<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

================================================================================

                                  FORM 10-Q


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


                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
                        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 16,849,200 SHARES OF COMMON STOCK, PAR VALUE $0.01, OUTSTANDING AS
OF JUNE 30, 1998
<PAGE>

PART I:     FINANCIAL INFORMATION

ITEM I:     FINANCIAL STATEMENTS

                       U.S. DIGITAL COMMUNICATIONS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                    ASSETS
                                                                                         June 30,         December 31,   
                                                                                           1998              1997       
                                                                                        -----------       ------------   
<S>                                                                                   <C>                <C>           
Current assets:                                                                                                          
     Cash and cash equivalents                                                         $  2,005,515       $    545,790   
     Trade accounts receivable, net                                                         126,220            209,073   
     Inventory                                                                               43,942            107,967   
     Note receivable                                                                        421,000             25,000   
     Prepaid expenses                                                                       111,482             17,436   
                                                                                       ------------       ------------   
          Total current assets                                                            2,708,159            905,266   
                                                                                                                         
     Investments                                                                             29,900              9,750   
                                                                                                                         
     Property and equipment, net                                                            112,591            122,500   
                                                                                                                         
     Intangible assets, net                                                               1,570,449          1,758,903   
                                                                                                                         
     Other noncurrent assets                                                                 34,010             13,032   
                                                                                       ------------       ------------   
                                                                                                                         
     Total assets                                                                      $  4,455,109       $  2,809,451   
                                                                                       ============       ============    
                                                                                                                         
                    LIABILITIES AND STOCKHOLDERS' (DEFICIT)                                                              
                                                                                                                         
Current liabilities:                                                                                                     
     Accounts payable and accrued expenses                                                1,186,246          1,770,208   
     Deferred revenue                                                                        59,902            107,267   
     Dividends payable                                                                      324,610            135,931   
     Stockholder loans                                                                      962,385            962,385   
     Accrued interest on stockholder loans                                                  182,748            144,252   
     Notes payable                                                                          913,443            313,290   
     Minimum royalty obligation                                                             450,000            450,000   
     Due to former officers and stockholders                                                901,522          1,080,022   
                                                                                       ------------       ------------   
          Total current liabilities                                                       4,980,856          4,963,355   
                                                                                                                         
Notes payable (net of current portion)                                                       14,835             17,785   
                                                                                       ------------       ------------   
                                                                                                                         
          Total liabilities                                                               4,995,691          4,981,140   
                                                                                       ------------       ------------   
                                                                                                                         
Commitments and contingencies                                                                                            
                                                                                                                         
Stockholders' (deficit):                                                                                                 
     Preferred stock -- $.01 par, 10,000,000 shares authorized; 4,164,232 and                            
          2,882,232 issued and outstanding at June 30, 1998 and December 31, 1997         8,157,176          4,105,607   
     Common stock --  $0.01 par, 50,000,000 shares authorized; 22,751,400 and                            
          22,298,000 outstanding at June 30, 1998 and December 31, 1997                     227,514            222,980   
     Additional paid-in capital                                                          10,285,643         12,422,255   
     Common stock warrants                                                                4,988,539          1,581,337   
     Accumulated other comprehensive loss                                                   (11,050)           (31,200)  
     Treasury stock (5,902,200 shares of common stock, at cost)                                 (10)               (10)  
     Deferred compensation                                                                       -              (3,744)  
     Shares to be issued (including additional paid in capital)                           1,222,700          1,222,700   
     Stockholders' receivable                                                              (200,000)          (200,000)  
     Accumulated deficit                                                                (25,211,094)       (21,491,614)  
                                                                                       ------------       ------------   
                                                                                                                         
          Total stockholders' (deficit)                                                    (540,582)        (2,171,689)  
                                                                                       ------------       ------------   
                                                                                                                         
          Total liabilities and stockholders' (deficit)                                $  4,455,109       $  2,809,451   
                                                                                       ============       ============    
</TABLE>

     See accompanying notes to condensed consolidated financial statements

<PAGE>
 
                       U.S. DIGITAL COMMUNICATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                       Three Months Ended June 30,        Six Months Ended June 30,
                                                       ----------------------------      ---------------------------
                                                           1998             1997            1998            1997
                                                       -----------      -----------      -----------     -----------
<S>                                                   <C>                 <C>           <C>             <C>   
Sales:                                                                                                             
    Equipment                                          $    50,035                -      $   194,356               -
    Services                                               176,675                -          331,801               -
                                                       -----------      -----------      -----------     -----------
        Total sales                                        226,710                -          526,157               -
                                                                                                                  
Cost of goods sold                                         158,761                -          374,286               -
                                                       -----------      -----------      -----------     -----------
        Gross margin                                        67,949                -          151,871               -
                                                       -----------      -----------      -----------     -----------
Operating expenses:                                                                                                
    Sales and marketing                                    198,609                -          389,424               -
    General and administrative                           1,170,752        1,206,332        1,709,734       1,705,562
    Stock option compensation                              253,787          602,088          353,575         707,560
                                                       -----------      -----------      -----------     -----------
        Total operating expenses                         1,623,148        1,808,420        2,452,733       2,413,122
                                                       -----------      -----------      -----------     -----------
Loss from operations                                    (1,555,199)      (1,808,420)      (2,300,862)     (2,413,122)
                                                       -----------      -----------      -----------     -----------
                                                                                                                   
