<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
 
                            WASHINGTON, D.C. 20549
 
         -------------------------------------------------------------

 
                               ADMENDMENT NO. 1
 
                                 FORM 10--Q/A
 
 
              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
 
                FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
                        COMMISSION FILE NUMBER 0-21225
 
 
                       U.S. DIGITAL COMMUNICATIONS, INC.
 
 
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
         NEVADA                                             52-2124492
 (STATE OF INCORPORATION)                            (I.R.S. EMPLOYER ID NO.)
 
 
          2 Wisconsin Circle, Suite 700, Chevy Chase, Maryland 20815
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
 
                                (301)  961-1540
               (REGISTRANT'S PHONE NUMBER, INCLUDING AREA CODE)
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         COMMON STOCK, $0.01 PAR VALUE
                               (TITLE OF CLASS)
 
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
 
                 YES                      No      X
                     ------------            ------------
 
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASSES OF COMMON STOCK
WAS 22,128,000 SHARES OF COMMON STOCK, PAR VALUE $0.01, OUTSTANDING AS OF MARCH
31, 1997
<PAGE>
 
PART I:  FINANCIAL INFORMATION
 
ITEM I:  FINANCIAL STATEMENTS
<TABLE> 
<CAPTION> 
 
                                       U.S. DIGITAL COMMUNICATIONS, INC.
                                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                                   (UNAUDITED)
 

                                                      ASSETS
 
                                                                                 
                                                       March 31, 1997                   December 31, 1996 
                                                   ----------------------         ---------------------------
Current assets:
<S>                                                   <C>                               <C>  
       Cash and cash equivalents                             $  1,510,314                        $      8,654
       Trade accounts receivable, net                                   -                                   -
       Inventory                                                    1,389                                   -
       Other receivable                                            20,000                              20,000
       Prepaid expenses                                            31,820                              30,478
                                                   ----------------------         ---------------------------
            Total current assets                                1,563,523                              59,132
 
       Investments                                                      -                                   -
 
       Property and equipment, net                                 86,289                              90,789
 
       Intangible assets, net                                      86,950                              86,628
 
       Other noncurrent assets                                      6,414                               5,753
                                                   ----------------------         ---------------------------
 
       Total assets                                          $  1,743,176                        $    242,302
                                                   ======================         ===========================
 
                                    LIABILITIES AND STOCKHOLDERS' (DEFICIT)
 
Current liabilities:
       Accounts payable and accrued expenses                      979,948                           1,572,011
       Deferred revenue                                                 -                                   -
       Dividends payable                                                -                                   -
       Stockholder loans                                          744,385                             624,386
       Accrued interest on stockholder loans                        9,841                              34,649
       Notes payable                                               13,527                             110,755
       Minimum royalty obligation                                 450,000                             450,000
       Due to former officers and stockholders                    203,522                             203,522
                                                   ----------------------         ---------------------------
          Total current liabilities                             2,401,223                           2,995,323
 
Notes payable (net of current portion)                             25,034                              29,865
                                                   ----------------------         ---------------------------
 
          Total liabilities                                     2,426,257                           3,025,188
                                                   ----------------------         ---------------------------
 
Commitments and contingencies
 
Stockholders' (deficit):
       Preferred stock -- $.01 par, 10,000,000
          shares authorized; 2,031,832
          outstanding at March 31, 1997                            20,318                                   -
       Common stock   $0.01 par, 50,000,000 shares
          authorized; 22,128,000 outstanding
          at March 31, 1997 and December 31, 1996                 221,280                             221,280
       Additional paid-in capital                              16,967,773                          15,096,123
       Common stock warrants                                    1,249,577                                   -
       Deferred compensation                                   (3,713,542)                         (3,713,542)
       Accumulated deficit                                    (15,428,486)                        (14,386,747)
                                                   ----------------------         ---------------------------
 
          Total stockholders' (deficit)                          (683,080)                         (2,782,886)
                                                   ----------------------         ---------------------------
 
          Total liabilities and 
             stockholders' (deficit)                         $  1,743,177                        $    242,302
       
                                                   ======================         ===========================
 
 
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
 
                       U.S. DIGITAL COMMUNICATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE> 
<CAPTION> 
                                                                            Three Months Ended March 31,
                                                                    ------------------------------------------
                                                                         1997                        1996
                                                                    ---------------             --------------
<S>                                                                  <C>                         <C> 
Sales:                                                                                          
      Equipment                                                                   -                          -
      Services                                                                    -                          -
                                                                    ---------------             --------------
         Total sales                                                              -                          -
                                                                                                
Cost of goods sold                                                                -                          -
                                                                    ---------------             --------------
         Gross margin                                                             -                          -
                                                                    ---------------             --------------
                                                                                                
Operating expenses:                                                                             
      Research and develpoment                                                    -                    286,738
      Sales and marketing                                                         -                          -
      General and administrative                                            499,229                    494,950
      Stock option compensation                                              97,896                          -
                                                                    ---------------             --------------
         Total operating expenses                                           597,125                    781,688
                                                                    ---------------             --------------
Loss from operations                                                       (597,125)                  (781,688)
                                                                    ---------------             --------------
Other income (expense):                                                                         
      Interest expense                                                      (28,465)                    (3,498)
      Interest and other income                                                   -                      1,638
                                                                    ---------------             --------------
         Total other income (expense), net                                  (28,465)                    (1,860)
                                                                    ---------------             --------------
                                                                                                
Net loss                                                                   (625,590)                  (783,548)
                                                                                                
