DIGITAL DATA NETWORKS, INC.

                          NOTES TO FINANCIAL STATEMENTS
4

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)
         [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1998.

         [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]

        For the transition period from ________________to_______________

        Commission file number:   0-27704

                           DIGITAL DATA NETWORKS, INC.
                 (Name of small business issuer in its charter)


Washington                                                   91-1426372
(State or other  jurisdiction                                (IRS Employer
of incorporation  or  organization)                          Identification No.)

3102 Maple Avenue, Suite 230
Dallas, Texas                                               75201
(Address of principal executive offices)                    (Zip Code)

                                 (214) 969-7200
              (Registrant's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, no par value                        Common Stock Purchase Warrants
(Title of class)                                  (Title of class)


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 [ X ] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]

The issuer's revenues for its most recent fiscal year were $574,000.

The aggregate market value of the voting stock held by non-affiliates of the
issuer on January 31, 1999 was approximately $1,007,000.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of January 31, 1999, 2,314,597
shares of Common Stock and 1,840,000 Common Stock Purchase Warrants were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:  None.



<PAGE>





                                     PART I

Item 1.     Business.

Company Background

         Digital Data Networks, Inc. (the "Registrant", the "Company" or "DDN"),
was incorporated as Transit Information Systems, Inc. under the laws of the
State of Washington on October 17, 1988. The present name was adopted in July,
1995. The Company also operates as The Transit Network under an assumed name
certificate. The Company's offices are currently located at 3102 Maple Avenue,
Suite 230, Dallas, Texas 75201, and its telephone number is (214) 969-7200.

         In February 1996, the Company completed the sale of 1,322,500 shares of
Common Stock and 1,840,000 Common Stock Purchase Warrants through its initial
public offering (the "Public Offering"), and received net cash proceeds of
approximately $5.8 million. The Company's Common Stock and Common Stock Purchase
Warrants are listed on the OTC Electronic Bulletin Board under the trading
symbols "DIDA" and DIDAW", respectively.

General

         Through its Transit Network division, DDN markets and operates a
digital information network from which it generates advertising revenue.

History

         The Transit Network's digital information network is a network of
computerized electronic displays that delivers information, both text and
graphics, to riders on-board public transit vehicles, utilizing an FM subcarrier
signal to transmit the data. The Transit Network currently operates its digital
information network on the 768-bus fleet of the Dallas Area Rapid Transit
("DART") system, which began operations in 1991. The Company had been operating
its digital information network on approximately 60 buses of the Rhode Island
Public Transportation Authority ("RIPTA") system since 1988, but in December
1997, the Company canceled its contract with RIPTA and ceased operating in
Providence, Rhode Island. The Company helped fund the development of an
automated audio/visual announcement system and had begun marketing this system,
but due to uncertainty surrounding its manufacturer, as well as the emergence of
an increasing number of competitors with manufacturing and financial resources
far greater than those of the Company, in December 1997, the Company
discontinued the marketing of this system.

         In September 1998, DDN's Canadian subsidiary sold its entire
operations, which had comprised the Company's Internet services business
segment.

Strategy

         The Company's strategy is to market its digital information network to
additional transit authorities across the United States and Canada. This
strategy consists of the following key element:

              Continued availability of funds for transit authorities. Funding
              for wireless communications systems, such as The Transit Network's
              digital information network, typically originates from federal
              programs that pay for approximately 80% of the total cost, with
              the remaining difference funded by the local transit authority.
              The amount of federal dollars available to transit authorities has
              been shrinking the past few years, but the Company believes that
              if funding remains near current levels, or is reduced only
              slightly in the future, enough federal funding will exist for some

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<PAGE>

              transit authorities to purchase these types of systems. The
              Company's strategy is to assist interested transit authorities in
              applying for these funds which are available under certain federal
              grant programs.

The Transit Network's Digital Information Network

         Background

         The Transit Network's digital information network is a network of
computerized electronic displays that delivers transit authority messages, news,
information and may optionally include advertising, to riders on-board public
transit vehicles. The network consists of specialized electronic LED displays,
transmission protocol, and control software. Each system requires an agreement
with a local FM radio station for the use of an FM subcarrier frequency. The
Company does not believe that the cost of these arrangements will be a
significant expense.

         The electronic display utilized on the DART buses is approximately six
inches high by twenty-six inches in length, strategically located behind and
slightly above the driver, and is visible from most areas inside the vehicle.
The software for the digital information network is licensed from Sunrise
Systems. See "--Digital Information Network Technology" and "--Software
License."

         News briefs, weather, trivia questions, sports reports and transit
authority information are continuously presented, and can be interspersed with
advertising messages as well. The program sequence runs approximately 12-15
minutes, generally assuring that the full program cycle is viewed more than once
during an average commute, which lasts approximately 30 minutes according to
United States Department of Transportation statistics. Programs are usually
updated twice a day, changing content to reflect the demographic profile of
riders at different times, to update the news, and to include new information
from the transit authority. News stories may be changed more frequently if the
events of the day warrant such updates. The Company subscribes to United Press
International's (UPI) wire service and receives continuous news stories every
few minutes throughout the day via satellite transmission and UPI's software
package. With UPI's service, the Company is able to obtain up-to-the-minute
programming information on news, weather, sports and entertainment. Advertising
copy is usually supplied by the advertiser, while public service and transit
information announcements are provided by the transit authority.

         The digital information network has other important capabilities,
including the ability to (i) target specific buses and routes with different
programming, (ii) custom design special programming, and (iii) display in
Spanish and other foreign languages. The network allows certain messages to be
displayed system-wide, on selected vehicles, or on selected routes. In addition
to regular programming, special programming can be custom-tailored for specific
events. For example, in Dallas, the transit authority uses approximately 100
buses to transport fans to Dallas Cowboys football games. Those buses are
targeted with a special program that is filled with football and other
sports-related features, while the other buses in the fleet continue to run the
regular program. This ability to target buses and routes is a feature of the
system that can be sold to advertisers desiring to reach specific riders.
Targeting of individual buses which have been chartered for one-day special
events is also available on the system.

         Digital Information Network  Technology

         The digital information network consists of specialized electronic LED
displays, transmission protocol, and control software. The software allows a
programmer to enter information and entertainment data into a personal computer.
The program is updated via a high-speed modem connected between the programming
site and the transmitting location. It is then broadcast through an FM

                                      3
<PAGE>

subcarrier frequency and received by a small antenna located on each bus. The
digital information is then transferred into buffer memory inside the LED
display. As the program then being displayed completes its cycle, the new data
automatically replaces the old data without any interruption. The entire
broadcast cycle - from in-house computer, to transmitter, to transit vehicle, to
its on-screen appearance, can be completed in just minutes. The Company is
responsible for repairing or replacing its electronic displays that are
defective or damaged after installation. The Company performs monthly
maintenance on all installed message displays.

         Software License

         The Company licenses the software to operate its digital information
network from Sunrise Systems, pursuant to a License Agreement (the "Software
License") dated November 1, 1995, as amended. The Software License grants the
Company a perpetual, fully paid up license to use the software wherever it
wishes. The Software License is exclusive with regard to each metropolitan area
in the United States and Canada (the "Primary Territory") which has a population
of at least 100,000 people, and is otherwise non-exclusive in the Primary
Territory. In areas other than the United States and Canada (the "Option
Territory"), the Software License is non-exclusive, although the Software
License allows it to become exclusive if certain conditions are met.