Other income (expense):                                                                                            
    Interest expense                                       (60,727)         (39,460)         (97,978)        (67,925)
    Interest and other income                               17,575           16,074           17,594          16,074
    Income (loss) on repayment of debt                     167,881          (85,700)         167,881         (85,700)
    Loss on investments                                          -           (9,050)               -          (9,050)
                                                       -----------      -----------      -----------     -----------
        Total other income (expense), net                  124,729         (118,136)          87,497        (146,601)
                                                       -----------      -----------      -----------     -----------
                                                                                                                   
Net loss                                                (1,430,470)      (1,926,556)      (2,213,365)     (2,559,723)
                                                                                                                   
Dividends on preferred stock                            (1,368,470)        (413,359)      (1,505,715)       (818,793)
                                                       -----------      -----------      -----------     -----------
                                                                                                                   
Net loss available to common stockholders              $(2,798,940)     $(2,339,915)     $(3,719,080)    $(3,378,516)
                                                       ===========      ===========      ===========     ===========
                                                                                                                       
Net loss per common share:                                                                                             
    Basic                                              $     (0.17)     $     (0.11)     $     (0.23)    $     (0.15)
                                                                                                                        
    Diluted                                            $     (0.17)     $     (0.11)     $     (0.23)    $     (0.15)
                                                                                                                       
    Weighted average shares of common                               
       stock outstanding                                16,576,751       22,128,000       16,511,782      22,128,000
</TABLE>

     See accompanying notes to condensed consolidated financial statements

<PAGE>
 
                       U.S. DIGITAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                    FOR THE SIX MONTHS ENDED JUNE 30, 1998
                                  (UNAUDITED)

<TABLE>
<CAPTION>


                                                    Preferred Stock                     Preferred Stock               
                                                      Series A                               Series B                 
                                              ---------------------------------      ---------------------------------
                                                                                                                      
                                                  Shares             Amount             Shares             Amount     
                                              --------------     --------------      --------------     --------------
<S>                                          <C>                <C>                 <C>                <C>            
BALANCE, DECEMBER 31, 1997                         2,882,232     $    4,105,607                   -      $           -
                                                                                                                      
Issuance of stock in legal settlement                                                                                 
Sale of stock for cash in option exercise                  -                  -                   -                  -
Sale of Series A Preferred Shares and                                                                                 
  Warrants for cash                                1,280,000            142,800                   -                  -
Sale of Series B Preferred Shares and                                                                                 
  Warrants for cash                                        -                  -               2,000            913,331
Put option related to Sale of Series B                     -                  -                   -                  -
Preferred Stock                                            -                  -                   -          1,678,000
Preferred dividends and beneficial                                                                                    
  conversion feature                                       -          1,317,438                   -                  -
Deferred compensation related to grant of                                                                             
  stock options                                            -                  -                   -                  -
Amortization of deferred compensation                                                                                 
Other comprehensive income                                 -                  -                   -                  -
Stock issuance cost                                        -                  -                   -                  -
Net Loss                                                   -                  -                   -                  -
                                              --------------     --------------      --------------     --------------
                                                                                                                      
BALANCE, JUNE 30, 1998                             4,162,232     $    5,565,845               2,000     $    2,591,331
                                              ==============     ==============      ==============     ==============

<CAPTION> 
                                                         Common Stock
                                                           Par Value                   Additional           Common
                                              ---------------------------------         Paid-In              Stock
                                                  Shares            Amount              Capital             Warrants
                                              --------------     --------------      --------------     --------------  
<S>                                          <C>               <C>                 <C>                <C> 
BALANCE, DECEMBER 31, 1997                        22,298,000     $      222,980      $   12,422,255     $    1,581,337   
                                                                                                                         
Issuance of stock in legal settlement                150,000     $        1,500             177,000                      
Sale of stock for cash in option exercise            270,000              2,700             119,175                  -   
Sale of Series A Preferred Shares and                                                                        1,777,200   
  Warrants for cash                                        -                  -                                          
Sale of Series B Preferred Shares and                                                                        1,086,669   
  Warrants for cash                                        -                  -                   -                      
Put option related to Sale of Series B                     -                  -                                      -   
Preferred Stock                                            -                  -          (1,678,000)                     
Preferred dividends and beneficial                                                                                   -   
  conversion feature                                       -                  -                   -                      
Deferred compensation related to grant of                                                                            -   
  stock options                                            -                  -             349,831                      
Amortization of deferred compensation                                                                                -   
Other comprehensive income                                 -                  -                   -                      
Stock issuance cost                                   33,400                334          (1,104,618)           543,333   
Net Loss                                                   -                  -                   -                  -     
                                              --------------     --------------      --------------     --------------   
                                                                                                                         
BALANCE, JUNE 30, 1998                            22,751,400     $      227,514      $   10,285,643     $    4,988,539
                                              ==============     ==============      ==============     ==============