Dividends on preferred stock                                               (416,149)                         -
                                                                    ---------------             --------------
                                                                                                
Net loss available to common stockholders                           $    (1,041,739)            $     (783,548)
                                                                    ===============             ==============
                                                                                                
Net loss per common share:                                                                      
      Basic                                                         $         (0.05)            $        (0.04)
                                                                                                
      Diluted                                                       $         (0.05)            $        (0.04)
                                                                                                
      Weighted average shares of                                                                
        common stock outstanding                                         22,128,000                 21,221,333
      
 
 
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
 
                       U.S. DIGITAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                   FOR THE THREE MONTHS ENDED MARCH 31, 1997
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                   Preferred Stock              Common Stock         
                                                      Series A                   Par Value          
                                              -----------------------    --------------------------- 
                                                                                                     
                                                 Shares       Amount        Shares          Amount   
                                              -----------    --------    -------------     ----------
<S>                                             <C>          <C>         <C>               <C>       
BALANCE, DECEMBER 31, 1996                              -     $     -       22,128,000      $221,280 
                                                                                                     
Sale of Series A Preferred Shares and           2,031,832      20,318                -             - 
 Warrants for cash                                                                                   
Stock issued in legal settlement                        -           -                -             - 
Preferred dividends and beneficial conversion           -           -                -             - 
 feature                                                                                             
Deferred compensation related to grant of               -           -                -             - 
 stock options                                                                                       
Amortization of deferred compensation                   -           -                -             - 
Other comprehensive income                              -           -                -             - 
Stock issuance cost                                     -           -                -             - 
Net Loss                                                -           -                -             - 
                                                ---------    --------    -------------     --------- 
                                                                                                     
BALANCE, MARCH 31, 1997                         2,031,832     $20,318     $ 22,128,000      $221,280 
                                               ==========     =======     ============      =========
                                                                                                     
                                                                                                     
                                                                                                     
                                                                                                     
<CAPTION>                                                                                            
                                                                                                     
                                                                                                     
                                                   Treasury Stock                           Shares   
                                              -----------------------      Deferred          to be   
                                                 Shares        Cost      Compensation       Issued   
                                              -----------    --------    ------------      ----------
<S>                                             <C>          <C>         <C>               <C>       
BALANCE, DECEMBER 31, 1996                              -     $     -     $(3,713,542)      $      - 
                                                                                                     
Sale of Series A Preferred Shares and                   -           -                -             - 
 Warrants for cash                                                                                   
Stock issued in legal settlement                        -           -                -             - 
Preferred dividends and beneficial conversion           -           -                -             - 
 feature                                                                                             
Deferred compensation related to grant of               -           -          (97,896)            - 
 stock options                                                                                       
Amortization of deferred compensation                   -           -           97,896             - 
Other comprehensive income                              -           -                -             - 
Stock issuance cost                                     -           -                -             - 
Net Loss                                                -           -                -             - 
                                                ---------    --------    -------------     --------- 
                                                                                                     
BALANCE, MARCH 31, 1997                                 -     $     -     $(3,713,542)      $      - 
                                                =========     =======     ===========       =========
 



<CAPTION>
                                                                                    Accumulated
                                               Additional           Common             Other
                                                 Paid-In            Stock          Comprehensive
                                                 Capital           Warrants        Income (Loss)
                                              -------------     --------------    --------------
<S>                                           <C>               <C>                <C>
BALANCE, DECEMBER 31, 1996                      $15,096,123      $           -      $          -
                                              
Sale of Series A Preferred Shares and             1,777,853          1,249,577                 -
 Warrants for cash                            
Stock issued in legal settlement                          -
Preferred dividends and beneficial conversion       352,404                  -                 -
 feature                                      
Deferred compensation related to grant of            97,896                  -                 -
 stock options                                
Amortization of deferred compensation                                        -                 -
Other comprehensive income                                -                  -                 -
Stock issuance cost                                (356,503)                 -                 -
Net Loss                                                  -                  -                 -
                                              -------------     --------------    --------------
                                              
BALANCE, MARCH 31, 1997                         $16,967,773      $   1,249,577    $            -
                                              =============      =============    ==============
                                              
                                              
                                              
                                              
<CAPTION>                                     
                                              
                                                                                       Total
                                              Stockholders'      Accumulated       Stockholders'
                                               Receivable          Deficit            Equity
                                              -------------     --------------     -------------
<S>                                           <C>               <C>                <C>
BALANCE, DECEMBER 31, 1996                      $         -       $(14,386,747)      $ (2,782,886)
                                              
Sale of Series A Preferred Shares and                     -                  -      $   3,047,748
 Warrants for cash                            
Stock issued in legal settlement                          -                  -      $           -
Preferred dividends and beneficial conversion             -           (416,149)     $     (63,745)
 feature                                      
Deferred compensation related to grant of                 -                  -      $          -
 stock options                                
Amortization of deferred compensation                     -                  -      $      97,896
Other comprehensive income                                -                  -      $           -
Stock issuance cost                                       -                  -      $    (356,503)
Net Loss                                                  -           (625,590)     $    (625,590)
                                              -------------     --------------     --------------
                                              
BALANCE, MARCH 31, 1997                         $         -       $(15,428,486)     $    (683,080)
                                              =============     ==============      =============