         Transit Authority Marketing

         The Company has contracted with the transit authority in Dallas, and is
continuing to analyze its strategy as it relates to soliciting other public
transit authorities for the purchase of its digital information network, and/or
contracting for the exclusive rights to operate its system inside the transit
vehicles operated by the authorities. In cases where the Company sells its
system to transit agencies, the Company will require initial capital during the
early stages of installation, since transit authorities typically cannot or will
not make payments until certain performance requirements are satisfied. There
can be no assurance that the Company will be awarded contracts in any new
markets.

         Dallas Area Rapid Transit

         The Transit Network's Dallas operation serves as a prototype for
operations in a large transit market. Dallas ranks approximately 13th in the
United States bus transit market, with approximately 770 vehicles. The Company
entered into a contract with DART on October 16, 1990, which granted the Company
exclusive rights to install and operate its digital information network on-board
DART's buses for a period of five years. Installation of the DART system was
completed in August 1993. The Company and DART entered into a new contract
effective October 16, 1995 for an additional three years. In November 1997, the
Company and DART modified their contract, whereby the Company was granted the
approval to install its electronic information system on DART's forty (40) light
rail vehicles, subject to the successful completion of a 30-day test which was
concluded in March 1998. Installation of these 40 light rail vehicles was
completed in July 1998. Simultaneously, the contract was extended through
October 2001. Under the existing contract, the Company pays DART 4% of its gross
advertising receipts. In addition, DART has reserved a permanent position on the
digital information network program for its exclusive use, as well as limited
access to advertising space for its own printed material. The Company must
reserve up to 30% of available space on interior advertising panels and one
message block on the digital information network during each cycle of messages
for DART'S use and public service announcements. Advertising revenues from the
interior advertising panels account for less than five percent of total
advertising revenues and the reservation of advertising space to DART does not
materially affect the Company's total advertising revenues. Maintenance of the
digital information network is subcontracted to an independent party. Each bus
is inspected monthly to ensure that the hardware is functioning properly and the
program is accurately displayed. Defective hardware is returned to Sunrise
Systems for repair or replacement.

                                       4
<PAGE>

         Advertiser Participation

         In the DART market, where The Transit Network depends on the sale of
advertising to generate revenues, its clients consist primarily of local
consumer products and service companies, as well as regional and local offices
of national companies.

         Competition for Advertisers

         The advertising industry is intensely competitive. The Company competes
for advertising dollars with all advertising and promotional channels, including
television, radio, magazines, newspapers and direct mailings. Management
believes that its primary competition is radio and newspapers, which charge
rates significantly higher than those charged by the Company. The Company
believes that the primary basis for competition in the advertising industry is
price and value, although other factors such as market coverage, audience
demographics, and time and cost of production are also of importance.

         Manufacturing, Supply and Installation

         The Company does not manufacture its hardware, but contracts with third
parties to produce the equipment. Sunrise Systems assembles The Transit
Network's hardware from components and subassemblies manufactured by others.
While the Company believes that most of such components and subassemblies are
available to Sunrise Systems from multiple sources, there can be no assurance
that Sunrise Systems will be able to obtain commitments from qualified
manufacturers to provide the components and subassemblies within the Company's
time and cost estimates. The Company incorporates both system and application
software, most of which is licensed from Sunrise Systems. See "-Software
License."

         The Company contracts with third party electrical contractors to
install the hardware in participating transit authority vehicles. The Company
has an agreement with a Dallas electrical contractor who has installed The
Transit Network's hardware in DART vehicles, whereby the contractor has the
right of first refusal to install the hardware in other transit systems in the
United States, unless there are union labor or transit authority requirements
which the contractor cannot meet.

Merger Agreement

In October 1998, the Company entered into a Merger Agreement with Internet
Sports Network, Inc. ("ISN"), a sports entertainment and information company
that offers interactive competitive sports leagues, pools and contests via the
internet. Pursuant to terms of the Merger Agreement, ISN would merge (the
"Merger") with and into DDN, such that following completion of the Merger, ISN
shareholders would own approximately 86% of the merged entity and DDN
shareholders would own approximately 14% of the merged entity. The Merger was
subject to a number of certain conditions, including, among other thing,
consummation of a private financing by ISN raising in excess of $1 million, and
shareholder approval by both DDN and ISN shareholders. In connection with the
proposed merger, the Company acquired for $250,000 cash, in private placement
transactions, 625,000 shares of ISN common stock and incurred approximately
$69,000 of merger costs. In February 1999, as a result of ongoing discussions
between DDN and ISN boards of directors, the parties agreed to terminate the
merger agreement. As part of the termination agreement, among other things, the
Company received approximately $335,000 cash and delivered shares of ISN common
stock to ISN such that the Company retained ownership of 150,000 shares of ISN
common stock. The excess of the fair value of consideration received over the
recorded value of related assets will be recorded as investment income during
1999.

                                       5
<PAGE>


ACIS Acquisition

         In 1997, the Company entered into a letter of intent with Advanced
Communication and Information Services, Inc. ("ACIS") whereby the Company would
acquire all of the capital stock of ACIS through an exchange of stock. The
Company advanced ACIS approximately $1,048,000 pursuant to secured promissory
notes due June 1, 1997. The notes went into default and the Company filed a
lawsuit against ACIS for repayment of these loans, as well as a cancellation
fee. In April 1998, the Company received a judgment against ACIS in the
principal amount of approximately $1.35 million, but has not received any
payment from ACIS. The Company continues to pursue various collection actions.
There can be no assurance that the Company will recover any, all or part of this
judgment from ACIS. The entire amount of the receivable was reserved during
1997. See "Legal Proceedings."

Employees

         As of January 31, 1999, the Company had five employees, of which four
were employed full-time, and one part-time.


Item 2.     Properties.

         The Company leases approximately 1,370 square feet in Dallas for
approximately $1,900 per month pursuant to a 3-year lease which commenced
December 1, 1996.


Item 3.     Legal Proceedings.

         In 1997, the Company entered into a letter of intent with Advanced
Communication and Information Services ("ACIS") to acquire all of the issued and
outstanding capital stock of ACIS in exchange for DDN common shares. Pursuant to
the letter of intent, the Company forwarded ACIS $1,048,000 cash under terms of
promissory notes for working capital pending completion of the acquisition.
Subsequently, ACIS issued to the Company 1 million shares of ACIS common stock
and withdrew from the letter of intent. ACIS defaulted on the repayment of
amounts owed the Company and in 1997 the Company fully reserved the notes
receivable. In April 1998, the Company received a judgment from the King County
Superior Court in the State of Washington against ACIS, ordering ACIS to pay the
Company the amount of the loan, plus interest, plus a $300,000 cancellation fee.
The Company continues to pursue various collection actions, including, but not
limited to, additional litigation and acquisition of debtor assets and/or
businesses. There can be no assurance that the Company will be successful in
recovering any, all or part of this judgment.