</TABLE> 


<TABLE> 
<CAPTION> 

                                                      Accumulated
                                                        Other                                                           
                                                     Comprehensive            Treasury Stock                 Deferred   
                                                                       -------------------------------   ---------------
                                                     Income (Loss)         Shares           Cost           Compensation 
                                                     --------------    --------------   --------------    --------------  
<S>                                                  <C>                <C>              <C>               <C> 
BALANCE, DECEMBER 31, 1997                           $      (31,200)       (5,902,200)   $         (10)   $       (3,744)
                                                                                                                        
Issuance of stock in legal settlement                                                                                   
Sale of stock for cash in option exercise                                                                               
Sale of Series A Preferred Shares and                                                                                   
Warrants for cash                                                                  -                 -                 -
Sale of Series B Preferred Shares and                                                                                   
Warrants for cash                                                                                                       
Put option related to Sale of Series B                                                                                  
 Preferred Stock                                                  -                -                 -                 -
Preferred dividends and beneficial                                                                                      
 conversion feature                                               -                -                 -                 -
Deferred compensation related to grant of                                                                               
 stock options                                                                     -                 -          (349,831)
Amortization of deferred compensation                                              -                 -           353,575
Other comprehensive income                                   20,150                -                 -                 -
Stock issuance cost                                                                -                 -                 -
Net Loss                                                          -                -                 -                 -
                                                     --------------    --------------   --------------    -------------- 

BALANCE,  JUNE 30, 1998                              $      (11,050)       (5,902,200)   $          (10)  $            -
                                                     ==============    ==============    ==============   ==============   


<CAPTION> 
                                                    
                                                         Shares                                               Total
                                                          to be         Stockholders'     Accumulated       Stockholders' 
                                                         Issued          Receivable         Deficit           Deficit
                                                     --------------    --------------    --------------    --------------  
<S>                                                <C>                <C>              <C>                <C>          
BALANCE, DECEMBER 31, 1997                           $    1,222,700     $    (200,000)   $  (21,491,614)   $   (2,171,689)

Issuance of stock in legal settlement                                                                             178,500
Sale of stock for cash in option exercise                                                                         121,875 
Sale of Series A Preferred Shares and                                                                                       
Warrants for cash                                                 -                 -                 -         1,920,000 
Sale of Series B Preferred Shares and                                                                                       
Warrants for cash                                                                                               2,000,000         
Put option related to Sale of Series B                                                                        
 Preferred Stock                                                  -                 -                 -                 - 
Preferred dividends and beneficial                                                                                 
 conversion feature                                               -                 -        (1,506,115)         (188,677) 
Deferred compensation related to grant of                                                                     
 stock options                                                    -                 -                 -                 -
Amortization of deferred compensation                             -                 -                 -           353,575
Other comprehensive income                                        -                 -                 -            20,150
Stock issuance cost                                               -                 -                 -          (560,951)
Net Loss                                                          -                 -        (2,213,365)       (2,213,365)
                                                     --------------    --------------    --------------    --------------  

BALANCE,  JUNE 30, 1998                              $    1,222,700    $     (200,000)   $  (25,211,094)   $     (540,582)
                                                     ==============    ==============    ==============    ==============   
</TABLE> 

     See accompanying notes to condensed consolidated financial statements



<PAGE>
 
                       U.S. DIGITAL COMMUNICATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           Six Months Ended June 30,
                                                                         -------------------------------
                                                                              1998             1997
                                                                         -------------     -------------
<S>                                                                      <C>               <C>
Cash flows from operating activities:                                                   
    Net loss                                                             $  (2,213,365)    $  (2,559,723)
                                                                                        
    Adjustments to reconcile net loss to net cash used in                               
       operating activities--                                                           
    Depreciation and amortization                                              207,174            19,681
    Stock option compensation                                                  353,575           707,560
    Loss on investment                                                               -             9,050
    Loss on repayment of debt                                                        -            85,700
    Changes in assets and liabilities:                                                  
        Decrease in trade accounts receivable, net                              82,853                 -
        Decrease in other receivables                                                -             7,390
        Decrease in inventory                                                   64,025                 -
        Decrease (increase) in prepaid expenses                                (94,046)          (33,826)
        (Increase) Decrease in other noncurrent assets                         (20,978)           (3,000)
        (Decrease) increase in accounts payable and accrued expenses          (583,962)         (768,786)
        Decrease in deferred revenue                                           (47,365)                -
        Increase in accrued interest on stockholder loans                       38,496            19,682
        Increase in in due to former officers and stockholder                        -           698,000
                                                                         -------------     -------------
                                                                                        
            Total adjustments                                                     (228)          741,451
                                                                         -------------     -------------
                                                                                        
            Net cash used in operating activities                           (2,213,593)       (1,818,272)
                                                                         -------------     -------------
                                                                                        
Cash flows from investing activities:                                                   
    Advances to non-affiliates                                                (396,000)                -
    Purchase of investments                                                          -          (100,000)
    Advances to Skysite prior to acquisition                                         -          (198,481)
    Capital expenditures                                                        (8,810)          (58,394)
                                                                         -------------     -------------
                                                                                        
            Net cash used in investing activities                             (404,810)         (356,875)
                                                                         -------------     -------------
                                                                                        