</TABLE> 
 
     See accompanying notes to condensed consolidated financial statements
<PAGE>
 
                       U.S. DIGITAL COMMUNICATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 

<TABLE> 
<CAPTION> 
                                                                                      Three Months Ended March 31,
                                                                                          1997           1996
                                                                                      ------------   -------------
<S>                                                                                   <C>            <C>          
Cash flows from operating activities:                                                             
      Net loss                                                                        $ (625,590)     $  (783,548)
      Adjustments to reconcile net loss to net cash used in                                          
      operating activities--                                                                         
      Depreciation and amortization                                                         9,931          40,784
      Stock option compensation                                                            97,896               -
      Changes in assets and liabilities:                                                             
           Decrease in trade accounts receivable                                                -               -
           Decrease in other receivables                                                      130               -
           Decrease in inventory                                                                -               -
           Decrease (increase) in prepaid expenses                                         (3,294)       (462,300)
           (Increase) Decrease in other noncurrent assets                                  (5,982)              -
           (Decrease) increase in accounts payable and accrued expenses                  (659,327)        102,858
           Decrease in deferred revenue                                                         -               -
           Increase in accrued interest on stockholder loans                                9,841           3,498
                                                                                      -----------    ------------
               Total adjustments                                                         (550,805)       (315,160)
                                                                                      -----------    ------------
               Net cash used in operating activities                                   (1,176,395)     (1,098,708)
                                                                                      -----------    ------------
Cash flows from investing activities:                                                                
      Advances to stockholders                                                                  -         (24,598)
      Capital expenditures                                                                      -         (10,077)
                                                                                      -----------    ------------
               Net cash used in investing activities                                            -         (34,675)
                                                                                      -----------    ------------
Cash flows from financing activities:                                                                
      Borrowings from stockholders                                                         70,000               -
      Principal payments under notes payable                                               (2,060)              -
      Proceeds from issuance of common stock                                                    -         500,000
      Proceeds from issuance of preferred stock and warrants                            3,069,648               -
      Payment of dividends on preferred stock                                             (53,030)              -
      Payment of stock issuance costs                                                    (356,503)              -
      Repayment of stockholder borrowings                                                 (50,000)              -
                                                                                      -----------    ------------
               Net cash provided by financing activities                                2,678,055         500,000
                                                                                      -----------    ------------
Net change in cash and cash equivalents                                                 1,501,660        (633,383)
Cash and cash equivalents, beginning of period                                              8,654         739,930
                                                                                      -----------    ------------
Cash and cash equivalents, end of period                                              $ 1,510,314     $   106,547
                                                                                      ===========    ============
Supplemental disclosures of cash transactions:                                                       
      Cash paid for interest                                                          $         -     $         -
                                                                                      ===========    ============
Supplemental disclosures of non-cash transactions:                                                   
      Stock issues in satisfication of stockholder loan                               $         -     $         -
                                                                                      ===========    ============
      Unrealized loss on investments                                                  $         -     $         -
                                                                                      ===========    ============
      Beneficial conversion feature on preferred stock                                $   352,404     $         -
                                                                                      ===========    ============
 
</TABLE> 
 
See accompanying notes to condensed consolidated financial statements
<PAGE>
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

(1)      BASIS OF PRESENTATION

  The condensed consolidated balance sheets of U.S. Digital Communications, Inc.
(the "Company") as of March 31, 1997 and December 31, 1996, and the related
condensed consolidated statements of operations for the three month periods
ended March 31, 1997 and 1996, condensed consolidated statement of cash flows
for the three month periods ended March 31, 1997 and 1996 and condensed
consolidated statement of changes in stockholders' equity (deficit) for the
three month period ended March 31, 1997 presented in this Form 10-Q are
unaudited.  In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included.  Such adjustments
consist only of normal recurring items.  Interim results are not necessarily
indicative of results for a full year.  Certain amounts have been reclassified
to conform to the current year presentation.

  Certain notes and other information have been condensed or omitted from these
interim financial statements.

(2)    SUBSEQUENT EVENTS

  On June 20, 1997, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Skysite Communications Corporation
("Skysite").  Under the Agreement, the Company was to issue 750,000 shares of
its common stock to the shareholders of Skysite, as well as options to purchase
an additional 500,000 shares of its common stock at an exercise price of $.40
per share.

  The stock of Skysite was transferred to the Company on August 26, 1997.
Subsequent to the acquisition, disputes arose between the Company and the former
President of Skysite related to the value of Skysite at the time of the
acquisition.  As a result of this dispute, the Company withheld its shares.  The
Company has entered into an amended agreement with the shareholders of Skysite,
except for the former President (who was allocated 240,000 shares).  Under the
terms of this amended agreement, the other shareholders' shares and options will
be placed in an escrow account.  The shareholders will have all rights
attributable to these escrowed shares, however, they have agreed that at such
time when they elect to sell these shares, the first $200,000 of related
proceeds will be paid to the Company, and the remaining shares and options will
be released to the shareholders.  The 240,000 shares due to the former President
remain unissued, and the Company does not intend to issue such shares.  The
shares and options for the other shareholders were placed in escrow by the
Company during October 1998.

  The Company has recognized the Skysite acquisition as a purchase for
accounting purposes.  The Company has valued the consideration to be given to
the shareholders of Skysite using the 510,000 shares to be placed in escrow and
the related options, less the $200,000 to be received from escrow when these
shares are sold.  This $200,000 has been recognized by the Company as a
reduction of stockholders' equity.  Since the Company does not intend to issue
the 240,000 shares to Skysite's former President, the value for these shares
($100,980) has not been included in the consideration to be given.  If the
Company is required to distribute such shares in the future, the equity and
related goodwill accounts will be increased.