         The Company has been advised that an action in damages for breach of
settlement agreement may be commenced against the Company in connection with the
April 1998 settlement agreement with the former shareholder of hip
Communications. As part of that settlement agreement, the Company was required
to transfer the "hip.com" domain name to the former shareholder. The Company has
not transferred the domain name and no longer has registration rights to such
domain name. The Company is attempting to contact the party which has such
registration rights. Counsel for the former shareholder has advised the Company
that if the Company is unable to cause the domain name to be transferred, their
only remedy will be an action in damages for breach of settlement agreement. As
no amounts were named and since no action has yet been taken, the Company is
unable to determine the consequences, monetary or otherwise, which might result
from the outcome of this uncertainty.

                                      6
<PAGE>

         In January 1999, the Company was named as one of approximately 150
defendants in a lawsuit brought before the United States Bankruptcy Court for
the Northern District of Texas Dallas Division by the Chapter 7 Trustee for the
estate of Dally Advertising, Inc. ("Dally"). Through this action, the Trustee
seeks to avoid as preferences and to recover certain payments made by Dally
within 90 days of the January 1997 filing of its bankruptcy petition. Dally was
one of the Dallas Transit Network customers. The Complaint to Recover seeks
$28,656 of payments allegedly made to the Company. The Company has responded to
the Court regarding this matter, among other things, denying the allegations of
preferential transfer, asserting its own affirmative defenses, and requesting
the Court to deny the relief requested by the Plaintiff. The Company is unable
to determine the consequences, monetary or otherwise, which might result from
the outcome of this uncertainty.

         The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. Company management currently believes
that resolution of such legal matters will not have a material adverse impact on
the Company's financial position, results of operations or cash flows.


Item 4.     Submission of Matters to a Vote of Security Holders.

         No matter was submitted to a vote of security holders during the fourth
quarter of 1998.



                                     PART II

Item 5.     Market for Registrant's Common Equity and Related Stockholder 
            Matters.

         (a) The Company's Common Stock (symbol "DIDA") and Warrants (symbol
"DIDAW") traded on the NASDAQ SmallCap Market from February 1996 through May
1998. Since May 1998 the Company's Common Stock and Warrants have traded on the
OTC Electronic Bulletin Board. The following table sets forth the high and low
sales prices for the Company's Common Stock and Warrants through the first
quarter of 1998, and thereafter the high and low closing prices.

<TABLE>
<CAPTION>
                                   Common Stock                      Warrants
           Period               High          Low             High              Low
           ------               ----          ---             ----              ---
<C>                          <C>         <C>              <C>              <C>     
1997:
1st Quarter                  $  7.00     $   4.63         $   1.97         $   1.13
2nd Quarter                     6.50         2.25             1.50             0.44
3rd Quarter                     3.50         1.38             0.97             0.25
4th Quarter                     3.38         0.63             1.06             0.19
1998:
1st Quarter                     0.88         0.25             0.25             0.03
2nd Quarter                     2.81         0.41             0.78             0.03
3rd Quarter                     1.25         0.25             0.22             0.03
4th Quarter                     1.63         0.13             0.44             0.03
</TABLE>

                                       7
<PAGE>


         The above prices represent inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not represent actual transactions.


         (b) As of February 22, 1999, the Company had approximately 130
shareholders of record and 19 warrantholders of record.

         (c) The Company has never paid cash dividends on its Common Stock, and
currently intends to retain earnings, if any, for use in the operation and
expansion of its business and therefore does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future.


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<PAGE>


Item 6.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations.

The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-KSB (the "Annual Report"). This Annual Report contains
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Annual Report should be read as being
applicable to all related forward-looking statements wherever they appear in
this Annual Report.

Overview

From inception in 1988 through 1992, the Company generated insignificant
revenues, and as a result of costs associated with funding the development and
initial implementation of the digital information network, the Company incurred
significant cumulative net losses which were financed by issuances of debt and
common stock. During 1988, the Company completed the installation of the Rhode
Island Public Transit Authority ("RIPTA") test market. In 1990, the Company was
awarded a contract from Dallas Area Rapid Transit ("DART") to install an
electronic advertising system on all DART buses. Installation commenced in 1991,
but was not immediately completed, due to insufficient financial resources to
purchase needed equipment and labor. During 1993, the Company raised
approximately $670,000 from the sale of common stock. These funds were used to
complete installation of the DART digital information network and to hire
additional sales personnel and programmers, and the DART system began generating
its advertising revenues.

The following year and a half was a transitional period for the Company, as it
continued to operate the DART and RIPTA systems, negotiated the conversion of
debt to equity, funded development of a new product, expanded its sales and
operations departments in Dallas, and implemented changes to its senior
management and Board of Directors.

During the years prior to the Company's 1996 public offering, the Company
incurred significant financing, legal and other consulting expenses in
connection with, among other things, extension of credit, modification of
existing contract or agreement terms, debt exchanges, services provided, and the
continued forbearance of its creditors, for which the Company issued shares of
its common stock and options to acquire shares of its common stock. The
estimated fair value of such securities issued was recorded as financing, legal
and other consulting expense.

In February 1996, the Company closed its initial public offering and received
net cash proceeds of approximately $5.8 million, after deducting for underwriter
commissions and certain other offering related costs, from the issuance of
approximately 1.3 million shares of common stock and 1.8 million common stock
purchase warrants.

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<PAGE>


As a result of continuing cash flow losses, the Company closed its Cyber America
and RIPTA operations in the third and fourth quarter of 1997, respectively. In
September 1998, the Company sold all of its assets and interests in its internet
services business. The accompanying statements of operations present the results
of the internet services business segment operations as a one-line item net loss
from discontinued operations for all periods presented. The following
management's discussion has been prepared on the basis giving effect to this
sale of the internet services business segment as discontinued operations
consistent with the manner presented in the accompanying financial statements.

Results of Operations

         1997 Compared to 1996

The loss from continuing operations increased to approximately $2.25 million in
1997 as compared to $1.1 million in 1996. Revenues for the year ended December
31, 1997 increased $31,000 to $524,000 from $493,000 during the prior year. The
increase is due to increased advertising volume from the Company's Transit
Network in Dallas. Total expenses increased from $1.75 million to $2.8 million
due primarily to the write-down of assets as the Company established a $1.05
million reserve for the full amount of a note receivable from a former
acquisition target. The Company experienced modest decreases in 1997 over the
prior year in direct operating costs, salaries and related, and financing, legal
and other consulting expenses, which were offset by increases in marketing,
general and administrative expenses. Other income decreased $110,000 due
primarily to less investment income in 1997 resulting from lower balances of
cash and investments in 1997 compared to the prior year.

The loss from discontinued operations decreased from $852,000 to $667,000.
Revenue from discontinued operations increased in 1997 to $365,000 from $190,000
in 1996, due primarily to having a full year of operations in 1997. Total
expenses were approximately the same, $1.04 million and $1.03 million in 1996
and 1997, respectively. Included in expenses in 1997, is $343,000 relating to
expensing in full remaining goodwill relating to the internet services business
segment. Product development expenses decreased approximately $225,000 in 1997
due to decreased levels of expenditures.


