole or in
part at any time on or before the maturity
date, subject to certain limited exceptions.
The initial conversion price will be
$ . The conversion price may be
adjusted for certain reasons described in
"Description of Notes" under the heading
"Conversion."

Optional Redemption by Us....... On or after , 2002, we may
redeem some or all of the Notes at any time
at the redemption prices listed in
"Description of Notes" under the heading
"Optional Redemption by Us."

Mandatory Offer to Repurchase... If we experience specific kinds of changes
of control, liquidate or sell our business
or if our common stock ceases to be traded
on an exchange, we must offer to repurchase
the Notes at a repurchase price of 100% of
the principal amount of the Notes.

Use of Proceeds................. We will use the proceeds of the Notes to
repay indebtedness and for working capital
and general corporate purposes.

Listing......................... We intend to list our Notes on the Nasdaq
National Market under the symbol " ."
3
<PAGE> 7

SUMMARY FINANCIAL AND OPERATING DATA
(in thousands, except per share data and operating statistics)

The statement of operations data for the years ended December 31, 1996,
1997 and 1998 and balance sheet data as of December 31, 1998 are derived from
our Consolidated Financial Statements which have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants, included
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 1994 and 1995 are derived from financial statements not
included in this prospectus, which have also been audited by
PricewaterhouseCoopers LLP.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Sales............................ $ -- $ -- $ 6,044 $ 9,081 $ 24,191
Cost of goods sold............... -- -- 2,079 3,124 9,219
------- ------- ------- ------- --------
Gross profit..................... -- -- 3,965 5,957 14,972
------- ------- ------- ------- --------
Operating expenses:
Engineering and development.... 1,241 1,509 2,403 5,342 14,335
Sales and marketing............ 67 199 1,706 5,260 11,363
General and administrative..... 260 1,017 1,380 3,812 7,223
Reorganization charges(1)...... -- -- -- -- 1,018
Litigation settlements(2)...... -- -- -- -- 11,500
------- ------- ------- ------- --------
Total operating
expenses............ 1,568 2,725 5,489 14,414 45,439
------- ------- ------- ------- --------
Operating loss................... (1,568) (2,725) (1,524) (8,457) (30,467)
Other income (expense)........... (114) (609) (584) 1,767 642
------- ------- ------- ------- --------
Net loss......................... $(1,682) $(3,334) $(2,108) $(6,690) $(29,825)
======= ======= ======= ======= ========
Net loss per share............... $ (.04) $ (.08) $ (.10) $ (.25) $ (1.13)
======= ======= ======= ======= ========
Weighted average shares(3)....... 41,045 39,444 21,829 26,084 26,476
OTHER DATA:
Ratio of earnings to fixed
charges(4)..................... -- -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
ACTUAL AS ADJUSTED(5)
------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital......................................... $ 2,267 $
Total assets............................................ 27,558
Total long-term debt.................................... 281
Stockholders' equity.................................... 12,320
</TABLE>

4
<PAGE> 8

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING STATISTICS:
Units shipped in period(6).......................... 171 275 723
Cumulative units shipped(6)......................... 171 446 1,169
Average selling price............................... $35,345 $33,022 $33,459
Total customers shipped during the period........... 24 31 66
Cumulative customers shipped........................ 24 44 90
</TABLE>

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

(1) Includes a charge of $1.0 million for reorganization charges as described
under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview" and Note 14 of the Consolidated Financial
Statements -- Reorganization Charges.

(2) Includes a charge of $8.5 million made in connection with the settlement of
a class action legal proceeding and a charge of $3.0 million made in
connection with the settlement of litigation with a former stockholder, as
described under "Risk Factors -- We are defending significant litigation,"
"Business -- Legal Proceedings," "Management's Discussion and Analysis of
Financial Condition -- Overview" and Notes 15 and 16 of the Consolidated
Financial Statements -- Legal Proceedings and -- Subsequent Events.

(3) On November 30, 1995, we purchased 19,215,686 shares of common stock from a
former stockholder pursuant to an option granted to us by the former
stockholder in February 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" and Note 15 of
the Consolidated Financial Statements -- Legal Proceedings.

(4) The ratio of earnings to fixed charges is determined by dividing (i) the sum
of income before income taxes and interest expense by (ii) interest expense,
including the interest component of leases. Earnings were inadequate to
cover fixed charges in 1994 through 1998 by $1.7 million, $3.3 million, $2.1
million, $6.7 million and $29.8 million, respectively.

(5) As adjusted to give effect to the sale of the Notes offered hereby as of
December 31, 1998, after deduction of estimated offering expenses and the
discount to the Underwriter. See "Use of Proceeds" and "Capitalization."

(6) Substantially all units shipped were Network Information Computers.
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<PAGE> 9

RISK FACTORS

You should consider carefully the following risks before buying our Notes.
The risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties may also adversely impair our business
operations or financial condition.

This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry.
Our actual results could differ materially from those anticipated in such
forward-looking statements. Certain factors that could cause our actual results
to differ from the forward-looking statements are more fully described in this
section. We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.

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

WE HAVE A LIMITED OPERATING HISTORY AND CUMULATIVE LOSSES AND WE EXPECT TO INCUR
ADDITIONAL LOSSES

We have a limited operating history. We shipped our first product, the ASA
312 Network Information Computer, in February 1996, and have shipped only
limited quantities of our second product, the Network Access Agent. To date, we
have incurred substantial costs, including costs to:

- Develop and enhance our technology and products;

- Establish our engineering, production and quality assurance operations;

- Recruit and train a sales and marketing group; and

- Build an administrative organization.

As a result of these costs, we have incurred operating losses in each fiscal
year through December 31, 1998. Our operating losses, combined with $11.5
million in charges and settlement amounts recorded in connection with the
settlement of certain lawsuits and a $1.0 million reorganization charge, were
$30.5 million for the year ended December 31, 1998. We anticipate that our costs
will continue to increase for the foreseeable future as we create and introduce
new products and develop additional distribution channels. We expect that any
related increases in revenues will lag behind these cost increases for the
foreseeable future. If we cannot achieve and sustain operating profitability or
positive cash flow from operations, we may not be able to meet our working
capital requirements. This would have a material adverse effect on our business,
financial condition and results of operations.

An investor in our Notes must consider the risks, challenges and
difficulties frequently encountered by early stage companies, particularly
companies in intensely competitive and

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rapidly evolving markets such as the telecommunications and fiber optic
equipment markets. To address these risks, we must, among other things:

- Respond to competitive and technological developments;

- Continue to attract, retain and motivate qualified personnel;

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

- Increase the scope of our product offerings.

We may be unsuccessful in addressing these risks, which could have a
material adverse affect on our business, financial condition and results of
operations.

WE EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS AND OUR SALES ARE SEASONAL

Our quarterly operating results have fluctuated in the past and our future
quarterly operating results are likely to vary significantly due to a variety of
factors, many of which are outside our control. Factors that could affect our
quarterly operating results include:

- The product mix, volume, timing and number of orders we receive from our
customers;

- The long sales cycle for obtaining new orders;

- Our ability to obtain sufficient supplies of sole or limited source
components for our products;

- Our ability to attain and maintain production volumes and quality levels
for our products;

- The timing of introduction and market acceptance of new products by us,
our competitors or our suppliers;

- Our success in developing, introducing and shipping product enhancements
and new products;

- Pricing actions by us or our competitors;

- Changes in costs of materials;

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

- General economic conditions.

Because of these factors, our operating results for any particular quarter may
not be indicative of future operating results. These factors have historically
been, and are likely to continue to be, difficult to forecast. Any unfavorable
changes in these or other factors could negatively affect our business,
financial condition and operating results.

Our revenues and operating results generally depend on the volume and
timing of the orders we receive from customers, as well as our ability to
fulfill the orders received. Most of our expenses, particularly employee
compensation and rent, are relatively fixed and cannot be reduced in response to
decreases in revenues. As a result, variations in the timing of revenues could
cause significant variations in results of operations from quarter to quarter
and could result in continuing quarterly losses. The deferral of any large order
from
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<PAGE> 11

one quarter to another would negatively affect our results of operations for the
earlier quarter. To achieve our revenue objectives, we must obtain orders during
each quarter for shipment in that quarter. If we fail to do this, we may be
unable to achieve or sustain profitability on a quarterly or annual basis.
Quarterly fluctuations in operating results may result in volatility in the
market prices of our common stock and our Notes.

We have experienced and expect to continue to experience seasonality in our
business. Historically, our sales have been affected by a seasonal decrease in
demand in the first quarter of each calendar year due to budgetary constraints.
We expect this trend to continue, which may contribute to quarterly or annual
fluctuations in our operating results, and could have a material adverse effect
on our business, financial condition and results of operations.

WE ARE DEPENDENT ON A LIMITED NUMBER OF PRODUCTS AND ARE UNCERTAIN OF THE MARKET
FOR OUR PRODUCTS AND OUR PLANNED PRODUCTS

We derive the vast majority of our sales from our initial product, the
Network Information Computer, and we expect that sales of Network Information
Computers will continue to account for a substantial portion of our sales for
the foreseeable future. In 1998, we started shipping commercial versions of our
Network Access Agent, which utilizes the same core technology as the Network
Information Computer. Because the market for our products is evolving and
subject to rapid technological change, we are uncertain about the size and scope
of the market for our current and future products. Our future performance will
depend on increased sales of the Network Information Computer, market acceptance
of Network Access Agents and the successful development, introduction and market
acceptance of other new and enhanced products. If we are delayed in introducing
or producing new products or fail to detect software or hardware errors in new
products (which frequently occur when new products are first introduced), market
acceptance of our products and our credibility with our customers might be
diminished. This could have a material adverse affect on our business, financial
condition and results of operations.

OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL POSITION

After this offering, we will have a significant amount of indebtedness. The
following chart shows certain important credit statistics and is presented
assuming we had completed this offering as of the date specified below:

<TABLE>
<CAPTION>
AT DECEMBER 31, 1998,
AS ADJUSTED
---------------------
(UNAUDITED)
<S> <C>
Total indebtedness...................................... $20,436,000
Stockholders' equity.................................... $12,320,000
Debt-to-equity ratio.................................... 1.66
</TABLE>

The degree to which we are leveraged could materially adversely affect our
ability to fund our operations for working capital and other purposes and could
make us more vulnerable to industry downturns and competitive pressures.

8
<PAGE> 12

WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO PAY DEBT SERVICE ON THE NOTES OR FOR
OTHER CAPITAL REQUIREMENTS

We believe that the proceeds of this offering, together with our existing
capital resources, will be sufficient to meet our capital requirements through
at least the next twelve months. We expect to use the proceeds from this
offering to repay outstanding indebtedness, for working capital, and for general
corporate purposes. Our capital requirements depend on several factors,
including the rate of market acceptance of our products and our ability to
expand our client base. If our capital requirements are materially different
from those currently planned, we may require additional financing. If additional
funds are raised through the issuance of debt securities, such securities may be
senior to the Notes. If additional funds are raised through the issuance of
equity securities, the percentage ownership of our stockholders will be reduced
and such securities may have rights, preferences or privileges senior to those
of our common stock. We cannot assure you that additional financing will be
available on favorable terms or at all. If adequate funds are not available or
are not available on acceptable terms, we may be unable to make payments on the
Notes, develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures.

OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE ARE DEPENDENT ON
NEW PRODUCT INTRODUCTIONS

To remain competitive, we must develop, manufacture and sell new products
and improve our existing products. Our market is characterized by:

- Rapid technological change;

- Changes in customer requirements and preferences;

- Frequent new product introductions; and

- The emergence of new industry standards and practices.

These factors could cause our sales to decrease or render our current products
obsolete. Our success will depend, in part, upon our ability to:

- Create improvements on and enhancements to our existing products;

- Develop, manufacture and sell new products to address the increasingly
sophisticated and varied needs of our current and prospective customers;

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

- Increase market acceptance of our products.

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

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<PAGE> 13

OUR INDUSTRY IS EXTREMELY COMPETITIVE AND SUCH COMPETITION MAY NEGATIVELY AFFECT
OUR BUSINESS

- Product capabilities and design;

- Price;

- Customer service and support;

- Ease of operation and reliability of products;

- Length of operating history, industry experience and name recognition;
and

- Extent and maturity of sales and distribution relationships.

Our principal competitors are Hewlett-Packard, Technology Techniques Corporation
(TTC) (a subsidiary of Dynatech), Tektronix, Anritsu, Wavetek Wandel Goltermann,
ANDO Corporation and other companies which offer network monitoring products. We
are a relative newcomer to the telecommunications equipment market, and many of
these competitors have significantly longer operating histories, greater name
recognition, and greater technical, financial, manufacturing and marketing
resources than we have. A number of our competitors have long-established
relationships with our current and potential customers. Furthermore, many of our
large competitors may offer customers a broader product line than we currently
offer or anticipate offering in the near future. These companies may have a
competitive advantage over us in sales of similar products or alternative
lightwave management solutions. We expect that competition will increase in the
future and that new competitors will enter the market for most if not all of the
products we will offer. Increased competition could reduce our profit margins
and cause us to lose, or prevent us from gaining, market share. Any of these
events could have a material adverse effect on our business, financial condition
and results of operation.

WE ARE DEPENDENT ON A LIMITED NUMBER OF MAJOR CUSTOMERS

For the year ended December 31, 1998, our four largest customers accounted
for approximately 57% of total revenues, with Qwest, MCI WorldCom, Tellabs, and
GTE accounting for approximately 17%, 16%, 13% and 11% of total sales,
respectively. For the year ended December 31, 1997, sales to our five largest
customers comprised 69% of our total revenues, with WorldCom (prior to its
acquisition of MCI Communications) and its subsidiaries accounting for 42% of
total sales. For the year ended December 31, 1996, our five largest customers
accounted for approximately 62% of total revenues, with MCI Communications
(prior to its acquisition by WorldCom, Inc.), Ameritech and Pacific Telesis
Group accounting for 23%, 19% and 15% of total sales, respectively. No other
customers accounted for sales of 10% or more during such periods. There can be
no assurance regarding the amount or timing of purchases by any customer in any
future period.

Our success is dependent upon our ability to broaden our customer base to
increase the level of sales. None of our customers has a written agreement with
us that obligates it

10
<PAGE> 14

to purchase additional products, and we cannot assure you that our customers
will purchase additional products. We also cannot assure you that we will be
able to retain our largest customers or to attract additional major customers.
If we lose one or more of our major customers or if we fail to broaden our
customer base, it could have a material adverse effect on our business,
financial condition and results of operations.

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

Our operational strategy is to outsource component manufacturing. We
subcontract the manufacture of computer system boards, plastic molds and metal
chassis and certain subassemblies and components. We do not maintain large
inventories of components for building our products. From time to time, our
suppliers have failed to meet component delivery schedules, have failed to
provide us with sufficient quantities of components and have failed to meet our
component quality standards. We expect that these or other difficulties may
occur in the future. These difficulties may be magnified as we introduce new
products and product enhancements in 1999. If demand for our products increases,
we will need to coordinate our efforts with our contract manufacturers in order
to achieve sufficient production levels. We do not know whether we will be able
to manage our contract manufacturers effectively or whether the manufacturers
will be able to supply us with the quantity and quality of products on the
delivery schedule that we require. Although we are attempting to identify
additional potential component manufacturers, we cannot assure you that we will
be able to obtain sufficient quantities of quality components. If our contract
manufacturers are unable to provide us with adequate supplies of high-quality
products or if we lose any of our contract manufacturers without qualifying
others, our ability to meet orders may be diminished. Such delays could have a
material adverse effect on our business, financial condition and results of
operations.

Several key components used in the manufacture of our products are
currently purchased from a sole-source or limited sources, the loss of which
could seriously disrupt our operations. We purchase certain laser and laser
amplifier components, power supplies, touch-screen sensors, single-board
computers and SONET overhead terminators used in the Network Information
Computer and the Network Access Agent from a single or a limited number of
contractors. In addition, for the Network Access Agent, we purchase a controller
board and an interface board from a single or limited number of contractors. We
do not have long-term agreements with any of these sole or limited sources of
supply. Any interruption in the supply of any of these components, or in our
ability to procure these components from alternate sources at acceptable prices
and within a reasonable time, could have a material adverse effect upon our
business, financial condition and results of operations. We are currently
attempting to qualify certain additional suppliers for certain of the
sole-sourced components. However, qualifying additional suppliers is time
consuming and expensive and the likelihood of errors could be greater with new
suppliers.

WE INTEND TO RELOCATE AND EXPAND OUR PRODUCTION AND ASSEMBLY OPERATIONS WHICH
COULD INTERRUPT OUR OPERATIONS

In late 1998, we initiated a plan to consolidate our production and
assembly operations from our facility in St. Petersburg, Florida to our
corporate headquarters in Clearwater, Florida. We anticipate that we will
complete this move by September 1999. The new facility will be configured to
assemble all of our product lines. We may encounter difficulty in consolidating
our production and assembly operations, and we may experience

11
<PAGE> 15

business interruptions as we relocate our personnel and equipment. Interruptions
and transition difficulties could impair our ability to meet customer orders and
lead customers to cancel orders, which would have a material adverse affect on
our business, financial condition and results of operations.

FAILURE TO MANAGE OUR GROWTH MAY AFFECT OUR RESULTS

Successful implementation of our business strategy in the rapidly evolving
fiber optic equipment market will require effective planning and management. We
are continuing to expand our product lines and introduce new products and
features and intend to extend our operations internationally. We have expanded
our operations over the past year and our success depends upon continued
expansion. Our growth has placed, and we expect future growth to continue to
place, a significant strain on our management, operational and financial
resources. To manage our growth, we will need to continue to:

- Improve our financial and managerial controls, reporting systems and
procedures;

- Increase, train and manage our work force;

- Develop our sales and marketing network; and

- Expand our manufacturing, production and assembly capacity.

Currently we are pursuing strategic relationships as part of our growth
strategy, and we cannot forecast the impact that any strategic relationships
will have upon our growth. If we experience difficulty in managing our growth,
our business, financial condition and operating results could be materially
adversely affected.

FAILURE TO ENTER INTO STRATEGIC RELATIONSHIPS MAY ADVERSELY AFFECT OUR RESULTS

An important component of our business strategy is to enter into strategic
relationships in order to expand our product lines and offer our products and
services to a larger customer base. For example, we are seeking strategic
relationships to market our products on an original equipment manufacturer
basis. We have not entered into any such arrangements to date. If we do enter
into such arrangements, we anticipate that our pricing to strategic partners
would be less than our pricing for direct sales, resulting in lower gross
margins in connection with these arrangements. We may not be able to
successfully enter into such arrangements or, if we do, we may become overly
dependent on our strategic partners. Either development could have a material
adverse effect on our business, operating results and financial condition.

WE ARE DEPENDENT ON PROPRIETARY TECHNOLOGY AND SUBJECT TO RISKS OF INFRINGEMENT

12
<PAGE> 16

may independently develop technologies that are substantially equivalent or
superior to our technology. In addition, our growth strategy includes a plan to
enter international markets, and the laws of some foreign countries may not
protect our proprietary rights to the same extent as do the laws of the United
States. If our protective measures are not successful, our business, financial
condition and operating results could be materially and adversely affected.

As part of our confidentiality procedures, we generally enter into
non-disclosure agreements and proprietary information and invention agreements
with our employees and suppliers and limit access to and distribution of our
proprietary information. Despite those precautions, it may be possible for a
third party to copy or otherwise obtain and use our technology without
authorization. Accordingly, there can be no assurance that we will be successful
in protecting our intellectual property or that our rights will preclude
competitors from developing products or technology equivalent or superior to
ours.

From time to time we may either license our proprietary rights to
third-parties or in-license certain technologies from third-parties for use in
our products. The telecommunications industry is characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. We have no reason to believe that our technology infringes
on the proprietary rights of others and we have not received any notice of
claimed infringements. Nonetheless, third parties may assert infringement claims
against us in the future that may or may not be successful. If we must defend
ourselves or our customers against such claims, we could incur substantial costs
regardless of the merits of the claims. Parties making such claims may be able
to obtain injunctive or other equitable relief which could effectively block our
ability to sell our products, and could obtain an award of substantial damages.
Any such claim could seriously damage our business. In the event of a successful
claim of infringement against us, we may be required to obtain one or more
licenses from third parties, including our customers. We cannot assure you that
any such licenses would be available on terms acceptable to us, if at all.

OUR PRINCIPAL STOCKHOLDER HAS SUBSTANTIAL INFLUENCE OVER OUR COMPANY

As of March 31, 1999, Dr. Bryan J. Zwan, the Chairman of Digital Lightwave,
together with entities affiliated with him, beneficially own approximately 75%
of outstanding shares of common stock. Accordingly, Dr. Zwan is able to elect
our directors, has the voting power to approve all matters requiring stockholder
approval and has significant influence over our affairs, including the power to
cause, delay or prevent a change in control of Digital Lightwave.

WE ARE DEFENDING SIGNIFICANT LITIGATION

As of April 9, 1998, 23 class action complaints (which were subsequently
consolidated into a single action) for violations of the federal securities laws
during certain periods in 1997 and 1998 had been filed in the United States
District Court for the Middle District of Florida, on behalf of purchasers of
our common stock. The complaints named as defendants Digital Lightwave, Bryan J.
Zwan, our Chairman, Steven H. Grant, our Executive Vice President, Finance,
Chief Financial Officer and Secretary, and other former corporate officers. The
complaints allege that Digital Lightwave and certain officers during the
relevant time period violated Sections 10(b) and 20(a) of the Securities
Exchange Act by, among other things, issuing to the investing public false and
misleading financial

13
<PAGE> 17

statements and press releases concerning our revenues, income and earnings,
which artificially inflated the price of our common stock.

On July 23, 1998, we entered into a memorandum of understanding for the
settlement of these class action complaints. In late October 1998, a Stipulation
of Settlement was filed with the court and on December 21, 1998, the court
preliminarily approved the settlement. On March 12, 1999, the court indicated
that it would grant final approval of the settlement. The settlement is subject
to appeal. The settlement consists of $4.3 million in cash, to be paid to
plaintiffs primarily by a claim on our directors and officers liability
insurance policy, and the issuance of up to 1.8 million shares of common stock.
We recorded a charge of $8.5 million during 1998 as a result of the settlement.

In addition, we are aware of a related informal investigation by the
Securities and Exchange Commission, which was commenced in March 1998. We
believe that the investigation relates to the circumstances underlying the
restatement of our financial results. The investigation is ongoing. We are
unable to predict the outcome of the investigation. There can be no assurance
that such investigation will not have a material adverse effect on our business,
financial condition or results of operations.

We are from time to time involved in other lawsuits arising in the ordinary
course of business. Our management believes that we have adequate legal defenses
and/or adequate reserves for related costs for these lawsuits. As of the date of
this prospectus, we were not aware of any additional lawsuits that were pending
that could have a material adverse effect on our business, financial condition
and operating results.

A SIGNIFICANT NUMBER OF SHARES ARE ELIGIBLE FOR FUTURE SALE AND THEIR SALE COULD
DEPRESS OUR STOCK PRICE

Sales or issuances of a large number of shares of common stock in the
public market or the perception that sales may occur could cause the market
price of our Notes and common stock to decline. As of March 31, 1999, 26,558,766
shares of common stock were outstanding. Of these shares, 6,558,766 are eligible
for sale in the public market without restriction. The remaining 20,000,000
shares of outstanding common stock are held by Dr. Zwan, our Chairman. As an
"affiliate" (as defined under Rule 144, under the Securities Act ("Rule 144"))
of Digital Lightwave, Dr. Zwan may only sell his shares of common stock in the
public market in compliance with the volume limitations of Rule 144. In
addition, in connection with the settlement of the class action litigation
against us, we expect to issue up to 1.8 million shares of common stock, all of
which will be freely tradeable immediately upon issuance. Further, there are
currently warrants outstanding to purchase up to 550,000 shares of common stock.
These warrants were issued in connection with the sale by Digital Lightwave of
its 9% Secured Bridge Notes Due January 17, 2000. The warrants are exercisable
immediately, have an exercise price of $2.75 per share of common stock and have
a term of five years. Digital Lightwave has agreed to register the warrants and
shares of common stock issuable upon exercise thereof. Upon their registration,
such warrants and common stock will be freely tradeable.

WE ARE DEPENDENT ON KEY PERSONNEL

Our success depends to a significant degree upon the continued
contributions of key management, engineering, sales and marketing, finance and
product assembly personnel, some of whom would be difficult to replace. In
particular, we believe that our future success is highly dependent on Dr. Bryan
J. Zwan, our Chairman. We do not intend to

14
<PAGE> 18

maintain key man life insurance covering our key personnel. Until 1996, we were
in the development stage. Most of our executive officers joined us during 1997
and 1998 and, therefore, have been involved only with our most recent operating
activities. For example, Mr. Gerry Chastelet, our President and Chief Executive
Officer, joined us on December 31, 1998. Our success will depend on the
performance of our officers, our ability to retain and motivate our executive
officers, our ability to integrate new officers into our operations and the
ability of all personnel to work together effectively as a team.

THE MARKET PRICES OF OUR COMMON STOCK AND NOTES MAY BE VOLATILE

The market prices of our common stock has been and is likely in the future
to be highly volatile. We also expect that the market price of our Notes may
fluctuate significantly. These prices may fluctuate significantly in response to
factors such as:

- Quarterly variations in our operational results;

- Announcements of technological innovations;

- New product introductions by us or our competitors;

- Changes in earnings estimates by analysts or our failure to meet such
earnings estimates;

- Announcements by us regarding significant acquisitions, strategic
relationships or capital expenditure commitments;

- Additions or departures of key personnel;

- Sales or issuances of common stock or other securities; and

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

In addition, the stock markets in general, and the stocks of technology
companies in particular, have experienced extreme price and volume fluctuations
recently. These fluctuations often have been unrelated or disproportionate to
the operating performance of these companies. These broad market and industry
factors may have a material adverse effect on the market price of our common
stock and Notes, regardless of our actual operating performance. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation often has been initiated against that
company. Litigation like this, if initiated, could result in substantial costs
and divert attention and resources of our management personnel.

THE SUBORDINATION PROVISIONS MAY NEGATIVELY AFFECT THE HOLDERS OF THE NOTES

The Notes will be unsecured and subordinated in right of payment to all
present and future senior indebtedness, as described in "Description of the
Notes." As a result, if we file for bankruptcy, dissolve, wind-up our business,
liquidate or reorganize, our assets will be available for payment of the Notes
only after all senior indebtedness has been paid in full. There may not be
sufficient assets remaining to pay the Notes. The Notes also are effectively
subordinated in right of payment to all liabilities, including trade payables,
of any of our present or future subsidiaries. The Indenture, as described in
"Description of the Notes," does not prohibit us from incurring senior
indebtedness or from creating subsidiaries, nor does the Indenture prohibit our
subsidiaries from incurring liabilities.

15
<PAGE> 19

In December 1998, we entered into an accounts receivable-based credit
agreement pursuant to which we can borrow up to $2.9 million and which is
secured by our accounts, accounts receivable, contract rights, equipment,
chattel paper, general intangibles, instruments, inventory and all proceeds of
the foregoing. In addition, we expect to enter into a new $5.0 million line of
credit, which we expect will be collateralized by substantially all of our
assets. We expect that such credit line will replace the existing $2.9 million
receivable-based credit agreement. All of our obligations under these borrowing
arrangements are senior to the Notes. As of March 31, 1999 after giving effect
to this offering and the application of the net proceeds therefrom, we will have
no indebtedness outstanding other than the Notes and capital lease obligations.
If we were to incur additional substantial senior indebtedness, or if our
subsidiaries were to incur substantial liabilities, our ability to pay the Notes
could be substantially impaired.