Cash flows from financing activities:                                                   
    Borrowings from stockholders                                               600,000           120,000
    Principal payments under notes payable                                      (2,797)           (4,794)
    Proceeds from issuance of preferred stock and warrants                   3,920,000                 -
    Proceeds from issuance of common stock                                     121,875         3,047,749
    Payment of dividends on preferred stock                                          -          (113,985)
    Payment of stock issuance costs                                           (560,950)         (346,503)
    Repayment of stockholder borrowings                                              -           (50,000)
                                                                         -------------     -------------
                                                                                        
            Net cash provided by financing activities                        4,078,128         2,652,467
                                                                         -------------     -------------
                                                                                        
Net change in cash and cash equivalents                                      1,459,725           477,320
Cash and cash equivalents, beginning of period                                 545,790             8,654
                                                                         -------------     -------------
                                                                                        
Cash and cash equivalents, end of period                                 $   2,005,515     $     485,974
                                                                         =============     =============
                                                                                        
Supplemental disclosures of cash transactions:                                          
    Cash paid for interest                                               $      36,148     $           -
                                                                         =============     =============
                                                                                        
Supplemental disclosures of non-cash transactions:                                      
    Common stock issues in satisfication of stockholder loan             $     178,500     $           -
                                                                         =============     =============
                                                                                        
    Common stock and warrants issued as consideration for 
       placement fees                                                    $     543,667     $           -
                                                                         =============     =============
                                                                                        
    Unrealized income on investment                                      $      20,150     $           -
                                                                         =============     =============
                                                                                        
    Beneficial conversion feature on preferred stock                     $   1,317,438     $     704,808
                                                                         =============     =============
</TABLE> 

     See accompanying notes to condensed consolidated financial statements

<PAGE>
 
                        US DIGITAL COMMUNICATIONS, INC.
             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 June 30, 1998, and December 31, 1997, and the related
condensed consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the three and six month periods ended June 30, 1998
and 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)   ACQUISITION

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
($304,000) 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.

  Since the Company had not issued the shares or options due to the other
shareholders as of June 30, 1998, the Company has recorded the value of the
consideration to be given as shares to be issued in stockholders' equity.  As
these shares and options have now been placed in the escrow account, the Company
will recognize an increase to its common stock and additional paid in capital
accounts in its financial statements for the year ending December 31, 1998.  The
purchase price is $1,884,539 in excess of the fair value of the net tangible
assets acquired.  The Company has recognized this as intangible assets which is
being amortized straight-line over a period of five years.

The following unaudited pro forma financial information presents the
consolidated results of operations of the Company and Skysite as if the
acquisition had occurred as of January 1, 1997  The pro forma financial
<PAGE>
 
information does not necessarily reflect the results of operations that would
have occurred had the Company and Skysite constituted a single entity during
such periods.

<TABLE>
<CAPTION>
                                                             Six Months Ended  
                                                              June  30, 1997
                                                             -----------------
<S>                                                           <C>
Proforma sales                                                    $    350,061
Proforma net loss available to common stockholders                $ (4,020,525)
Proforma net loss per share                                       $      (0.18)
</TABLE>


(3)  RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

  Effective January 1, 1998, the Company adopted Statement of Financial
Standards No. 130, "Reporting Comprehensive Income."  This Statement requires
that all items recognized under accounting standards as components of
comprehensive income (loss) be reported in a financial statement that is
displayed with the same prominence as other financial statements.  Comprehensive
income (loss) as defined includes all changes in equity (net assets) during a
period from non-owner sources.  For the six months ended June 30, 1998,
comprehensive income consisted of unrealized losses on available for sale
securities totaling $20,150.

  Effective January 1, 1998, the Company adopted Statement of Financial
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information."  This Statement establishes standards for reporting financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
reports issued to shareholders.  Disclosure in interim financial reports in the
initial year of adoption is not required.  The Statement also establishes
standards for related disclosures about products and services, geographic areas
and major customers.  Operating segments are defined as components of an
enterprise about which separate financial information is available and evaluated
regularly by chief operating decision makers in deciding how to allocate
resources and in assessing performance.  Management is in the process of
evaluating the segment disclosures for purposes of reporting under this
Statement.  The adoption of this Statement will have no impact on the results of
operations or financial condition.
<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 October 20, 1998
on Form 10-K 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

This report on Form 10-Q for the second quarter of fiscal year 1998 ("June 10-
Q"), due on August 15, 1998, is being filed on or about November 20, 1998.  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-Q for the first
quarter of fiscal year 1998 ("March 10-Q"), due May 15, 1998, on or about
November 21, 1998.  The Company has not yet filed a report due on Form 10-Q for
the quarter ending September 31,1998.  This filing should be read in conjunction
with the more extensive information provided in the Company's 10-K/A 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 have been associated with substantial changes in the Company's
management and operations.  In the Summer 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.  As a result, the Registrant's business presently consists
solely of the operation of its wholly owned "Skysite" subsidiary that is engaged
in the satellite based telecommunications business.  The Company filed a report
on Form 8-K on July 2, 1997 that reported these changes in its operations.
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.  Management believes
that it is addressing the effect of these changes on financial and other
operations and intends to achieve compliance with filing requirements under the
Securities Exchange Act of 1934 (the "Exchange Act") as soon as practically
possible.  However as of the date of this report, the Company is not in
compliance with the filing requirements of the Exchange Act as discussed in the
paragraph above.