  Also in August of 1998, the Company entered into a take or pay minute of use 
commitment for three million minutes with Iridium North America ("INA"). The 
minutes must be taken or paid within fifteen months following the commercial 
launch of the Iridium system.
 
  In January 1999 the Company acquired asset tracking, real-time single-frame
video wireless communications applications, Personal Digital Assistant
technology and other assets from two unrelated entities as additional components
of the Company's value-added services for satellite platforms.
<PAGE>

 
The Company may from time to time make written or oral forward-looking
statements.  Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission (the "Commission"), in press
releases, and in reports to shareholders.  The Private Securities Litigation
Reform Act of 1995 contains a safe harbor for forward-looking statements on
which the Company relies in making such disclosures.  Forward-looking statements
can be identified by the use of words such as "believes," "anticipates,"
"plans," "expects," "may," "will," "intends," "estimates" and the negatives
thereof and similar expressions.  In connection with this "safe harbor," the
Company has identified in this report and in its report filed December 31, 1998
on Form 10-K/A for the fiscal year ending December 31, 1997 important factors
that could cause actual results to differ materially from those contained in any
forward-looking statements made by or on behalf of the Company.  Any such
statement is qualified by reference to these cautionary statements.


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS


General

  The Company filed a report on Form 10-Q for the first quarter of fiscal year
1997, due on May 15, 1997 on or about May 15, 1997. This report on Form 10-Q/A
for the first quarter of fiscal year 1997 ("March 10-Q"), is being filed on or
about February 26, 1999. The Company filed a report on Form 10-K for the fiscal
year ending December 31, 1997 ("1997 10-K"), due on March 30, 1998, on October
7, 1998 and subsequently filed a report on Form 10-K/A for the fiscal year
ending December 31, 1997 ("1997 10-K/A") on October 20, 1998. Both the 1997 10-K
and 1997 10-K/A contained financial statements and accompanying notes that had
not been audited by an independent accountant. The Company filed a report on
Form 10-K/A Amendment No. 2 for the fiscal year ending December 31, 1997 on
December 31, 1998 which contained financial statements and accompanying notes
that have been audited by an independent accountant. The Company filed a report
on Form 10-Q for the first quarter of fiscal year 1998 ("March 10-Q"), due May
15, 1998, on or about November 19, 1998. The Company filed a report due on Form
10-Q for the second quarter of fiscal year 1998 ("June 10-Q"), due on August 14,
1998, on or about November 20, 1998. The Company filed a report on Form 10-Q for
the third quarter of fiscal year 1998 on or about December 7, 1998. This filing
does not necessarily address and should be read in conjunction with the more
extensive information provided in the Company's 10-K/A Amendment No. 2 for
fiscal year 1997 concerning that year and subsequent events in fiscal year 1998.

  The delays and, in the case of the 1997 10-K and 1997 10-K/A, absence of the
required audit were associated with substantial changes in the Company's
management and operations.  In the first half of 1997, the Company discontinued
its principal business activity  the development of the Universal Internet
Television Interface and Electronic Device technologies  and acquired Skysite
Communications Corporation, Inc.  The Company filed a report on Form 10-K for
the year ended December 31, 1996 on May 15, 1997 that describes the discontinued
development program.  The Company filed a report on Form 8-K on July 2, 1997
that reported these changes in its operations and is filing a report on Form 8-
K/A on or about February 26, 1999 that more fully reports on these changes.  In
July 1998, the Company created U.S Digital Satellite, Inc. ("Insat") to oversee
its satellite communications operations and transferred the common stock of
Skysite to Insat and incorporated Project 77 Corp. ("Project 77") as Insat's
other wholly-owned subsidiary.  As a result, the Company's business presently
consists primarily of the operations of its wholly owned subsidiary that is
engaged in the satellite based telecommunications business. During the Spring of
1998, the Company relocated its headquarters from Burbank, California to Chevy
Chase, Maryland and replaced its two principal officers in order to more
effectively pursue its new opportunities. As of the date of this report, the
Company believes it has become current in meeting the filing requirements of the
Securities Exchange Act of 1934 as the amendments required on its 1997 and 1998
reports on Form 10-Q and 8-K have been filed.

  The Company's independent accountant in fiscal year 1996, Blackman, Kallick
Bartelstein, LLP, declined to stand for reelection as the Company's auditors,
effecting its decision through a letter dated 
<PAGE>
 
September 24, 1997. The Company filed a report on Form 8-K on December 3, 1997
that discloses the declination. Arthur Andersen LLP was engaged on June 1, 1998
to perform an audit of the Company's consolidated balance sheet and related
financial statements for the fiscal year ended December 31, 1997. On September
30, 1998, Arthur Andersen LLP resigned as the Company's auditors. The Company
filed reports on Form 8-K on June 5, 1998 and October 7, 1998 that announced
these events. On October 15, 1998, the Company engaged Reznick Fedder and
Silverman P.C. to perform an audit of the Company's consolidated balance sheet
and related financial statements for the fiscal year ended December 31, 1997.
The Company filed a report on Form 8-K on October 20, 1998 that disclosed the
engagement. The audit was completed in December 1998.