WE MAY NOT BE ABLE TO REPURCHASE THE NOTES FOLLOWING A "REPURCHASE EVENT"

Upon a Repurchase Event, which is defined to include a liquidation, certain
changes of control, certain asset sales and certain terminations of trading of
our common stock, we will be obligated, at the option of each holder, to
repurchase the Notes on the terms and conditions provided in the Indenture. See
"Description of the Notes -- Repurchase Event." In the event of a Repurchase
Event, we may not have sufficient funds to pay the repurchase price. A
Repurchase Event may result in a default under other agreements governing
indebtedness agreements. If this occurs, the subordination provisions contained
in the Indenture may prevent us from making any payment on the Notes, including
a payment of the repurchase price, unless we first obtain the consent of the
holders of defaulted senior indebtedness or repay the senior indebtedness in
full.

THERE IS NO ACTIVE TRADING MARKET FOR OUR NOTES

Prior to the effective date of this prospectus, there has been no trading
market for our Notes, and we cannot assure you that one will develop, or if one
does develop, that it will be maintained. If an active market for the Notes does
not develop, or cannot be sustained, the trading price of the Notes could be
materially adversely affected.

SOME ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR NOTES AND COMMON STOCK

Our Board of Directors has the authority to issue up to 20,000,000 shares
of preferred stock and to determine the preferences, rights and privileges of
those shares without any further vote or action by our stockholders. The rights
of the holders and the market value of our Notes and common stock may be
adversely affected by the rights of the holders of any series of preferred stock
that may be issued in the future. Some provisions of our certificate of
incorporation, our bylaws and Delaware law could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock, even if doing so would be beneficial to our stockholders. These include
provisions that prohibit stockholders from taking action by written consent and
restrict the ability of stockholders to call special meetings.

WE MAY EXPERIENCE "YEAR 2000" PROBLEMS

Many currently installed computer systems and software products are coded
to accept only two digit entries for the year in the date code field and, as a
result, cannot distinguish

16
<PAGE> 20

21st century dates from 20th century dates. Failure to distinguish 21st century
dates from 20th century dates could result in systems failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements.

We have made a preliminary assessment of our Year 2000 readiness. We are in
the process of providing our customers with product upgrades which we believe
are Year 2000 compliant. We have identified and evaluated the actions needed to
upgrade our information technology ("IT") and non-IT embedded systems to Year
2000 compliance. We are preparing to contact certain third-party suppliers of
key components or services regarding their Year 2000 readiness. Following
completion of these items, we will be better able to make a complete evaluation
of our Year 2000 readiness, to determine what additional costs will be necessary
to be Year 2000 compliant and whether we will have to develop contingency plans.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance" for detailed information on our state of
readiness, assessment of costs, potential risks and contingency plans regarding
the Year 2000 issue.

CERTAIN OF OUR PRODUCTS MUST MEET REGULATORY REQUIREMENTS BEFORE WE CAN SELL
THEM

In the United States, our products must meet industry standards and comply
with various regulations promulgated by the Federal Communications Commission,
Underwriters Laboratories and Bellcore in the event we sell our products in
international markets, it will be necessary for our products to comply with
standards established by telecommunications authorities in various foreign
countries, as well as with recommendations of the Consultative Committee on
International Telegraph and Telephony. If we fail to meet industry standards or
regulatory requirements, or if in the future we have difficulty obtaining
regulatory approvals or certifications, our business, financial condition and
results of operations could be materially adversely affected.

17
<PAGE> 21

USE OF PROCEEDS

The net proceeds from the sale of the Notes offered hereby, after deducting
underwriting discounts and commissions and estimated expenses payable by us, are
estimated to be approximately $ million ($ million if the Underwriter's
over-allotment option is exercised in full). We intend to use approximately $3.0
million of the net proceeds of the offering to repay the 9% Secured Bridge Notes
due January 17, 2000 and accrued interest thereon. Currently, there is $3.0
million principal amount of 9% Secured Bridge Notes outstanding. We intend to
use the remaining net proceeds for working capital and general corporate
purposes. Pending use of the net proceeds, we will invest the net proceeds in
short-term investment grade securities.

We anticipate that the net proceeds of this offering together with our
existing capital resources, will be adequate to satisfy our capital needs for
the next twelve months. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

18
<PAGE> 22

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

Our shares of common stock have traded on the Nasdaq National Market System
under the symbol "DIGL" since February 7, 1997. The prices set forth below
represent quotes between dealers and do not include commissions, mark-ups or
mark-downs, and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1997
1st Quarter (from February 7, 1997)......................... $12.875 $7.125
2nd Quarter................................................. 9.250 3.250
3rd Quarter................................................. 17.750 7.875
4th Quarter................................................. 23.750 12.000
1998
1st Quarter................................................. $16.813 $2.000
2nd Quarter................................................. 6.469 3.000
3rd Quarter................................................. 4.500 1.281
4th Quarter................................................. 4.375 1.156
1999
1st Quarter................................................. $ 5.000 $2.313
2nd Quarter (through April 16, 1999)........................ 3.563 2.500
</TABLE>

On April 16, 1999, the closing price of our common stock was $3.438. As of
March 31, 1999, there were approximately 200 holders of record for our common
stock.

We have not paid any dividends since our inception and do not contemplate
payment of dividends in the foreseeable future. We anticipate that any earnings
in the near future will be retained from the development and expansion of our
business. Certain of our credit agreements require consent prior to payments of
dividends.

19
<PAGE> 23

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 1998
(i) on an actual basis and (ii) on an as adjusted basis to give effect to the
issuance of the Notes offered hereby (assuming no exercise of the Underwriter's
over-allotment option) and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------
ACTUAL AS ADJUSTED
------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Short-term debt............................................ $ 155 $ 155
======= ========
Long-term obligations(1)................................... $ 281 $ 20,281
------- --------
Stockholders' equity:
Preferred Stock, $.0001 par value; authorized 20,000,000
shares; no shares issued and outstanding................. --
Common Stock, $.0001 par value; 200,000,000 shares
authorized; 26,535,332 shares issued and
outstanding(2)........................................... 3 3
Additional paid-in capital................................. 57,927 57,927
Accumulated deficit........................................ (45,610) (45,610)
------- --------
Total stockholders' equity............................... 12,320 12,320
------- --------
Total capitalization.................................. $12,601 $ 32,601
======= ========
</TABLE>

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

(1) As of December 31, 1998, excludes $3.0 million of 9% Secured Bridge Notes
due January 17, 2000, which were issued after December 31, 1998.

(2) As of December 31, 1998, excludes 2,690,146 shares of common stock issuable
pursuant to outstanding employee stock options under our 1996 Stock Option
Plan at a weighted average exercise price of $3.98 per share. Also excludes
warrants to purchase up to 550,000 shares of common stock at $2.75 per
share, which were issued after December 31, 1998. See "Management -- 1996
Stock Option Plan" and Notes 10 and 16 of the Consolidated Financial
Statements -- Common Stock, Stock Options, and Warrants and -- Subsequent
Events.

20
<PAGE> 24

SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except share data and per share data)

The following selected consolidated financial data are derived from our
Consolidated Financial Statements. The selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Consolidated Financial
Statements and Notes thereto appearing elsewhere in this prospectus. The
selected consolidated statements of operations data for the years ended December
31, 1996, 1997 and 1998 and consolidated balance sheet data as of December 31,
1997 and 1998 are derived from the Consolidated Financial Statements, which have
been audited by PricewaterhouseCoopers LLP, independent certified public
accountants, included elsewhere in this prospectus. The statement of operations
data for the years ended December 31, 1994 and 1995 and the balance sheet data
as of December 31, 1994, 1995 and 1996 are derived from financial statements not
included in this prospectus, which have also been audited by
PricewaterhouseCoopers LLP.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS:
Sales.............................. $ -- $ -- $ 6,044 $ 9,081 $ 24,191
Cost of goods sold................. -- -- 2,079 3,124 9,219
----------- ----------- ----------- ----------- -----------
Gross profit....................... -- -- 3,965 5,957 14,972
----------- ----------- ----------- ----------- -----------
Operating expenses:
Engineering and development...... 1,241 1,509 2,403 5,342 14,335
Sales and marketing.............. 67 199 1,706 5,260 11,363
General and administrative....... 260 1,017 1,380 3,812 7,223
Reorganization charges(1)........ -- -- -- -- 1,018
Litigation settlements(2)........ -- -- -- -- 11,500
----------- ----------- ----------- ----------- -----------
Total operating expenses........... 1,568 2,725 5,489 14,414 45,439
----------- ----------- ----------- ----------- -----------
Operating loss..................... (1,568) (2,725) (1,524) (8,457) (30,467)
Other income (expense)............. (114) (609) (584) 1,767 642
----------- ----------- ----------- ----------- -----------
Net loss........................... $ (1,682) $ (3,334) $ (2,108) $ (6,690) $ (29,825)
=========== =========== =========== =========== ===========
Net loss per share................. $ (.04) $ (.08) $ (.10) $ (.25) $ (1.13)
=========== =========== =========== =========== ===========
Weighted average shares(3)......... 41,044,921 39,443,614 21,829,235 26,084,208 26,475,749
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit).......... $ (1,939) $ (8,595) $ 2,349 $ 32,495 $ 2,267
Total assets....................... 332 1,277 6,374 44,361 27,558
Total long-term debt............... 2,102 7,985 983 25 281
Stockholders' equity (deficit)..... (2,328) (8,163) 3,449 39,419 12,320
</TABLE>

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

(2) Includes a charge of $8.5 million made in connection with the settlement of
a class action legal proceeding and a charge of $3.0 million made in
connection with the settlement of litigation with a former stockholder. See
"Risk Factors -- We are defending significant litigation,"
"Business -- Legal Proceedings" and Notes 15 and 16 of the Consolidated
Financial Statements -- Legal Proceedings and -- Subsequent Events.

(3) On November 30, 1995, we purchased 19,215,686 shares of common stock from a
former stockholder pursuant to an option granted to us by the former
stockholder in February 1995. See Note 15 of the Consolidated Financial
Statements -- Legal Proceedings.

21
<PAGE> 25

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This prospectus contains certain statements of a forward-looking nature
relating to future events or the future performance of Digital Lightwave.
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 Digital Lightwave
generally, such investors should specifically consider various factors
identified in this prospectus, 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 might
cause future results to differ materially from those discussed in the
forward-looking statements include, but are not limited to, those discussed in
"Risk Factors" and elsewhere in this prospectus.

OVERVIEW

Digital Lightwave designs, develops, markets and supports network analysis
equipment for monitoring, maintaining and managing fiber optic networks. Our
products provide telecommunications service providers and equipment
manufacturers with capabilities to cost-effectively deploy and manage fiber
optic networks to address the rapidly increasing demand for bandwidth.

From inception in 1990 through 1996, we focused our primary activities on
developing the necessary technology and infrastructure required to launch our
first product, the Network Information Computer. We had no sales until February
1996, when we began shipping the Network Information Computer. As of December
31, 1998, we had sold 1,100 Network Information Computers to over 80 customers,
including telecommunications services providers, such as AT&T, GTE, MCI
WorldCom, Qwest Communications and Sprint, and telecommunications equipment
manufacturers, such as Alcatel Network Systems, Northern Telecom and Tellabs. In
1998, we commenced limited sales of the Network Access Agent. Our net sales were
$24.2 million, $9.1 million and $6.0 million for the years ended December 31,
1998, 1997 and 1996, respectively.

Our net sales are generated from sales of our products, less an estimate
for customer returns. Net sales are recognized when products are shipped to a
customer. The average sales price ("ASP") of the Network Information Computer
was approximately $33,459, $33,022 and $35,345 for the years ended December 31,
1998, 1997, and 1996, respectively. We expect that the ASP of the Network
Information Computer will fluctuate based on a variety of factors, including
product configuration, potential volume discounts to customers, the timing of
new product introductions and enhancements and the introduction of competitive
products. Fluctuations in the ASP may have a material adverse effect on our
results of operations.

We sell our products through a direct sales force to telecommunications
service providers and equipment manufacturers. The sales cycle for new customers
tends to be long. In addition, the telecommunications industry historically has
had a limited number of competitors. Given long sales cycles and few industry
participants, sales of our products have tended to be concentrated, and we
expect that sales will continue to be concentrated in the future. For the year
ended December 31, 1998, our four largest customers accounted for approximately
57% of total revenues, with Qwest, MCI Worldcom, Tellabs, and GTE accounting for
approximately 17%, 16%, 13% and 11% of total sales, respectively. For the year
ended December 31, 1997, sales to our five largest customers comprised 69% of
our

22
<PAGE> 26

total revenues, with WorldCom, Inc. (prior to its acquisition of MCI
Communications Corporation) and its subsidiaries accounting for 42% of total
sales. For the year ended December 31, 1996, our five largest customers
accounted for approximately 62% of total revenues, with MCI Communications
Corporation (prior to its acquisition by WorldCom, Inc.), Ameritech Corporation
and Pacific Telesis Group accounting for 23%, 19% and 15% of total sales,
respectively. No other customers accounted for sales of 10% or more during such
periods. There can be no assurance regarding the amount or timing of purchases
by any customer in any future period. See "Risk Factors -- We are dependent on a
limited number of major customers."

Our sales are generally seasonal, with the largest portion of quarterly
sales tied to the telecommunications industry purchasing patterns, which usually
decrease during the first calendar quarter of the year.

We have not entered into long-term agreements or blanket purchase orders
for the sale of our products, but generally obtain purchase orders for immediate
shipment and other cancelable purchase commitments. As a result, we do not
expect to carry substantial backlog from quarter to quarter in the future. Our
sales during a particular quarter are, therefore, highly dependent upon orders
placed by customers during the quarter. Sales may fluctuate significantly from
quarter-to-quarter and year-to-year due to the timing and amount of orders from
customers, among other factors. Because most of our expenses, particularly
employee compensation and rent, are relatively fixed and cannot be reduced in
response to decreased revenues, quarterly fluctuations in sales have a
significant effect on our results of operations.

Since inception we have incurred substantial net operating losses as a
result of significant investment in research and development, sales and
marketing and administrative expenses. As of December 31, 1998, we had an
accumulated deficit of approximately $45.6 million and net operating loss
carryforwards of approximately $39.0 million for tax purposes. We intend to
continue to build our organization in anticipation of growth and believe that
our 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
we will achieve profitability, or that if profitability is achieved that it will
be sustained.

In January 1998, we restated our revenue from the second and third quarters
of fiscal 1997. Our decision to restate the 1997 results of operations resulted
from the discovery of certain errors in the timing of revenue recognition and a
review of related accounting policies and procedures. A committee consisting of
the independent members of our board of directors was established to review the
policies, procedures and circumstances which may have been factors in the
restatement of revenue and made recommendations regarding the adoption of
appropriate revenue recognition policies and procedures. In April 1998, 23 class
action lawsuits (which were subsequently consolidated into a single action) were
filed against Digital Lightwave arising out of such restatement and alleged
violations of the federal securities laws. We have a proposed settlement pending
in connection with the class action and recorded a charge of $8.5 million in the
second quarter of 1998. Pursuant to the terms of the settlement, we will pay
$4.3 million in cash, which payment will be primarily funded by our directors'
and officers' liability insurance policy, and issue up to 1.8 million shares of
common stock, all of which will be freely tradable upon issuance. In

23
<PAGE> 27

late October 1998, a Stipulation of Settlement was filed with the court and on
December 21, 1998, the court preliminarily approved the settlement. On March 12,
1999, the court indicated that it would grant final approval of the settlement.
The settlement is subject to appeal. See "Risk Factors -- We are defending
significant litigation," Notes 15 and 16 of the Consolidated Financial
Statements, and "Business -- Legal Proceedings."

In February 1995, we entered into a Stock Purchase Option (the "Option")
with a former stockholder to repurchase the 19,215,686 shares of common stock
held by the former stockholder for a purchase price of $2.5 million. The
purchase price was subsequently reduced to $800,522. On November 30, 1995, we
exercised the Option and retired the shares of treasury stock acquired. In
November 1997, the former stockholder commenced an action in the United States
District Court alleging violations of Section 10(b) of the Securities Exchange
Act, violations of state corporation statutes, and various common law violations
in connection with the exercise of the Option. On October 20, 1998, Digital
Lightwave and Dr. Bryan J. Zwan, our Chairman of the Board and principal
stockholder, entered into an agreement with the former stockholder to settle the
action. The settlement agreement provides, among other things, for dismissal of
the action with prejudice, for a $500,000 payment by Digital Lightwave to the
former stockholder for his attorneys' fees and for the grant to the former
stockholder of an option exercisable for 10 years, to purchase two million
shares of Dr. Zwan's stock in Digital Lightwave for $1.00 per share. Pursuant to
that agreement, the action was dismissed with prejudice on November 13, 1998. We
recorded a $3.0 million charge to earnings consisting of the cash payment and
the valuation of the Option upon settlement. See Note 15 of the Consolidated
Financial Statements -- Legal Proceedings.

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

24
<PAGE> 28

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
financial data expressed as a percentage of net sales.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net sales................................................ 100% 100% 100%
Cost of goods sold....................................... 34 34 38
---- --- ----
Gross profit............................................. 66 66 62
Operating expenses:
Engineering and development......................... 40 58 59
Sales and marketing................................. 28 58 47
General and administrative.......................... 23 42 30
Reorganization and litigation charges............... -- -- 52
---- --- ----
Total operating expenses....................... 91 158 188
---- --- ----
Operating loss........................................... (25) (92) (126)
Other income (expense), net.............................. (8) 19 3
---- --- ----
Net loss............................................... (33)% (73)% (123)%
==== === ====
</TABLE>

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

Net Sales

Net sales include total revenues from customer purchases of Network
Information Computers and, to a limited extent, Network Access Agents, net of
accrual for product returns. Net sales for the year ended December 31, 1998
increased by $15.1 million, or 166%, to $24.2 million from $9.1 million in
fiscal 1997. Sales to existing customers for the year represented 77% of sales,
or $18.6 million as compared to 55% of sales, or $5.0 million for fiscal 1997.
During fiscal 1998, we shipped 723 units of the Network Information Computer in
varying configurations at an ASP of $33,459 compared with 275 units at an ASP of
$33,022 for fiscal 1997.

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

Cost of Goods Sold

Cost of goods sold principally includes inventory, labor and overhead,
management costs, facility rental and depreciation of equipment. Cost of goods
sold for the year ended December 31, 1998 increased by $6.1 million to $9.2
million, or 38% of net sales, from $3.1 million, or 34% of net sales in fiscal
1997. The primary reason for the increase in cost of goods sold is the increase
in the volume of units sold.

25
<PAGE> 29

Gross Profit

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

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

Engineering and Development

Engineering and development expenses principally include compensation
attributable to engineering and development personnel, depreciation of
production assets, consulting fees and other development expenses. Engineering
and development expenses for the year ended December 31, 1998 increased by $9.0
million to $14.3 million, or 59% of net sales, from $5.3 million, or 58% of net
sales, last year.

The increase is primarily related to the ongoing engineering and
development efforts on products such as the Network Access Agents, and
enhancements to our Network Information Computers (most significantly, the OC-48
option). In addition, during the last two quarters of 1998, we incurred a
significant level of overhead costs that could not be absorbed into inventory
production due to a lower level of production activity during the last six
months. Although our efforts to lower overhead costs by reducing the number of
manufacturing personnel were successful, some fixed costs such as facility
rental and depreciation of production assets could not be reduced. Accordingly,
a disproportionate share of overhead expenses could not be capitalized as part
of inventory costs.

Sales and Marketing

Sales and marketing expenses principally include salaries and commissions
paid on sales of products, travel expenses, tradeshow costs, and costs of
promotional materials and customer incentives. Sales and marketing expenses for
the year ended December 31, 1998 increased by $6.1 million to $11.4 million from
$5.3 million last year. As a percentage of net sales, sales and marketing
expenses in the year ended December 31, 1998 declined to 47%, from 58% in 1997.
The dollar increase is directly related to a larger sales force, higher
commissions resulting from the increased sales activity, and an increase in
marketing related expenses.

General and Administrative

General and administrative expenses principally include professional fees,
facility rentals, compensation, and information systems related to general
management functions. General and administrative expenses for the year ended
December 31, 1998 increased by $3.4 million to $7.2 million from $3.8 million
last year. As a percentage of net sales, general and administrative expenses
declined to 30%, from 42% in 1997. The dollar increase is primarily due to
professional fees associated with outstanding litigation and

26
<PAGE> 30

various legal matters. These fees increased approximately $3.3 million for the
year ended December 31, 1998.

Reorganization Charges

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

Litigation Settlement

We signed a memorandum of understanding and a Stipulation of Settlement for
the settlement of class action complaints filed against us in U.S. District
Court for alleged violations of federal securities laws. The settlement has
resulted in a charge of approximately $8.5 million recorded during the second
quarter of 1998. In addition, Dr. Bryan Zwan and Digital Lightwave entered into
an agreement to settle an action commenced by Hugh Brian Haney. Pursuant to that
agreement, the action was dismissed with prejudice on November 13, 1998. We
recorded a non-cash charge to earnings of approximately $2.5 million and a $0.5
million accrual of related legal expenses during the fourth quarter of 1998.

Other Income (Expense)

Other income for the year ended December 31, 1998 decreased by $1.1 million
to $0.6 million from $1.7 million last year. The decrease is the result of the
utilization of cash reserves to fund our operations which caused a decrease in
interest earned on invested cash balances.

Net Loss

Net loss for the year ended December 31, 1998 increased by $23.1 million to
a net loss of $29.8 million or $1.13 per share, from a net loss of $6.7 million
or $.25 per share in 1997. The net loss for the year ended December 31, 1998
included charges of approximately $8.5 million to record the settlement of
outstanding securities litigation, $3.0 million to record the settlement of the
Haney litigation, $1.0 million to record the reorganization, $1.3 million in
legal expenses, and $0.3 million of other special charges. Without these
charges, the pro-forma net loss would have been $15.7 million or a loss of $.59
per share.

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

Net Sales

Net sales in 1997 increased $3.1 million to $9.1 million from $6.0 million
in 1996. Sales to existing customers in 1997 represented 55% of sales, or $5.0
million as compared to 48% of sales, or $2.9 million in 1996. During 1997 we
shipped 275 units of the Network

27
<PAGE> 31

Information Computer in varying configurations at an ASP of $33,022 compared
with 171 units of the Network Information Computer at an ASP of $35,345 in 1996.

Cost of Goods Sold

Cost of goods sold in 1997 increased by $1.0 million to $3.1 million from
$2.1 million in 1996, and remained constant at 34% of net sales in both years.
The primary reason for the increase in cost of goods sold in 1997 relates to the
increase in volume of units produced and the increased infrastructure and
manufacturing costs incurred in supporting these efforts. While the overall cost
of goods sold has increased, the average cost of goods sold per unit has
declined as a result of absorption of fixed production costs over a larger
volume of units produced and the component cost reductions associated with the
purchase of larger lot sizes. During the quarter ended September 30, 1997, we
moved our manufacturing operation to a new expanded facility and we recorded
certain non-recurring expenses in connection with this move.

Gross Profit

Gross profit in 1997 increased by $2.1 million to $6.0 million from $3.9
million in 1996. As a percentage of sales, gross margin for the years ended
December 31, 1997 and 1996 was 65.6%. As highlighted above, the increase in
gross profit in 1997 is directly related to the increase in sales.

Engineering and Development

Engineering and development expenses in 1997 increased by $2.9 million to
$5.3 million, or 58% of net sales from $2.4 million, or 40% of net sales, in
1996. The increase is primarily related to the addition of engineering and
quality control personnel and the other expenses associated with our ongoing
research and development efforts on products such as the Network Access Agents
and enhancements to our Network Information Computers.

Sales and Marketing

Sales and marketing expenses in 1997 increased by $3.6 million to $5.3
million, or 58% of net sales, from $1.7 million, or 28% of net sales in 1996.
The increase is related to the addition of personnel for our direct sales force
and marketing functions, an increase in trade show appearances, and customer
incentives.

General and Administrative

General and administrative expenses in 1997 increased by $2.4 million to
$3.8 million, or 42% of net sales, from $1.4 million, or 23% of net sales in
1996. The increase is due to the expansion of facilities, personnel, and
information systems to support the growth of our business.

Other Income (Expense)

Other income in 1997 increased by $2.2 million to an income of $1.7 million
from an expense of $0.5 million in 1996. The increase relates to interest income
generated primarily from the investment of proceeds from our initial public
offering in 1997.

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<PAGE> 32

Net Loss

Net loss in 1997 increased by $4.6 million to a net loss of $6.7 million or
$.25 per share, from a net loss of $2.1 million or $.10 per share in 1996. The
computation of weighted shares outstanding for the 1997 periods reflect a higher
number of shares outstanding as a result of the completion of our initial public
offering.

QUARTERLY RESULTS OF OPERATIONS

The following tables present certain unaudited quarterly consolidated
statements of operations data for the eight quarters ended December 31, 1998. In
the opinion of management, this information has been presented on the same basis
as the audited Consolidated Financial Statements appearing elsewhere in this
prospectus, and all necessary adjustments have been included in the amounts
stated below to present fairly the unaudited quarterly results when read in
conjunction with our audited Consolidated Financial Statements. Results of
operations for any quarter are not necessarily indicative of the results to be
expected for the entire fiscal year or for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $ 1,498 $ 2,601 $ 1,240 $ 3,742 $ 5,432 $ 3,517 $ 6,915 $ 8,327
Cost of goods sold..... 567 795 426 1,336 2,103 1,334 2,620 3,162
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
Gross profit........... 931 1,806 814 2,406 3,329 2,183 4,295 5,165
Operating expenses:
Engineering and
development......... 779 948 1,230 2,385 3,309 3,692 4,290 3,044
Sales and marketing... 879 1,179 1,799 1,403 1,942 3,094 3,526 2,801
General and
administrative...... 878 795 911 1,228 1,899 1,644 1,096 2,584
Reorganization and
litigation
charges............. -- -- -- -- 1,018 8,500 -- 3,000
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
Total operating
expenses.......... 2,536 2,922 3,940 5,016 8,168 16,930 8,912 11,429
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
Operating loss:........ (1,605) (1,116) (3,126) (2,610) (4,839) (14,747) (4,617) (6,264)
Other income........... 293 539 511 595 279 167 102 95
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
Net loss............ $ (1,312) $ (577) $ (2,615) $ (2,186) $ (4,560) $ (14,580) $ (4,515) $ (6,169)
========== ========== ========== =========== ========== ========== ========== ==========
Net loss per
share............. $ (0.05) $ (0.02) $ (0.10) $ (0.08) $ (0.17) $ (0.55) $ (0.17) $ (0.23)
========== ========== ========== =========== ========== ========== ========== ==========
Weighted average common
shares outstanding.... 24,754,887 26,321,990 26,374,388 27,596,955 26,441,775 26,461,151 26,484,670 26,512,397
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

From our inception through December 31, 1998, we have financed our
operations primarily through private sales of common stock, cash from operations
and the initial public offering of 3,658,860 shares of common stock. We
completed our initial public offering in February 1997, resulting in net
proceeds to Digital Lightwave of $39.6 million. During 1997, we used the net
proceeds from our initial public offering to fund the repayment of notes payable
for approximately $0.8 million, to purchase computer equipment, software, test
equipment and other assets for approximately $6.0 million and to fund product
research and development for approximately $5.3 million. In addition,
approximately $3.5 million was used to fund our expansion in the form of
additional

29
<PAGE> 33

manufacturing and administrative space and a significant increase in
engineering, production and financial management personnel to support our
growth.