         1998 Compared to 1997

The loss from continuing operations decreased to $409,000 in 1998 as compared to
$2.25 million in 1997. Revenues of $574,000 for the year ended December 31, 1998
increased from $524,000 during the prior year, due to increased advertising
volume from the Company's Transit Division in Dallas. Increases from DART
operations were offset by decreases of approximately $58,000 relating to
operations closed in 1997. Total expenses decreased from approximately $1.76
million (excluding the $1.05 million provision for notes receivable) in 1997 to
$972,000 in 1998, of which $340,000 of the decrease relates to operations closed
in 1997. Direct operating costs, salaries and related expenses and marketing,
general and administrative expenses decreased primarily due to elimination of
costs for operations closed in 1997 as well as due to decreases in corporate
salaries and certain other corporate-related costs in 1998 as compared to
expenditure levels in 1997. Financing, legal and consulting expenses decreased
in 1998, primarily the result of declining merger and acquisition related
activity in 1998 than in the prior year. Other income (expense) decreased from
$31,000 of income in 1997 to $11,000 of expense in 1998. The decrease is
primarily due to having lower balances of cash and investments in 1998 as
compared to the prior year, as well as due to having recorded in 1998 unrealized
losses of approximately $37,000 relating to mark-to-market adjustments for other
than temporary declines in market values of certain of the Company's investments
in marketable equity securities.

                                       10
<PAGE>


Discontinued operations had net losses of $50,000 for the year ended December
31, 1998 as compared to losses of $667,000 in the prior year. The decrease in
net loss is primarily attributable to the 1997 expensing of $343,000 of
remaining goodwill relating to this business segment, and decreases in product
development expenditures in 1998. As a result of the sale of discontinued
operations in September 1998, the Company recorded a gain on disposition of
$137,000 representing the excess of liabilities over the net book value of
assets sold and disposition costs.

The Company recorded a valuation allowance for the full amount of deferred
income taxes, which would otherwise be recorded for tax benefits relating to
operating losses, as realization of such deferred tax assets cannot be
determined to be more likely than not.

Financial Condition, Liquidity and Capital Resources

In 1997, the Company entered into a letter of intent with Advanced Communication
and Information Services ("ACIS") to acquire all of the issued and outstanding
capital stock of ACIS in exchange for DDN common shares. Pursuant to the letter
of intent, the Company forwarded ACIS $1,048,000 cash under terms of promissory
notes for working capital pending completion of the acquisition. Subsequently,
ACIS issued to the Company 1 million shares of ACIS common stock and withdrew
from the letter of intent. ACIS defaulted on the repayment of amounts owed the
Company and in 1997 the Company fully reserved the notes receivable. In April
1998, the Company received a judgment from the King County Superior Court in the
State of Washington against ACIS, ordering ACIS to pay the Company the amount of
the loan, plus interest, plus a $300,000 cancellation fee. The Company continues
to pursue various collection actions, including, but not limit to, additional
litigation and acquisition of debtor assets and/or businesses. There can be no
assurance that the Company will be successful in recovering any, all or part of
this judgment.

The Company is subject to various legal proceeding and claims that arise in the
ordinary course of business. Company management currently believes that
resolution of such legal matters will not have a material adverse impact on the
Company's financial position, results of operations or cash flows.

Net cash used by operating activities for the years ended December 31, 1996 and
1997 were approximately $1.46 million and $870,000 respectively. Investing
activities cash used increased approximately $1 million in 1997 due primarily to
advances made to ACIS. In 1996 and 1997, cash used by operating activities were
funded by the February 1996 public offering's net cash proceeds of approximately
$5.8 million. Stockholders' equity decreased from approximately $3.1 million at
December 31, 1996 to $490,000 at December 31, 1997, due primarily to the 1997
net loss of $2.9 million.

                                       11
<PAGE>


The Transit Network Division is currently installing the Company's information
system on 150 new DART buses. DART has ordered an additional 300
state-of-the-art buses, and the Company will install its information system on
these buses as they are added to DART's fleet. It is anticipated that the
Company will fund the installations primarily from operations and, to a lesser
extent, from existing cash and cash equivalents.

At December 31, 1998, the Company's principal current assets consisted of
approximately $151,000 of cash and cash equivalents, $38,000 of net trade
accounts receivable, and $27,000 of net notes receivable. The Company's total
liabilities of approximately $442,000 consisted primarily of $50,000 in accounts
payable and accrued payroll and related liabilities, unearned income of $68,000,
other accrued liabilities of $152,000, and approximately $172,000 of long-term
debt, including current portion.

The Company incurred net losses of approximately $1.97 million, $2.92 million
and $322,000 during 1996, 1997 and 1998, respectively, and continues to
experience losses from continuing operations and negative cash flows from
operations. In May 1998, the Company was notified that the Company's securities
were delisted from the Nasdaq SmallCap Market as a result of non-compliance with
tangible net worth continued listing requirements. As noted in an explanatory
paragraph in the Report of Independent Certified Public Accountants on the
Company's consolidated financial statements, these conditions raise substantial
doubt about the Company's ability to continue as a going concern.

In October 1998, the Company entered into a Merger Agreement with Internet
Sports Network, Inc. ("ISN"), a sports entertainment and information company
that offers interactive competitive sports leagues, pools and contests via the
internet. Pursuant to terms of the Merger Agreement, ISN would merge (the
"Merger") with and into DDN, such that following completion of the Merger, ISN
shareholders would own approximately 86% of the merged entity and DDN
shareholders would own approximately 14% of the merged entity. The Merger was
subject to a number of certain conditions, including, among other thing,
consummation of a private financing by ISN raising in excess of $1 million, and
shareholder approval by both DDN and ISN shareholders. In connection with the
proposed merger, the Company acquired for $250,000 cash, in private placement
transactions, 625,000 shares of ISN common stock and incurred approximately
$69,000 of merger costs. In February 1999, as a result of ongoing discussions
between DDN and ISN boards of directors, the parties agreed to terminate the
merger agreement. As part of the termination agreement, among other things, the
Company received approximately $335,000 cash and delivered shares of ISN common
stock to ISN such that the Company retained ownership of 150,000 shares of ISN
common stock. The excess of the fair value of consideration received over the
recorded value of related assets will be recorded as investment income during
1999.

The Company has taken actions to reduce negative cash flows, including disposing
of portions of the business, such as the sale of the internet services segment
and closing RIPTA operations, reducing general and administrative expenses, and
minimizing capital expenditures. The Company has pursued merger possibilities
and continues to do so. The ability of the Company to generate positive cash
flows from operations and net income, is dependent on, among other things,
market conditions, the recovery of recorded assets, cost control, and the
Company's ability to raise capital under acceptable terms. While the Company has
had some successes in certain of these endeavors in the past, there can be no
assurance that its efforts will be successful in the future. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.

                                       12
<PAGE>


         Year 2000

The Year 2000 issue is the result of computer programs that were written using
two digits rather than four to identify the applicable year. Any of the
Company's computer equipment, software and devices with embedded technology that
are time-sensitive may mistakenly identify a date field using "00" as the year
1900, rather than the year 2000. The failure to correct a material Year 2000
problem could result in an interruption in, or a failure of, certain normal
business activities or operations. If such failures occur, the Company's results
of operations, liquidity, and financial condition could be materially and
adversely affected and the Company may be required to incur unanticipated
expenses. Additionally, if any of the Company's material suppliers are not Year
2000 compliant, it is possible that a system failure or miscalculations causing
disruption in the Company operations could result.