Risk Factors

  The Company has incurred significant operating losses in every fiscal period
since inception.  In August 1997, in connection with the acquisition of Skysite,
the Company terminated its production of the UITI and ED technologies and
concentrated its business on the global satellite communications market.
Skysite was incorporated in August 1995 and has only limited operating history.
The Company is thus subject to the risks inherent in the establishment and
growth of a new business enterprise. The likelihood of success of the Company
must be considered in light of the problems, expenses, difficulties and delays
frequently encountered in connection with a new business, including, but not
limited to, a continually evolving industry subject to rapid technological and
price changes, acceptance of the products that Skysite markets and an increasing
number of market competitors and a continuing need for additional capital.  The
Company is filing a report on Form 8-K on the date of this filing that discusses
the Company's immediate capital needs. For the year ended December 31, 1997, the
Company's operating loss was $4,685,185. The Company has incurred substantial
quarterly operating losses through the first three quarters of 1998 and expects
a loss for the full year and possibly longer.  The Company has discussed risk
factors in its report on Form 10-K/A Amendment No. 2 for fiscal year 1997 filed
on December 31, 1998.


Results Of Operations

Three Months Ended March 31,1997 Compared to three Months Ended March 31, 1996.

  The Company's primary activities were in transition in 1996 and 1997.  The
Company had continued pursuing the development of an electronic device capable
of adding modem, video data and telephone features to an ordinary television
receiver over a telephone line ("Initial Products") during 1996.  But in early
1997, the Company concluded that these Initial Products would not produce
adequate revenues or profits if brought to market.  A new interim President was
hired and specifically charged with developing a business plan that would
utilize the Company's assets more effectively than would continuing with its
original strategy. Our efforts in the first quarter of 1997 were largely devoted
to that task.

  Research and development expenses were not incurred for the first quarter of
1997 as compared to an expense of $286,738 for the first quarter of fiscal 1996.
This decrease was due to the termination of activity related to the Initial
Products.

  General and administrative expense for the first quarter of 1997 was $499,229
as compared to $494,950 in the year earlier period.  Savings in management
travel expense were largely offset by increased compensation expense related to
retaining the new President.  The overall level of activity remains stable even
as management shifted its focus from the Initial Products to seeking new areas
of operations.

The Company granted stock options to various employees and other individuals
during the first quarter of fiscal 1997.  In connection with the granting of
these options, the Company recorded a stock option compensation expense in the
amount of $97,896. The amount recorded represents the difference between the
exercise price and the fair market value of the Company's Common Stock, as
determined by reference to the publicly traded value of the stock, as of the
date the options were granted.
<PAGE>
 
Liquidity and Capital Resources

  The Company ended fiscal 1996 with inadequate cash available to continue its
regular business activities.  In the absence of additional financing, it could
not continue to operate.

  In December 1996, the Company entered into an agreement with a placement agent
to raise equity financing solely from non-U.S. persons as defined in Regulation
S promulgated by the U.S. Securities and Exchange Commission through a private
offering of the Company's 8% cumulative convertible preferred stock ("Series
A"), $0.01 par value per share. The Company offered a minimum of 2,000,000 and a
maximum of 6,666,667 shares of the 8% preferred stock for consideration of
between $3,000,000 and $10,000,000. The Series A preferred stock is nonvoting.

  The first offering period, according to the December 1996 offering memorandum,
was to expire on June 30, 1997. However, the Company closed that offering in
February 1997 after selling 2,031,832 shares of Series A Preferred Stock with
1,015,916 warrants for a total consideration of $3,047,748.  Cash proceeds, net
of placement fees and expenses, to the Company were $2,691,245.  Funds used for
operations during the first quarter were $1,176,395. The net loss for the
quarter was $625,590.  Additional funds were used to reduce accounts payable.
At March 31, 1997, the Company had available $1,510,315 in cash.   The Company
was not producing any revenue and had no immediate prospects of doing so; but
the available cash was sufficient in the opinion of Management to continue
productively the Company's efforts to identify acquisition candidates and to
seek additional capital infusions.

  For every two Series A preferred shares purchased, the stockholder received
one warrant (which shall expire three years after the date of execution of the
subscription agreement) to purchase one share of common stock at an exercise
price of $3.00 per share (the "preferred stock warrants"). The preferred stock
warrants shall become exercisable in the same increments and on the same dates
that the conversion rights with respect to the shares to which they are attached
become vested, as described below. No warrants were exercised in 1997.

  The Company has allocated the equity raised during the first quarter of 1997
between the preferred stock and the warrants. Based on the valuation of each on
the date of issuance, the Company has allocated approximately $1,798,171 to the
preferred stock and $1,249,577 to the warrants for the entire proceeds received
under Series A through March 31, 1997.

  Series A preferred stockholders have the right to convert each share into one
share of common stock as follows: a) 25% of the shares 90 days following the
date the shares were issued (the initial conversion date) and b) 25% of the
shares at the end of each of the three consecutive 90-day periods following the
initial conversion date. No conversion of Series A preferred stock to common
stock was made in 1997.

  Six months after the date of issuance of the Series A preferred shares, the
Company shall have the option to require the preferred stockholder to convert
each of such shares into one share of common stock. Upon such conversion, all of
the preferred stock warrants attached to such shares shall become fully
exercisable.

  Each Series A preferred stockholder is entitled to receive quarterly dividends
on the last day of March, June, September and December in an amount equal to 8%
per annum of the stated value of the preferred stock. Dividends totaling $63,745
were paid in the first quarter of 1997.

  On the date of issuance of some of the Series A preferred stock, the purchase
price of the shares was less than the quoted market price of the Company's
common stock. Accordingly, the intrinsic value of this beneficial conversion
feature is being accreted to preferred stock over the conversion rights period.
Accretion of the beneficial conversion feature as of March 31, 1997 totaled
$352,404 and is reflected as an increase in the carrying value of the preferred
stock and a dividend charge against accumulated deficit.

  Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of the Series A preferred stock will be entitled to be
paid, before any distribution or payment is made 
<PAGE>
 
in respect of any common stock as to distribution on liquidation, dissolution or
winding up, an amount in cash equal to the aggregate stated value ($1.50 per
share) of all shares outstanding plus all accrued but unpaid dividends.

  Under the terms of the placement agent agreement related to Series A, the
placement agent is entitled to (1) a placement fee based on a percentage of
capital raised, (2) options to purchase common stock of the Company and (3) 5%
of the proceeds related to exercise of warrants issued with the Series A
preferred shares. The total fees earned were $356,503 as of March 31, 1997.  In
accordance with the placement agent agreement, on March 6, 1997, the placement
agent was granted 2,800,000 options to purchase common stock of the Company at
$0.3125 per share. On December 12, 1997, these options were canceled and the
Company granted the placement agent 2,800,000 new options, for which the
placement agent could exchange each option for .85 share of the Company's stock
upon registration. On December 12, 1997, the Company valued the new options to
be $1,278,631. The Company has recognized the value of the new options and
recorded this amount as of December 12, 1997 as stock issuance cost, which is
reflected as a reduction of additional paid-in capital.
<PAGE>
 
PART II -- OTHER INFORMATION


     ITEM 1. LEGAL PROCEEDINGS

  William H. Buck v. Viscorp & Visual Information Services Corp.  On or about
  -------------------------------------------------------------              
June 2, 1997, the Company filed a complaint against William H. Buck, the
Company's former Chief Executive Officer and Director, in the United States
District Court, Northern District of Illinois, Eastern Division, Case No. 97 C
3390, entitled Viscorp and Visual Information Services Corp. v. William H. Buck,
               ---------------------------------------------------------------- 
alleging breach of fiduciary duty, breach of employment agreement, accounting as
to severance agreement and conspiracy to defraud arising out of Mr. Buck's
conduct as Chief Executive Officer of the Company.   On June 23 1997, Mr. Buck
filed a complaint against Viscorp, et. al., in the United States District Court,
Northern District of Illinois, Eastern Division, Case No. 97 C 4480.  Mr. Buck
sought a declaratory judgment permitting him to sell 220,000 shares of Common
Stock of the Company.  On September 19, 1997, Mr. Buck filed a counterclaim
against the Company, alleging partial rescission of his severance agreement,
dated January 8, 1997, breach of severance agreement, rescission of lock-up
agreement, breach of lock-up agreement and tortious interference with economic
advantage.  On November 12, 1997, Raquel Velasco filed a complaint against the
Company, in the United States District Court, Northern District of Illinois,
Eastern Division, Case Number 97-C-7897, entitled Raquel Velasco v. Viscorp
                                                  -------------------------
seeking $220,000 in damages and expenses from alleged rescission for breach of
written severance agreement, or in the alternative, breach of severance
agreement.  On June 9, 1998, the Company filed a counterclaim against Ms.
Velasco relating to her alleged employment agreement with the Company.  The
aforementioned matters were consolidated for purposes of discovery.  On August
31, 1998, the Company entered into settlement agreements with Mr. Buck and Ms.
Velasco.  Pursuant to the Company's settlement agreement with Mr. Buck, Mr. Buck
is permitted to sell 350,000 shares of the Company's common stock that he
already owns, pursuant to a tradeability schedule.  Mr. Buck returned all other
shares to the Company for cancellation. Mr. Buck's stock options have been
canceled. Pursuant to the Company's settlement agreement with Ms. Velasco, Ms.
Velasco received 350,000 shares of the Company's common stock, formerly held by
Mr. Buck, also subject to a tradeability schedule. Ms. Velasco has also been
granted an option to purchase certain property from the Company, including the
ED and UITI technologies, for $50,000, which she exercised in November 1998.

  Visual Information Service Corp. v. Interactive Video Publishing, Inc.  On
  ---------------------------------------------------------------------     
July 25, 1996, the Company filed a lawsuit in the United States District Court
for the Northern District of California, San Jose Division, case number C 96-
20593 RMW (EAI), against Interactive Video Publishing, Inc., David Serlin, Steve
Owens and Kaori Kuwata ("Defendants") for injunctive relief and damages of
approximately $7 million for misappropriation of trade secrets, conversion and
breach of fiduciary duty.  Defendants filed counterclaims for declaratory
relief, intentional interference with economic advantage, breach of contract and
unfair competition claiming damages yet to be determined.  On November 20, 1996,
David Serlin and Marvin Lerch filed suit against the Company and its former
officer, Jerome Greenberg, in the United States District Court, Northern
District of California, San Jose Division.  The case is captioned Serlin v.
                                                                        ---
Visual Information Service Corp., case number C 96-21073. David Serlin and
-------------------------------                                           
Marvin Lerch claimed damages in excess of $6.5 million in connection with the
alleged breach of their employment contracts, alleging breach of employment
contracts, breach of the implied covenant of good faith and fair dealing, fraud,
deceit and negligent misrepresentation among several causes of action. On June
25, 1997, a settlement conference was held in Visual Information Service Corp v.
                                              ----------------------------------
Interactive Video Publishing, Inc. and Serlin v. Visual Information Service
---------------------------------     -------------------------------------
Corp. and a settlement was reached with all parties in both actions. On
September 26, 1997, Messrs. Serlin and Lerch entered into a settlement agreement
with the Company whereby the Company agreed to pay Messrs. Serlin and Lerch
$25,000 each, and granted each 400,000 stock options with an exercise price of
$1.50.  The Company is currently unable to comply with terms of the settlement
agreement because the shares underlying the stock options have not yet been
registered.  This in ability has raised questions about the validity of the
agreement and could result in consequential damages assessed against the
Company.  The parties are attempting to reach a settlement of the issues 
outstanding.  At this time, management is unable to estimate the likelihood or
amount of any such damages.
<PAGE>
 