  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 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 
<PAGE>
 
consolidated balance sheet and related financial statements for the fiscal year
ended December 31, 1997 that is now in progress. The Company filed a report on
Form 8-K on October 20, 1998 that disclosed the engagement.


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. For the year ended December 31, 1997, the
Company's operating loss was $5,144,888. The Company expects to incur
substantial quarterly operating losses through 1998 and possibly longer.  The
Company has discussed risk factors in its report filed on Form 10-K/A for fiscal
year 1997 on October 20, 1998.


Results Of Operations

Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997.

  The Company had $226,710 in revenue from sales of satellite equipment and
services in the second quarter of fiscal 1998 compared to no such revenue in the
second quarter of fiscal 1997.  This increase resulted entirely from the
Company's acquisition of Skysite Communications Corporation, Inc. in August,
1997. Skysite is a provider of satellite based telecommunications services and
products which utilize satellite based voice/data fax technology with the
Internet.  The Company's ability to maintain sales volume at current levels or
to increase them is dependent on the uninterrupted supply from its major vendors
of goods and services for resale. This supply could be adversely affected by
trade accounts payable of approximately $1.186 million at the end of the second
quarter of fiscal 1998.

  Costs of goods sold was $158,761 in the second quarter of fiscal 1998 compared
to no cost of goods sold in the second quarter of fiscal 1997.  These costs were
associated with the sales generated by Skysite.

  Sales and marketing expense in the second quarter of fiscal 1998 was $198,609
compared to no such expense in the second quarter of fiscal 1997.  These costs
were due to the operational expense incurred by Skysite.

General and administrative expenses, including travel and entertainment
expenses, legal fees and consulting fees, as well as certain other expenses,
decreased to $1,170,752 in the second quarter of fiscal 1998, compared to
$1,206,332 in the second quarter of fiscal 1997. This decrease of $35,580 was
substantially due to reductions in staff at the Company's headquarters that were
largely offset by the general and administrative expenses associated with
operating Skysite.

  The Company granted stock options to various employees and other individuals
during the second quarter of fiscal 1998.  In connection with the granting of
these options, the Company recorded a stock option compensation expense in the
amount of $253,787. 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.

  Net loss for the second quarter of fiscal 1998 was $1,430,470 as compared to
$1,926,556 in the second quarter of fiscal 1997.  Significant factors
contributing to the decrease in the net loss by $496,086 were 
<PAGE>
 
reductions in general and administrative and stock compensation expense and a
one time gain on the settlement of debt.



Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997.

  The Company had $526,157 in revenue from sales of satellite equipment and
services in the first half of fiscal 1998 compared to no such revenue in the
first half of fiscal 1997.  This increase resulted entirely from the Company's
acquisition of Skysite Communications Corporation, Inc. in August, 1997.
Skysite is a provider of satellite based telecommunications services and
products which utilize satellite based voice/data fax technology with the
Internet.  The Company's ability to maintain sales volume at current levels or
to increase them is dependent on the uninterrupted supply from its major vendors
of goods and services for resale. This supply could be adversely affected by
trade accounts payable of approximately $1.186 million at the end of the first
half of fiscal 1998.

  Costs of goods sold was $374,286 in the first half of fiscal 1998 compared to
no cost of goods sold in the first quarter of fiscal 1997.  These costs were
associated with the sales generated by Skysite.

  Sales and marketing expense in the first half of fiscal 1998 was $389,424
compared to no such expense in the first half of fiscal 1997.  These costs were
due to the operational expense incurred by Skysite.

General and administrative expenses, including travel and entertainment
expenses, legal fees and consulting fees, as well as certain other expenses,
decreased to $1,709,734 in the first half of fiscal 1998, compared to $1,705,562
in the first half of fiscal 1997. This decrease of $4,172 was substantially due
to reductions in staff at the Company's headquarters that were largely offset by
the general and administrative expenses associated with operating Skysite.

  The Company granted stock options to various employees and other individuals
during the second half of fiscal 1998.  In connection with the granting of these
options, the Company recorded a stock option compensation expense in the amount
of $353,575. 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.

  Net loss for the first half of fiscal 1998 was $2,213,365 as compared to
$2,559,723 in the first half of fiscal 1997.  Significant factors contributing
to the decrease in the net loss by $346,358 were a reduction in general and
administrative and stock compensation expense and a one time gain on the
settlement of debt.

Liquidity and Capital Resources

  During the first half of fiscal 1998, cash and short-term investments
increased by approximately $1,459,725. The Company used approximately $2,213,593
of cash in operations during the quarter. This use of cash included a reduction
in accounts payable of approximately $583,962 and an increase in prepaid
expenses of approximately $94,046. These uses of cash were more than offset by
the sale of Series A preferred stock for $1,920,000 and Series B preferred stock
for $2,000,000 during the second quarter of fiscal 1998. Cash stock issuance
costs during the quarter were approximately $536,756.