Cash and cash equivalents at December 31, 1998 were approximately $3.8
million compared to approximately $24.0 million at December 31, 1997. As of
December 31, 1998, our working capital was approximately $2.3 million as
compared to $32.5 million at December 31, 1997. The decrease in working capital
was primarily associated with cash used in operations as a result of operating
losses during the fiscal year ended December 31, 1998, as detailed in our
Consolidated Statements of Cash Flows, and the proposed settlement of the
litigation previously discussed. For the year ended December 31, 1998, capital
expenditures were approximately $4.5 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.

We entered into an accounts receivable agreement dated December 28, 1998
with EAB Leasing Corp. ("EAB") providing for the sale of our accounts receivable
to EAB. The aggregate maximum amount we can borrow at one time under this
agreement is $2.9 million through June 28, 1999 with a maximum of $2.0 million
available on a monthly basis. As of March 31, 1999, there were no borrowings
under this agreement. In connection with this agreement, we granted EAB a
security interest in our bank accounts, accounts receivable, contract rights,
equipment, chattel paper, general intangibles, instruments, inventory and all
proceeds of the foregoing. The annual interest rate equivalent charged to us
under this agreement is the prime rate plus 1.5%. The agreement also provides
that we pay a minimum monthly service fee in the amount of $10,000.

On March 31, 1999, we entered into a financing agreement with certain
investors pursuant to which we issued $3.0 million of 9% Secured Bridge Notes
due January 17, 2000 (the "Bridge Notes"). The Bridge Notes are collateralized
by all of our assets and are subordinated to the accounts receivable agreement
with EAB and the proposed line of credit agreement with Emergent Business
Capital described in the following paragraph. In connection with the Bridge
Notes, we issued warrants to purchase an aggregate of 550,000 shares of our
common stock at an exercise price of $2.75 per share, the closing price of the
stock on the date prior to the issuance of the warrants. The warrants have a
term of five years from the date of issuance. We have agreed to register the
warrants and the common stock issuable upon exercise thereof under the
Securities Act of 1933.

On March 31, 1999, we entered into a Letter of Commitment with Emergent
Business Capital pursuant to which Emergent Business Capital would provide us
with a $5.0 million line of credit (the "Emergent Line of Credit"). Under the
Emergent Line of Credit, we would be entitled to borrow up to $5.0 million,
subject to certain borrowing limitations based on amounts of our accounts
receivable and other assets. The Emergent Line of Credit will have a term of two
years. All indebtedness outstanding under the Emergent Line of Credit Agreement
will be collateralized by substantially all of our assets.

YEAR 2000 READINESS DISCLOSURE

Year 2000 Issues and State of Readiness

We are aware of the issues associated with existing computer-controlled
systems properly recognizing and processing information relating to dates in and
after the Year 2000. Systems that cannot adequately process dates beyond the
year 1999 could generate erroneous data or cause a system to fail. The problem
may affect internal information technology ("IT") systems we use for product
development, accounting, distribution and
30
<PAGE> 34

planning. The problem may also affect non-IT embedded systems such as building
security systems, machine controllers, and other equipment. We have made a
preliminary assessment of our Year 2000 readiness for our operations relating to
(1) our software products, (2) our internal IT and non-IT systems and (3) third
party customers, vendors and others with whom we do business.

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

Certain of our customers may be running earlier versions of our products
that are not Year 2000 compliant. These earlier software versions, like the
compliant versions, rely on time and dates only as a "time stamp" for
data-logging events, for file dates, for display of elapsed time, and setting
the test duration and do not prohibit function of the equipment. We have made
our policy statement regarding our product line available on the Internet as
well as providing written copies at customer request. This alerts customers to
the noncompliance of earlier versions of the ASA 312 software. Of these earlier
versions, 3.100 through prior to 3.500 partially comply, although if allowed to
run past 1999 and into January 1, 2000, the date after power-down will be
incorrectly set to 1980. Instructions regarding correcting this are provided
both on the Internet and via customer inquiry. This leaves only versions earlier
than 3.100 which are truly non-compliant. The suggested solution for these
products is an upgrade to a more recent, compliant version of the software at
our cost. We have evaluated the number of customers still operating with these
non-compliant versions. Of these customers, it is estimated that approximately
half have already received the desired upgrades. As of March 31, 1999, the cost
to upgrade the remaining units is estimated to total $36,000 which would not
have a material adverse impact on our business, operating results or financial
condition.

With respect to IT systems, we have inventoried our internal software and
electronic hardware devices currently in use to determine which of these devices
rely on a valid date to function. Of these, certain operating, accounting, and
telephony systems were identified as critical. Resources required to make these
systems Year 2000 compliant were evaluated based on availability and cost of the
related upgrade. In general, we are obtaining Year 2000 compliant versions from
third party software vendors and modifying these systems, which we expect to
complete during the second quarter of 1999. Total costs of such remediation are
estimated at $21,000. Non-IT embedded systems, consisting primarily of security
systems, the emergency power generator, HVAC controls and elevators have also
been reviewed. These systems were found to be Year 2000 compliant.

We also have certain key relationships with suppliers and subcontractors.
We are preparing to contact certain third-party suppliers of key components or
services regarding their Year 2000 readiness. Following completion of contacting
these vendors, we will be better able to make a complete evaluation of the costs
associated with identifying alternative vendors if the need arises.

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<PAGE> 35

Risks Associated with Year 2000 and Contingency Plan

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

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

We anticipate that generally throughout the computer industry substantial
litigation may be brought against software vendors of non-compliant operating
environments. We believe that any such claims against us, with or without merit,
could have a material adverse effect on our business, operating results and
financial condition.

We currently do not have any Year 2000 contingency plan. The most
significant aspect of any such plan would involve our ability to identify
alternative vendors if the need arose. We believe we have that ability.

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

Expenses Related to Year 2000 Compliance

The total cost of the Year 2000 preparedness effort is funded through
operating cash flows and we are expensing these costs. We have not established
any specific reserves for these costs. We have not incurred significant expense
in becoming Year 2000 compliant as both the majority of our product software and
the infrastructure of our internal systems were developed after the Year 2000
risks were realized. Future costs related to Year 2000 compliance are not
expected to have a material adverse effect on our results of operations or
financial condition. However, we may experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which are composed predominantly of
third party software and hardware technology with embedded software, and our own
products.

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<PAGE> 36

NEW ACCOUNTING PRONOUNCEMENTS

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 130, "REPORTING
COMPREHENSIVE INCOME." In June 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 130, effective for fiscal periods beginning after
December 15, 1997. The new standard requires that comprehensive income, which
includes net income as well as certain changes in assets and liabilities
recorded in common equity, be reported in the financial statements. We adopted
SFAS No. 130 during the year ended December 31, 1998. For the years ended
December 31, 1998, 1997, and 1996, there were no components of comprehensive
income other than net income.

SFAS NO. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION." In 1998, we adopted SFAS No. 131, which requires a "management"
approach of disclosing segment information. The management approach designates
the internal organization that is used by management for making operating
decisions and assessing performance as the source of our reportable segments.
SFAS No. 131 also requires disclosures about products and services, geographic
areas, and major customers. For the years ended December 31, 1998, 1997, and
1996, there was no impact on our financial statements.

SFAS NO. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POST-RETIREMENT BENEFITS." In February 1998, the FASB issued SFAS No. 132 which
is effective for periods ending after December 15, 1998. The new standard
revises employers' disclosures about pensions and other post-retirement
benefits. For the years ended December 31, 1998, 1997, and 1996, there was no
impact on our financial statements.

SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INVESTMENTS AND HEDGING
ACTIVITIES." SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. We do not
currently maintain any derivative investments nor do we conduct any hedging
activities; therefore, SFAS No. 133 is not expected to impact us.

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<PAGE> 37

BUSINESS

GENERAL

Digital Lightwave designs, develops, markets and supports network analysis
equipment for monitoring, maintaining and managing fiber optic networks.
Telecommunications service providers utilize fiber optics to provide increased
network bandwidth to transmit Internet, voice, data, and multimedia video
traffic. Our products provide telecommunications service providers and equipment
manufacturers with capabilities to cost-effectively deploy and manage fiber
optic networks to address the rapidly increasing demand for bandwidth. Our
current customers include telecommunications service providers, such as AT&T,
GTE, MCI WorldCom, Qwest Communications and Sprint, and telecommunications
equipment manufacturers, such as Alcatel Network Systems, Northern Telecom and
Tellabs.

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

Our ASA 312 Network Information Computer provides engineers and technicians
with a truly portable, easy-to-use diagnostic product that offers increased
functionality for the installation and maintenance testing of advanced, high
speed networks and transmission equipment. In 1998, we introduced our initial
Network Access Agent, which incorporates the technology developed for the
Network Information Computer and is an unattended, software-controlled
performance monitoring and diagnostic product permanently installed within
optical-based networks for management from a central location.

INDUSTRY

Over the past several years, the telecommunications industry has undergone
fundamental changes. The volume of traffic carried over telecommunications
networks has increased significantly, principally as the result of the rapid
growth of data traffic as well as steady growth of voice traffic. Data traffic
has increased substantially due to a variety of factors, including the Internet,
e-commerce, fax, video and a proliferation of bandwidth intensive applications.
International Data Corporation has estimated that the number of devices that
access the Internet worldwide will increase from approximately 78 million at the
end of 1997 to approximately 515 million by the end of 2002, representing a
compound annual growth rate of 60.3%.

The telecommunications industry has addressed the demand for increased
network capacity by installing new fiber optic transmission lines, increasing
transmission rates and employing new technologies such as Dense Wave Division
Multiplexing (DWDM), a process that increases the carrying capacity of existing
fiber. Faster transmission speeds and new technologies magnify the complexity of
telecommunications networks while continuing demands for greater bandwidth
stress their capacity. In addition, various standards or "protocols" are
required for encoding and transmitting information across these networks,
including the T-Carrier protocol, SONET and ATM. New fiber optic networks must
be

34
<PAGE> 38

compatible with existing legacy networks and protocols as well as with wireless
networks used in cellular technologies.

The increasing demand for telecommunications capabilities, together with
worldwide deregulation of the telecommunications industry, has led to an
increase in the number of service providers entering the industry. These
conditions have heightened the need to provide uninterrupted service while
creating new competitive pressures to increase operational efficiencies.

As the network environment becomes increasingly complex and the
telecommunications industry becomes more competitive, network communications
equipment is required for quality assurance during network installation and to
monitor and maintain the integrity of existing networks. During the installation
of new networks, test equipment is required to qualify and verify the
communications infrastructure, including transmission lines, signal generators,
switches and other network equipment. Once the network is deployed, real-time
simultaneous and independent analysis is required to monitor network performance
and reduce the possibility of network interruptions or system failures to
improve overall operational efficiency.

The network test equipment historically available was originally designed
for legacy networks. These products: (i) have been primarily hardware based, and
therefore difficult to upgrade to accommodate new technologies; (ii) have
typically worked with only one transmission speed at a time; (iii) do not have
the capability to permit users to simultaneously switch and multiplex different
signals; (iv) tend to be large and heavy making them difficult to operate in the
field; and (v) do not provide easy-to-use intuitive user interfaces. To meet the
challenge of managing increasingly complex networks, telecommunications service
providers require increasingly sophisticated optical diagnostic equipment that
provide a cost-effective solution capable of meeting the challenges of the new
and increasingly complex network environment.

THE DIGITAL LIGHTWAVE SOLUTION

Our products provide telecommunications service providers and equipment
manufacturers with capabilities to cost-effectively deploy and manage fiber
optic networks to address the rapidly increasing demand for bandwidth.
Characterized by their ease of use, Digital Lightwave's products qualify and
verify service during optical network installation and provide ongoing quality
assurance after new equipment is deployed.

We believe that our Network Information Computers and Network Access Agents
offer a broad range of features and capabilities that provide distinct
competitive advantages over the traditional network test equipment offered by
our competitors. Our Network Information Computers were designed to provide
technicians with a more compact, easy-to-use, lightweight product with increased
functionality compared to other products currently available. The Network
Information Computer (i) is an integrated product that is capable of
independently and simultaneously testing multiple protocols; (ii) utilizes an
intuitive windows-based graphical user interface with a touch sensor display to
create an easy-to-use diagnostic tool; and (iii) is a software-based solution
which can be easily upgraded and customized.

Utilizing the technology of the Network Information Computer, in 1998, we
introduced our first Network Access Agent. Network Access Agents are software-
controlled performance monitoring and diagnostic equipment, permanently
installed at multiple access points within optical networks to provide real-time
analysis and network

35
<PAGE> 39

management from a centralized location. Using the real-time analysis provided by
the Network Access Agent, a network operator is able to monitor signed
degradation and respond immediately in order to prevent potential network
interruptions or failures.

Our products are based on advanced technologies, including modular and
scaleable hardware and software platforms and a flexible architecture that
allows customers to easily upgrade existing systems to accommodate new
technologies. We plan to utilize the core technology of our Network Information
Computer and our Network Access Agents to continue to develop products that
address the evolving needs of the optical networking industry.

THE DIGITAL LIGHTWAVE STRATEGY

Digital Lightwave has developed a growth strategy to increase its market
share and expand distribution across a wide range of customers, the key elements
of which are:

CONTINUE TO PENETRATE NEW AND EXISTING MARKETS AND BROADEN CUSTOMER
BASE. We believe that our family of products offers superior performance over
competing products. We intend to continue to market our Network Information
Computers and Network Access Agents to new and established telecommunications
equipment manufacturers and service providers, including the Regional Bell
Operating Companies (RBOCs), Interexchange Carriers (IXCs), Competitive Local
Exchange Carriers (CLECs) and other recent entrants to the telecommunications
industry that require network analysis equipment. We intend to leverage our
customer relationships and our reputation for high quality products to attract
new key accounts.

DEVELOP NEW PRODUCTS AND ENHANCEMENTS BY LEVERAGING TECHNOLOGY AND PRODUCT
DESIGN EXPERTISE. Digital Lightwave believes that there is significant
opportunity for the development of a family of lightwave management products
that address the evolving and emerging markets within the telecommunications
industry. We plan to continue to build upon the core technologies and
architecture developed for our Network Information Computers and Network Access
Agents to offer advanced, easy-to-use products based on a flexible platform that
can be easily upgraded to include advanced features and functionality. In the
third quarter of 1998, we released our latest enhancement to the Network
Information Computer, adding OC-48 analysis capabilities, which enable customers
to monitor higher speed networks. Future products are expected to include
enhanced Network Access Agents and other lightwave management products.

ESTABLISH STRATEGIC RELATIONSHIPS. We are actively engaged in efforts to
enter into strategic OEM relationships for the marketing and distribution of our
Network Access Agent technology for optical networking and DWDM applications. We
believe such relationships will enable us to more effectively develop and market
additional products. We believe that strategic relationships will be critical to
our continued growth and to future development of new products and technologies.

DEVELOP AND MARKET INTERNATIONAL PRODUCTS. We believe that significant
opportunities exist outside the United States for our products, and are
currently developing versions of the Network Information Computer for
international markets.

PRODUCTS

Our current family of products is organized into two product lines: Network
Information Computers and Network Access Agents.

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<PAGE> 40

NETWORK INFORMATION COMPUTERS. Our portable Network Information Computers,
enable users to verify, qualify and monitor the performance of
telecommunications networks and transmission equipment. The Network Information
Computer was designed to replace existing network test instruments by
incorporating their functions into a software-based information processing
system, adding additional functions and improving performance while maintaining
competitive pricing. With the Network Information Computer, telecommunications
service providers and equipment manufacturers are able to plan for and implement
fiber optic network expansion more cost-effectively and verify and manage
information concerning the transmission of voice, data, image and video traffic.
Telecommunications equipment manufacturers also use the Network Information
Computer in designing, engineering and manufacturing their products, installing
their products in the networks of their customers and providing ongoing customer
support.

The following diagram illustrates where our Network Information Computers
are used in telecommunications networks.

[GRAPHIC ILLUSTRATING WHERE NETWORK INFORMATION COMPUTERS ARE USED IN
TELECOMMUNICATIONS NETWORKS]

The Network Information Computer generates, transmits, receives,
multiplexes and processes legacy and lightwave signals and provides network
analysis. The Network Information Computer's easy-to-use graphical user
interface is a touch sensor over a large color display which provides simple and
intuitive windowed graphics and menus. The Network Information Computer may be
accessed and operated remotely by modem or through direct connection to an
Ethernet local area network ("LAN").

The Network Information Computer competes against the network test
instruments currently available, which are primarily hardware-based, work with
one transmission speed or protocol at a time, do not provide an easy-to-use
graphical user interface, do not permit users to simultaneously switch and
multiplex different signals to derive information concerning embedded signals,
cannot store a significant amount of data. We believe that these test
instruments are generally more difficult to use than the Network Information
Computer.

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<PAGE> 41

The following table sets forth certain features of the Network Information
Computer that we believe provide superior performance over competitive devices:

- ------------------------------------------------------------------------------
FEATURE CUSTOMER BENEFIT
- ------------------------------------------------------------------------------
<S> <C>
Software-based Provides for custom features and field
upgrades
- ------------------------------------------------------------------------------
One simple menu format for all Easy to learn and set up
protocols
- ------------------------------------------------------------------------------
Touch sensor over full color Easy to use by personnel of all levels
windowed graphics of aptitude
- ------------------------------------------------------------------------------
Intuitive graphic user interface Clear display of data
- ------------------------------------------------------------------------------
Transmitting and receiving of Simultaneous review of multiple
signals through all protocols protocols reduces overall task time
simultaneously
- ------------------------------------------------------------------------------
Switch matrix Facilitates configuration of the
product for dropping and inserting
traffic from, into and between
different protocols
- ------------------------------------------------------------------------------
Remote operation capability Provides complete, direct and
identical operation of the product at
a remote site
- ------------------------------------------------------------------------------
Ethernet interface Provides operation of the product via
LAN
- ------------------------------------------------------------------------------
Laptop profile/lightweight Truly portable
- ------------------------------------------------------------------------------
PCMCIA card for expanded memory Can display long-term history graphs
Provides recallable setups and can
store significant amounts of data.
- ------------------------------------------------------------------------------
Non-volatile memory Saves data when turned off
- ------------------------------------------------------------------------------
Software calibration Allows calibration by the customer
which reduces cost and down-time
- ------------------------------------------------------------------------------
</TABLE>

The following core technologies are used in the Network Information
Computer and provide a basis for certain of our products in development: (1) a
software operating environment which runs over a windows or a MS-DOS platform;
(2) programs which operate our firmware and hardware; (3) graphical user
interface programs, written in object-oriented code, running in a windowed
environment; (4) Network Protocol Translators, which logically process discrete
network information from signals at specific bandwidths and specific protocols;
and (5) Network Protocol Processors, which process information encoded in a
specific protocol over a range of bandwidth.

To allow our customers to work simultaneously with different bandwidths and
protocols, we have developed a non-blocking switch matrix and applications
software that allow our customers to "frame up" on a given signal, multiplex or
demultiplex the signal into different transmission speeds and map the signal
into different protocols without interfering with signal transmission. These
functions allow customers to derive information concerning the performance of
the network under various existing or potential conditions.

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<PAGE> 42

NETWORK ACCESS AGENTS. Network Access Agents are unattended, software
controlled performance monitoring and diagnostic equipment installed within
optical networks for analysis and management of a telecommunications network
from a centralized location. We recently commenced sales of our Network Access
Agents which is a modular hardware/software platform designed to provide network
operators with real-time information concerning performance of the network
segments where a Network Access Agent has been installed. Installation of
Network Access Agents at multiple access points throughout networks provides the
capability for end-to-end monitoring, maintenance and management of fiber optic
networks. Network Access Agents provide performance and quality data to the
network operator through a standard operations interface. Network Access Agents
incorporate technology we developed for the Network Information Computer, which
includes advanced hardware and software technology that accesses bits in
lightwave and legacy telecommunications transmissions, a non-blocking switch
matrix that maps signals into different transmission speeds and protocols, and
object-oriented software that controls selectable features accessible through
Windows operating system or other user environments.

The following table sets forth certain features of the Network Access
Agent:

-------------------------------------------------------------------------------------
FEATURE CUSTOMER BENEFIT
-------------------------------------------------------------------------------------
<S> <C>
Comprehensive remote Cost-effective network and service reliability
bi-directional broadband analysis with reduced downtime
testing
-------------------------------------------------------------------------------------
Remote ATM service level testing Verification of "Quality of Service" and proper
ATM operations
-------------------------------------------------------------------------------------
Interoperability with Network Single platform for analysis throughout the
Information Computer network
-------------------------------------------------------------------------------------
Hardware and software based Field reprogrammable and upgradeable
-------------------------------------------------------------------------------------
Centralized management of remote Reduced time to install service and maintain
testing capabilities networks
Utilizes senior level technicians to perform
testing
-------------------------------------------------------------------------------------
Non-intrusive test capabilities Qualify circuits without service interruption
-------------------------------------------------------------------------------------
Similar graphical user interface Decrease learning curve associated with new test
to Network Information equipment
Computer
-------------------------------------------------------------------------------------
Industry standard interface Integrates into existing operating system
-------------------------------------------------------------------------------------
Enhanced digital cross connects Increased return on investment through grooming
testing and routing testing
-------------------------------------------------------------------------------------
</TABLE>

FUTURE PRODUCTS AND ENHANCEMENTS. We plan to leverage the core
technologies of our Network Information Computer and Network Access Agents to
continue to develop a family of advanced products and enhancements that address
the evolving needs of the optical networking industry.

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<PAGE> 43

CUSTOMERS

Through December 31, 1998, we have sold over 1,100 units of the Network
Information Computer to over 80 customers. Set forth below is a representative
list of purchasers of our products:

<TABLE>
<S> <C>
INTEREXCHANGE CARRIERS EQUIPMENT MANUFACTURERS
- ------------------------------- ---------------------------------------------
AT&T ADC Telecommunications
IXC Communications Alcatel Network Systems
Level 3 Communications Ascend Communications
MCI WorldCom CIENA
Qwest Communications Cisco Systems
Sprint Fujitsu
Hitachi Telecom Technologies
Lucent Technologies
NEC America
Northern Telecom Limited Systems
QUALCOMM
Tellabs Operations
REGIONAL BELL OPERATING
COMPANIES COMPETITIVE LOCAL EXCHANGE CARRIERS
- ------------------------------- ---------------------------------------------
Ameritech AT&T Local Service (TCG)
Bell Atlantic Communications Electric Lightwave
Pacific Telesis Group GST
SBC Communications Hyperion Communications
US West Communications ICG Communications
MFS WorldCom
WorldxChange Communications
INDEPENDENT TELEPHONE COMPANIES WIRELESS SERVICE PROVIDERS
- ------------------------------- ---------------------------------------------
Frontier Communications AT&T Wireless
GTE GTE Mobilnet
Pacific Bell Mobile Services
EQUIPMENT LEASING COMPANIES PRIVATE NETWORK OPERATORS
- ------------------------------- ---------------------------------------------
Newcourt Capital Bear Stearns
GE Capital IBM Global Services
McGrath Rentelco Time Warner
Telogy U.S. Department of Defense
</TABLE>

We involve key customers in the evaluation of products in development and
continually solicit suggestions from customers regarding additional desirable
features of products that we have introduced or plan to develop. Because our
products are software-based, we have generally been able to satisfy requests for
additional feature sets by providing software upgrades for loading into our
products in the field.

For the year ended December 31, 1998, our four largest customers accounted
for approximately 57% of total revenues, with Qwest, MCI Worldcom, Tellabs, and
GTE accounting for approximately 17%, 16%, 13% and 11% of total sales,
respectively. For the year ended December 31, 1997, sales to our five largest
customers comprised 69% of our total revenues, with WorldCom (prior to its
acquisition of MCI Communications)

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<PAGE> 44

and its subsidiaries accounting for 42% of total sales. For the year ended
December 31, 1996, our five largest customers accounted for approximately 62% of
total revenues, with MCI Communications (prior to its acquisition by WorldCom,
Inc.), Ameritech and Pacific Telesis Group accounting for 23%, 19% and 15% of
total sales, respectively. No other customers accounted for sales of 10% or more
during such periods. There can be no assurance regarding the amount or timing of
purchases by any customer in any future period. See "Risk Factors -- We are
dependent on a limited number of major customers."

SALES, MARKETING AND CUSTOMER SUPPORT

SALES. We sell our products to telecommunications service providers and
network equipment manufacturers through a sales organization of 29 employees,
including managers, sales engineers and sales administrative staff based at our
principal executive offices. The primary functions of our direct sales force are
(i) to ensure that existing and potential customers in each territory are being
regularly contacted, (ii) to differentiate the features and capabilities of our
products from competitive offerings, (iii) to assist customers with the
implementation of our products and (iv) to serve as a direct link to assure
quality and timely customer support. In addition, we believe that our direct
sales staff helps us to monitor changing customer requirements, as well as the
development of industry standards.

MARKETING. In marketing the Network Information Computer, we focus on the
divisions of telecommunications service providers that are responsible for
planning and installing extensions of the network, as well as the quality
assurance divisions of telecommunications equipment manufacturers. In marketing
the Network Access Agents, we have directed our preliminary efforts towards the
strategic planning divisions of telecommunications service providers and private
network operators in order to define customer requirements. We seek to build
awareness of our products through a variety of marketing channels and
methodologies, including industry trade shows and conferences and direct
mailings to targeted customers.

CUSTOMER SUPPORT. We offer technical support to our customers 24 hours a
day, seven days a week, via a toll-free hotline to reach on-site or on-call
personnel. Our customer support organization is comprised of 19 employees. All
service, repair and technical support are performed at our facilities. Our
technical support engineers are trained in the hardware and software
incorporated in our products, as well as the networks and transmission equipment
operated by our customers. We offer a three-year limited warranty on all
components of our products other than the laser transmitter unit, which has a
one-year limited warranty, and software and firmware, which have 90-day limited
warranties.

PRODUCTION

Our production operations consist primarily of material planning and
procurement, final assembly, software loading, testing and quality assurance.
Our operational strategy relies on outsourcing of manufacturing to reduce fixed
costs and to provide flexibility in meeting market demand. We subcontract the
manufacture of computer system boards, plastic molds and metal chassis, and
certain subassemblies and components for the Network Information Computer and
the Network Access Agent. We perform final assembly and program the products
with our software. We have implemented strict quality

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<PAGE> 45

control procedures throughout each stage of the manufacturing process, and test
the boards and subassemblies at various stages in the process, including final
test and qualification of the product. We are ISO 9001 certified. To further
enhance quality and efficiency, we are in the process of centralizing all of our
production in one location by transferring all operations to our new
headquarters facility in Clearwater, Florida.

Although we generally use standard parts and components for our products,
several key components used in the manufacture of our products are currently
purchased only from a sole-source or limited sources, the loss of which could
seriously disrupt our operations. We purchase certain laser and laser amplifier
components, power supplies, touch-screen sensors, single-board computers and
SONET overhead terminators used in the Network Information Computer and the
Network Access Agent from a single or a limited number of contractors. In
addition, for the Network Access Agent, we purchase a controller board and an
interface board from a single or limited number of contractors. We do not have
long-term agreements with any of these sole or limited sources of supply. Any
interruption in the supply of any of these components, or our inability to
procure these components from alternate sources at acceptable prices and within
a reasonable time, could have a material adverse effect upon our business,
financial condition and results of operations. We are currently attempting to
qualify certain additional suppliers for certain of the sole-sourced components.
However, qualifying additional suppliers is time consuming and expensive and the
likelihood of errors could be greater with new suppliers.