Year 2000 related matters which could have a material effect on the Company's
ability to continue its normal business practices through the change of the
century include internal business systems, telecommunications, power, and the
compliance and readiness of the Company's service providers and customers.
During the assessment and planning stage of the review process, no information
was revealed which indicate that the magnitude of the Company's Year 2000
problem is material.

In addition to its own compliance efforts, the Company is conducting an
assessment of the third parties with whom it has material relationships to
determine if they are Year 2000 compliant. The Company has contacted significant
service providers, specifically the Transit Network's software provider and
DART. To date, the Company has not received sufficient responses to make a
definitive statement; however, the responses received indicate that these
suppliers are addressing their Year 2000 issues.

The Company has not incurred any incremental costs in connection with Year 2000
related matters. Based on current information, management believes that
modifications necessary to operate and effectively manage the Company will be
performed by the year 2000 and that related costs will not have a material
impact on the Company's results of operations, cash flows or financial condition
of future periods.

         Effect of Recently Issued Accounting Standards

As described in Note 1 to the Company's consolidated financial statements, there
are recent accounting pronouncements having relative applicability to the
Company. It is presently anticipated that adoption of these accounting
pronouncements will not have a material impact on the Company's financial
position, results of operations or cash flows.

                                       13
<PAGE>



Item 7.     Financial Statements.
                                                                     Page
                                                                     ----
         Index to Financial Statements:                              F-1

         Report of Independent Certified Public Accountants          F-2

         Consolidated Balance Sheets                                 F-3

         Consolidated Statements of Operations                       F-4

         Consolidated Statement of Stockholders' Equity              F-5

         Consolidated Statements of Cash Flows                       F-6

         Notes to Consolidated Financial Statements                  F-7 to F-17

Item 8.     Changes In and Disagreements With Accountants on Accounting and
            Financial Disclosure.

         None.


                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
               Compliance With Section 16(a) of the Exchange Act.

                        DIRECTORS AND EXECUTIVE OFFICERS

         Information regarding the executive officers and directors of the
Company as of December 31, 1998 is as follows:

Name                          Age         Position with the Company
----                          ---         -------------------------
Donald B. Scott, Jr.          43          President and Chairman of the Board

James F. Biagi, Jr.           42          Secretary and Director

Robert F. Hussey              49          Director

Jerry L. Smith                58          Director   [Resigned January 27, 1999]

Richard J. Boeglin            41          Vice President, Finance and Operations
                                          Chief Financial Officer

Susan E. Hassel               52          Vice President, Sales

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

                                       14
<PAGE>

         The names and a brief description of their business experience for at
least the past five years of the directors and executive officers of the Company
follows:

         Donald B. Scott, Jr. has served as President and a director of the
Company since March 1993. In July 1996, Mr. Scott was also elected as the
Company's Chairman of the Board. Mr. Scott served as the Company's Acting
President from December 1992 through March 1993. Mr. Scott was previously a
principal of Rutkowski, Erickson, Scott ("RES"), a consulting firm, from 1991 to
July 1995. Prior to his association with RES, Mr. Scott was with Paine Webber in
New York from 1987 to 1991.

         James F. Biagi, Jr. has served as Secretary and a director of the
Company since its inception in 1988. He is a practicing attorney in Seattle,
Washington, and has been a principal of the law firm Monahan & Biagi since March
1996. Prior to Monahan & Biagi, Mr. Biagi practiced law at the firm Monahan &
Robinson since 1989, where he has specialized in tax, corporate and securities
matters.

         Robert F. Hussey has served as a director of the Company since November
1997. Mr. Hussey was President and CEO of MetroVision of North America, Inc., a
niche cable television company, from February 1991 until April 1997, when it
merged with York Hannover Health Care, Inc. Mr. Hussey has been a director of
IVEX Corporation since May 1993 and Nur Macroprinters Ltd. since December 1997,
as well as on the board of advisors for Kaufmann Fund since December 1996,
Argentum Capital Partners, I and II since June 1990, and Josephthal & Company,
Inc. since December 1997.

         Jerry L. Smith, until his resignation on January 27, 1999, served as a
director of the Company since November 1997. Since 1985, Mr. Smith has been the
president of Gateway Group, Inc., a merger, acquisition and investment banking
firm specializing in the sale of manufacturing, distribution and service
companies.

         Richard J. Boeglin has served as Vice President of Finance and
Operations and the Chief Financial Officer since April 1995. He has been with
the Company since 1991. He has eleven years of management experience, including
direct management of transit system design, development and installation. From
1987 to 1991, Mr. Boeglin worked in the outdoor advertising industry.

         Susan E. Hassel has served as Vice President of Sales since she started
with the Company in April 1992. She has fifteen years of sales and marketing
experience. From 1985 until 1991, Ms. Hassel was the Director of Sales and
Marketing for The Relocation Center, a relocation counseling company in Dallas,
Texas.


                             SECTION 16 REQUIREMENTS

         Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors and officers, and persons who own more
than 10% of a registered class of the Company's equity securities, to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission (the "SEC"). Such persons are required by SEC
regulations promulgated pursuant to the Exchange Act to furnish the Company with
copies of all Section 16(a) report forms they file with the SEC.

         The Company's registration statement under Section 12 of the Exchange
Act became effective February 13, 1996. Based solely on its review of the copies
of report forms received by it with respect to initial filings from reporting

                                       15
<PAGE>

persons, the Company believes that all filing requirements applicable to its
directors, officers and persons who own more than 10% of a registered class of
the Company's equity securities have been timely complied with in accordance
with Section 16(a) of the Exchange Act.

Item 10.          Executive Compensation.

The following table sets forth certain information regarding cash and non-cash
compensation paid by the Company during each of the Company's last three fiscal
years to the Company's Chief Executive Officer and the other most highly
compensated executive officer of the Company whose annual compensation exceeded
$100,000 during the fiscal year ended December 31, 1998 (the "Named Persons").

<TABLE>
<CAPTION>
                                                      Annual Compensation          Long-Term Compensation
                                                                                            Awards
Name and                                                                                 Securities
Principal Position                      Year             Salary         Bonus        Underlying Options
------------------                      ----             ------         -----        ------------------
<S>                                     <C>            <C>            <C>                   <C>
Donald B. Scott, Chairman               1998           $ 38,000       $   -0-                -0-
  of the Board and President            1997            150,500           -0-                -0-
                                        1996            144,000        74,872               60,000


Susan E. Hassel, V.P. Sales             1998           $121,929       $   -0-                -0-
                                        1997            115,641           -0-                -0-
                                        1996            129,637           -0-               15,000
</TABLE>

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


No options were granted to the Named Persons during the fiscal year ended
December 31, 1998.

No options were exercised by the Named Persons during the fiscal year ended
December 31, 1998. The following table sets forth information with respect to
the value of unexercised options held by the Named Persons at December 31, 1998.