The Company's operations continue to use cash in excess of the amounts they
produce and are expected to do so at least for the remainder of this fiscal
year.  Additional cash has been required from non-operating sources to support
operational requirements as well as any other cash required, such as for
possible acquisitions. The Company has sold additional preferred shares to meet
operational cash requirements and the proceeds of such sales have been
sufficient to allow it to meet its current liquidity requirements.  The Company
expects to make additional offers of stock to support future operations and
acquisitions but there can be no assurance such offerings will be consummated or
that the proceeds thereof will be adequate to meet the Company's requirement.
<PAGE>
 
Series A Preferred Stock:  In December 1996 and again in August 1997, 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 private offerings of the
Company's 8 percent cumulative convertible preferred stock ("Series A Preferred
Stock"), $0.01 par value per share. The Series A Preferred Stock is nonvoting.
For each two shares of Series A Preferred Stock, an investor also received a
warrant to purchase one share of the Company's Common Stock.

  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 of 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. In August of 1997,
the Company again offered its Series A Preferred Stock and warrants with the
offering period to expire March 31, 1998. The August 1997 memorandum was
subsequently amended and the offering period was extended to July 31, 1998. The
Company raised $3,460,500 through the issuance of 2,307,000 additional shares of
Series A Preferred Stock and 1,153,500 warrants. The Company raised a total of
$6,508,248 through the issuance of 4,338,832 total shares of Series A Preferred
Stock in the two offering.  Of this, $1,920,000 was raised through the issuance
of 1,280,000 shares during the first half of fiscal year 1998.

  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 "Series A Preferred Stock Warrants"). The Series A
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. As of June 30, 1998, a
total of 2,081,116 Series A Preferred Stock Warrants had been issued. No
warrants were exercised through June 30, 1998.

  The Company has allocated the equity raised in the Series A Preferred Stock
Offer between the preferred stock and the warrants. Based on the valuation of
each on the date of issuance, the Company has allocated approximately $2,868,000
to the preferred stock and $3,640,000 to the warrants for the entire proceeds
received under Series A through closing at July 31, 1998.

  Series A preferred stockholders have the right to convert each share into one
share of common stock as follows:  a) 25 percent of the shares 90 days following
the date the shares were issued (the "Series A Initial Conversion Date") and b)
25 percent of the shares at the end of each of the three consecutive 90-day
periods following the Series A Initial Conversion Date.  No conversion of Series
A Preferred Stock to common stock was made through June 30, 1998.

  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 Series A 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
percent per annum of the stated value of the Series A Preferred stock.
Dividends totaling $113,985 were paid in 1997.  Additionally, the Company has
recognized dividends payable totaling $324,610 as of June 30, 1998.

  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 (approximately $7,650,000) is being accreted to preferred stock over the
conversion rights period.  Accretion of the beneficial conversion feature as of
June 30, 1998, totaled $2,649,655 and is reflected as an increase in the
carrying value of the preferred stock and a dividend charge against retained
earnings.
<PAGE>
 
  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 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) five
percent of the proceeds related to exercise of warrants issued with the Series A
preferred shares.  The total fees earned and the value of the options granted
through the closing at July 31, 1998, amounted to $5,661,320.  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 $.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.  The Company calculated the fair value of the options granted on
March 6, 1997, to be $4,256,000.  On December 12, 1997, the Company valued the
new options to be $4,902,800.  The Company has recognized the value of the new
options and the percentage fee earned by the placement agent and recorded this
amount, which totaled $5,410,057, for the year ended December 31, 1997, as stock
issuance cost, which is reflected as a reduction of additional paid-in capital.
In addition, if all warrants issued in the Series A offering are exercised, the
placement agent's 5 percent fee would increase by approximately $325,000.

  Series B Preferred Stock:  In April 1998, the Company created a Series B issue
of Preferred Stock, which it offered in a Regulation D Private Placement.  The
Company offered 3,000 shares of the 10,000,000 authorized shares of Preferred
Stock at a purchase price of $1,000 per share.  Each share had a stated value of
$1,000 and no par value ("Series B Preferred Stock"). The offer of Series B
Preferred Stock  closed on May 28, 1998.  The Company accepted subscriptions for
all 3,000 shares for $3,000,000, resulting in $2,670,000 net cash proceeds to
the Company.  As of June 30, 1998, the Company had received payment of
$2,000,000 for 2,000 shares.  The Series B Preferred Stock will not pay
dividends and is nonvoting stock.

  Each share of Series B Preferred Stock shall be convertible into shares of the
Company's common stock based upon a Conversion Formula, as defined in the
Offering Agreement.

  In conjunction with the offering, 500,000 warrants were issued to the Series B
shareholders proportionate to each investor's number of shares purchased to the
total shares offered.  Each warrant entitles the holder to purchase shares of
the Company's common stock at a price 110 percent of the closing bid price as of
the closing of the Series B offering.  The exercise price is $4.34.  The
exercise price and number of shares to be purchased may be adjusted from time to
time based on computations included in the warrant agreement.  Such warrants are
exercisable for three years after closing of the Series B offering.

  The Company has allocated the equity raised in the offerring of the Series B
Preferred Stock between the preferred stock and the warrants.  Based on the
valuation of each on the date of issuance, the Company will allocate
approximately.  The equity raised in the Series B Preferred Stock offering
through June 30, 1998 has been allocated $913,331 to the preferred stock and
$1,086,669 to the warrants.