In connection with our outsourcing strategy, we are seeking to identify and
secure additional sources of supply, including additional contract subassembly
and component manufacturers. We have experienced in the past, and may in the
future experience, problems with our contract manufacturers, in areas such as
quality, quantity and on-time delivery. In addition, we may in the future
experience pricing pressure from our contract manufacturers.

We forecast product demand on a quarterly basis, based on anticipated
product sales and order materials and components based on these forecasts. Lead
times for materials and components we order vary significantly, and depend on
factors such as the specific supplier, purchase terms and demand for a component
at a given time. If actual orders vary significantly from forecasts, we may have
excess or inadequate inventory of certain materials and components.

ENGINEERING AND DEVELOPMENT

We have organized our engineering and development efforts into product or
project teams, currently ranging in size from three to eleven engineers. The
teams are organized around the development of a particular product, and are
responsible for all aspects of the development of that product and any enhanced
features or upgrades. Our research and development teams are located at our
corporate headquarters in Clearwater, Florida and a facility in Wall Township,
New Jersey.

As of March 31, 1999, we maintain an engineering and development department
of 45 individuals, 39 of whom are full time employees and the remainder of whom
are contractors. During fiscal years 1998, 1997 and 1996, the amounts spent on
sponsored engineering and development activities were approximately $14.3
million, $5.3 million and $2.4 million, respectively.

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<PAGE> 46

INTELLECTUAL PROPERTY

Our success and our ability to compete depends in part upon our proprietary
technology, which we protect through a combination of patent, copyright, trade
secret and trademark law. As of March 31, 1999, in the United States, we have
two issued patents relating to the Network Information Computer and Network
Access Agent. We have filed continuation applications for each of these issued
patents. We may apply for additional patents for our Network Access Agent
technology. We cannot assure you that the patents for which we have applied or
intend to apply will be issued, or that the steps that we take to protect our
technology will be adequate to prevent misappropriation. Our competitors may
independently develop technologies that are substantially equivalent or superior
to our technology. In addition, our growth strategy includes a plan to enter
international markets, and the laws of some foreign countries may not protect
our proprietary rights to the same extent as do the laws of the United States.

As part of our confidentiality procedures, we generally enter into
non-disclosure agreements and marketing information and invention agreements
with our employees and suppliers and limit access to and distribution of our
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our technology without
authorization.

BACKLOG

Our backlog at December 31, 1998 was approximately $1.0 million. Variations
in the size and delivery schedule of purchase orders we receive, as well as
changes in customers' delivery requirements, may result in substantial
fluctuations in backlog from period to period. Accordingly, We believe that our
backlog cannot be considered a meaningful indicator of future financial results.

SEASONALITY

Our sales are generally seasonal, with the largest portion of quarterly
sales tied to telecommunications industry purchasing patterns, which usually
decrease during the first calendar quarter of the year.

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<PAGE> 47

COMPETITION

The market for our products is intensely competitive and is subject to
rapid technological change, frequent product introductions with improved
performance, competitive pricing ratios and shifting industry standards. We
believe that the principal competitive factors in our markets are product
capabilities and design, price, customer service and support, ease of operation
and reliability, length of operating history, industry experience and name
recognition, and extent and maturity of sales and distribution relationships.

We believe that there are six principal competitors which currently offer
products that compete with the Network Information Computer, including
Hewlett-Packard, Technology Techniques Corporation (TTC) (a subsidiary of
Dynatech), Anritsu, Tektronix, Wavetek Wandel Goltermann, and ANDO. However, the
companies that offer test instruments in competition with the Network
Information Computer do not provide an integrated comprehensive solution to
performance monitoring transmission speeds from DS-0 through OC-48 in a single,
upgradeable, portable unit. Although there are several companies that offer
network monitoring and test instruments, including Hekimian Laboratories, Inc.,
TTC, Applied Digital Access, and Sage Instruments, none of these companies offer
lightwave network monitoring products in competition with our Network Access
Agents. Accordingly, we believe that there are currently no competitors that
provide optical network monitoring capability which cover the full range of
features offered by the Network Access Agent. We are aware of certain companies
that are also developing equipment to monitor lightwave transmissions. Many of
our competitors and certain prospective competitors have significantly longer
operating histories, larger installed bases, greater name recognition and
significantly greater technical, financial, manufacturing and marketing
resources than we do. In addition, a number of these competitors have long
established relationships with our customers and potential customers. We believe
it is likely that competitors will enter the market for most, if not all, of the
products which we will offer. See "Risk Factors -- Our industry is extremely
competitive and such competition may negatively affect our business."

REGULATORY MATTERS

Our products must meet industry standards and, in the United States, our
products must comply with various regulations promulgated by the Federal
Communications Commission and Underwriters Laboratories. In the event we sell
our products in international markets, it will be necessary for our products to
comply with standards established by telecommunications authorities in various
countries as well as with recommendations of the Consultative Committee on
International Telegraph and Telephony. In addition, certain planned products of
the Company may be required to be certified by Bell Communications Research
("Bellcore") to be commercially viable. Any inability to obtain on a timely
basis or retain domestic or foreign regulatory approvals or certifications that
may be required in the future or to comply with existing or evolving industry
standards could have a material adverse effect on our business, financial
condition and results of operations.

EMPLOYEES

As of March 26, 1999, we employed a full-time staff of 161 employees, of
which 75 were engineering and production personnel, and the remainder were sales
and marketing

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<PAGE> 48

staff and administrative personnel. We believe that our relationship with our
employees is good.

FACILITIES

In November 1998, we relocated our operations, other than our production
operations, into our corporate headquarters facility of 92,225 square feet in
Clearwater, Florida. We also lease space for our software development operations
in Wall Township, New Jersey. Currently, we lease a manufacturing facility in
St. Petersburg, Florida, but anticipate that we will consolidate our
manufacturing activities to our corporate headquarters in Clearwater, Florida by
September 1999.

The lease for our Clearwater, Florida headquarters expires in November
2008; the Wall Township, New Jersey lease expires in December 2002; and the St.
Petersburg, Florida lease expires in July 2000.

LEGAL PROCEEDINGS

As of April 9, 1998, 23 class action complaints (which were subsequently
consolidated into a single action) for violations of the Federal Securities Laws
during certain periods in 1997 and 1998 had been filed in the United States
District Court for the Middle District of Florida, on behalf of purchasers of
our common stock. The complaints named as defendants the Company, Bryan J. Zwan,
the Company's Chairman, Steven H. Grant, the Company's Executive Vice President,
Finance, Chief Financial Officer and Secretary, and other former corporate
officers. The complaints allege that we and certain officers during the relevant
time period violated Sections 10(b) and 20(a) of the Securities Exchange Act by,
among other things, issuing to the investing public false and misleading
financial statements and press releases concerning our revenue, income and
earnings, which artificially inflated the price of our common stock.

On July 23, 1998, we entered into a memorandum of understanding for the
settlement of these class action complaints. In late October 1998, a Stipulation
of Settlement was filed with the court and on December 21, 1998, the court
preliminarily approved the settlement. On March 12, 1999, the court indicated
that it would grant final approval of the settlement. The settlement is subject
to appeal. The settlement consists of $4.25 million in cash, to be paid to
plaintiffs primarily by a claim on our directors and officers liability
insurance policy, and the issuance of up to 1.8 million shares of common stock.
We recorded a charge of $8.5 million during 1998 as a result of the settlement.

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<PAGE> 49

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information concerning our executive
officers and directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Dr. Bryan J. Zwan......................... 51 Chairman of the Board
Gerry Chastelet........................... 52 President and Chief Executive Officer
and Director
Steven H. Grant........................... 39 Executive Vice President, Finance, Chief
Financial Officer and Secretary
George Matz............................... 49 Executive Vice President and General
Manager, Network Products
Ali Haider................................ 48 Senior Vice President, Engineering
Joe Fuchs................................. 47 Vice President, Quality Management
Dr. William F. Hamilton(1)(2)(3).......... 59 Director
William Seifert(1)(2)(3).................. 49 Director
</TABLE>

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

(1) Member of the Audit Committee

(2) Member of the Compensation Committee

(3) Member of the Nominating Committee

Following is a description of the background of each of our executive officers
and directors:

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

Mr. Chastelet currently serves as President and Chief Executive Officer and
a Director and joined Digital Lightwave on December 31, 1998. Prior to joining
us, Mr. Chastelet served as President and Chief Executive Officer of Wandel &
Goltermann Technologies, Inc., a global supplier of communications test and
measurement equipment, from December 1995 to October 1998. From June 1993 to
November 1995, he served as Vice President Sales, Marketing and Service-Americas
and Asia Pacific for Network Systems Corporation, a supplier of channel-attached
communications solutions for large mainframe computers. From 1989 to 1993, he
was Vice President Sales, Marketing and Service for Infotron/Gandalf Systems
Corporation. Mr. Chastelet holds a degree in

46
<PAGE> 50

Electronics Engineering from Devry Institute of Technology and is a graduate of
the University of Toronto Executive MBA Program.

Mr. Grant currently serves as Executive Vice President, Finance, Chief
Financial Officer and Secretary and joined Digital Lightwave in September 1997.
Prior to joining us, Mr. Grant served as Executive Vice President, Chief
Financial Officer, Treasurer and Corporate Secretary at Precision Systems Inc.
from July 1996 through September 1997. Mr. Grant also served as Executive Vice
President, Chief Financial/Administrative Officer and Treasurer for Silver King
Communications Inc. from December 1992 through July 1996, and as Director of
Corporate Finance, Investor Relations and Assistant Treasurer at Home Shopping
Network from February 1989 through December 1992. Mr. Grant holds a Bachelor's
Degree in Accounting from the University of Alabama and holds an MBA in Finance
from the University of South Florida.

Mr. Matz currently serves as Executive Vice President and General Manager,
Network Products and joined Digital Lightwave in May 1998. Mr. Matz joined us as
the Executive Vice President of Global Marketing and Sales and switched to his
current position in February, 1999. Prior to joining us, Mr. Matz served as Vice
President of Global Sales at Boston Technology, Inc., a supplier of systems,
software and services to telecommunications companies, from December 1995 to May
1998. From August 1994 to December 1995, Mr. Matz served as Executive Director
of Global Sales at Dale, Gesek, McWilliams and Sheridan, Inc., an international
supplier of telecommunications products and services. From March 1990 to August
1994, Mr. Matz served as Director of North American Sales at Summa Four, Inc.
Mr. Matz holds a B.S. degree from Wilkes University.

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

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

Dr. Hamilton has served as a Director since 1997. He is the Landau
Professor of Management and Technology at the Wharton School of the University
of Pennsylvania and has been a professor at the University of Pennsylvania since
July 1967. He is also a director of the following public companies: Centocor,
Inc., Hunt Manufacturing Co., Marlton Technologies, Inc. and Neose Technologies,
Inc.

Mr. Seifert has served as a Director since 1997. He is currently a General
Partner at Prism Venture Partners of Westwood, Massachusetts. Prior to this he
served as Chief Executive Officer of Agile Networks, Inc., a wholly-owned
subsidiary of Lucent

47
<PAGE> 51

Technologies, Inc. from 1991 to 1997. Prior to founding Agile Networks, in 1991,
Mr. Seifert was also a founder of Wellfleet Communications, now Bay Networks.

BOARD OF DIRECTORS

Our Bylaws provide that the board can fix the authorized number of
directors from time to time between one and nine. The board currently is fixed
at and consists of four (4) members, Messrs. Zwan, Chastelet, Hamilton and
Seifert. There are no family relationships among any of our directors or
executive officers.

EXECUTIVE OFFICERS

Digital Lightwave's executive officers are elected by the board of
directors on an annual basis and serve until the next annual meeting of the
board of directors or until their successors have been duly elected and
qualified. There are no family relationships among any of our directors or
executive officers.

BOARD COMMITTEES

The board of directors of Digital Lightwave has established an audit
committee, a compensation committee and a nominating committee. The audit
committee, composed of Messrs. Hamilton and Seifert, is responsible for
reviewing financial statements, accounting and financial policies and internal
controls and reviewing the scope of the independent auditor's activities and
fees. The compensation committee, composed of Messrs. Hamilton and Seifert, is
responsible for reviewing and approving, within its authority, compensation,
benefits, training and other human resource policies. In 1999, the Board formed
a nominating committee to select nominees to the board of directors. The
nominating committee consists of Messrs. Hamilton and Seifert.

COMPENSATION OF DIRECTORS

Our directors who are not our officers or employees receive an annual fee
of $10,000. Directors are also reimbursed for travel and other expenses relating
to attendance at meetings of the board or committees. In addition, in connection
with their services on a special investigative committee formed by the board to
investigate the class action litigation and the related underlying restatement
issues, Messrs. Hamilton and Seifert received $4,750 and $6,250 respectively.
Effective December 8, 1997, Mr. Seifert began serving as our consultant. In
1998, Mr. Seifert received $12,750 for services performed as our consultant.
Under the Option Plan, non-employee directors are also eligible to receive stock
options in consideration for their services. In fiscal 1998, none of the
non-employee directors were granted options.

48
<PAGE> 52

EXECUTIVE COMPENSATION

The following table shows, for the year ended December 31, 1998, the cash
and other compensation awarded to those individuals who served as chief
executive officer during 1998 and each other executive officer who earned in
excess of $100,000 for all services in all capacities (the "Named Executive
Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------- ---------------------
AWARDS
OTHER --------------------- ALL
ANNUAL RESTRICTED OTHER
COMPEN- STOCK OPTIONS/ COMPEN-
SALARY BONUS SATION AWARDS SARS SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- --------------------------- ---- -------- ------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Bryan J. Zwan(1)(2)................. 1998 $309,587 -- -- -- -- --
Chairman of the Board 1997 $305,779 -- -- -- -- --
1996 $300,000 -- -- -- -- $215,340

Gerry Chastelet(3).................. 1998 $ 1,060 -- -- -- 600,000 --
President and Chief 1997 -- -- -- -- -- --
Executive Officer 1996 -- -- -- -- -- --

Steven H. Grant..................... 1998 $193,333 $40,000 -- -- 200,000 $ 1,800(4)
Executive Vice President, 1997 $ 40,615 -- -- -- 75,000(6) $ 500(4)
Finance, Chief Financial 1996 -- -- -- -- -- --
Officer and Secretary

George Matz......................... 1998 $148,415 $50,000 -- -- 300,000 $ 8,000(5)
Executive Vice President 1997 -- -- -- -- -- $ --
and General Manager, 1996 -- -- -- -- -- $ --
Networks Products

Ali Haider.......................... 1998 $149,443 $22,275 -- -- 48,000 $ 1,963(4)
Senior Vice President, 1997 $ 34,788 $25,000 -- -- 33,000(6) --
Engineering 1998 -- -- -- -- -- $ --

Joe Fuchs........................... 1998 $117,878 -- -- -- 30,000 --
Vice President, Quality 1997 $ 86,018 $ 1,000 -- -- 10,000(6) --
Management 1996 -- -- -- -- -- --
</TABLE>

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

(1) Dr. Zwan served as Chief Executive Officer until his resignation from that
position on December 31, 1998.

(2) Amounts include the payment of $9,587 and $5,779 of earned and unused
vacation from 1997 and 1996, which were paid in 1998 and 1997, respectively,
and 1995 deferred compensation of $215,340 which was paid in 1996.

(3) Mr. Chastelet commenced employment on December 31, 1998.

(4) Reflects 401(k) matching contributions.

(5) Reflects Automobile Allowance.

(6) Represents options which were cancelled and reissued in 1998 and which are
included in the 1998 grants listed in this table.

49
<PAGE> 53

1996 STOCK OPTION PLAN

Our 1996 Stock Option Plan (the "Option Plan") became effective on March 5,
1996. The purpose of the Option Plan is to attract and retain qualified
personnel, to provide additional incentives to our employees, officers,
directors and consultants and to promote the success of our business. A reserve
of 5,000,000 shares of common stock has been established for issuance under the
Option Plan. The Option Plan is administered by the board who may delegate the
administration of the plan to a committee of the board. The board now has, and
such committee would have, complete discretion to determine which eligible
individuals are to receive option grants, the number of shares subject to each
such grant, the status of any granted option as either an incentive stock option
or a non-statutory option, the vesting schedule to be in effect for the option
grant and the maximum term for which any granted option is to remain
outstanding.

Each option granted under the Option Plan has a maximum term of ten years,
subject to earlier termination following the optionee's cessation of service
with us. Options granted under the Option Plan may be exercised only for fully
vested shares. The exercise price of incentive stock options and non-statutory
stock options granted under the Option Plan must be at least 100% and 85%,
respectively, of the fair market value of the stock subject to the option on the
date of grant (or 110% with respect to holders of more than 10% of the voting
power of our outstanding stock). The board or, when appointed, such committee,
has the authority to determine the fair market value of the stock. The purchase
price is payable immediately upon the exercise of the option. Such payment may
be made in cash, in outstanding shares of common stock held by the participant,
through a promissory note payable in installments over a period of years or any
combination of the foregoing.

The board may amend or modify the Option Plan at any time, provided that no
such amendment or modification may adversely affect the rights and obligations
of the participants with respect to their outstanding options or vested shares
without their consent. In addition, no amendment of the Option Plan may, without
the approval of our stockholders (i) modify the class of individuals eligible
for participation, (ii) increase the number of shares available for issuance,
except in the event of certain changes to our capital structure, or (iii) extend
the term of the Option Plan. The Option Plan will terminate on March 4, 2006,
unless sooner terminated by the board.

Section 162(m) of the Internal Revenue Code limits our deduction in any one
fiscal year for federal income tax purposes to $1 million per person with
respect to our Chief Executive Officer and our four (4) other highest paid
executive officers who are employed on the last day of the fiscal year unless
the compensation was not otherwise subject to the deduction limit. Certain
performance-based compensation is not included in this $1 million limitation.
Stock options may qualify for exclusion from this limitation if the plan under
which they are granted meets certain conditions. At present, the Option Plan
does not satisfy these conditions. Accordingly, we will not be able to claim a
tax deduction for certain exercises of non-statutory stock options or
disqualifying dispositions of incentive stock options by the chief executive
officer (should it grant any in the future) and our four (4) other highest paid
executive officers to the extent that the income from such exercises or
dispositions, combined with such executive's other taxable compensation for the
year, exceeds $1 million.

As of December 31, 1998, we had outstanding options under the Option Plan
exercisable into an aggregate of 2,690,146 shares of common stock.

50
<PAGE> 54

The following table sets forth information concerning stock options awarded
to each of the Named Executive Officers during Fiscal 98. All such options were
awarded under the Option Plan.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF
SHARES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE FOR OPTION TERM(1)
OPTIONS FISCAL PRICE EXPIRATION -------------------------
GRANTED YEAR ($/SH) DATE 5% 10%
---------- ------------ -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Bryan J. Zwan........ -- -- -- -- -- --
Gerry Chastelet...... 600,000 25.40% $ 2.3130 12/31/04 $471,583 $1,070,241
Steven H. Grant...... 200,000 8.47 4.6875 03/26/04 704,117 1,232,662
George Matz.......... 300,000 12.70 4.4375 05/19/04 477,879 1,060,357
Ali Haider........... 33,000 1.40 4.6875 03/26/04 116,179 203,389
15,000 .64 2.5630 08/04/04 14,659 33,827
Joe Fuchs............ 10,000 .42 4.6875 03/26/04 35,206 61,633
10,000 .42 4.6875 03/26/04 35,206 61,633
10,000 .42 2.5630 12/19/04 8,710 19,766
</TABLE>

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

(1) Potential realizable value is based on the assumption that the common stock
appreciates at the annual rate shown (compounded annually) from the date of
grant until the expiration of the option term. These numbers are calculated
based on the requirements of the Securities and Exchange Commission and do
not reflect our estimate of future price growth.

The following table sets forth certain information regarding options to
purchase shares of common stock held as of December 31, 1998 by each of the
Named Executive Officers.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FY-END(#) FY-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bryan J. Zwan........ -- -- -- -- -- --
Gerry Chastelet...... -- -- -- 600,000 -- --
Steven H. Grant...... -- -- 50,000 150,000 -- --
George Matz.......... -- -- 75,000 225,000 -- --
Ali Haider........... -- -- -- 48,000 -- --
Joe Fuchs............ -- -- 4,999 25,001 -- --
</TABLE>

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

(1) Values shown in these columns reflect the difference between the closing
price of $2.313 on December 31, 1998 and the exercise price of the options
and does not include the federal and state taxes due upon exercise.

51
<PAGE> 55

STOCK PURCHASE PLAN

On August 25, 1997, the board approved the Stock Purchase Plan whereby
300,000 shares of common stock were reserved for issuance and purchase by our
employees to assist them in acquiring a stock ownership interest in Digital
Lightwave and to encourage them to remain our employees. The Stock Purchase Plan
is intended to qualify under Section 423 of the Internal Revenue Code and
permits eligible employees to purchase shares of common stock at a discount
through payroll deductions during specified six-month offering periods. No
employee may purchase more than $25,000 worth of stock in any calendar year or
1,500 shares of common stock in any one offering period. The Stock Purchase Plan
is administered by an administrative committee appointed by the board and
provides generally that the purchase price must not be less than 85% of the fair
market value of the common stock on the first or last day of the offering
period, whichever is lower. As of March 31, 1998, 123,153 shares have been
purchased under the Stock Purchase Plan.

EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS

We entered into a letter agreement dated as of December 31, 1998 (the
"Chastelet Agreement"), with Gerry Chastelet, our Chief Executive Officer and
President. The Chastelet Agreement provides for: (1) employment at will; (2) an
annual salary of $275,000; (3) a $150,000 signing bonus payable over two years;
and (4) a performance bonus of up to 50% of his base salary to be paid based on
80% quantitative and 20% qualitative criteria to be established by our board of
directors. In addition, we granted to Mr. Chastelet stock options to purchase
600,000 shares of common stock at an exercise price of $2.313 per share, of
which 100,000 stock options vest after each six months of employment. In the
event of a "change in control" Mr. Chastelet's unvested options will accelerate.

We entered into a letter agreement dated as of April 13, 1998 and an
addendum to the letter agreement dated February 9, 1999 (the "Matz Agreements"),
with George J. Matz, our Executive Vice President, Global Marketing and Sales.
The Matz Agreements provide for: (1) employment at will; (2) an annual salary of
$225,000; (3) a $150,000 sign-on bonus payable over three years; and (4) a
performance bonus of 20% for the first year. In addition, we granted to Mr. Matz
stock options to purchase 300,000 shares of common stock at an exercise price of
$4.4375 per share, of which 75,000 stock options vest on December 31, 1999, and
75,000 vest on each of the second and third of his employment anniversary dates.
In the event of a "change in control" Mr. Matz's unvested options will
accelerate.

We entered into an employment agreement effective as of February 27, 1998
(the "Grant Agreement"), with Steven H. Grant, our Executive Vice President,
Finance, Chief Financial Officer and Secretary. The Grant Agreement provides
for: (1) an employment term of three years which automatically renews for an
additional two years unless either Mr. Grant or Digital Lightwave provides
reasonable notice of non-renewal prior to expiration; (2) an annual salary of
$200,000; and (3) a $40,000 bonus (which is primarily an acceleration of a
deferred sign-on bonus) to be paid upon completion of our filings with the
Securities and Exchange Commission for the year ended December 31, 1997. The
Grant Agreement also provides that we will provide to Mr. Grant on an annual
basis sufficient funds to purchase a term life insurance policy payable to his
heirs and a disability insurance policy to provide comparable compensation,
including benefits over the

52
<PAGE> 56

life of the agreement. In addition, we granted to Mr. Grant stock options to
purchase 200,000 shares of common stock at an exercise price of $4.6875 per
share, of which 50,000 stock options vest on the date of grant and 50,000 stock
options vest on each of the three anniversaries following the date of grant. As
a result of this new option grant, the previously issued grant for 75,000 shares
was canceled. In the event that Mr. Grant's employment with us terminates, all
stock options that have not yet vested will continue to vest except in the event
of a "change in control" whereby the unvested options will accelerate. In the
event of his termination without "cause," including due to a "change in control"
or a "change in duties" (as such terms are defined in the Grant Agreement), Mr.
Grant will be entitled to severance compensation, including all benefits, for a
period of 18 to 24 months. We are not obligated to pay compensation and benefits
under the Grant Agreement if Mr. Grant's employment is terminated for "cause."

We entered into a letter agreement dated as of September 8, 1997 as
modified by letters dated July 27, 1998 and August 4, 1998 with Ali Haider (the
"Haider Agreements"), our Senior Vice President, Engineering. The Haider
Agreements provide for: (1) an annual salary of $170,000; and (2) a performance
bonus of $22,275 for positive first and second quarter 1998 performance. In
addition, we agreed to grant to Mr. Haider certain stock options. In the event
of the termination of Mr. Haider's employment for any reason (other than a
criminal act), Mr. Haider is entitled to severance pay in the amount of six
months base salary at the greater of Mr. Haider's base salary as of the date of
any termination of employment or as of July 27, 1998.

SECTION 401(K) PLAN

In 1997, we adopted a 401(k) Salary Savings Plan (the "401(k) Plan")
covering our full-time employees located in the United States. The 401(k) Plan
is intended to qualify under Section 401(k) of the Internal Revenue Code, so
that contributions to the 401(k) Plan by employees or by us, and the investment
earnings thereon, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions by us, if any, will be deductible by us when
made. Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($10,000 in 1998)
and to have the amount of such reduction contributed to the 401(k) Plan. The
401(k) Plan permits, but does not require, additional matching contributions to
the 401(k) Plan by us on behalf of all participants in the 401(k) Plan.
Currently, we match the first 6% of such voluntary contributions at 50% of the
amount contributed by the employee.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

In 1998, the compensation committee of the board consisted of Messrs.
Marshall and Seifert. None of our executive officers served on the compensation
committee of another entity or on any other committee of the board of directors
of another entity performing similar functions during Fiscal 98. Additionally,
no member of the compensation committee is currently or was formally an officer
or employee of Digital Lightwave. Effective December 8, 1997, Mr. Seifert began
serving as a consultant to Digital Lightwave. In 1998, Mr. Seifert received
$12,750 for services performed as our consultant.

53
<PAGE> 57

CERTAIN TRANSACTIONS

On December 15, 1998, we loaned $100,000 to Dr. Zwan, our Chairman of the
Board. The loan has a simple interest rate of 9% per annum, is evidenced by an
unsecured promissory note and is due December 14, 1999. As of March 15, 1999,
$100,000 was the balance outstanding on such loan plus accrued and unpaid
interest thereon. In accordance with our policy on related party transactions,
the loan was approved by the independent members of the audit committee of the
board of directors.

BENEFICIAL OWNERS OF SECURITIES

The following table sets forth certain information regarding beneficial
ownership of common stock as of April 1, 1999 by (i) each person who we know to
own beneficially more than five percent (5%) of the outstanding shares of common
stock, (ii) each of our directors (iii) all of the executive officers including
executive officers named in the Summary Compensation Table (the "Named Executive
Officers"), and (iv) all of our directors and executive officers as a group. To
our knowledge all persons listed below have sole voting and investing power with
respect to their shares of common stock, except to the extent set forth in the
footnotes below and except to the extent authority is shared by spouses under
applicable law.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
--------------------
NAME NUMBER PERCENT
- ---- ---------- -------
<S> <C> <C>
Bryan J. Zwan(2)............................................ 20,000,000 74.6%
Hugh Brian Haney(3)......................................... 2,000,000 7.4
Gerry Chastelet............................................. -- *
Steven H. Grant(4).......................................... 107,430 *
George Matz(5).............................................. 75,000 *
Ali Haider(6)............................................... 14,304 *
Joe Fuchs(7)................................................ 21,165 *
William F. Hamilton(8)...................................... 33,332 *
William M. Seifert(8)....................................... 33,332 *
All executive officers and directors as a group (9
persons)(9)............................................... 20,284,563 75.6
</TABLE>

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

* Less than one percent

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially owned
by any person who has or shares voting or investment power with respect to
such shares. Unless otherwise indicated below, the persons and entities
named in the table have sole voting and sole investment power with respect
to all shares beneficially owned, subject to community property laws where
applicable. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of April 1, 1999 are deemed to be
outstanding and to be beneficially owned by the person holding such options
for the purpose of computing the percentage ownership of such person but are
not treated as outstanding for the purpose of computing the percentage
ownership of any other person.