  Donald Gilbreath v. USDI, Viscorp and Corporate Stock Transfer, Inc.  On
  -------------------------------------------------------------------     
December 19, 1997, Donald Gilbreath, a former director of the Company, filed a
complaint against the Company in the United States District Court, District of
Colorado, Case No. 97-WY-2667-CB, alleging a claim against the Company for
failing to remove restrictive legends on shares owned by Mr. Gilbreath.  Mr.
Gilbreath requested that the Court hold that he was the lawful owner of
1,000,000 unrestricted shares of Common Stock of the Company, and 237,800
unrestricted options to acquire common shares.  On July 2, 1998, the Company
entered into a settlement agreement with Mr. Gilbreath, whereby 500,000 of Mr.
Gilbreath's shares in the Company will be unrestricted, and Mr. Gilbreath will
retain 75,000 options, which must be exercised by January 1, 1999.   As of
December 31, 1998 75,000 of those options have been exercised.  Pursuant to the
settlement agreement, the remaining 500,000 shares have been canceled. Further,
Mr. Gilbreath is permitted to sell his shares pursuant to a tradeability
schedule.

  Roger and Bonnie Remillard v. U.S. Digital Communications, Inc. f/k/a Viscorp
  -----------------------------------------------------------------------------
and Corporate Stock Transfer, Inc.  On or about June 1, 1998, Roger and Bonnie
---------------------------------                                             
Remillard filed a complaint in the United States District Court, District of
Colorado, Case No. 98-WY-1217-CH, alleging that the Company failed to remove
restrictive legends from the Remillards' shares in the Company, in violation of
Nevada Revised Statute 104.8401.  Pursuant to a settlement agreement, dated July
2, 1998, the Remillards retained 820,000 shares of the Company's Common Stock.
Further, the Remillards retained 200,000 out of 288,000 stock options, which
must be exercised before January 1, 1999.  As of December 28, 1998 150,000 of
those options have been exercised.  The Company has placed the remaining 50,000
options in escrow pending resolution of a dispute over the ownership.  These
options may be exercised in the future.  The Remillards are permitted to sell
their shares pursuant to a tradeability schedule.

  James Goodnow v. Viscorp.  On February 9, 1998, James Goodnow filed a
  ------------------------                                             
complaint in the Nevada County Superior Court, State of California, against the
Company, alleging breach of contract, fraud, unfair business practices and money
on open book account, based on the alleged breach of a software consulting
agreement dated July 17, 1997. Mr. Goodnow sought damages in the amount of
$20,219.40.  In June 1998, the Company and Mr. Goodnow entered into a settlement
agreement whereby the Company agreed to pay Mr. Goodnow $16,000, which was
subsequently paid.

  Cochran Ranch, ITG and Rubin Kitay v. U.S. Digital Communications Inc. and
  --------------------------------------------------------------------------
Larry Siegel.  In January 1998, plaintiffs, former shareholders of Skysite,
------------                                                               
filed a request for mediation and demand for arbitration with the American
Arbitration Association in Los Angeles, California, case number 72 174 00098 98
GS, requesting mediation and arbitration in connection with the Company's
alleged breach of the Agreement and Plan of Reorganization, dated June 20, 1997,
whereby the Company acquired Skysite.   Plaintiffs alleged that the Company
failed to issue shares in consideration of the acquisition.  On May 28, 1998,
plaintiffs and the Company settled this dispute pursuant to the amendment to
agreement and plan of reorganization.  See "Notes to Condensed Consolidated
Financial Statements (Unaudited)-(2) Acquisition."

  Nolan Bushnell v. Viscorp.  On December 13, 1994, Nolan Bushnell filed a
  -------------------------                                               
complaint against the Company, in San Mateo Superior Court, case number 390474,
alleging breach of fiduciary duties, breach of contract, wrongful termination
and other causes of action in connection with Mr. Bushnell's employment with
Company.  On February 3, 1998, the Company and Nolan and Nancy Bushnell entered
into a settlement, the terms of which, by agreement of the parties thereto, are
confidential.  The Company believes that the terms of such settlement agreement
would not have a material adverse effect on the Company.

  David Rosen v. U.S. Digital Communications, Inc.  On July 27, 1998, David
  -----------------------------------------------                          
Rosen, a former employee and consultant of the Company, filed a complaint
against the Company in the California Superior Court, County of San Francisco,
case number 996762, in connection with his alleged employment contract and his
employment termination.  Mr. Rosen alleged breach of contract, breach of the
covenant of good faith and fair dealing, violation of California Labor Code
Sections 201, 226 and 227, and conversion.  Mr. Rosen seeks severance pay and
other damages in excess of $100,000.  Discovery has not yet begun.
<PAGE>
 
  CBS (formerly Westinghouse) v. Skysite.  On April 1, 1998, CBS filed a
  ---------------------------------------                               
complaint, in Los Angeles County Superior Court, case number 188569, alleging
that Skysite breached a distribution agreement with CBS dated December 21, 1996,
and a subsequent settlement agreement between CBS and Skysite, dated March 6,
1997, seeking monies allegedly owed under the distribution agreement. In June
1998, CBS and the Company entered into a settlement agreement whereby Skysite
agreed to pay CBS $430,000, which was paid soon thereafter.