  Each holder of Series B Preferred Stock will have the right to convert their
shares as follows:  a) 50 percent of the shares on the effective date of
registration ("Series B Conversion Date") at the Series B Conversion Price
(lesser of (i) 25 percent off the five-day average Closing Bid Price for the
Company's common stock immediately before conversion or (ii) 100 percent of
Closing Bid Price for the Company's common stock on the date of closing, but not
less than $.50 per share of the Company's common stock) and b) 50 percent of the
shares on the 45th day after the effective date of registration at the
Conversion Price.  The holder shall be entitled to an additional discount
privilege equal to one percent (1%) per month, or fraction of a month, from the
time of closing until the Series B Conversion Date for any conversion thirty
(30) days after the Series B Conversion Date and one-half percent (.5%) per
month or fraction of a month 
<PAGE>
 
for any conversions thereafter ("Series B Additional Discount"). All shares
outstanding on May 1, 2001, will be automatically converted into common stock in
accordance with the Conversion Formula, at the Conversion Price.

  The Company will have the right, in its sole discretion, to redeem in whole or
in part any shares of Series B Preferred Stock submitted for conversion.  The
redemption price per share of common stock after conversion of the Series B
Preferred Stock shall be calculated as 133 percent of the face value plus any
accrued Series B Additional Discount.

  On the date of issuance of the Series B Preferred Stock, the conversion price
of certain of the Series B Preferred Stock was less than the quoted market price
of the Company's common stock.  Accordingly, had the shares been converted as of
the issuance date, the intrinsic value of this beneficial conversion feature
would have been approximately $1,288,000.  The eventual accretion of the
intrinsic value of the beneficial conversion feature will be recorded as an
increase in the carrying value of the preferred stock and a dividend charge to
retained earnings over the conversion rights period.

  In the event of any liquidation, dissolution or winding-up of the Company,
either voluntary or involuntary (a "Liquidation"), the holders of shares of the
Series B Preferred Stock then issued and outstanding shall be entitled to be
paid out of the assets of the Company available for distribution to its
shareholders, whether from capital, surplus or earnings, before any payment
shall be made to the holders of shares of the Common Stock or upon any other
series of Preferred Stock of the Company with a liquidation preference
subordinate to the liquidation preference of the Series A Preferred Stock.  The
amount of the pay-out will be an amount per share equal to the Stated Value.

  The Series B Preferred Stock subscription agreements contain a "put" provision
for common stock which allows the Company to raise an additional $3,000,000. The
provision specifies that 75 days after the effective date of the registration of
additional common shares to be used under this provision, the Company may sell
common stock (the "Put Stock") to the Series B subscribers. The price of the Put
Stock is determined by taking the lower of (1) 80 percent of the lowest closing
bid price for the previous 20 trading days prior to funding or (2) 80 percent of
the closing bid price on the day of funding.  The minimum draw is $250,000 and
the maximum draw is $750,000.  If the price of the Company's common stock for
the 20 trading days prior to the funding is less than $1.25 and the average
trading volume is less than $300,000 per day for the previous 20 trading days,
the Series B shareholders have the option not to fund the requested draw.  These
minimums increase as the amount of the funds requested by the Company increase
from $250,000 to $750,000.  The Company has valued the Series B Preferred Stock
Put provision at $2,517,000 of which $1,678,000 has been recorded in the second
half of fiscal 1998.  The value has been recorded as an increase in the carrying
value of Preferred stock and an off-setting charge to additional paid in
capital.

  On the date of issuance of the Series B Preferred Stock with the put
provision, the conversion price under the put provision was less than the quoted
market price of the Company's common stock.  Accordingly, had the put provision
been exercised at the date of issuance of the Series B Preferred Stock, the
intrinsic value of the beneficial conversion feature would have been
approximately $483,000.  The put provision will be recorded as an offsetting
charge to shareholders' equity.  The stock put rights will be amortized over the
period of the put provision with an offsetting charge to retained earnings.  The
accretion of the intrinsic value of the beneficial conversion feature will be
recorded ratably over the term of the put contract (two years from execution of
the subscription agreement) based on the earliest dates the Company may put its
shares.

  Under the terms of the Placement Agent Agreement related to the issuance of
Series B Preferred Stock, the Placement Agent was paid fees equal to 11 percent
of the funded amount of $3 million or $330,000 for the placement of the 3,000
shares of Series B Preferred Stock, 50,000 shares of common stock of the
Company, valued at approximately $200,000 as of the closing date, for
establishing the Put Equity Line of Credit and warrants to purchase 250,000
shares of common stock at a price and under the conditions of the Series B
Preferred Stock investors' warrants, valued at approximately $815,000 as of the
closing date.   As of June 30, 1998, the Placement Agent had earned $220,000 as
well as common stock valued at approximately $133,333 and warrants valued at
approximately $543,333.  In addition, as the Company, at 
<PAGE>
 
its sole discretion, utilizes the Put Equity Line of Credit, the Placement Agent
will receive a fee of 8 percent of the cash actually invested at each funding.
If the entire Line of Credit is used, the Placement Agent would earn an
additional $240,000.

  Series C Preferred Stock:  In August 1998, the Company created a Series C
issue of Preferred Stock.  The Company offered 4,000 shares of the 10,000,000
authorized shares of Preferred Stock at a purchase price of $1,000 and no par
value ("Series C Preferred Stock").  When the offering  ended on September 1,
1998, the Company had issued 3,000 shares for $3,000,000, resulting in
$2,670,000 net cash proceeds to the Company.   The Series C Preferred Stock will
not pay dividends and is nonvoting stock.