54
<PAGE> 58

(2) Includes 2,000,000 shares for which an option has been granted to Hugh Brian
Haney pursuant to a litigation settlement and 15,000,000 shares held by Dr.
Bryan J. Zwan through his wholly owned Nevada corporation, ZG Nevada, Inc.
Dr. Zwan's address is 15550 Lightwave Drive, Clearwater, Florida 33760.

(3) Represents 2,000,000 shares for which an option has been granted by Bryan J.
Zwan, pursuant to a litigation settlement. Mr. Haney's address is c/o Law
Office of Eric L. Brown Co., L.P.A., Suite 550, 172 East State Street,
Clearwater, Florida 33755.

(4) Consists of 7,430 shares of common stock and 100,000 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60
days of April 1, 1999.

(5) Consists of 75,000 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of April 1, 1999.

(6) Consists of 3,304 shares of common stock and 11,000 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60
days of April 1, 1999.

(7) Consists of 9,500 shares of common stock and 11,665 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60
days of April 1, 1999.

(8) Consists of 33,332 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of April 1, 1999.

(9) Consists of 20,020,234 shares of common stock and 264,329 shares issuable
upon exercise of options that are currently exercisable or exercisable
within 60 days of April 1, 1999.

DESCRIPTION OF THE NOTES

The Notes will be issued under an indenture to be dated as of ,
1999 (the "Indenture"), between us and , as trustee. Many of the
terms and conditions applicable to the Notes will be contained in the Indenture.
The following summarizes some, but not all, of the provisions of the Notes and
the Indenture. Prospective buyers of Notes should refer to the actual terms of
the Notes and the Indenture for the definitive terms and conditions. Copies of
the proposed forms of Indenture and Notes are available from us upon request. As
used in this Description of Notes, the words "we," "us," or "our" do not include
any of our subsidiaries. Capitalized terms used, but not defined, in this
Description of Notes have the meanings given in the Indenture.

GENERAL

The Notes represent our general unsecured obligations and are subordinate
in right of payment to certain of our other obligations as described under
"-- Subordination." The Notes are convertible into common stock as described
under "-- Conversion." The aggregate principal amount of the Notes will be
limited to $25,000,000 ($ if the underwriters' over-allotment option is
fully exercised). The Notes will be issued in fully registered form and
denominated in integral multiples of $1,000.00. The Notes will mature on
, 2004 unless earlier converted, redeemed or repurchased.

The Notes will bear interest at an annual rate of %. Interest will be
paid and of each year commencing 1999,
and upon maturity, redemption and repurchase. The record dates for the Notes
will be

55
<PAGE> 59

(for interest paid on any ) and (for interest paid on
any ). If any payment date falls on a day that is not a business
day, payment will be made on the next business day and no additional interest
will be paid. Interest will be computed on a "bond-equivalent basis" which
assumes that each year consists of 360 days comprised of twelve 30-day months.

We will maintain an office in the Borough of Manhattan, State of New York
where Notes may be presented for registration, transfer, exchange or conversion.
Initially this office will be located at . Any principal or
premium payable on any Note is to be paid at our New York office. Interest
payable on the Notes will generally be paid by check and mailed to the holders
of record as of the close of business on the last Business Day before the
related record date. Holders of more than $2,000,000 of Notes may request that
their interest be paid by wire transfer. Subject to certain exceptions, interest
payable at maturity, redemption or repurchase will be payable to the person to
whom principal is payable. Whenever interest is paid, the payment will include
interest accrued to, but excluding, the interest payment date or the date of
redemption, repurchase or maturity.

The Indenture does not restrict our ability to enter into any transaction
or alter the nature of our business, even if the transaction or alteration would
be detrimental to the holders of the Notes. For example, we may incur
substantial amounts of debt, pay large dividends to our shareholders or sell our
assets to an acquiror without violating the terms of the Indenture. If the
transaction involves a "Change of Control," a holder will have the right to
require us to repurchase its Notes, in the manner described in "-- Repurchase at
Option of Holders Upon a Repurchase Event." Dividends, stock splits and other
distributions may result in an adjustment to the conversion price of the Notes.

The Notes will have no sinking fund. A sinking fund is a custodial or
similar account into which regularly scheduled deposits are made for purposes of
redeeming or repurchasing of securities.

FORM, DENOMINATION AND REGISTRATION

The Notes will be issued in definitive, registered form and without
coupons. The Notes will be denominated in integral multiples of $1,000.

Notes may be presented for registration, transfer or exchange at our New
York office. We, or our agent, will maintain a registry for the Notes. We will
not charge any fee for registration, transfer or exchange of any Notes. We may
request reimbursement for taxes incurred by us in connection with any
registration, transfer or exchange of Notes. We are not required to register the
transfer or exchange of any Note that has been previously surrendered for
conversion or redemption. Any Note that has been presented for repurchase
following a Repurchase Event may only be registered, transferred or exchanged if
the holder delivers a notice of withdrawal to us at our New York office before
the close of business on the last business day before the repurchase date.

CONVERSION

Each holder may convert its Notes, in whole or in part, into our common
stock at a conversion price of $ per share. A Note may be converted at
any time prior to the close of business of the last Business Day before the
maturity date. If the Notes are called for redemption, the holder's conversion
rights on the called Notes will expire at the close of business of the last
business day before the redemption date. Any Note that has been

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presented for repurchase following a Repurchase Event may only be converted if
the holder delivers a notice of withdrawal to our New York registration office
prior to the close of business on the last business day before the repurchase
date.

A holder may exercise the right to convert its Notes in denominations of
integral multiples of $1,000 by delivering its Notes to our New York office
accompanied by a conversion notice in the form required by the Indenture. If the
date of conversion occurs on or after a record date, but before the next
interest payment date, and we have not called the Notes for redemption, the
Notes to be converted and conversion notice must be accompanied by a payment
equal to the amount of the interest payable on the next interest payment date.
If the principal amount to be converted is not evenly divisible by the
conversion price, instead of issuing a fractional share, we will pay a cash
adjustment based on the closing market price of the common stock on the last
business day before the date of conversion.

A holder that presents a Note for conversion will not be required to pay
any taxes or duties resulting from the issuance of our common stock, but a
holder will be required to pay any tax or duty resulting from the issuance of
common stock in the name of any person other than the holder.

The conversion price may be adjusted upon certain events including:

our issuing common stock or other capital stock as a dividend or
distribution to the holders of our common stock;

our dividing or combining our outstanding shares of common stock into
a different number of shares;

subject to certain exceptions, our issuing to the holders of our
common stock options, warrants or other rights to purchase common stock at
less than the current market price of the common stock unless the holder of
the Notes is entitled to receive the same upon conversion;

our making a non-cash dividend or distribution to the holders of our
common stock unless the holder of the Notes is entitled to receive the same
upon conversion;

our paying a cash dividend or distribution to all holders of our
common stock or our repurchasing any shares of our common stock (whether by
tender offer or otherwise) in a transaction in which all holders of our
common stock are invited to participate if, when aggregated with all other
dividends, distributions or repurchases during the prior 12 calendar months
for which an adjustment to the conversion price has not been made, the
dividend, distribution or repurchase exceeds 7 1/2% of the Company's market
capitalization (calculated by multiplying the current market price of its
common stock by the number of outstanding shares of common stock, on a
fully diluted basis);

If we implement a stockholders' rights plan that grants rights to the
holders of our common stock, the Indenture will require that the plan also allow
the holders of Notes to receive the same rights upon conversion of the Notes
into common stock, on a share-for-share basis.

In the event of any reclassification or other change in our common stock,
or our consolidation, merger, or combination with or into another entity or a
sale or conveyance to another Person of our property and assets as an entirety
or substantially as an entirety,

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that results in the holders of our common stock becoming entitled to receive
stock, other securities, cash or other property or assets on or in exchange for
their shares of common stock, the holders will generally be entitled to convert
their Notes into the type of property or assets that they would have received
had the Notes been converted immediately before such event. If the holders of
common stock have the right to chose between or among alternative types of
property, the holders of Notes will receive the kind and amount of property
received per share by a plurality of non-electing shares. All references in this
Description of Notes to "common stock" in the context of any holder's right to
convert, should be construed to mean either our common stock or the other
property into which the Note is convertible.

The holders of Notes may, in certain circumstances, be deemed to have
received a distribution or dividend subject to United States income tax as a
result of an adjustment (or the nonoccurrence of an adjustment) to the
conversion price. See "Certain Federal Income Tax Considerations."

We will be permitted to reduce the conversion price of the Notes for
certain periods of time, if our Board of Directors deems it advisable. Any such
reduction shall be effective for not less than 20 days. We may also reduce the
conversion price to avoid or diminish income tax to holders of our common stock
in connection with a dividend or distribution of stock or similar event. We will
be required to give at least 15 days prior notice of any such reduction.

No adjustment in the conversion price will be required unless it would
result in a change in the conversion price of at least 1%. Any adjustment not
made will be taken into account in subsequent adjustments.

OPTIONAL REDEMPTION BY US

On or after , 2002, we may elect to redeem all or part of the
Notes. We will not be allowed to redeem the Notes prior to , 2002.
Partial redemptions must be in integral multiples of $1000. We will provide the
holders at least 30 but not more than 60 days notice of our intent to redeem.

If we elect to redeem the Notes the redemption price will be as follows,
expressed as a percentage of the principal amount of the Notes to be redeemed:

<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------
<S> <C>
From , 2002 through
, 2003..................................... %
From , 2003 through
, 2004..................................... %
</TABLE>

We will also pay accrued interest through the date of redemption. If a
redemption date occurs on an interest payment date, the interest will be payable
to the holder of record as of the record date, otherwise interest will be paid
to the party to whom the principal is being paid.

In the event of a partial redemption, the trustee will select the Notes to
be redeemed on a pro rata basis or by any other method that the trustee
considers fair and appropriate. Partial redemptions of any Note must be in
integral multiples of $1,000. A new Note will be issued having a principal
amount equal to the unredeemed principal portion of the old

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Note. In the event that a holder partially converts a Note that has been called
for a partial redemption, the conversion shall first reduce the portion of the
Note called for redemption.

In addition, the Company may at any time or from time to time repurchase
the Notes in the open market or in a private transaction. Notes repurchased by
the Company will be canceled.

REPURCHASE AT OPTION OF HOLDERS UPON A REPURCHASE EVENT

If a Repurchase Event occurs, each holder shall have the right to require
us to repurchase all or part of its Notes on the 40th calendar day after the
date that we mail a notice of repurchase to the holders. The purchase price will
be 100% of the principal amount of the Notes. We will also pay accrued interest
to, but excluding, the repurchase date. If a repurchase date occurs on an
interest payment date, the interest becoming due on the interest payment date
will be payable to the holder of record on the Record Date, which will satisfy
our obligation to otherwise pay interest in connection with the repurchase.

We are required to mail a notice to each holder of record within 15
calendar days after the occurrence of a Repurchase Event. The notice must
describe the Repurchase Event, the holder's right to elect repurchase of the
Notes and the repurchase date. We must deliver a copy of the notice to the
Trustee and cause a copy, or a summary of the notice, to be published in a
newspaper of general circulation in the City of New York. A holder may exercise
its repurchase rights by delivering written notice to us and the Trustee
indicating that the holder has elected to exercise its repurchase rights. The
notice is to be accompanied by the Notes endorsed for transfer to us. The
exercise notice is to be delivered to us on or before the close of business on
the 39th calendar day after the date the repurchase notice is mailed.

The Indenture includes the following defined terms relating to the
repurchase of Notes:

"Change in Control" will be deemed to have occurred when (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) becomes the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act) of shares representing more than 45% of
the combined voting power of the then outstanding securities entitled to
vote generally in elections of directors of the Company ("Voting Stock")
other than any such holding by the Company, any subsidiary of the Company
or any employee benefit plan of the Company or directly or indirectly by
Dr. Bryan Zwan or any person or entity controlled by Dr. Bryan Zwan; (ii)
approval by stockholders of the Company of any plan or proposal for the
liquidation, dissolution or winding up of the Company; (iii) the Company
(A) consolidates with or merges into any other corporation or any other
corporation merges into the Company, and in the case of any such
transaction, the outstanding common stock of the Company is changed or
exchanged into or for other assets or securities as a result, unless the
stockholders of the Company immediately before such transaction own,
directly or indirectly immediately following such transaction, more than
45% of the combined voting power of the outstanding voting securities of
the corporation resulting from such transaction in substantially the same
proportion as their ownership of the Voting Stock immediately before such
transaction or (B) conveys, transfers or leases all or substantially all of
its assets to any person; (iv) any time Continuing Directors (as defined)
do not constitute a majority of the

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Board of Directors of the Company (or, if applicable, a successor
corporation to the Company); or (v) Dr. Bryan Zwan (together with any
person or entity controlled by Dr. Bryan Zwan) ceases to own at least 40%
of the combined voting power of the outstanding voting securities of the
corporation; provided that a Change in Control shall not be deemed to have
occurred if either (x) the last sale price of the Common Stock for any five
trading days during the ten trading days immediately preceding the Change
in Control is at least equal to 105% of the conversion price in effect on
such day or (y) in the case of a merger or consolidation, all of the
consideration (excluding cash payments for fractional shares) in such
merger or consolidation constituting the Change in Control consists of
common stock traded on a United States national securities exchange or
quoted on the Nasdaq National Market (or which will be so traded or quoted
when issued or exchanged in connection with such Change in Control) and as
a result of such transaction or transactions the Notes become convertible
solely into such common stock.

"Continuing Director" means at any date a member of the Company's
Board of Directors (i) who was a member of such board on the date of this
prospectus or (ii) who was nominated or elected by at least a majority of
the directors who were Continuing Directors at the time of such nomination
or election or whose election to the Company's Board of Directors was
recommended or endorsed by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or by the
nominating committee comprised of independent directors of the Company.

"Repurchase Event" means a Change in Control or a Termination of
Trading.

A "Termination of Trading" shall have occurred if our Common Stock (as
defined in the Indenture or other common stock into which the Notes are
then convertible) is neither listed for trading on a United States national
securities exchange nor approved for trading on an established automated
over-the-counter trading market in the United States.

If the phrase "all or substantially all" used in the definition of Change
in Control were to be interpreted, the interpretation would likely depend on the
facts and circumstances existing at such time. As a result, there may be
uncertainty as to whether or not a sale or transfer of "all or substantially
all" of our assets has occurred.

In the event that we are required to repurchase the Notes, there can be no
assurances that we will have sufficient funds to pay the repurchase price. A
Repurchase Event may result in a default (directly or by way of a cross-default
provision) under one or more agreements governing our Senior Indebtedness. In
such a circumstance, the subordination provisions contained in the Indenture may
prevent us from making any payment on the Notes, including a payment of the
repurchase price, unless we first obtained the consent of the holders of
defaulted Senior Indebtedness or repaid the Senior Indebtedness in full.

The holders' right to require us to repurchase Notes as a result of a
Repurchase Event may have the effect of delaying, deferring or preventing a
Change of Control or other attempt to acquire control of us. Consequently, the
right may render more difficult a merger, consolidation or tender offer, or an
assumption of control by a holder of a large block of our shares and the removal
of incumbent management. The Change of Control repurchase feature is a result of
negotiations between us and the Underwriters and is not the result of our
knowledge of any specific effort to accumulate shares of common stock or

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to obtain control of us by means of a merger, tender offer, solicitation or
otherwise, or part of a plan by us to adopt a series of anti-takeover
provisions. We have no present intention to engage in a transaction involving a
Change of Control, although it is possible that we would decide to do so in the
future.

Rule 13e-4 under the Exchange Act requires the distribution of certain
information to security holders in the event of certain issuer tender offers and
may apply in the event of a repurchase. We will comply with this rule to the
extent applicable.

SUBORDINATION

All payments under the Notes are, to the extent provided in the Indenture,
subordinate to the prior payment in full of Senior Indebtedness. The
subordination provisions apply to existing Senior Indebtedness as well as Senior
Indebtedness incurred after the date of this prospectus. Upon any distribution
of our assets upon any dissolution, winding up, liquidation or reorganization of
us, the payments on the Notes will be subordinated in right of payment to the
prior payment in full of all Senior Indebtedness. Moreover, if the Notes are
accelerated following an Event of Default (as defined), the holders of any
Senior Indebtedness then outstanding will be entitled to payment in full before
the holders of the Notes are entitled to receive any payment on the Notes.
However, the obligations of the Company to make payments with respect to the
Notes will not otherwise be affected.

In addition, the subordination provisions will prevent us from making any
payments on the Notes if:

we fail to pay any payment of principal, interest, premium, or other
obligation, if any, due on any Senior Indebtedness beyond the applicable
grace period; or

any other default occurs and is continuing under any Senior
Indebtedness that permits holders of the Senior Indebtedness to accelerate
the maturity of any Senior Indebtedness and any holders of more than
$1,000,000 aggregate principal amount of Senior Indebtedness (or their
representative) send the Trustee and us a notice of such default (a
"Payment Blockage Notice").

We may resume making payments on the Notes once the default on the Senior
Indebtedness is cured or waived or otherwise ceases to exist. We may also resume
making payment (including all payments which were scheduled to be due during
such period of payment blockage) on the Notes following a non-payment default
regardless of whether it has been waived or cured, 179 days after the date on
which the applicable Payment Blockage Notice is received. No new period of
payment blockage may be commenced pursuant to a Payment Blockage Notice unless:

365 days have elapsed since our receipt of the prior Payment Blockage
Notice, and

all scheduled payments of principal and interest due and owing on the
Notes have been paid in full, or, if not paid in full, neither the Trustee
nor any of the holders of Notes has begun proceedings to enforce the right
of the holders to receive such payments.

No default that existed on any Senior Indebtedness on the date of delivery
of any Payment Blockage Notice may be the basis for a subsequent Payment
Blockage Notice.

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The issuance of junior securities upon conversion of the Notes, or
otherwise in satisfaction of any obligations of the Company on the Notes or in
exchange therefor, shall not constitute a payment on the Notes for purposes of
the subordination provisions. The term "junior securities" shall mean any
securities that are subordinated to Senor Indebtedness at least to the same
extent as the Notes are so subordinated and that are not secured by any
collateral.

The Indenture defines "Senior Indebtedness" as follows:

The term "Senior Indebtedness" means the principal of, premium, if
any, interest on (including any interest accruing after the filing of a
petition by or against the Company under any bankruptcy law, whether or not
allowed as a claim after such filing in any proceeding under such
bankruptcy law), and any other fee, cost, expense or payment due pursuant
to, any of the following, whether outstanding on the date of the Indenture
or thereafter incurred, created: (a) all indebtedness of the Company for
money borrowed that is evidenced by notes, debentures, bonds or other
securities (including, but not limited to, those which are convertible or
exchangeable for securities of the Company); (b) all indebtedness of the
Company due and owing with respect to letters of credit (including, but not
limited to, reimbursement obligations with respect thereto); (c) all
indebtedness or other obligations of the Company due and owing with respect
to interest rate and currency swap agreements, cap, floor and collar
agreements, currency spot and forward contracts and other similar
agreements and arrangements; (d) all indebtedness consisting of commitment
or standby fees due and payable to lending institutions with respect to
credit facilities or letters of credit available to the Company; (e) all
obligations of the Company under leases required or permitted to be
capitalized under generally accepted accounting principles; (f) all
obligations of the Company evidenced by a note or similar instrument or
written agreement given in connection with the acquisition of any business,
properties or assets, including securities; (g) all indebtedness or
obligations of others of the kinds described in any of the preceding
clauses (a), (b), (c), (d), (e) or (f) assumed by or guaranteed in any
manner by the Company or in effect guaranteed (directly or indirectly) by
the Company through an agreement to purchase, contingent or otherwise, and
all obligations of the Company under any such guarantee or other
arrangements; (g) all renewals, extensions, refundings, deferrals,
amendments or modifications of indebtedness or obligations of the kinds
described in any of the preceding clauses (a), (b), (c), (d), (e), (f) or
(g) unless in the case of any particular indebtedness, obligation, renewal,
extension, refunding, amendment, modification or supplement, the instrument
or other document creating or evidencing the same or the assumption or
guarantee of the same expressly provides that such indebtedness, renewal,
extension, refunding, amendment, modification or supplement is subordinate
to, or is not senior to, or is pari passu with, the Notes; provided that
Senior Indebtedness shall not include (i) any indebtedness of any kind of
the Company to any subsidiary of the Company, a majority of the voting
stock of which is owned, directly or indirectly, by the Company, (ii)
indebtedness for trade payables or constituting the deferred purchase price
of assets or services incurred in the ordinary course of business, (iii)
the Notes, or (iv) any Indebtedness incurred after the date of the
Indenture for which the instrument creating or evidencing the same or the
assumption or guarantee thereof (or related agreements or documents to
which the Company is a party) does not expressly provide that such Senior
Indebtedness shall be "Senior Indebtedness" for purposes of the Indenture.

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If the Trustee or any holder of Notes receives any payment or distribution
of our assets of any kind on the Notes in contravention of any of the terms of
the Indenture, then such payment or distribution will be held by the recipient
in trust for the benefit of the holders of Senior Indebtedness, and will be
immediately paid or delivered to the holders of Senior Indebtedness or their
representative or representatives.

We are the sole obligor on the Notes. If, in the future, a significant
portion of our consolidated operations is conducted through subsidiaries, the
cash flow and our ability to service our debt may be dependent upon the earnings
of such subsidiaries and the distribution of those earnings to us. Each
subsidiary will be a separate legal entity, will not be required to guaranty our
obligations with respect to the Notes and will have no obligation to pay any
amounts due on the Notes or to make any funds available for payment on the
Notes. In addition, the payment of dividends and the making of loans and
advances to us by our subsidiaries may be subject to statutory, contractual or
other restrictions. Our right to receive assets of any of our subsidiaries upon
its liquidation or reorganization will be effectively subordinated to the claims
of that subsidiary's creditors (including trade creditors and even if those
claims do not include "senior indebtedness" of that subsidiary) and that
subsidiary's preferred stockholders.

The Indenture will not prevent us from incurring additional indebtedness,
including Senior Indebtedness. As of December 31, 1998, we had approximately
$0.4 million of outstanding Indebtedness which is expected to be Senior
Indebtedness.

The subordination provisions of the Indenture and the Notes will not
prevent the occurrence of any default or Event of Default or limit the rights of
any holder of Notes to pursue any other rights or remedies with respect to the
Notes.

As a result of the subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceedings, holders of the Notes may receive less than other creditors (on a
ratable basis).

EVENTS OF DEFAULT AND REMEDIES

The following events will be included as "Events of Default" in the
Indenture:

our failure to pay the principal of, or premium, if any, on any of the
Notes when due;

our failure to pay interest on the Notes when due if such failure
continues for 30 days;

our failure to perform any covenant in the Indenture if such failure
continues for 60 days after notice is given by the Trustee or by the
holders of not less than 25% of the aggregate principal amount of the
Notes;

our failure following a Repurchase Event to repurchase any Notes that
have been presented for repurchase in accordance with the Indenture;

our failure to provide timely notice of a Repurchase Event;

our failure to convert any Notes into common stock when required;

our failure or the failure of any of our Significant Subsidiaries to
make any payments on any Indebtedness (other than the Notes) following the
passing of any

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applicable grace periods, in an amount in excess of $1,000,000 and such
amount has not been paid or discharged within 30 days after notice is given
in accordance with the Indenture;

a default by us or any of our Significant Subsidiaries on any
Indebtedness (other than the Notes) that results in the acceleration of
Indebtedness in an amount in excess of $1,000,000 and such Indebtedness or
such acceleration has not been discharged for 30 days after notice is given
in accordance with the Indenture; or

certain events involving bankruptcy, insolvency or reorganization of
us or any of our Significant Subsidiaries.

The Trustee will be generally required, within 90 days after its becoming
aware of a default, to provide the registered holders of the Notes written
notice of such default. Except in the case of a payment default, the Trustee
will not be required to deliver a notice of default if it determines in good
faith that withholding such notice is in the best interest of the holders of the
Notes.

If an Event of Default has occurred and is continuing, the Trustee, or the
holders of not less than 25% of the aggregate principal amount of the Notes, may
declare all amounts outstanding on the Notes to be immediately due and payable.
Defaults may be waived by the holders of a majority of the aggregate principal
amount of the Notes. If an Event of Default occurs resulting from the
bankruptcy, insolvency or reorganization of us or any of our Significant
Subsidiaries, all unpaid principal of and accrued interest on the outstanding
Notes would become due and payable immediately without any declaration or other
act on the part of the Trustee or holders of Notes.

The Indenture will generally provide that the holders of a majority of the
aggregate principal amount of the Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee, subject to certain limitations.
Before proceeding to exercise any right or power under the Indenture at the
direction of the holders, the Trustee will be entitled to receive from such
holders reasonable security or indemnity against any costs, expenses and
liabilities that it might incur as a result. Following an Event of Default for
nonpayment, each holder to which such default pertains will have the absolute
right to institute suit to enforce payment of any Notes held by it.

Generally, the holders of not less than a majority principal amount of the
Notes may on behalf of the holders of all Notes waive any default or Event of
Default. The consent of all affiliated holders will be required to waive any
default and Events of Default relating to a failure to make payment on any Note,
convert any Note into common stock or to comply with any of the provisions of
the Indenture that would require the consent of affected holders to modify.

Within 120 days of the end of each fiscal year, we will be required to send
the Trustee a statement of certain of our officers:

stating whether or not to the best of their knowledge we are out of
compliance with any terms of the Indenture or the Notes; and

specifying, if any of them has any such knowledge that we are out of
compliance, the nature of the default.

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We are also required, if certain of our officers obtain knowledge that we
are out of compliance with the terms of the Indenture or the Notes, to deliver
to the Trustee a statement specifying the nature of the default and the action
we have taken, are taking or proposes to take to cure the default.

CONSOLIDATION, MERGER OR SALE OF ASSETS

The Indenture provides that we may not, directly or indirectly, consolidate
or merge with or into another Person or sell, lease, convey or transfer all or
substantially all of our assets, whether in a single transaction or a series of
related transactions, to another Person or group of affiliated persons, unless,

if we are not the resulting, surviving or transferee entity, such
entity:

is a corporation or other business entity organized under the laws
of the United States, any state thereof or the District of Columbia; and

expressly assumes all of our obligations under the Notes and the
Indenture;

no default or Event of Default shall exist or shall occur immediately
after giving effect to such transaction; and

certain other conditions are satisfied.