                                               Number of
                                              Securities           Value of
                                              Underlying          Unexercised
                                              Unexercised        In-the-Money
                                              Options at            Options
                                                Fiscal        At Fiscal Year-End
                Name                         Year-End (1)             (1)
                                                      ---             ---

Donald B. Scott, President                      156,408            $  19,551
Susan E. Hassel, V.P. Sales                      26,738            $   3,342


 (1) All options were exercisable on December 31, 1998. The value of unexercised
     options is based on the market value of the Company's Common Stock on
     December 31, 1998, of $.375 per share.

                                     16
<PAGE>



                            COMPENSATION OF DIRECTORS

         No director received cash compensation for serving as a director in
1998. In March 1998, Messrs. Hussey, Biagi and Smith received options to
purchase 10,000 shares of Common Stock, with an exercise price of $.25 per
share, in connection with services provided in 1998.


Item 11. Security Ownership of Certain Beneficial Owners and Management.

         The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of December 31, 1998, by
(i) each person or entity who beneficially owns 5% or more of the Common Stock,
(ii) each director, (iii) the Named Persons, and (iv) all officers and directors
of the Company as a group. Unless otherwise noted, the persons and entities
named below have sole voting and investment power with respect to such shares.

<TABLE>
<CAPTION>
Name of                                 Total Beneficial Ownership          Percent of Class Beneficially
Beneficial Owner                            (including options)             Owned as of December 31, 1998
----------------                            -------------------             -----------------------------
<S>                                              <C>                                        <C> 
Donald B. Scott, Jr., Chairman of
   the Board and President                       168,001 (1)                                 5.6%
James F. Biagi, Jr., Secretary and Director       89,133 (2)                                 3.0%
Robert F. Hussey, Director                       110,000 (3)                                 3.6%
Jerry L. Smith, Director                         110,000 (4)                                 3.6%
Susan E. Hassel, V.P. Sales                       27,857 (5)                                  .9%
All Executive Officers and Directors             559,526 (6)                                18.6%
  as a group (6 persons)
</TABLE>

-----------------------
         (1)   Includes options to purchase 156,408 shares, and 750 Common Stock
               Purchase Warrants exercisable within 60 days.
         (2)   Includes options to purchase 89,133 shares exercisable within 60
               days.
         (3)   Includes options to purchase 110,000 shares exercisable within 60
               days.
         (4)   Includes options to purchase 110,000 shares exercisable within 60
               days.
         (5)   Includes options to purchase 26,738 shares exercisable within 60
               days.
         (6)   Includes options to purchase 545,886 shares exercisable within 60
               days.

Item 12. Certain Relationships and Related Transactions.

         In June 1996, in consideration for acquiring all of the outstanding
capital stock of Pro.Net Communications, Inc. ("ProNet"), the Company issued
100,000 shares of the Company's Common Stock to shareholders of ProNet,
including 28,500 shares to Peter Ciccone, who became the Company's Chief
Operating Officer, and 28,500 shares to Stephen R. Willey, who was appointed a
director of the Company in August 1996 and resigned in September 1997. Pursuant
to a September 1998 Asset Purchase Agreement, the Company's wholly-owned
subsidiary, DDN Canada, sold all of its assets and interests in its internet
services business to ProNet Communications, Inc. ("ProNet"), the principals of
which include Messrs. Ciccone and Willey (the "Principals"). ProNet assumed DDN
Canada liabilities relating to the internet business and released the Company
from, among other things, amounts owed by DDN to the Principals, which
approximated $100,000, and received $20,000 cash from the Company.

                                     17
<PAGE>


         The Company believes that the foregoing transactions with its officers
and directors were on terms no less favorable than could have been obtained from
independent third parties. All future transactions with such persons will also
be on terms no less favorable than could be obtained from independent third
parties and will be approved by a majority of the independent, disinterested
directors.

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

          (a) Exhibits - none filed with this report.

          (b) On October 5, 1998, the Company filed a Form 8-K with the
          Commission to report the disposition of the assets of its Canadian
          operations. On October 9, 1998, the Company filed a Form 8-K to report
          that it had entered into a definitive Agreement and Plan of Merger
          with Internet Sports Network, Inc. On February 8, 1999, the Company
          filed a Form 8-K to report that it had entered into a Settlement
          Agreement with Internet Sports Network, Inc. terminating the Agreement
          and Plan of Merger dated October 7, 1998 between the parties.


                                       18
<PAGE>

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                            DIGITAL DATA NETWORKS, INC.
                                            (Registrant)


                                   By:    /s/  Donald B. Scott
                                          --------------------------------------
                                          Donald B. Scott, Chairman of the Board
                                         (Principal Executive Officer)


                                   Date: March 25, 1999


In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
Signatures                                  Capacity                            Date
----------                                  --------                            ----
<S>                                         <C>                                 <C> 
/s/  Donald B. Scott                        Chairman of the Board,              March 25, 1999
--------------------------------            President, Director,
Donald B. Scott                             (Principal Executive Officer)


/s/  James F. Biagi, Jr.                    Secretary and Director              March 25, 1999
--------------------------------
James F. Biagi, Jr.


/s/  Robert  F. Hussey                      Director                            March 25, 1999
--------------------------------
Robert F. Hussey


/s/  Richard J. Boeglin                     Vice President, Finance and         March 25, 1999
--------------------------------            Operations (Principal Financial
Richard J. Boeglin                          and Accounting Officer)
</TABLE>




                                       19
<PAGE>


                           DIGITAL DATA NETWORKS, INC.
                        CONSOLIDATED FINANCIAL STATEMENTS


                                      INDEX

                                                                           Page

Report of Independent Certified Public Accountants                          F-2

Consolidated Balance Sheets                                                 F-3

Consolidated Statements of Operations                                       F-4

Consolidated Statement of Stockholders' Equity                              F-5

Consolidated Statements of Cash Flows                                       F-6

Notes to Financial Statements                                        F-7 to F-17











                                      F-1
<PAGE>



               Report of Independent Certified Public Accountants


To the Board of Directors and Stockholders of
Digital Data Networks, Inc.


         We have audited the accompanying consolidated balance sheets of Digital
Data Networks, Inc. and its subsidiaries ("the Company"), as of December 31,
1997 and 1998 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years ended December 31,
1996, 1997 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of Digital Data Networks, Inc.
and its subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years ended December 31, 1996,
1997 and 1998 in conformity with generally accepted accounting principles.