  Witter Publishing v. Skysite.  On February 6, 1997, Witter Publishing filed a
  ----------------------------                                                 
complaint in Los Angeles Municipal Court, case number 97K02741, alleging open
book account and account stated, and seeking money damages. On December 12,
1997, Witter Publishing and Skysite entered a stipulation for entry of judgment
whereby Skysite agreed to pay Witter Publishing $19,038 between December 20,
1997 and November 20, 1998.

  PR Newswire Association, Inc. v. Skysite.  On November 12, 1997, PR Newswire
  ----------------------------------------                                    
filed a complaint against Skysite in New Jersey Superior Court, Hudson County,
docket number DC - 10873 - 97, alleging a breach of contract and seeking damages
of $6,590.  In January 1998, Skysite agreed to pay PR Newswire payments totaling
$5,044, and the case has been dismissed.

  Tom Soumas v. Skysite.  On October 6, 1997, Tom Soumas, a former employee of
  ---------------------                                                       
Skysite, filed a complaint with the Labor Commissioner of the State of
California, seeking damages for vacation pay and wellness days he alleges he was
due upon termination, in the amount of $9,300.  A hearing on Mr. Soumas' claim
was held on June 2, 1998, pursuant to which the Labor Commissioner issued a
decision in favor or Mr. Soumas in the amount of $2,500.

  Penwell Publishing v. Skysite.  On March 5, 1997, plaintiff filed a complaint
  -----------------------------                                                
in the Tulsa County, Oklahoma District Court, Case Number CJ 9701105, alleging
actions for open account and breach of contract resulting from the Company's
alleged obligation to place certain advertisements in Penwell Publications.
Plaintiff seeks damages of $36,217.  In October 1998, the Company agreed to pay
Penwell Publishing $10,000 and the case was dismissed.

  Intelligent Data Systems, Inc.  On August 4, 1998, counsel for Intelligent
  -----------------------------                                             
Date Systems, Inc. ("IDS") made a demand on the Company for (i) rescission of a
technology licensing agreement dated January 1, 1995 and (ii) return of
consideration to IDS, in the amount of $968,750.  No complaint has been filed.

  Tom Soumas.  In a letter dated August 31, 1998, counsel for Tom Soumas made a
  ----------                                                                   
demand on the Company in connection with the Company's acquisition of Skysite.
On January 29, 1999, Tom Soumas filed a complaint against the Company and others
in Los Angeles County Superior Court, case number BC204576, alleging breach of
contract; fraud and deceit; negligent representation; specific performance;
conversion; trespass; and seeking money damages and that the Company perform its
obligations under the agreement to acquire Skysite by issuing and delivering to
plaintiff shares and options to purchase shares of common stock of the Company.
The Company is unable to express an opinion as to the outcome of this matter and
the Company has made no independent investigation of potential claims, defense
and counterclaims.  The Company intends to vigorously defend itself against this
action.
<PAGE>
 
ITEM 6 -  EXHIBITS AND REPORTS ON FORM 8-K


  The Company filed Form 8-K on February 19, 1998 to announce that the Company
had decided in fiscal year 1997 to discontinue the development of the Universal
Internet Television Interface and Electronic Device technologies described under
the section entitled "Business" in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.  As a result, the Registrant's business
presently consists solely of the operation of its wholly owned subsidiary
Skysite Communications Corporation.   The filing also reported that the Company
had not yet replaced its prior auditor.

  The Company filed Form 8-K on June 5, 1998 to announce that it had engaged
Arthur Andersen LLP to perform an audit of its consolidated balance sheet for
the fiscal year ended December 31, 1997.

  The Company filed Form 8-K on July 8, 1998 to announce that Jerome Greenberg
resigned from his position as a director of the Company.

  The Company filed Form 8-K on August 20, 1998 to report developments in its
negotiations with EuroTelecomm Communications, Inc. on its possible acquisition
of that company, to disclose sales of Series A Preferred Stock, to disassociate
itself from unauthorized projections of its earnings and to make further
disclosure of its engagement of Arthur Andersen LLP to perform an audit of its
consolidated balance sheet for the fiscal year ended December 31, 1997.

  The Company filed Form 8-K on October 7, 1998 to announce that Arthur Andersen
LLP had resigned as its auditor.

  The Company filed a Form 8-K on October 20, 1998 to announce that it had
engaged Reznick Fedder and Silverman P.C. to perform an audit of the its
financial statements for the fiscal year ended December 31, 1997.

  The Company filed a Form 8-K on December 11, 1998 to report the correction to
a press release reporting the Company's financial results for the third quarter
of 1998.
<PAGE>
 
                                   SIGNATURES

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

                                    U.S. Digital Communications, Inc.



Date: February  25, 1999            /s/ ROBERT J. WUSSLER
      ------------------            -----------------------------------
                                    Robert J. Wussler
                                    (President, Chief Executive Officer
                                    and Director (Principal Executive
                                    Officer))


Date: February 25, 1999             /s/ EDWARD J. KOPF
      -----------------             -----------------------------------
                                    Edward J. Kopf
                                    (Executive Vice President and Chief
                                    Operating Officer
                                    (Principal Financial and Accounting
                                    Officer))