MODIFICATIONS OF THE INDENTURE

The Indenture generally allows the Trustee and us, with the consent of the
holders of not less than a majority of the aggregate principal amount of the
Notes, to modify the Indenture, any supplemental indenture or the Notes. The
following modifications require the consent of each affected holder:

an extension of the maturity of any Note;

a reduction in the rate or an extension of the time or payment of
interest on any Note;

a reduction in the principal amount of any Note;

a reduction in any amount payable upon redemption or repurchase of any
Note;

any modification, to our obligation to repurchase any Note upon the
happening of a Repurchase Event if adverse to any holder of Notes;

any modification that impairs or adversely affects the right of any
holder to institute suit for the payment of any Note;

any change in currency in which any Note is payable;

any modification, to the right of the holders to convert the Notes
into common stock if adverse to any holder of Notes; or

any modification of the subordination provisions that adversely
affects the holders of the Notes.

Any change to the provisions of the Indenture relating to modifications and
amendments will require the consent of the holders of all Notes.

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SATISFACTION AND DISCHARGE

We may discharge our obligations under the Indenture while Notes remain
outstanding if:

all Notes are within one year of their scheduled maturity or the date
on which they are scheduled for redemption; and

we have deposited with the Trustee an amount sufficient to pay all
outstanding Notes on their scheduled maturity or the date scheduled for
redemption.

GOVERNING LAW

The Indenture and the Notes will be governed by the laws of the State of
New York.

CONCERNING THE TRUSTEE

, the trustee under the Indenture, has been appointed by us
as the initial paying agent, conversion agent, registrar and custodian with
regard to the Notes. We may maintain deposit accounts and conduct other banking
transactions with the Trustee or its affiliates in the ordinary course of
business.

If the trustee becomes a creditor of us, the Indenture and the Trust
Indenture Act of 1939, as amended (the "TIA"), may limit the right of the
Trustee to obtain payment on, or to realize on any provided as security for, its
claims. If the Trustee develops any conflicting interest (as described in the
TIA) with the holders of Notes or us, it must eliminate the conflict or resign.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 20,000,000 shares of preferred
stock, $.0001 par value, issuable in series and 200,000,000 shares of common
stock, $.0001 par value. The following statements are brief summaries of certain
provisions relating to our capital stock contained in our Certificate of
Incorporation and Bylaws and in the laws of Delaware.

COMMON STOCK

Our authorized common stock consists of 200,000,000 shares, $.0001 par
value, of which 26,558,766 shares are issued and outstanding as of the date of
this prospectus. The issued and outstanding shares of common stock are fully
paid and non-assessable. Holders of our common stock are entitled to one vote
for each share held of record on all matters submitted to a vote of the
stockholders. As of the date of this prospectus, there are 200 holders of record
of our common stock. Each share of our common stock is entitled to equal
dividend rights and to equal rights in our assets available for distribution to
holders of common stock upon liquidation, subject to the rights of outstanding
series of preferred stock. Our Certificate of Incorporation and Bylaws do not
provide for preemptive rights of the holders of our common stock. The transfer
agent and registrar for the common stock is American Stock Transfer & Trust
Company. Its telephone number is 212-936-5100.

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PREFERRED STOCK

Our board of directors may, without further action by our stockholders,
from time to time direct the issuance of preferred stock in series and may, at
the time of issuance, determine the rights, preferences and limitations of each
series. Satisfaction of any dividend preferences of outstanding preferred stock
would reduce the amount of funds available for the payment of dividends on
shares of common stock. See "Dividend Policy." Also, holders of preferred stock
would normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of Digital Lightwave before any payment
is made to the holders of common stock. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control without
further action by our stockholders. The issuance of preferred stock with voting
and conversion rights may adversely affect the voting powers of the holders of
common stock, including the loss of voting control to others. No shares of
preferred stock have been issued.

CERTAIN VOTING PROVISIONS

Stockholders' rights and related matters are governed by Delaware corporate
law, our Certificate of Incorporation and our Bylaws. Certain provisions of our
Certificate of Incorporation and Bylaws which are summarized below may affect
potential changes in control, may make it more difficult to acquire and exercise
control and may make changes in management more difficult to accomplish.

Article Eight of our Certificate of Incorporation contains provisions (the
"Fair Price Provisions") which require the approval (an "Unaffiliated 70% Vote")
of the holders of 70% of those shares that are not beneficially owned or
controlled by a stockholder who owns directly or indirectly 10% or more of our
outstanding voting shares (a "Related Person"), defined to exclude our sole
incorporator Bryan J. Zwan, or his affiliates, as a condition to specified
business combinations (the "Business Combinations") with or proposed by any
Related Person, except where the transaction (1) has been approved by two-thirds
of the directors who are not affiliated with the Related Person (the "Continuing
Directors") or (2) meets certain minimum price criteria and procedural
conditions. If the Business Combination satisfies either of these criteria, the
usual requirements of applicable law, regulations and other provisions of the
Certificate of Incorporation would apply.

A Business Combination includes, among others, the following: (1) a merger
or consolidation of us or any of our subsidiaries with a Related Person; (2) the
sale, lease, mortgage or other disposition by us or any of our subsidiaries of
assets worth more than a specified amount to a Related Person; (3) the sale,
lease or mortgage to us or any of our subsidiaries of all or more than a
specified amount of the assets of a Related Person or its affiliates; (4) the
issuance, pledge or transfer of stock or other of our securities or the
securities of any of our subsidiaries to a Related Person in exchange for cash
or property worth more than a specified amount, unless such person is acting as
an underwriter with respect to such securities; (5) the adoption of any plan or
proposal to liquidate or dissolve us that is proposed by a Related Person; (6)
any reclassification of securities, recapitalization or other transaction which
has the direct or indirect effect of increasing the voting power or
proportionate share of our or any of our subsidiaries' outstanding stock (or of
any class or series of stock) owned by a Related Person; (7) any agreement,
contract or other arrangement providing directly or indirectly for any of the
foregoing; or (8) any

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series of transactions that not less than two-thirds of the Continuing Directors
determine are related and, if taken together, would constitute a Business
Combination.

The Fair Price Provisions require the consideration to be paid to our
stockholders in a Business Combination not approved by either two-thirds of the
Continuing Directors or an Unaffiliated 70% Vote to be either cash or the same
type of consideration paid by the Related Person in acquiring our voting stock
that we previously acquired. The fair market value of any consideration other
than cash or publicly traded securities would be determined by a majority of the
Continuing Directors. The Fair Price Provisions require the Related Person to
meet the minimum price criteria with respect to each class or series of common
or preferred stock, whether or not the Related Person owned shares of that class
or series prior to proposing the Business Combination.

Candidates for directors shall be nominated only by the board of directors
or by a stockholder who gives us written notice at least 120 days but not more
than 180 days before the annual meeting. We may have one to nine directors as
determined from time to time by the board of directors. The board of directors
currently consists of four members. Messrs. Hamilton and Seifert have agreed to
serve as our directors following the offering. Between stockholders' meetings,
the board of directors may appoint new directors to fill vacancies or newly
created directorships. A director may be removed from office only for cause and
only by the affirmative vote of at least 70% of the combined voting power of the
then outstanding shares of stock entitled to vote generally in the election of
directors.

The Certificate of Incorporation further provides that stockholder action
must be taken at a meeting of stockholders and may not be effected by any
consent in writing unless approved by a vote of two-thirds of the Continuing
Directors. Special meetings of stockholders may be called only by the President
or by a majority of the board of directors. If a stockholder wishes to propose
an agenda item for consideration, he must give a brief description of each item
and notice to us not less than 120 nor more than 180 days prior to the meeting.
Stockholders will need to present their proposals or director nominations in
advance of the time they receive notice of the meeting since our Bylaws provide
that notice of a stockholders' meeting must be given not less than ten or more
than 60 days prior to the meeting date.

The Certificate of Incorporation generally provides further that the
foregoing provisions of the Certificate of Incorporation and Bylaws may be
amended or repealed by the stockholders only with the affirmative vote of at
least 70% of the shares entitled to vote generally in the election of directors
voting together as a single class unless two-thirds of the Continuing Directors
approve the changes in which event a majority vote would be sufficient. These
provisions exceed the usual majority vote requirement of Delaware law and are
intended to prevent the holders of less than 70% of the voting power from
circumventing the foregoing terms by amending the Certificate of Incorporation
or Bylaws. These provisions, however, enable the holders of more than 30% of the
voting power to prevent amendments to the Certificate of Incorporation or Bylaws
even if they are approved by the holders of a majority of the voting power.

The effect of such provisions of our Certificate of incorporation and
Bylaws may be to make more difficult the accomplishment of a merger or other
takeover or change in control. To the extent that these provisions have this
effect, removal of our incumbent Board of Directors and management may be
rendered more difficult. Furthermore, these provisions may make it more
difficult for stockholders to participate in a tender or exchange offer for
common stock and in so doing may diminish the market value of

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<PAGE> 72

common stock. We are not aware of any proposed takeover attempt or any proposed
attempt to acquire a large block of common stock.

CHANGE OF CONTROL PROVISIONS

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. Section 203 prevents certain
Delaware corporations, including those whose securities are listed on the Nasdaq
National Market, from engaging, under certain circumstances, in a "business
combination" (which includes a merger or sale of more than 10% of the
corporation's assets) with any "interested stockholder" (a stockholder who
acquired 15% or more the corporation's outstanding voting stock without the
prior approval of the corporation's board of directors) for three years
following the date that such stockholder became an "interested stockholder." A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from a stockholders' amendment
approved by at least a majority of the outstanding voting shares. We have not
"opted out" of the provisions of Section 203.

WARRANTS

There are currently warrants outstanding to purchase up to 550,000 shares
of common stock. These warrants were issued in connection with the sale by
Digital Lightwave of $3 million of its 9% Secured Bridge Notes due January 17,
2000. The warrants were exercisable immediately, have an exercise price of $2.75
per share of common stock and have a term of five years. We have agreed to
register the warrants and the shares of common stock issuable upon exercise
thereof.

REGISTRATION RIGHTS

We have agreed to register the warrants and the 550,000 shares of common
stock issuable upon exercise thereof promptly following the issuance thereof but
in any event within 180 days thereafter. Simultaneously with the filing of the
registration statement of which this prospectus is a part, we filed a
registration statement with the Securities and Exchange Commission to register
the warrants and the warrant shares.

PERSONAL LIABILITY OF DIRECTORS

Delaware law authorizes a Delaware corporation to eliminate or limit the
personal liability of a director to the corporation and its stockholders for
monetary damages for breach of certain fiduciary duties as a director. We
believe that such a provision is beneficial in attracting and retaining
qualified directors, and accordingly the Certificate of Incorporation includes a
provision eliminating liability for monetary damages for any breach of fiduciary
duty as a director, except as provided under Delaware law. Pursuant to Delaware
law, our directors are not insulated from liability for breach of their duty of
loyalty (requiring that, in making a business decision, directors act in good
faith and in the honest belief that the action was taken in the best interest of
the corporation), or for certain other claims. The foregoing provisions of the
Certificate of Incorporation may reduce the likelihood of success of derivative
litigation against directors for breaches of their fiduciary duties, even though
such an action, if successful, might otherwise have benefited us and our
stockholders. Furthermore, we intend to enter into indemnity

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agreements with present and future officers and directors for the
indemnification of and the advancing of expenses to such persons to the full
extent permitted by law.

SHARES ELIGIBLE FOR FUTURE SALE

As of March 31, 1999, we had outstanding 26,558,766 shares of common stock.
Of these shares, 6,558,766 are eligible for sale in the public market without
restriction. The remaining 20,000,000 shares of common stock are held by Dr.
Zwan, our chairman. As our "affiliate" (as defined under Rule 144 under the
Securities Act of 1933), Dr. Zwan may only sell his shares of common stock in
the public market in compliance with the volume limitations of Rule 144. In
addition, we expect to issue up to 1,800,000 shares of common stock in
connection with the settlement of certain litigation against us all of which
will be freely transferable upon issuance. Further, there are currently warrants
outstanding to purchase up to 550,000 shares of common stock. These warrants
were issued in connection with the sale by Digital Lightwave of its 9% Secured
Bridge Notes Due January 17, 2000. The warrants were exercisable immediately,
have an exercise price of $2.75 per share of common stock and have a term of
five years. Digital Lightwave has agreed to register the warrants and shares of
common stock issuable upon exercise thereof.

We and all our directors and executive officers have agreed with the
Underwriter not to sell or otherwise dispose of any shares of common stock for a
period of 180 days after the effective date of the registration statement
covering the Notes without the prior written consent of the Underwriter. See
"Underwriting."

In general, under Rule 144, a person (or persons whose shares are
aggregated), including an Affiliate, who has beneficially owned Restricted
Shares for at least one year (including the holding period of certain prior
owners), will be entitled to sell in "brokers' transactions" or to market
makers, a number of Restricted Shares that does not exceed the greater of (1) 1%
of the then outstanding shares of common stock or (2) the average weekly trading
volume in the common stock during the four calendar weeks immediately preceding
such sale, subject, generally, to the filing of a Form 144 with respect to such
sales and certain other limitations and restrictions. In addition, a person (or
person whose shares are aggregated), who is not deemed to have been an Affiliate
at any time during the 90 days immediately preceding the sale and who has
beneficially owned the Restricted Shares proposed to be sold for at least two
years (including the holding period of any prior owner other than an Affiliate),
is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above. Further, Rule 144A under the Securities Act permits
the immediate sale of restricted shares to certain qualified institutional
buyers without regard to the volume restrictions described above.

We have filed a registration statement on Form S-8 covering the shares that
have been reserved for issuance under the 1996 Stock Option Plan and the 1997
Stock Purchase Plan, thus permitting the resale of such shares in the public
market.

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of certain United States federal income tax
considerations relating to the purchase, ownership and disposition of the Notes
and of common stock into which Notes may be converted, but is not a complete
analysis of all potential tax considerations. This summary is based on laws,
regulations, rulings and decisions now in effect, which may change in the
future. It relates only to those of you who will hold Notes and common stock
into which Notes may be converted as "capital assets" (within the meaning of
Section 1221 of the Internal Revenue Code) and does not address particular tax
considerations or circumstances. You may be subject to special tax rules if you
are:

- subject to the alternative minimum tax;

- a bank;

- a tax-exempt organization;

- an insurance company;

- a foreign person or entity (except to the extent specifically set forth
below);

- a dealer in securities or currencies;

- holding Notes as a position in a hedging transaction, "straddle" or
"conversion transaction;" or

- deemed to sell Notes or common stock under the constructive sale
provision of the Internal Revenue Code.

This summary discusses the tax considerations applicable to those of you
who are the initial purchasers of the Notes and who purchase the Notes at their
"issue price" as defined in Section 1273 of the Internal Revenue Code. It does
not discuss the tax considerations applicable to subsequent purchasers of the
Notes. We have not sought any ruling from the IRS or an opinion of counsel with
respect to the statements we make and the conclusions we reach in the following
summary, and we are not sure that the IRS will agree with our statements and
conclusions. The IRS may successfully adopt a contrary position. Our summary
does not consider the effect of the federal estate or gift tax laws or the tax
laws of any applicable foreign, state, local or other jurisdiction.

Those of you considering the purchase of Notes should consult your own tax
advisors with respect to the application of the United States Federal Income Tax
Laws to your particular situation as well as any tax consequences arising under
the Federal estate or gift tax rules, under the laws of any state, local or
foreign taxing jurisdiction or under any applicable tax treaty.

TAXATION OF INTEREST

Interest paid on the Notes will be included in your income as ordinary
income at the time it is treated as received or accrued, in accordance with your
regular method of tax accounting. If there is a Repurchase Event, as defined in
"Description of Notes -- Repurchase at Option of Holders Upon a Repurchase
Event," we may be required to pay additional interest on the Notes. Those
payments will result in the recognition of additional interest or original issue
discount income with respect to the Notes. According to Treasury Regulations,
the possibility of an additional payment on a Note will not affect the amount

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<PAGE> 75

of interest or original issue discount income you recognize (or the timing of
your recognition) if the likelihood of the additional payment, as of the date
the Notes are issued, is remote. We believe that the likelihood of a Repurchase
Event occurring is remote and do not intend to treat the possibility of one
occurring as affecting the yield to maturity of any Note. The IRS may not agree
with us.

SALE, EXCHANGE OR REDEMPTION OF THE NOTES

When you sell or exchange the Note or the Note is redeemed, you will
generally recognize capital gain or loss equal to the difference between:

- the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent such
amount is attributable to accrued interest income not previously included
in your taxable income, which will be taxable as ordinary income, or is
attributable to accrued interest that was previously included in income,
which amount may be received without generating further taxable income);
and

- your adjusted tax basis in the Note.

Your adjusted tax basis in a Note generally will equal the amount you paid
for the Note. Capital gain or loss will be long-term capital gain or loss if
your holding period for the Note is more than one year at the time of sale,
exchange or redemption.

CONVERSION OF THE NOTES

You will generally not recognize any income, gain or loss upon conversion
of a Note into common stock except to the extent the common stock is considered
attributable to accrued interest not previously included in your taxable income
(which is taxable as ordinary income) or with respect to cash received in lieu
of a fractional share of common stock. Your tax basis in the common stock
received on conversion of a Note will be the same as your adjusted tax basis in
the Note at the time of conversion (reduced by any basis allocable to a
fractional share interest), and the holding period of the common stock received
on conversion will generally include the holding period of the converted Note.
However, your tax basis in shares of common stock considered attributable to any
accrued interest generally will equal the amount of such accrued interest
included in income, and the holding period for such shares will begin on the
date of conversion.

Cash you receive in lieu of a fractional share of common stock upon
conversion will be treated as a payment in exchange for the fractional share of
common stock. Accordingly, cash you receive in lieu of a fractional share of
common stock generally will result in capital gain or loss (measured by the
difference between the cash received for the fractional share and your adjusted
tax basis in the fractional share).

DIVIDENDS

Any dividends you are paid on the common stock after a conversion generally
will be included in your taxable income as ordinary income to the extent of our
current or accumulated earnings and profits. You may, in certain circumstances,
be deemed to have received constructive distributions if the conversion ratio of
the Notes is adjusted. Adjustments to the conversion price made pursuant to a
bona fide reasonable adjustment formula which has the effect of preventing the
dilution of your interest as a holder of the

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debt instrument will generally not be considered to result in a constructive
distribution. Certain of the possible adjustments provided in the Notes
(including, without limitation, adjustments in respect to taxable dividends to
our stockholders) will not qualify as being pursuant to bona fide reasonable
adjustment formula. If such adjustments are made, you, as a Note holder, might
be deemed to have received constructive distributions taxable as dividends even
though you have not received any cash or property as a result of the
adjustments. In certain circumstances, the failure of the Notes to provide for
such an adjustment may result in taxable dividend income to the holders of
common stock.

SALE OF COMMON STOCK

Upon the sale or exchange of common stock, you will generally recognize
capital gain or loss equal to the difference between:

- the amount of cash and the fair market value of any property you receive
upon the sale or exchange; and

- your adjusted tax basis in the common stock.

Capital gain or loss will be long-term capital gain or loss if your holding
period in common stock is more than one year at the time of the sale or
exchange. Your basis and holding period in common stock received upon conversion
of a Note are determined as discussed above under "Conversion of the Notes."

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a Note, payments of dividends on
common stock, payments of the proceeds of the sale of a Note and payments of the
proceeds of the sale of common stock. A 31% backup withholding tax may apply to
some or all of such payments unless you:

- certify that you are a corporation, a "United States Alien Holder" (as
defined below) that is not engaged in a United States trade or business,
or come within certain other exempt categories and when required
demonstrate this fact; or

- provide a taxpayer identification number, certify as to no loss of
exemption from backup withholding, and otherwise comply with applicable
requirements of the backup withholding rules.

Any amounts withheld under the backup withholding rules from your payment will
be allowed as a credit against your United States federal income tax and may
entitle you to a refund, provided that you furnish required information to the
IRS.

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SPECIAL TAX RULES APPLICABLE TO FOREIGN HOLDERS

For purposes of the following discussion, a "United States Alien Holder" is
any holder who, for United States federal income tax purposes, is:

- a foreign corporation,

- a foreign partnership,

- a nonresident alien individual,

- an estate, other than an estate the income of which is includible in
income for United States federal income tax purposes regardless of its
source; or

- a trust other than a trust with respect to which a court within the
United States is able to exercise primary supervision over the
administration of the trust, and with respect to which one or more United
States persons have the authority to control all substantial decisions of
the trust.

If you are a United States Alien Holder, payments of interest on the Notes
will not be subject to United States federal withholding tax provided that:

- you do not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock entitled to vote;

- you are not a "controlled foreign corporation" (within the meaning of the
Internal Revenue Code) that is related to us through stock ownership;

- either (1) you, under penalty of perjury, provide us or our agent with
your name and address and certify that you are not a United States person
or (2) a securities clearing organization, bank, or other financial
institution that holds customers' securities in the ordinary course of
its trade or business (a "financial institution") certifies to us or our
agent, under penalties of perjury, that such a statement has been
received from you by it or another financial institution and furnishes to
us or our agent a copy thereof; and

- the Notes are in registered form.

If you are a United States Alien Holder, you will generally not be subject
to United States federal income or withholding tax on gain realized on the sale
or exchange of Notes or common stock unless:

- subject to certain exceptions, you are an individual who was present in
the United States for 183 days or more during the taxable year and to
whom such gain is, under applicable tax rules, considered to be from
United States sources;

- the gain is effectively connected with the conduct of your trade or
business in the United States or, in the case of certain residents of
countries which have an income tax treaty in force with the United
States, attributable to a "permanent establishment" (or, in the case of
an individual, a "fixed base") in the United States as such terms are
defined in the applicable treaty;

- you are subject to tax pursuant to the provisions of United States tax
law applicable to certain United States expatriates (including certain
former citizens or residents of the United States); or

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- we are or have been a "United States real property holding corporation"
at any time within the shorter of the five-year period preceding the
disposition or your holding period. We do not believe that we are
currently a "United States real property holding corporation," or that we
will become one in the future.

If you are a United States Alien Holder, income you receive in the form of
interest on Notes or dividends on common stock will be subject to a United
States federal withholding tax at a 30% rate upon the actual payment of the
dividends or interest, except as described above with respect to the payment of
interest and except where an applicable tax treaty provides for the reduction or
elimination of the withholding tax. You will generally be taxed, however, in the
same manner as a United States corporation or resident with respect to such
income if it is effectively connected with the conduct of a trade or business in
the United States or, in the case of certain residents of countries which have
an income tax treaty in force with the United States, attributable to a
"permanent establishment" (or, in the case of an individual, a "fixed base") in
the United States as such terms are defined in the applicable treaty. Such
effectively connected income or income attributable to a permanent establishment
received by a United States Alien Holder which is a corporation may in certain
circumstances be subject to an additional "branch profits tax" at a 30% rate or
if applicable, a lower treaty rate.

If you are a United States Alien Holder, dividends paid to you that are
subject to the withholding tax described above will generally be exempt from
United States backup withholding tax but will be subject to certain information
reporting. Backup withholding generally will not apply to payments of interest
made to you if the certification described above under "Information Reporting
and Backup Withholding Tax" is received, but will be subject to certain
information reporting. Payment of the proceeds of the sale of Notes or common
stock to or through a United States office of a broker will be subject to
information reporting and possible backup withholding at a rate of 31% unless
you certify your non-United States status under penalties of perjury or
otherwise establish an exemption and the broker does not have actual knowledge
that such certification is false or the exemption is otherwise not applicable.
Payment of the proceeds of the sale of Notes or common stock to or through a
foreign office of a broker generally will not be subject to backup withholding
tax. In the case of the payment of proceeds from the disposition of Notes or
common stock through a foreign office of a broker that is:

- a United States person;

- a "controlled foreign corporation" for United States federal income tax
purposes; or

- a foreign person 50% or more of whose gross income from all sources for a
specified period is derived from activities that are effectively
connected with the conduct of a United States trade or business,

information reporting is required on the payment unless the broker has
documentary evidence in its files that the owner is a non-United States person
and the broker has no actual knowledge to the contrary or unless another
exemption is established. Both backup withholding and information reporting will
apply to the proceeds of such dispositions if the broker has actual knowledge
that the payee is a United States person. Our payments of principal on the Notes
may in certain circumstances be required to be reported to the IRS. Any amounts
withheld under the backup withholding rules from a payment to you as a United
States Alien Holder will be allowed as a refund or a credit against your United
States Federal income tax, provided that you furnish the required information to
the IRS.

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Copies of any information reports made to the IRS may be made available under
the provisions of a specific treaty or agreement to the tax authorities of the
country in which you reside.

Recently issued Treasury Regulations that are generally effective on and
after January 1, 2000 (the "Withholding Regulations") change the rules listed
above in certain respects. You should consult your tax advisor with respect to
such changes and their impact on your particular situation.

THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY,
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE PARTICULAR UNITED STATES
FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING
OF OUR NOTES AND COMMON STOCK. YOU SHOULD ALSO CONSULT A TAX ADVISOR AS TO THE
UNITED STATES ESTATE AND GIFT TAX CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES
OF PURCHASING, HOLDING AND DISPOSING OF OUR NOTES AND COMMON STOCK, AS WELL AS
THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.

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UNDERWRITING

Each underwriter has agreed to purchase from us Notes in an aggregate
principal amount indicated below opposite each underwriter's name. The purchase
price will be the public offering price less the underwriting discount. The
underwriting discount is set forth on the cover page of this prospectus. The
purchase will be made on the terms and conditions contained in an Underwriting
Agreement dated as of , 1999 between Digital Lightwave and the
underwriters. The obligation of the underwriters to purchase the Notes will be
subject to the conditions precedent described in the Underwriting Agreement. The
underwriters have agreed to purchase all the Notes, if any are to be purchased.
If an underwriter fails to purchase its allocated share, no other underwriter
will have an obligation to purchase the Notes on behalf of such underwriter.

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
UNDERWRITERS DEBENTURES
- ------------ -------------------
<S> <C>
C.E. Unterberg, Towbin...................................... $20,000,000

-----------
Total..................................................... $20,000,000
===========
</TABLE>

The underwriters may change the offering price or the sales terms following
the initial offering. The Notes are offered subject to receipt and acceptance by
the underwriters.

We have granted an option to the underwriters to purchase additional Notes
up to an aggregate principal amount of $3,000,000, at the initial offering price
less the underwriting discount shown on the cover page of this prospectus. This
option expires on the close of business on the 30th day following the date of
this prospectus. The underwriters may only exercise this option to cover
over-allotments in connection with the sale of the Notes. In the event that the
underwriters exercise their over-allotment option, each underwriter has agreed
to purchase additional Notes in approximately the same proportions as the
original purchase of Notes by the underwriters under this prospectus.

The following table summarizes the compensation to be paid by us to the
underwriters.

<TABLE>
<CAPTION>
Total
-------------------------------
Without With
Per $1,000 Over-allotment Over-allotment
---------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions.....
</TABLE>

<TABLE>
<CAPTION>
Warrants(1)
-----------
<S> <C>
Other Underwriter compensation..............................
</TABLE>

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

(1) Includes warrants to purchase up to shares of common stock,
exercisable at $2.75 per share, the market price of the common stock on the
date of issuance, issued on April 6, 1999 for services rendered in
connection with a private financing.

We have agreed to indemnify the underwriters against certain liabilities
that may be incurred in connection with this offering, including liabilities
under the Securities Act, or

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to contribute to payments that the underwriters may be required to make in
respect of any indemnified liability.

We have agreed that we will not issue any shares of common stock without
the prior written consent of C.E. Unterberg, Towbin until 180 days after the
effective date of the registration statement covering the Notes. This
restriction will not apply to the issuances by us under employee stock plans,
upon exercise of options outstanding at the commencement of this offering and
upon conversion of the Notes, or to private sales, transfers or issuances of
common stock.