         The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred recurring losses
from operations and has experienced negative cash flows from operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



BDO Seidman, LLP
Seattle, Washington



March 10, 1999


                                      F-2
<PAGE>


                           DIGITAL DATA NETWORKS, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                --------------------------
                                                                                    1997              1998
                                                                                    ----              ----
<S>                                                                           <C>               <C>       
Current assets
  Cash and cash equivalents                                                   $      540        $      151
  Trade accounts receivable, net of allowances
     for doubtful accounts of $33 and $7                                              58                38
  Prepaid expenses and other current assets                                           50                19
  Due from officer, net of reserves (Note 9)                                          42                 -
  Notes receivable, net of reserves of $1,048 and $1,053 (Note 12)                   320                27
                                                                             -----------      ------------
     Total current assets                                                          1,010               235
Equipment, net (Notes 5 and 6)                                                       147               102
Investments in equity securities (Note 12)                                            53               264
Other assets (Note 12)                                                                20                71
                                                                            ------------       -----------

Total assets                                                                   $   1,230         $     672
                                                                               =========         =========

Current liabilities
  Accounts payable                                                            $      117        $       36
  Accrued payroll and related                                                         44                14
  Current portion of long-term debt                                                   21                13
  Unearned income                                                                     89                68
  Other accrued liabilities                                                          191               152
                                                                              ----------        ----------
     Total current liabilities                                                       462               283

Long-term obligations
  Long-term debt and accrued interest, less current portion (Note 6)                 164               159
  Due to shareholders (Notes 4 and 9)                                                114                 -
                                                                              ----------     -------------
     Total liabilities                                                               740               442
                                                                              ----------        ----------

Commitments and contingencies (Notes 2, 8, 11, and 12)

Stockholders' equity
  Preferred stock, no par value, 1,000,000 shares authorized,
     no shares issued or outstanding                                                   -                 -
  Common stock, no par value, 10,000,000 shares authorized,
    2,339,597 and 2,314,597 shares issued and outstanding                         13,399            13,473
  Treasury stock, at cost, 30,000 shares                                               -                (7)
  Accumulated deficit                                                            (12,914)          (13,236)
  Cumulative foreign currency translation adjustment                                   5                 -
                                                                           -------------       -----------

     Total stockholders' equity                                                      490               230
                                                                             -----------       -----------

     Total liabilities and stockholders' equity                                $   1,230        $      672
                                                                               =========        ==========
</TABLE>







           See accompanying notes to consolidated financial statements
                                      F-3
<PAGE>

                           DIGITAL DATA NETWORKS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in Thousands, Except Per Share Data)
               (Reclassified for Discontinued Operations - Note 4)


                    Year Ended December 31,
<TABLE>
<CAPTION>
                                                                        1996             1997             1998
                                                                        ----             ----             ----

<S>                                                              <C>             <C>               <C>          
Revenues                                                         $         493   $          524    $         574
                                                                 -------------   --------------    -------------

Expenses:
   Direct operating costs                                                  460              449              203
   Salaries and related                                                    711              623              373
   Marketing, general and administrative                                   383              541              318
   Financing, legal and other consulting                                   194              149               78
   Provision for ACIS notes receivable (Note 12)                             -            1,048                -
                                                                 -------------   --------------    -------------

      Total expenses                                                     1,748            2,810              972
                                                                 -------------   --------------    -------------

Other income (expense):
   Interest expense                                                        (51)            (104)              (7)
   Investment income (loss)                                                192              135              (4)
                                                                 -------------   --------------    -------------
      Total other income, net                                              141               31             (11)
                                                                 -------------   --------------    -------------

Loss from continuing operations                                         (1,114)          (2,255)            (409)

Loss from discontinued operations (Note 4)                                (852)            (667)             (50)

Gain on disposition of discontinued operations (Note 4)                      -                -              137
                                                                 -------------   --------------    -------------

Net loss                                                            $   (1,966)      $   (2,922)      $     (322)
                                                                   ===========      ===========      ===========

Loss from continuing operations per share                           $    (0.56)     $     (0.97)      $    (0.18)

Gain (loss) from discontinued operations per share                       (0.42)           (0.28)            0.04
                                                                 -------------   --------------    -------------

Net loss per share                                                  $    (0.98)     $     (1.25)      $    (0.14)
                                                                  ============     ============      ===========

Weighted average shares outstanding                                      1,997            2,335            2,305
                                                                  ============     ============      ===========
</TABLE>












           See accompanying notes to consolidated financial statements
                                      F-4
<PAGE>


                           DIGITAL DATA NETWORKS, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in Thousands)

<TABLE>
<CAPTION>
                                                                                                Cumulative
                                                                                                 Foreign
                                                                                                 Currency
                                      Common Stock               Treasury Stock Accumulated     Translation
                                 Shares      Amount       Shares      Amount       Deficit      Adjustment       Total
                                 ------      ------       ------      ------       -------     ------------       -----
<S>                               <C>    <C>                  <C>    <C>         <C>           <C>             <C>      
Balance, January 1, 1996            705  $     6,359           -     $      -    $   (8,026)   $          -    $ (1,667)

Shares issued for cash            1,322        6,612           -            -             -               -       6,612
Warrants issued for cash              -          276           -            -             -               -         276
Stock offering costs                  -       (1,066)          -            -             -               -      (1,066)
Shared issued in connection
with
   acquisition of:
   Pro.Net Communications,          100          325           -            -             -               -         325
Inc.
   Cyber America Corporation         50          163           -            -             -               -         163
   hip Communications, Inc.          30           98           -            -             -               -          98
Shares issued upon debt              31          124           -            -             -               -         124
exchange
Shares issued for other than         59          170           -            -             -               -         170
cash
Warrants issued for other             -           38           -            -             -               -          38
than cash
Net loss                              -            -           -            -        (1,966)              -      (1,966)
                                 ------       ------      ------       ------       -------    ------------       -----

Balance, December 31, 1996        2,297       13,099           -            -        (9,992)              -       3,107

Shares issued upon debt              37          161           -            -             -               -         161
exchange
Shares issued for other than          5           27           -            -             -               -          27
cash
Options issued to other
than employees (Note 8)               -          112           -            -             -               -         112
Foreign currency translation          -            -           -            -             -               5           5
Net loss                              -            -           -            -        (2,922)              -      (2,922)
                                 ------       ------      ------       ------       -------    ------------       -----

Balance, December 31, 1997        2,339       13,399           -            -      (12,914)               5         490

Variable stock option plan
   compensation (Note 8)              -           80           -            -             -               -          80
Acquisition of Treasury stock
   (Note 12)                          -            -          30           (7)            -               -          (7)
Cancellation of shares (Note 8)     (25)          (6)          -            -             -               -          (6)
Foreign currency translation          -            -           -            -             -              (5)         (5)
Net loss                              -            -           -            -          (322)              -        (322)
                                 ------       ------      ------       ------       -------    ------------       -----

Balance, December 31, 1998        2,314   $   13,473          30      $    (7)    $ (13,236)  $           -    $    230
                                 ======       ======      ======       ======       =======    ============
</TABLE>






           See accompanying notes to consolidated financial statements
                                      F-5

<PAGE>

                           DIGITAL DATA NETWORKS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)

                Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
                                                                                             Year Ended December 31,
                                                                                --------------------------------------
                                                                                    1996          1997            1998
                                                                                    ----          ----            ----
<S>                                                                             <C>           <C>            <C>       
Cash flows from operating activities
Net Loss                                                                        $ (1,966)     $ (2,922)      $    (322)
   Adjustments to reconcile net loss to net cash
     used by operating activities, exclusive of the
     effects of business acquisitions
       Depreciation and amortization                                                 427           317             140
       Write-off of goodwill                                                           -           343               -
       Provision for doubtful notes and other receivables                              -         1,048              60
       Compensatory option expense                                                     -           112              80
       Gain on disposition of discontinued operations                                  -             -            (137)
       Other non-cash operating expense                                              538             9              37
       Decrease (increase) in prepaid expenses and other current assets             (137)          122              31
       Increase (decrease) in accounts payable and accrued liabilities              (252)          (45)           (120)
       Other                                                                         (66)          146              23
                                                                             ------------  ------------     ----------
Net cash used by operating activities                                             (1,456)         (870)           (208)
                                                                             ------------  ------------     ----------