  In conjunction with the offering, 660,000 warrants will be issued to the
Series C shareholders proportionate to each investor's number of shares
purchased to the total shares offered.  Each warrant entitles the holder to
purchase shares of the Company's common stock at a price of $4.34.  The exercise
price and number of shares to be purchased may be adjusted from time to time
based on computations included in the warrant agreement.  Such warrants are
exercisable for three years after closing of the Series C offering.

  The Company has allocated the equity in the offer of the Series C Preferred
Stock raised between the preferred stock and the related warrants.  Based on the
valuation of each on the date of issuance, the Company will allocate $1,802,000
to the preferred stock and $1,198,000 to the warrants.

  Fifty percent of each share of Series C Preferred Stock shall be convertible
on the earlier of the effective date of registration of the Company's common
stock ("Series C Conversion Date") or one-hundred and twenty (120) days from the
closing of the Series C Preferred Stock Offering, the remaining fifty percent
shall be convertible on the earlier of the forty-fifth day after the effective
date of registration or one-hundred and sixty-five (165) from the closing of the
Series C Preferred Stock Offering.  The Series C Conversion Price will be either
the discounted price (twenty-five percent off of the five-day closing bid price)
or $3.94, whichever is less. However, in no event shall the conversion price be
less than $1.875 per share.  In the event the stock is trading below $1.875, the
floor price will be adjusted to the lowest closing bid price for the Company's
common stock during such five-day period from which the holder shall be entitled
to an additional discount.  The holder shall be entitled to an additional
discount privilege equal to one percent (1%) per month, or fraction of a month,
from the time of closing until the Series C Conversion Date for any conversion
thirty (30) days after the Series C Conversion Date and one-half percent (.5%)
per month or fraction of a month for any conversions thereafter ("Series C
Additional Discount").  All shares outstanding on June 1, 2001, will be
automatically converted into Common Stock on such date in accordance with the
Conversion Formula and the Series C Conversion Price then in effect.

  The Company shall have the right in its sole discretion, to redeem, prior to
receipt of the Notice of Conversion, in whole or in part any shares of Series C
Preferred Stock.  The redemption price per share of common stock after
conversion of the Series C Preferred Stock shall be calculated as 133 percent of
the face value plus any unpaid penalty should the Company not effect the date of
registration 150 days from Closing.  The Company shall not have a redemption
privilege if the common stock is trading above $3.50 per share unless the Holder
agrees in writing to allow the Company to redeem such shares.

  On the date of issuance of the Series C Preferred Stock, the conversion price
of certain of the Series C Preferred Stock was less than the quoted market price
of the Company's common stock.  Accordingly, had the shares been converted as of
the issuance date, the intrinsic value of this beneficial conversion feature
would have been approximately $263,000.  The eventual accretion of the intrinsic
value of the beneficial conversion feature will be measured at the date of
conversion and will be recorded as an increase in the carrying value of the
Series C Preferred Stock and a dividend charge to retained earnings over the
conversion rights period.

  In the event of any liquidation, dissolution or winding-up of the Company,
either voluntary or involuntary (a "Liquidation"), the holders of shares of the
Series C Preferred Stock then issued and outstanding shall be entitled to be
paid out of the assets of the Company available for distribution to its
<PAGE>
 
shareholders, whether from capital, surplus or earnings, before any payment
shall be made to the holders of shares of the Common Stock or upon any other
series of Preferred Stock of the Company with a liquidation preference
subordinate to the liquidation preferences of the Series A and B Preferred
Stock.  The amount of the pay-out will be an amount per share equal to the
Stated Value.


Recent Accounting Pronouncements not yet Adopted

  In April 1998, the AICPA also issued Statement of Position No. 98-5,
"Reporting on the Costs of Start-up Activities" (SOP 98-5).  SOP 98-5 must be
adopted no later than January 1, 1999, and requires that costs of start-up
activities including pre-operating, pre-opening and other organizational costs
be expensed as incurred.  In addition, at the time of adoption the unamortized
balance of any previously deferred start-up costs must be expensed.  Management
does not expect the adoption of SOP 98-5 to have a material effect on results of
operations or financial condition.


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.

  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.
                                                                   ---------
<PAGE>
 
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.

  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.  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.  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.
<PAGE>
 
  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.

  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.

  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.
No lawsuit has been filed and no damages have been alleged. The Company is
unable to express an opinion as to the outcome of this matter as no lawsuit has
been filed and the Company has made no independent investigation of potential
claims, defense and counterclaims.  If a lawsuit is ever filed, it will be
vigorously defended.


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 
<PAGE>
 
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.
<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: November 12, 1998                 /s/ ROBERT J. WUSSLER
     ------------------                 --------------------------------------
                                        Robert J. Wussler
                                        (President, Chief Executive Officer
                                        and Director (Principal Executive
                                        Officer))


Date: November 12, 1998                 /s/ EDWARD J. KOPF
     ------------------                 --------------------------------------
                                        Edward J. Kopf
                                        (Executive Vice President and Chief
                                        Operating Officer (Principal Financial
                                        and Accounting Officer))