In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Notes or common stock. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M under the
Exchange Act pursuant to which the underwriters may bid for, or purchase, Notes
or common stock for the purpose of stabilizing the market price. The
underwriters may also create a short position by selling more Notes in
connection with this offering than they are committed to purchase from us, and
in such case may purchase Notes in the open market following completion of this
offering to cover all or a portion of such short position. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Notes or the common stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken, they may be discontinued at
any time. As permitted by Rule 103 under the Exchange Act, the underwriters or a
market maker in the common stock may make bids for or purchases of common stock
in the Nasdaq National Market until such time, if any, when a stabilizing bid
for such securities has been made.

LEGAL MATTERS

Certain matters relating to this offering are being passed upon for us by
Brobeck, Phleger & Harrison LLP, San Francisco, California. Certain matters
relating to this offering are being passed upon for the underwriters by Wilson,
Sonsini, Goodrich and Rosati, Palo Alto, California.

EXPERTS

The consolidated balance sheets of Digital Lightwave, Inc. and its
subsidiary as of December 31, 1997 and 1998 and the related consolidated
statements of operations, of stockholders' equity (deficit), and of cash flows
for each of the years in the three year period ended December 31, 1998 appearing
in this prospectus and registration statement are included in reliance on the
report of PricewaterhouseCoopers LLP, independent certified public accountants,
given on the authority of that firm as experts in accounting and auditing.

AVAILABLE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the Notes and
common stock offered by this prospectus. This prospectus, which constitutes part
of the registration statement, does not contain all of the information set forth
in the registration statement and the exhibits and schedules thereto, to which
reference is hereby made. Each statement made in this prospectus concerning a
document filed as an exhibit to the registration

78
<PAGE> 82

statement is qualified in its entirety by reference to such exhibit for a
complete statement of its provisions. For further information with respect to us
and the Notes and common stock offered hereby, reference is hereby made to the
registration statement, including the exhibits and schedules thereto.

We are subject to the periodic reporting and other informational
requirements of the Exchange Act pursuant to Section 15(d) thereof and, in
accordance therewith, files reports, proxy statements and other information with
the Commission. For further information with respect to us, reference is hereby
made to such reports and other information which, together with the registration
statement, can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at Seven World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Additional information may also be obtained
by calling 1-800-SEC-0330. Copies of such material may also be obtained from the
Public Reference Branch of the Commission located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of fees prescribed by the Commission or,
without charge, through the Commission's URL at "http://www.sec.gov."

INFORMATION CONCERNING FORWARD LOOKING STATEMENTS

This prospectus contains certain statements of a forward-looking nature
relating to future events or our future performance. 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 our future prospects generally, such investors should specifically
consider various factors identified in our Annual Report on Form 10-K for the
period ended December 31, 1998, 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 our 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 a 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. We
participate in a highly concentrated industry, and have limited visibility with
regard to customer orders and the timing of such orders. We 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 our customers during fiscal
periods. We disclaim any obligation to update any such factors or announce
publicly revisions to such statements to reflect future events or developments.

79
<PAGE> 83

DIGITAL LIGHTWAVE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 84

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Digital Lightwave, Inc. (the "Company") at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period then ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

Tampa, Florida
January 29, 1999, except for Note 16, as to
which the date is March 31, 1999

F-2
<PAGE> 85

DIGITAL LIGHTWAVE, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 3,848 $ 24,031
Accounts receivable............................... 7,152 4,780
Inventories....................................... 5,476 8,120
Prepaid expenses and other current assets......... 748 481
-------- --------
Total current assets........................... 17,224 37,412
Property and equipment, net......................... 9,274 6,785
Other assets........................................ 1,060 164
-------- --------
Total assets................................... $ 27,558 $ 44,361
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.......... $ 6,468 $ 4,917
Accrued settlement charges........................ 8,489 --
-------- --------
Total current liabilities...................... 14,957 4,917
Long-term liabilities............................... 281 25
-------- --------
Total liabilities.............................. 15,238 4,942
-------- --------
Commitments and contingencies (Notes 7, 8, 10 and
15)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; authorized
20,000,000 shares; no shares issued or
outstanding.................................... -- --
Common stock, $.0001 par value; authorized
200,000,000 shares; issued and outstanding
26,535,332 and 26,440,878 shares,
respectively................................... 3 3
Additional paid-in capital........................ 57,927 55,201
Accumulated deficit............................... (45,610) (15,785)
-------- --------
Total stockholders' equity..................... 12,320 39,419
-------- --------
Total liabilities and stockholders' equity..... $ 27,558 $ 44,361
======== ========
</TABLE>

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

F-3
<PAGE> 86

DIGITAL LIGHTWAVE, INC.

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

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Sales.................................... $ 24,191 $ 9,081 $ 6,044
Cost of goods sold....................... 9,219 3,124 2,079
---------- ---------- ----------
Gross profit............................. 14,972 5,957 3,965
---------- ---------- ----------
OPERATING EXPENSES:
Engineering and development.............. 14,335 5,342 2,403
Sales and marketing...................... 11,363 5,260 1,706
General and administrative............... 7,223 3,812 1,380
Reorganization charges................... 1,018 -- --
Litigation settlement.................... 11,500 -- --
---------- ---------- ----------
Total operating expenses............ 45,439 14,414 5,489
---------- ---------- ----------
Operating loss........................... (30,467) (8,457) (1,524)
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income........................ 649 1,826 211
Interest expense....................... (37) (66) (595)
Other income (expense), net............ 30 7 (200)
---------- ---------- ----------
Total other income (expense)........ 642 1,767 (584)
---------- ---------- ----------
Loss before income taxes................. (29,825) (6,690) (2,108)
Provision for income taxes............... -- -- --
---------- ---------- ----------
Net loss............................ $ (29,825) $ (6,690) $ (2,108)
========== ========== ==========
Basic and diluted loss per share of
common stock........................... $ (1.13) $ (0.25) $ (0.10)
========== ========== ==========
Weighted average common shares
outstanding......................... 26,475,749 26,084,208 21,829,235
========== ========== ==========
</TABLE>

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

F-4
<PAGE> 87

DIGITAL LIGHTWAVE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE
------------------- PAID-IN ACCUMULATED FROM
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDER TOTAL
---------- ------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996............... 20,000,000 $2 $ 522 $ (6,987) $(1,700) $ (8,163)
Issuance of common
stock in exchange
for debt........... 1,013,924 -- 4,820 -- -- 4,820
Sale of common
stock.............. 221,992 -- 2,602 -- -- 2,602
Issuance of common
stock upon exercise
of stock options... 31,334 -- 39 -- -- 39
Issuance of common
stock upon exercise
of warrants........ 1,251,667 -- 6,259 -- -- 6,259
Net loss........... -- -- -- (2,108) -- (2,108)
---------- -- ------- -------- ------- --------
Balance, December 31,
1996............... 22,518,917 2 14,242 (9,095) (1,700) 3,449
Issuance of common
stock from Initial
Public Offering,
net................ 3,658,860 1 39,591 -- -- 39,592
Issuance of common
stock.............. 263,101 -- 1,368 -- -- 1,368
Repayment of note
receivable from
stockholder........ -- -- -- -- 1,700 1,700
Net loss........... -- -- -- (6,690) -- (6,690)
---------- -- ------- -------- ------- --------
Balance, December 31,
1997............... 26,440,878 3 55,201 (15,785) -- 39,419
Issuance of common
stock.............. 94,454 -- 226 -- -- 226
Settlement of Haney
Litigation......... -- -- 2,500 -- -- 2,500
Net loss........... -- -- -- (29,825) -- (29,825)
---------- -- ------- -------- ------- --------
Balance, December 31,
1998............... 26,535,332 $3 $57,927 $(45,610) $ -- $ 12,320
========== == ======= ======== ======= ========
</TABLE>

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

F-5
<PAGE> 88

DIGITAL LIGHTWAVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(29,825) $(6,690) $(2,108)
Adjustments to reconcile net loss to cash used by
operating activities:
Interest expense converted to equity.............. -- -- 205
Depreciation and amortization..................... 2,254 778 204
Loss on disposal of property...................... 33 -- 8
Litigation settlement............................. 9,925 -- --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Increase in accounts receivable..................... (2,372) (2,270) (2,499)
Decrease (increase) in inventories.................. 2,645 (7,270) (228)
Increase in prepaid expenses and other assets....... (1,163) (37) (499)
Increase in accounts payable and accrued
liabilities....................................... 1,386 2,647 479
Decrease in other long-term liabilities............. -- -- (5)
Increase in accrued settlement charges.............. 1,064 -- --
-------- ------- -------
Net cash used by operating activities.......... (16,053) (12,842) (4,443)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (4,381) (5,994) (635)
Proceeds from sale of assets........................ 68 -- --
-------- ------- -------
Net cash used by investing activities.......... (4,313) (5,994) (635)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of stockholder receivable................. -- 1,700 --
Proceeds from notes payable......................... -- -- 2,350
Principal payments on notes payable................. -- (750) (3,000)
Principal payments on notes payable, related
party............................................. -- -- (202)
Principal payments, capital lease obligations....... (43) (208) (195)
Proceeds from sale of common stock, net of
expense........................................... 226 40,960 --
Cash paid for common stock.......................... -- -- 7,218
-------- ------- -------
Net cash provided by financing activities...... 183 41,702 6,171
-------- ------- -------
Net (decrease) increase in cash and cash
equivalents....................................... (20,183) 22,866 1,093
Cash and cash equivalents at beginning of period.... 24,031 1,165 72
-------- ------- -------
Cash and cash equivalents at end of period.......... $ 3,848 $24,031 $ 1,165
======== ======= =======
OTHER SUPPLEMENTAL DISCLOSURES:
Cash paid for interest.............................. $ 37 $ 66 $ 547
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred.................. $ 382 $ -- $ 355
Fixed asset additions included in accounts payable
at year end....................................... 82 327 --
Disposals of property and equipment................. -- -- 18
Notes payable converted to equity................... -- -- 6,295
Accounts receivable related to capital leases....... 847 -- --
</TABLE>

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

F-6
<PAGE> 89

DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

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

On January 6, 1998, Digital Lightwave Leasing Corporation ("DLLC") was
incorporated in the State of Delaware. The Company commenced business
immediately and provides financing for the purchase of the Company's product in
the form of capital leases as well as equipment rental to the Company's
customers. DLLC is a wholly-owned subsidiary of the Company and all significant
intercompany transactions and balances are eliminated in consolidation.

CASH EQUIVALENTS

The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or
market.

PROPERTY AND EQUIPMENT

The Company's property and equipment, including certain assets under
capital leases, are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over estimated useful lives of 5 to 7 years, or over the lesser of the
term of the lease or the estimated useful life of assets under the capital
lease. Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated
depreciation and amortization, and any resulting gain or loss is included in the
results of operations.

ACCRUED WARRANTY

The Company provides the customer a warranty with each product sold and
accrues warranty expense based upon a percentage of sales. Actual warranty costs
incurred are charged against the accrual when paid.

F-7
<PAGE> 90
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE RECOGNITION

Revenue is recognized when a purchase order or contract has been received
from the customer, and the product has been shipped to the Company's customer
or, in the case of sales to a distributor, when the product is shipped to the
distributor's end user because distributors generally have a right of return on
any product that does not sell within time periods specified in the agreement
with the distributor. Returns from individual customers are recorded as a
reduction in sales during the period in which the return was made. To date, the
Company has not experienced a significant amount of product returns.

In addition, beginning January 1, 1998, revenue from the sale of the
Company's product is recognized in accordance with SOP 97-2, Software Revenue
Recognition. SOP 97-2 requires the total contract revenue to be allocated to the
various elements of the contract based upon objective evidence of the fair
values of such elements and allows for only the allocated revenue to be
recognized upon completion of those elements. The effect of the adoption of SOP
97-2 was not significant to the Company's results of operations for the year
ended December 31, 1998.

Revenue representing interest income on leasing transactions is recognized
over the life of the lease as the payments become due.

DEFERRED REVENUE

Deferred revenue, which represents amounts billed to customers in advance
of shipment or amounts billed to distributors prior to the distributors sale of
the goods, is recorded at the date of billing. Revenue is subsequently
recognized at the date of shipment or, in the case of distributor sales, at the
time the distributor ships the product to the end user.

RESEARCH AND DEVELOPMENT

Software and product development costs are included in engineering and
development and are expensed as incurred. SFAS No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed," requires the
capitalization of certain software development costs during the period following
the time that technological feasibility is established until general release of
the product to customers. The capitalized cost is then amortized over the
estimated product life. To date, the period between achieving technological
feasibility and the general release to customers has been short and, therefore,
software development costs qualifying for capitalization have been
insignificant.

INCOME TAXES

The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the consolidated financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the consolidated financial
statement and the tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.

F-8
<PAGE> 91
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMPUTATION OF NET LOSS PER SHARE

Basic loss per share is based on the weighted average number of common
shares outstanding during the periods presented. For the years ended December
31, 1998 and 1997, diluted loss per share, which includes the effect of
incremental shares from common stock equivalents using the treasury stock
method, is not included in the calculation of net loss per share as the
inclusion of such equivalents would be anti-dilutive. The table below shows the
calculation of basic weighted average common shares outstanding and the
incremental number of shares arising from common stock equivalents under the
treasury stock method:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
BASIC:
Weighted average common shares outstanding... 26,475,749 26,084,208 21,375,584
---------- ---------- ----------
Total basic................................ 26,475,749 26,084,208 21,375,584
DILUTED:
Incremental shares for common stock
equivalents................................ 18,690* 976,013* 453,651
---------- ---------- ----------
Total dilutive............................. 26,494,439 27,060,221 21,829,235
========== ========== ==========
</TABLE>

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

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

Pursuant to the requirements of the Securities and Exchange Commission,
common stock, stock options and warrants issued by the Company during the twelve
months immediately preceding the Initial Public Offering date have been included
in the calculation of the weighted average shares outstanding for the year ended
December 31, 1996 using the treasury stock method based on the Initial Public
Offering price. Accordingly, weighted average common shares includes 1,375,584
of common stock equivalent shares issued during the year ended December 31, 1996
shown as outstanding. Incremental shares for common stock equivalents includes
453,651 common stock equivalent shares for options issued during the year ended
December 31, 1996.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and receivables. As of December 31, 1998, 1997 and 1996, substantially all of
the Company's cash balances, including amounts representing outstanding checks,
were deposited with what management believes to be high quality financial
institutions. During the normal course of business, the Company extends credit
to customers conducting business primarily in the telecommunications industry
both within the United States and internationally.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets

F-9
<PAGE> 92
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and liabilities at the date of the financial statements. Estimates also affect
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENTS

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 130, "REPORTING
COMPREHENSIVE INCOME". In June 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 130, effective for fiscal periods beginning after
December 15, 1997. The new standard requires that comprehensive income, which
includes net income as well as certain changes in assets and liabilities
recorded in common equity, be reported in the financial statements. The Company
adopted SFAS No. 130 during the year ended December 31, 1998. For the years
ended December 31, 1998, 1997, and 1996, there were no components of
comprehensive income other than net income.

SFAS NO. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION". In 1998, the Company adopted SFAS No. 131, which requires a
"management" approach of disclosing segment information. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosures about products and
services, geographic areas, and major customers. For the years ended December
31, 1998, 1997, and 1996, there was no impact on the Company's financial
statements.

SFAS NO. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS". In February 1998, the FASB issued SFAS No. 132 which
is effective for periods ending after December 15, 1998. The new standard
revises employers' disclosures about pensions and other postretirement benefits.
For the years ended December 31, 1998, 1997, and 1996, there was no impact on
the Company's financial statements.

SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INVESTMENTS AND HEDGING
ACTIVITIES". SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company does not currently maintain any derivative investments nor does it
conduct any hedging activities, therefore, SFAS No. 133 is not expected to
impact the Company.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the 1998
presentation.

F-10
<PAGE> 93
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. INVENTORIES

Inventories at December 31, 1998 and 1997 are summarized as follows:

<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $2,166 $1,266
Work-in progress............................................ 1,443 1,875
Finished goods.............................................. 1,867 4,979
------ ------
$5,476 $8,120
====== ======
</TABLE>

3. PROPERTY AND EQUIPMENT

Property and equipment at December 31, 1998 and 1997 are summarized as
follows:

<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Test equipment.............................................. $ 4,418 $ 2,569
Computer equipment and software............................. 3,555 2,895
Tooling..................................................... 487 455
Tradeshow fixtures and equipment............................ 242 59
Office furniture, fixtures and equipment.................... 2,255 1,381
Leasehold improvements...................................... 1,214 582
------- -------
12,171 7,941
Less accumulated depreciation............................... (2,897) (1,156)
------- -------
$ 9,274 $ 6,785
======= =======
</TABLE>

Equipment under capital lease and related accumulated amortization,
included above at December 31, 1998 and 1997 are summarized as follows:

<TABLE>
<CAPTION>
1998 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Test equipment.............................................. $425 $ 75
Computer equipment and software............................. 117 37
---- ----
542 112
Less accumulated amortization............................... (96) (39)
---- ----
$446 $ 73
==== ====
</TABLE>

F-11
<PAGE> 94
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at December 31, 1998 and 1997 are
summarized as follows:

<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable............................................ $3,594 $3,541
Deferred revenue............................................ 124 765
Current portion of capital lease obligations................ 153 42
Accrued expenses and other.................................. 2,597 569
------ ------
$6,468 $4,917
====== ======
</TABLE>

5. INCOME TAXES

The tax effected amounts of temporary differences at December 31, 1998 and
1997 are summarized as follows:

<TABLE>
<CAPTION>
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
CURRENT:
Deferred tax asset:
Deferred compensation..................................... $ 64 $ 33
Accrued liabilities....................................... 3,194 --
Other..................................................... 774 408
Valuation allowance....................................... (3,869) (418)
-------- -------
Total current deferred tax asset....................... 163 23
-------- -------
Net current deferred tax asset......................... $ 163 $ 23
-------- -------
NON-CURRENT:
Deferred tax asset:
Net operating loss carry forward.......................... $ 14,686 $ 5,628
Other..................................................... -- --
Research and experimentation credit....................... 549 142
Valuation allowance....................................... (14,621) (5,464)
-------- -------
Total non-current deferred tax asset................... 614 306
-------- -------
DEFERRED TAX LIABILITY:
Property related............................................ $ (777) $ (329)
-------- -------
Total non-current deferred tax liability............... (777) (329)
-------- -------
Net deferred tax asset................................. $ 0 $ 0
======== =======
</TABLE>

Management believes that it is more likely than not that the tax benefit
associated with these deferred tax assets will not be realized and, therefore as
of December 31, 1998, the Company has established a valuation allowance of
approximately $18.5 million. The result is an increase in the valuation
allowance from December 31, 1997 of approximately $12.6 million.

F-12
<PAGE> 95
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 1998, the Company had net operating loss carry forwards
of approximately $39.0 million for tax purposes. Due to certain change of
ownership requirements of Section 382 of the Internal Revenue Code ("IRC"),
utilization of the Company's net operating losses incurred prior to July 1, 1993
is expected to be limited to approximately $7,500 per year. This limitation in
conjunction with the expiration period for these pre-July 1, 1993 net operating
losses results in the Company's total net operating losses available being
limited to approximately $38.2 million. Loss carry forwards will expire between
the years 2008 and 2018.

As of December 31, 1998, the Company also had general business credit carry
forwards of approximately $500,000 which expire between the years 2008 and 2011.
These credits are also subject to the Section 382 annual limitation.
Approximately $15,000 of these credits are subject to the Section 382 annual
limitation.

Following is a reconciliation of the applicable federal income tax as
computed at the federal statutory tax rate to the actual income taxes reflected
in the statement of operations.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1998 1997 1996
-------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at U.S. Federal income tax rate.......... $(10,140) $(2,275) $(717)
State income tax benefit, net of Federal............. (1,083) (243) (76)
Other, net........................................... (979) (410) 6
Valuation allowance increase......................... 12,609 2,928 787
Research and experimentation credit.................. (407) -- --
-------- ------- -----
Provision for income taxes........................... $ 0 $ 0 $ 0
======== ======= =====
</TABLE>

6. NOTES PAYABLE

On February 28, 1997 the Company repaid all notes payable with proceeds
from the Initial Public Offering. At December 31, 1996 notes payable amounted to
$750,000. This note was unsecured, subordinated to all secured debt and any
future lines of credit up to $2 million, bore interest at 18% per annum with
interest due and payable August 30, 1996, November 30, 1996, February 29, 1997
and May 31, 1997.

F-13
<PAGE> 96
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. LEASES

The Company is obligated under various non-cancelable leases for equipment
and office space. Future minimum lease commitments under operating and capital
leases were as follows as of December 31, 1998:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ $196 $ 1,891
2000........................................................ 169 2,314
2001........................................................ 110 2,291
2002........................................................ -- 2,314
2003........................................................ -- 2,314
Thereafter.................................................. -- 13,006
---- -------
475 $24,130
-------
Less: Amount representing interest.......................... 69
----
Present value of minimum lease payments..................... 406
Less: Current portion....................................... 155
----
$251
====
</TABLE>

Total rental expense was approximately $1,162,900, $506,000 and $241,500
for the years ended December 31, 1998, 1997, and 1996, respectively.

8. COMMITMENTS

At December 31, 1998, the Company had outstanding purchase order
commitments to purchase certain inventory items totaling approximately $2.5
million.

On January 13, 1998 the Company entered into a ten year lease agreement,
which was amended on February 18, 1998, for a three story office building with
92,225 square feet of rentable space. The building was completed in November
1998 and the Company relocated certain of its operations to the building on
November 30, 1998. The Company is currently leasing 67% of the rentable space at
a cost of $13.43 per square foot per annum in base rent and $5.38 per square
foot per annum in operating expenses. At the beginning of year two, the rental
costs will increase to $14.175 and $6.00 for base rent and operating expenses,
respectively. Thereafter, the rental costs shall increase by 2.5% per lease
year.

The Company was required to pay a tenant improvement allowance of $900,000
during 1998. The allowance is held in escrow by the landlord to secure the
Company's obligations under the lease. The Company has an option to terminate
the lease at the conclusion of the seventh lease year. Such option, if
exercised, will invoke a termination fee of $1,941,749 plus six months of
estimated operating expenses. The Company also has an option to purchase the
building for approximately $14.5 million which may be exercised at any time
during the initial lease term and will require a $300,000 deposit when notice to
exercise is given.

As required by the lease agreement, the Company has put in place a standby
letter of credit to the benefit of the landlord in the amount of $2,300,000,
which is collateralized by

F-14
<PAGE> 97
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

a three month certificate of deposit with a financial institution. The lease
agreement calls for a declining letter of credit over the life of the lease.

In accordance with the terms of the lease, the Landlord also issued a
letter of credit to the benefit of the Company in the amount of $1,000,000,
which secured the landlord's performance obligations under the lease and was
terminated upon occupancy.

The Company entered into an accounts receivable agreement dated December
28, 1998 with EAB Leasing Corp. ("EAB") providing for the sale of the Company's
accounts receivable to EAB. The aggregate maximum amount the Company can borrow
at one time under this agreement is $2.9 million through June 28, 1999, with a
maximum of $2.0 million available on a monthly basis. In connection with this
agreement, the Company has granted EAB a security interest in its accounts,
accounts receivables, contract rights, equipment, chattel paper, general
intangibles, instruments, inventory and all proceeds of the foregoing. The
annual interest rate equivalent charged to the Company under this agreement is
the prime rate plus 1.5%. The agreement also provides that the Company pay a
minimum monthly service fee in the amount of $10,000. As of December 31, 1998,
no sales had been made under this agreement.

9. RELATED PARTY TRANSACTIONS

During December 1995, a stockholder borrowed $1,700,000 from the Company.
This note accrued interest at 9% with interest payments due monthly. The
principal sum and accrued interest thereon was repaid by the stockholder in
September 1997. The accompanying consolidated financial statements include the
note as a decrease in stockholders' equity, as well as accrued interest of
approximately $31,300 as of December 31, 1996.

During December 1998, a stockholder borrowed $100,000 from the Company.
This note is accruing interest at 9% with the principal sum and accrued interest
thereon payable no later than December 31, 1999.

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

10. COMMON STOCK, STOCK OPTIONS, AND WARRANTS

STOCK OPTIONS

During 1995, the Company entered into option agreements with certain
parties to purchase an aggregate of up to 701,000 shares of common stock at the
price to the public per share, in the event of an initial public offering of
common stock of the Company, at an aggregate purchase price equal to $154,500.
The Company subsequently terminated several agreements which reduced the
aggregate shares subject to such options to 470,000, at an aggregate price equal
to $39,000. The options were exercised during July, 1996.

SUBORDINATED NOTE

On January 2, 1996, the Company issued (i) its 16% Subordinated Promissory
Note due January 2, 1999 in the original principal amount of $1 million, and
(ii) warrants to

F-15
<PAGE> 98
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purchase 200,000 shares of Common Stock at an exercise price of $5.00 per share.
The warrants terminate on the earlier to occur of: (i) thirty (30) days
following the filing of a registration statement for an underwritten initial
public offering of the Common Stock of the Company, (ii) thirty (30) days
following an announcement of a change in control of the Company; or (iii)
January 2, 1999. On August 27, 1996, the noteholder surrendered the Subordinated
Promissory Note in exercise of the warrants.

CORPORATE MERGER

Pursuant to an Agreement and Plan of Merger (the Merger) dated January 9,
1996, Digital Lightwave, Inc., a California corporation merged into Digital
Lightwave, Inc., a Delaware corporation effective March 18, 1996. The merger
increased the number of shares of common stock authorized from 1,000,000, no par
value, to 80,000,000, $.0001 par value. In connection with the merger, the
Company also authorized 20,000,000 shares of $.0001 par value preferred stock.
Each share of outstanding common stock of the California corporation was
converted into 3,921.5686 shares of common stock of the Delaware corporation.
All applicable share and per share amounts in the accompanying consolidated
financial statements have been retroactively adjusted to reflect these events.

Effective July 25, 1996, the Board of Directors authorized an increase in
the number of authorized shares of common stock from 80,000,000 shares to
200,000,000 shares.

EMPLOYEE STOCK OPTION PLAN

The Company's 1996 Stock Option Plan (the "Option Plan") became effective
on March 5, 1996. A reserve of 5,000,000 shares of the Company's Common Stock
has been established for issuance under the Option Plan. Transactions related to
the Option Plan during 1998, 1997 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES OPTION PRICE
---------- ----------------
<S> <C> <C>
Outstanding at 1/1/96............................... -- --
Granted........................................... 1,250,037 $5.17
Exercised......................................... -- --
Forfeited......................................... (80,540) 5.24
----------
Outstanding at 12/31/96............................. 1,169,497 5.16
Granted........................................... 1,221,015 8.72
Exercised......................................... (257,843) 5.03
Forfeited......................................... (81,884) 5.37
----------
Outstanding at 12/31/97............................. 2,050,785 7.29
Granted........................................... 2,362,643 3.62
Exercised......................................... -- --
Forfeited......................................... (1,723,282) 7.39
---------- -----
Outstanding at 12/31/98............................. 2,690,146 $3.98
========== =====
</TABLE>

F-16
<PAGE> 99
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about stock options outstanding
to employees and directors at December 31, 1998:

<TABLE>
<CAPTION>
NUMBER NUMBER
OUTSTANDING WEIGHTED EXERCISABLE
AT AVERAGE AT
EXERCISE PRICE PER SHARE 12/31/98 REMAINING LIFE 12/31/98
- ------------------------ ----------- -------------- -----------
<S> <C> <C> <C>
$2.3130................................ 600,000 6.00 0
2.5630................................ 478,616 5.97 0
4.4375................................ 320,800 5.38 75,000
4.6875................................ 666,230 5.23 50,000
5.000................................ 117,083 3.18 69,296
5.250................................ 423,487 4.73 163,666
7.250................................ 25,000 7.10 8,333
9.000................................ 50,000 7.10 16,666
13.125................................ 8,930 4.78 2,972
</TABLE>

All options issued vest in one-third increments over a three year period,
with the exception of three option agreements which provide for various vesting
schedules throughout the same three-year vesting period. Option agreements
generally expire six years from date of issue if not exercised. Unvested options
are generally forfeited upon termination of employment with the Company. Total
shares exercisable were 385,933, 421,566 and 0 as of December 31, 1998, 1997 and
1996, respectively.

EMPLOYEE STOCK PURCHASE PLAN

The Company's 1997 Employee Stock Purchase Plan became effective on August
25, 1997 in order to provide employees with the opportunity to purchase shares
of the Company's Common Stock. An aggregate of 300,000 shares of the Company's
Common Stock was reserved for issuance under the Plan. At December 31, 1998 a
total of 99,712 shares had been purchased by employees participating in the plan
at a weighted average price per share of $2.98.

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

F-17
<PAGE> 100
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

net loss and loss per share would have been increased to the pro forma amounts
shown below:

<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
PRO FORMA NET LOSS:
As reported......................................... $(29,825) $(6,690) $(2,108)
As adjusted (unaudited)............................. (35,502) (8,769) (3,417)
PRO FORMA BASIC LOSS PER SHARE:
As reported......................................... $ (1.13) $ (0.25) $ (0.10)
As adjusted (unaudited)............................. (1.34) (0.34) (0.16)
</TABLE>

No options were granted prior to 1996.

These pro forma amounts were determined using the Black-Scholes valuation
model with the following key assumptions: (a) a discount rate of 4.86%, 5.84%,
and 6.00% for December 31, 1998, 1997 and 1996, respectively; (b) a volatility
factor based upon the week ending price for comparable public companies for
periods matching the terms of the options granted; (c) an average expected
option life of 4.0, 4.2 and 5.0 years for December 31, 1998, 1997 and 1996,
respectively; (d) there have been no options that have expired; and (e) no
payment of dividends.

SUBSCRIPTION AGREEMENTS

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

F-18
<PAGE> 101
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PRIVATE PLACEMENT

During the period March 13, 1996 through April 30, 1996, the Company sold
155,326 shares of Common Stock, par value $.0001 per share, at a price of $9.00
per share.

REVERSE SPLIT

Effective October 31, 1996, the Company effected a two-for-three reverse
split of its outstanding Common Stock. All share amounts included herein have
been adjusted to give historical effect to such reverse split for all periods
presented.

11. DEFINED CONTRIBUTION PLAN

During 1997, the Company implemented a defined contribution plan which
qualifies under IRC section 401(k). All full-time employees are eligible to
participate in the plan after three months of service with the Company.
Employees may contribute up to 15% of their salary to the plan, subject to
certain Internal Revenue Service limitations. The Company matches the first 6%
of such voluntary contributions at 50% of the amount contributed by the
employee. The Company does not make unmatched contributions. For the years ended
December 31, 1998 and 1997, total Company contributions to the plan were
approximately $141,000 and $27,000, respectively.

12. SIGNIFICANT CUSTOMERS

For the year ended December 31, 1998, the Company's four largest customers
accounted for approximately 57% of total revenues, with Qwest, MCI WorldCom,
Tellabs, and GTE accounting for approximately 17%, 16%, 13%, and 11% of total
sales, respectively. For the year ended December 31, 1997, sales to the
Company's five largest customers comprised 69% of its total revenues, with
WorldCom, Inc. (prior to its acquisition of MCI Communications Corporation) and
its subsidiaries accounting for 42% of total sales. For the year ended December
31, 1996, the Company's five largest customers accounted for approximately 62%
of total revenues, with MCI Communications Corporation (prior to its acquisition
by WorldCom, Inc.), Ameritech Corporation and Pacific Telesis Group accounting
for 23%, 19% and 15% of total sales, respectively. No other customers accounted
for sales of 10% or more during such periods.

13. INITIAL PUBLIC OFFERING

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

14. REORGANIZATION CHARGES

In order to reduce costs and improve operating efficiencies, the Company
began streamlining its management and operating structure in February 1998 and
eliminated 20 full-time positions resulting in a one-time charge to earnings of
$1.0 million in connection with this restructuring. Additionally, the Company
eliminated 55 full-time positions in August 1998 which did not result in a
significant charge to earnings. Notes and related

F-19
<PAGE> 102
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest receivable from employees terminated in the restructurings totaling
approximately $280,000 were forgiven and are included in the $1.0 million
restructuring charge.

15. LEGAL PROCEEDINGS

As of April 9, 1998, 23 class action complaints (which were subsequently
consolidated into a single action) for violations of the Federal Securities Laws
during certain periods in 1997 and 1998 had been filed in the United States
District Court for the Middle District of Florida, on behalf of purchasers of
our Common Stock. The complaints named as defendants the Company, Bryan J. Zwan,
the Company's Chairman, Steven H. Grant, the Company's Executive Vice President,
Finance, Chief Financial Officer and Secretary, and other former corporate
officers. The complaints allege that the Company and certain officers during the
relevant time period violated Sections 10(b) and 20(a) of the Securities
Exchange Act by, among other things, issuing to the investing public false and
misleading financial statements and press releases concerning the Company's
revenues, income and earnings, which artificially inflated the price of our
Common Stock.

On July 23, 1998, the Company entered into a memorandum of understanding
for the settlement of these class action complaints. In late October 1998, a
Stipulation of Settlement was filed with the court and on December 21, 1998, the
court preliminarily approved the settlement. The settlement is still subject to
final approval by the court. The preliminarily approved settlement consists of
$4.3 million in cash, to be paid to plaintiffs primarily by a claim on the
Company's directors and officers liability insurance policy, and the issuance of
up to 1.8 million shares of Common Stock. The Company recorded a one-time charge
of $8.5 million during 1998 as a result of the preliminarily approved
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 Chairman of the Board and then Chief Executive Officer,
and the Company ("Defendants"). An amended complaint filed December 15, 1997
alleged violations of Section 10(b) of the Securities Exchange Act, violations
of state corporation statutes, and various common law violations by Defendants
in connection with Plaintiff's sale to the Company's predecessor in November
1995, pursuant to a previously granted option exercisable by Zwan and/or the
Company's predecessor, of 4,900 shares of stock in the Company's predecessor, an
amount equivalent to 19,215,686 shares of the Company's common stock. The
amended complaint sought, among other things, (1) rescission of the sale of the
shares transferred by Plaintiff and (2) damages of $235 million, together with
interest. On October 20, 1998, the Company and Zwan entered into an agreement
with Plaintiff to settle the action. The settlement agreement provides, among
other things, for dismissal of the action with prejudice, for a $500,000 payment
by the Company to Plaintiff for his attorneys' fees and grants Plaintiff an
option, for 10 years, to purchase for $1 per share 2 million shares of Zwan's
stock in the Company. Pursuant to that agreement, the action was dismissed with
prejudice on November 13, 1998. The Company recorded a $3.0 million charge to
earnings consisting of the cash payment and the valuation of the options upon
settlement.

The Company from time to time is involved in lawsuits arising in the
ordinary course of business. With respect to these matters, management believes
that it has adequate legal

F-20
<PAGE> 103
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

defenses and/or provided adequate accruals for related costs. The Company is not
aware of any additional lawsuits that were pending that could have a material
adverse effect on the Company's business, financial condition and results of
operations.

16. SUBSEQUENT EVENTS

On March 12, 1999, the United States District Court for the Middle District
of Florida indicated that it would grant final approval of the settlement of the
class action complaints discussed at Note 15 -- Legal Proceedings. The
settlement is subject to appeal.

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. These notes are collateralized by all
of the Company's assets and are subordinated to the accounts receivable
agreement with EAB (see Note 8 -- Commitments) and the proposed line of credit
agreement with Emergent Business Capital described in the following paragraph.
In connection with the financing agreement, the Company issued warrants to
purchase an aggregate of 550,000 shares of the Company's common stock at an
exercise price of $2.75 per share, the market price of the stock on the date
prior to the issuance of the warrants. The warrants have a term of five years
from the date of issuance. The Company has agreed to register the warrants and
the common stock issuable upon exercise thereof under the Securities Act of
1933.

On March 31, 1999, the Company entered into a Letter of Commitment with
Emergent Business Capital pursuant to which Emergent Business Capital would
provide the Company with a $5.0 million line of credit (the "Emergent Line of
Credit"). Under the Emergent Line of Credit, the Company would be entitled to
borrow up to $5.0 million, subject to certain borrowing limitations based on
amounts of the Company's accounts receivable and other assets. The Emergent Line
of Credit will have a term of two years. All indebtedness outstanding under the
Emergent Line of Credit Agreement will be collateralized by substantially all of
the Company's assets.

17. QUARTERLY OPERATING RESULTS (UNAUDITED)

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

F-21
<PAGE> 104
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 quarters
ending June 30, 1997 and September 30, 1997, respectively. The table below gives
effect to such restatement:

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

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
----------- ----------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales......................... $ 1,498 $ 2,601 $ 1,240 $ 3,742
Gross Profit.................. 931 1,806 814 2,406
Operating loss................ (1,605) (1,116) (3,126) (2,610)
Net loss...................... (1,312) (577) (2,615) (2,186)
Loss per share(1)............. (.05) (.02) (.10) (.08)
Weighted average shares
outstanding................. 24,754,887 26,321,990 26,374,388 27,596,955
</TABLE>

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

(1) Earnings per share were calculated for each three month and twelve month
period on a stand-alone basis.

It is anticipated that as the Company matures, the Company's sales and
operating results may fluctuate from quarter-to-quarter and from year-to-year
due to a combination of factors, certain of which are outside the control of the
Company, including, among others (i) the timing and amount of significant orders
from the Company's customers, (ii) the ability to obtain sufficient supplies of
sole or limited source components for the Company's products, (iii) the ability
to attain and maintain production volumes and quality levels for its products,
(iv) the mix of distribution channels and products, (v) new product
introductions by the Company's competitors, (vi) the Company's success in
developing, introducing and shipping product enhancements and new products,
(vii) pricing actions by the Company or its competitors, (viii) changes in
material costs and (ix) general economic conditions. Any unfavorable changes in
these or other factors could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
anticipate that its backlog at the beginning of each quarter will be sufficient
to achieve expected revenue for that quarter. To achieve its revenue objectives,
the Company expects that it will have to obtain orders during a quarter

F-22
<PAGE> 105
DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for shipment in that quarter. As a result of all of the foregoing, there can be
no assurance that the Company will be able to sustain profitability on a
quarterly or annual basis. See "Item 1. Factors That May Affect Operating
Results -- We experience fluctuations in our operating results and our sales are
seasonal."

F-23
<PAGE> 106

GLOSSARY

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

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

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

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

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

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

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

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

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

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

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

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

Ethernet -- A protocol commonly used on LANs.

G-1
<PAGE> 107

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Network Access Agent -- A product of the Company designed to be distributed
throughout a network to provide network operators with real-time information
concerning

G-2
<PAGE> 108

the network segments where the Network Access Agent has been installed. This
product can be centrally monitored and administered.

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

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

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

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

Non-blocking switch matrix -- An internal switch in a system that has the
ability to switch multiple transmissions to different circuits simultaneously
without causing congestion internally in the switch.

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

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

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

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

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

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

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

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

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

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

SONET (Synchronous Optical Network Technology) -- An electronics and network
architecture and protocol utilized primarily in North America for variable
optical

G-3
<PAGE> 109

bandwidth products which enables transmission of voice, video, and data
(multimedia) at very high speeds.

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

Switch matrix -- A series of gate arrays or switches which provide for the
routing of signals from one circuit path to another.

T-Carrier or T-1 or T-3 -- Insulated copper wire cables which carry electrically
transmitted digital signals. A T-1 cable carries a DS-1 signal (1.544 Mbps), and
a T-3 cable carries a DS-3 signal (45 Mbps). Also, a generic name for any of
several digitally multiplexed carrier systems originally designed to carry
digitalized voice signals.

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

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

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

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<PAGE> 110

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

YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF NOTES MEANS THAT
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS
PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY THESE NOTES IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS
UNLAWFUL.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
Use of Proceeds....................... 18
Price Range of Common Stock and
Dividend Policy..................... 19
Capitalization........................ 20
Selected Consolidated Financial
Data................................ 21
Management's Discussion and Analysis
of
Financial Condition and Results of
Operations.......................... 22
Business.............................. 34
Management............................ 46
Certain Transactions.................. 54
Beneficial Owners of Securities....... 54
Description of the Notes.............. 55
Description of Capital Stock.......... 66
Shares Eligible for Future Sale....... 70
Certain United States Federal Income
Tax Considerations.................. 71
Underwriting.......................... 77
Legal Matters......................... 78
Experts............................... 78
Available Information................. 78
Information Concerning Forward Looking
Statements.......................... 79
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

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

$20,000,000
(Logo Digital Lightwave, Inc.)
% Convertible Subordinated Notes due 2004
--------------------
PROSPECTUS
--------------------
(C.E. UNTERBERG, TOWBIN UNDERWRITER)
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 111

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of Notes being registered. All amounts
are estimates except the registration fee, the NASD fee and the Nasdaq National
Market.

<TABLE>
<CAPTION>
AMOUNT
TO
BE PAID
-------
<S> <C>
Registration fee............................................ $6,394
NASD filing fee............................................. $2,800
Nasdaq National Market fee.................................. *
Printing and engraving...................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. *
Trustee fees and expenses................................... *
Transfer agent fees and expenses............................ *
Miscellaneous............................................... *
------
Total..................................................... $ *
======
</TABLE>

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

* To be filed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the General Corporation Law of the state of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was illegal. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation in the performance of his duty. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.

The Company's Certificate of Incorporation provides that the Company shall
indemnify its directors to the fullest extent permitted by law either now or
hereafter. Article 5 of the Amended and Restated Bylaws of the Company provides
for

II-1
<PAGE> 112

indemnification of the officers and directors of the Company to the fullest
extent permitted by applicable law. The Company has also entered into an
agreement with each of its directors and certain of its officers, a form of
which is attached as Exhibit 10.03 hereto, wherein it has agreed to indemnify
each of them to the fullest extent permitted by law. Reference is also made to
Section of the Underwriting Agreement contained in Exhibit 1.01 hereto,
indemnifying officers and directors of the Company against certain civil
liabilities that may be incurred in connection with this offering, including
certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act").

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

(1) The Registrant granted options to the persons identified below as
follows:

(a) On March 17, 1995, Digital Lightwave, Inc., a California
corporation (the "Predecessor"), granted an option, solely in the event of
an initial public offering (an "IPO") to purchase $150,000 worth of shares
of Common Stock at a price equal to 50% of the IPO effective price per
share to Michael Baum and George Murgatroyd in reliance on Sections 3(b)
and 4(2) of the Securities Act;

(b) On June 19, 1995, the Predecessor granted an option, solely in the
event of an IPO of the Predecessor, to purchase $400,000 worth of shares of
Common Stock at a price equal to 1% of the IPO effective price per share to
Stanley P. Zurn in reliance on Sections 3(b) and 4(2) of the Securities
Act;

(c) On June 22, 1995, the Predecessor granted an option, solely in the
event of an IPO of the Predecessor, to purchase $30,000 worth of shares of
Common Stock at a price equal to 50% of the IPO effective price per share
to Edward F. Guignon in reliance on Sections 3(b) and 4(2) of the
Securities Act;

(d) On June 23 1995, the Predecessor granted an option, solely in the
event of an IPO of the Predecessor, to purchase $30,000 worth of shares of
Common Stock at a price equal to 50% of the IPO effective price per share
to Paul J. Hedlund in reliance on Sections 3(b) and 4(2) of the Securities
Act;

(e) On July 12 1995, the Predecessor granted an option, solely in the
event of an IPO of the Predecessor, to purchase $21,000 worth of shares of
Common Stock at a price equal to 50% of the IPO effective price per share
to Margaret A. Guignon in reliance on Sections 3(b) and 4(2) of the
Securities Act;

(f) On August 15, 1995, the Predecessor granted an option to purchase
200,000 shares of Common Stock to Michael Baum and Paul J. Hedlund upon
conversion of a promissory note evidencing a loan made by such persons to
the Registrant in reliance on Sections 3(b) and 4(2) of the Securities Act;
and

(g) On September 7, 1995, the Predecessor granted an option, solely in
the event of an IPO of the Predecessor, to purchase $70,000 worth of shares
of Common Stock at a price equal to 50% of the IPO effective price per
share to Tony Charles Lonstein in reliance on Sections 3(b) and 4(2) of the
Securities Act.

(2) On January 2, 1996, the Registrant issued a three-year subordinated
promissory note in the original principal amount of $1 million and a warrant to
purchase 200,000 shares of Common Stock at an exercise price of $5.00 per share
to Renato Kasinsky, a citizen and resident of Brazil, in reliance on Regulation
S promulgated under the Securities Act.

II-2
<PAGE> 113

(3) On March 12, 1996, the Registrant issued an aggregate of 521,030 shares
of Common Stock and warrants to purchase 1,050,002 shares of Common Stock at an
exercise price of $5.00 per share to several noteholders of the Company, other
than those described in paragraph (1) above, in consideration of the
satisfaction of indebtedness of the Registrant in an aggregate amount of
$2,605,041 in reliance on Sections 3(b) and 4(2) of the Securities Act.

(4) On March 18, 1996, the Registrant issued 20,000,000 shares of Common
Stock to the sole stockholder of the Predecessor, upon the effective date of the
merger between the Registrant and the Predecessor in reliance on Section 3(a)(9)
of the Securities Act.

(5) On March 28, 1996, the Registrant issued 200,000 shares of Common Stock
for an aggregate purchase price of $263,192 to the persons identified in
subparagraph 1(f) above pursuant to the exercise of their option to purchase
shares of Common Stock described in subparagraph 1(f) in satisfaction of the
indebtedness evidencing their loan to the Registrant in reliance on Sections
3(b) and 4(2) of the Securities Act.

(6) Between March 31, 1996 and May 15, 1996, the Registrant issued an
aggregate of 448,212 shares of Common Stock to 57 persons for an aggregate of
$4,033,710 (consisting of cash subscriptions and the surrender of $2,449,000 of
the Company's indebtedness) in reliance on Sections 3(b) and 4(2) of the
Securities Act. Holders of the options described in subparagraphs 1(a), 1(c),
1(d) and 1(e) above surrendered such options in exchange for warrants
exercisable for an aggregate of 18,748 shares of Common Stock at a price of
$9.00 per share.

(7) On May 27, 1996, the Registrant issued 66,667 shares of Common Stock to
Bulldog Capital Partners for an aggregate purchase price of $1,200,000 in
reliance on Sections 3(b) and 4(2) of the Securities Act.

(8) On May 31, 1996, the Company issued an aggregate of $750,000 of its 18%
subordinated promissory notes due May 31, 1997 to 11 persons in reliance on
Sections 3(b) and 4(2) of the Securities Act.

(9) On July 29, 1996, the Registrant issued 26,668 shares of Common Stock
for an aggregate purchase price of $4,000 to the person identified in
subparagraph (1)(b) above pursuant to the exercise of his option to purchase
shares of Common Stock in reliance on Sections 3(b) and 4(2) of the Securities
Act.

(10) On July 29, 1996, the Registrant issued 4,667 shares of Common Stock
for an aggregate purchase price of $35,000 to the person identified in
subparagraph 1(g) above pursuant to the exercise of his option to purchase
shares of Common Stock in reliance on Sections 3(b) and 4(2) of the Securities
Act.

(11) During August and September 1996, the Registrant issued an aggregate
of 1,051,669 shares of Common Stock upon the exercise of warrants described in
items (3) and (6) above in reliance on Sections 3(b) and 4(2) of the Securities
Act and issued 200,000 shares of Common Stock upon the exercise of the warrants
described in item (2) above in reliance on Regulation S of the Securities Act.

(12) During the period August 1993 to December 1996, the Registrant granted
incentive and non-statutory stock options to employees, officers, directors and
consultants under the 1996 Stock Option Plan which were exercisable into an
aggregate of 1,250,037 shares of its Common Stock, none of which have been
issued upon exercise. These options are subject to vesting provisions following
their respective dates of grant and were issued in reliance on Sections 3(b) and
4(2) of the Securities Act.

II-3
<PAGE> 114

(13) 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. In connection with the financing
agreement, the Company issued warrants to purchase an aggregate of 550,000
shares of the Company's common stock at an exercise price of $2.75 per share,
the market price of the stock on the date prior to the issuance of the warrants.
The warrants have a term of five years from the date of issuance. The Company
has agreed to register the warrants and the common stock issuable upon exercise
thereof under the Securities Act of 1933. The warrants were issued in reliance
on section 3(b) and 4(2) of the Securities Act.

No underwriting discounts or commissions were paid in connection with any
of the foregoing transactions.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<C> <C> <S>
1.01* -- Form of Underwriting Agreement
3.01(1) -- Certificate of Incorporation of the Company
3.02(1) -- Amendment to Certificate of Incorporation of the Company
dated January 8, 1997
3.03(1) -- Amended and Restated By-laws of the Company
4.01(1) -- Specimen Certificate for the Common Stock
4.02* -- Form of Indenture
4.03* -- Form of Notes
5.01* -- Opinion of Brobeck Phleger & Harrison LLP
10.01(1) -- Lease Agreement dated October 7, 1994, between the Company
and Atrium at Clearwater, Limited
10.02(1) -- First Lease Agreement Amendment dated February 16, 1996,
between the Company and Atrium at Clearwater, Limited
10.03(1) -- Form of Indemnification Agreement between the Company and
officers and directors of the Company
10.04(1) -- Digital Lightwave, Inc. 1996 Stock Option Plan
10.05(3) -- Digital Lightwave, Inc. Employee Stock Purchase Plan
10.06(2) -- Second Lease Amendment, dated September 10, 1997, between
the Company and Atrium At Clearwater, Limited
10.07(2) -- Lease Agreement, dated June 30, 1997, between the Company
and Pinellas Business Center, Inc.
10.08(2) -- Lease Agreement, dated September 26, 1997, between the
Company and Monmouth/Atlantic Realty Associates
10.09(4) -- L.P. Lease Agreement, dated January 9, 1998, between the
Company and Orix Hogan-Burt Pinellas Venture.
10.10(4) -- First Lease Amendment, dated February 18, 1998, between the
Company and Orix Hogan-Burt Pinellas Venture.
</TABLE>

II-4
<PAGE> 115

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<C> <C> <S>
10.11(4) -- First Lease Amendment, dated September 25, 1997, between the
Company and Monmouth/Atlantic Realty Associates L.P.
10.12(4) -- Second Lease Amendment, dated February 23, 1998, between the
Company and Monmouth/Atlantic Realty Associates L.P.
10.13(4) -- Employment Agreement, dated February 27, 1998, between the
Company and Steven H. Grant.
10.14(5) -- Accounts Receivable Agreement dated December 28, 1998
between the Company and Bankers Capital.
10.15(5) -- Stock Option Agreement dated November 13, 1998 among the
Company, Dr. Brian J. Zwan and Hugh Brian Haney
10.16(5) -- Mutual General Release dated November 13, 1998, by and among
Hugh Brian Haney, Great American Fun Corp., Great American
Fun (HK) Ltd., Dr. Bryan J. Zwan, the Company and Logical
Magic, Inc.
10.17(5) -- Settlement Agreement dated November 13, 1998 by and among
Hugh Brian Haney, Dr. Bryan J. Zwan and the Company.
10.18(5) -- Letter Agreement dated as of December 31, 1998 between the
Company and Gerry Chastelet.
10.19(5) -- Letter Agreement dated April 13, 1998 and addendum thereto
dated February 9, 1999 between the Company and George J.
Matz.
10.20(5) -- Form of Stock Purchase Agreement, dated March 31, 1999,
between the Company and certain Purchasers, with exhibits
thereto.
10.21(5) -- Letter of Commitment between the Company and Emergent Asset
Based Lending, L.L.C. d/b/a/ Emergent Business Capital,
dated March 31, 1999.
10.22(5) -- Letter Agreement dated as of September 8, 1997 between the
Company and Ali Haider as amended and supplemented by the
Letter Agreements dated July 27, 1998 and August 4, 1998.
21.01(5) -- Subsidiaries of the Registrant
23.01 -- Consent of PricewaterhouseCoopers LLP
23.02* -- Consent of Brobeck Phleger & Harrison LLP
24.01 -- Power of Attorney (included on the signature page of this
Registration Statement)
25.01* -- Statement of Eligibility of Trustee
</TABLE>

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

(1) Incorporated by reference to the similarly described exhibits filed in
connection with the Registrant's Registration Statement on Form S-1, File
No. 333-09457, declared effective by the Securities and Exchange Commission
on February 5, 1997.
(2) Incorporated by reference to the exhibit filed in connection with the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997.
(3) Incorporated by reference to the exhibit filed in connection with the
Registrant's Registration Statement on Form S-8, File No. 333-35375.
(4) Incorporated by reference to the similarly described exhibits filed in
connection with the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.

II-5
<PAGE> 116

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

(b) Financial Statement Schedules

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.

(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

(3) The undersigned Registrant hereby undertakes:

(a) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of the registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time it was declared
effective.

(b) That for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.

II-6
<PAGE> 117

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the Registrant certifies that it has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Clearwater, Florida, on the 19th day of April,
1999.

DIGITAL LIGHTWAVE, INC.

By: /s/ GERRY CHASTELET
-----------------------------------
Gerry Chastelet
President and Chief Executive
Officer

POWER OF ATTORNEY

We the undersigned directors and officers of Digital Lightwave, Inc., do
hereby constitute and appoint Gerry Chastelet and Steven H. Grant, or either of
them, our true and lawful attorneys and agents, to do any and all acts and
things in our name and on our behalf in our capacities as directors and officers
and to execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys and agents, or either of them, may deem
necessary or advisable to enable said corporation to comply with the Securities
Act of 1933, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with the Registration
Statement, including specifically, but without limitation, power and authority
to sign for us or in any of our names and in the capacities indicated below, any
and all amendments (including post-effective amendments) to this Registration
Statement, or any related Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended; and
we do hereby ratify and confirm all that the said attorneys and agents, or
either of them, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>

/s/ DR. BRYAN J. ZWAN Chairman of the Board April 19, 1999
- ------------------------------------------------
Dr. Bryan J. Zwan

/s/ GERRY CHASTELET President, Chief Executive April 19, 1999
- ------------------------------------------------ Officer and Director
Gerry Chastelet

/s/ STEVEN H. GRANT Executive Vice President, April 19, 1999
- ------------------------------------------------ Finance, Chief Financial
Steven H. Grant Officer and Secretary

/s/ DR. WILLIAM F. HAMILTON Director April 19, 1999
- ------------------------------------------------
Dr. William F. Hamilton

/s/ WILLIAM SEIFERT Director April 19, 1999
- ------------------------------------------------
William Seifert
</TABLE>

II-7

<PAGE> 1

EXHIBIT 23.01

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the inclusion in this registration statement on Form S-1 to
be filed on or about April 16, 1999 of our report dated January 29, 1999, except
for Note 16, as to which the date is March 31, 1999, on our audits of the
financial statements of Digital Lightwave, Inc. We also consent to the
references to our firm under the captions "Experts, " "Summary Financial and
Operating Data," and "Selected Consolidated Financial Data."

PricewaterhouseCoopers LLP

Tampa, Florida
April 16, 1999