Cash flows from investing activities
   Purchases of equipment                                                            (15)          (73)           (131)
   Purchases of notes receivable and other investments                              (325)           (6)              -
   Advances to / investments in acquisition targets                                    -        (1,048)           (250)
   Payments of merger costs                                                            -             -             (69)
   Receipt of payments on notes receivable                                             -            10             290
   Cash acquired upon acquisition of businesses                                       99             -
                                                                             ------------  ------------     ----------
Net cash used by investing activities                                               (241)       (1,117)           (160)
                                                                             ------------  ------------     ----------

Cash flows from financing activities
   Proceeds from issuance of common stock, net of stock issue costs                5,822             -               -
   Repayment of expanded license commitment                                         (225)          (78)              -
   Repayment of notes payable                                                     (1,047)          (71)              -
   Debt principal payments                                                             -          (189)            (21)
                                                                             ------------  ------------     ----------
                                                                                       -
Net cash provided (used) by financing activities                                   4,550          (338)            (21)
                                                                             ------------  ------------     ----------

Net increase (decrease) in cash and cash equivalents                               2,853        (2,325)           (389)

Cash and cash equivalents
   Beginning of Year                                                                  12         2,865             540
                                                                             ------------  ------------     ----------
   End of Year                                                                 $   2,865   $       540       $     151
                                                                              ==========   ===========     ===========

Supplemental disclosures of non-cash investing and financing activities
   Exchange of debt for equity                                               $       124   $       161       $       -
   Common stock and warrants issued for other than cash                      $       208   $        27       $       -
   Common stock issued in business acquisitions                              $       586   $         -       $       -
   Debt assumed by Purchaser upon sale of ProNet                             $         -   $         -       $     100
</TABLE>


           See accompanying notes to consolidated financial statements
                                      F-6

<PAGE>


                           DIGITAL DATA NETWORKS, INC.
                          NOTES TO FINANCIAL STATEMENTS

Note 1  Description of Business and Summary of Significant Accounting Policies

Digital Data Networks, Inc. ("the Company" or "DDN"), a wireless, passenger
communication and advertising company, is principally engaged in development,
design, installation and operation of the "digital information network", a
network of computerized electronics message displays that deliver current news,
information and advertising to riders on-board public transit vehicles. The
digital information network consists of a series of electronic information
displays utilizing digital radio transmission technology. The Company,
incorporated in 1988, has a digital information network in operation in Dallas,
Texas. In July 1995, the Company changed its name from Transit Information
Systems, Inc. to Digital Data Networks, Inc.

As a result of 1996 acquisitions, the Company was also engaged in operating and
developing internet-related businesses. The Company's Canadian subsidiary, DDN
Canada, provided a range of internet offerings to business customers, including
connectivity services, intranet services, development of on-line working
programs, and web page design and development. As described in Note 4, in
September 1998, the Company disposed of its internet-related businesses. The
accompanying 1996 and 1997 statements of operations have been reclassified from
those included in the Company's December 31, 1997 Annual Report on Form 10-KSB
to present net operating results from discontinued operations as a separate
line-item and, accordingly, amounts relating to this business segment were
removed from amounts originally reported as revenues and expenses. There is no
change in previously reported net loss as a result of these reclassifications.

Principles of Consolidation - The consolidated financial statements of DDN
include the accounts of its subsidiaries from the date of their acquisition
after the elimination of intercompany balances and transactions.

Reclassifications - Certain amounts in prior period financial statements have
been reclassified to conform with current period classifications.

Cash and Cash Equivalents - For purposes of balance sheet classification and the
statements of cash flows, the Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.

Equipment - Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the respective assets,
which typically range from three to seven years.

Intangible Assets - Intangible assets include the cost of an expanded software
license, now fully amortized, and goodwill. Goodwill represents the excess of
the cost of companies acquired over the fair value of their net assets at their
dates of acquisition and was being amortized over 60 months. Cost and
accumulated amortization of fully amortized intangible assets are removed from
the accounts.

Impairment of Long-Lived Assets - In accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of",
management of the Company reviews the carrying value of its equipment and
intangible assets on a regular basis. Estimated undiscounted future cash flows
from operations is compared to current carrying value. Reductions or reserves
against assets, if necessary, are recorded to the extent the net book value of
the asset exceeds the estimate of future undiscounted cash flows on an aggregate
basis.

Investments in Marketable Equity Securities - The Company's investments in
marketable equity securities are stated at estimated market value. Unrealized
losses of approximately $37,000 relating to mark-to-market adjustments for other
than temporary declines in market value are included in investment income (loss)
for 1998 in the accompanying statements of operations.

Income Taxes - The Company accounts for income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires
the recognition of deferred income taxes to provide for temporary differences
between the financial reporting and tax basis of assets and liabilities.
Deferred taxes are

                                      F-7
<PAGE>


Note 1  Description of Business and Summary of Significant Accounting Policies
        (continued)

measured using enacted tax rates expected to be in effect in the years in which
the temporary differences are expected to reverse.

Fair Value of Financial Instruments - The carrying amount reported in the
balance sheet for cash and cash equivalents, trade accounts receivable, notes
receivable, other current assets, accounts payable and other accrued expenses
approximate fair value because of their immediate or short-term nature. The
carrying amount reported in the balance sheet for investments in equity
securities approximates fair value because they are stated at estimated market
value based upon recent transactions in such securities. The fair value of
long-term debt approximates its carrying value because the stated rates of the
debt either reflect recent market conditions or are variable in nature.

Revenue Recognition - The Company records revenue over the contractual period
which services are provided. To the extent payment is received in advance of the
contractual period expiration, such prepaid amounts are recorded as unearned
income until services are provided.

Stock-Based Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123") encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based employee compensation utilizing the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations and to furnish the proforma
disclosures required under SFAS 123. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. If stock options are repriced, the effects of changes in the
stock price are recognized as compensation expenses in accordance with
accounting for variable stock option plans.

Net Loss Per Share - Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("EPS", "SFAS No. 128") requires presentation of basic EPS
and diluted EPS on the face of all income statements issued after December 15,
1997. Adoption of SFAS No. 128 had no effect on the Company's financial
statements. Basic EPS is computed as net income divided by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities. As the Company's stock
options and warrants for approximately 2,554,000 shares of Company common stock
at December 31, 1998, are antidilutive for all periods presented, only basic EPS
is presented. These securities could potentially dilute future EPS calculations.

Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.

New Accounting Pronouncements - New accounting pronouncements having relative
applicability to the Company include SFAS No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS No. 130 requires that an enterprise present in the
same prominence as other financial statements a Comprehensive Income Statement.
Comprehensive income for the Company consists of net loss adjusted for any
changes in certain shareholders' equity accounts, including the cumulative
translation adjustment. SFAS No. 131 establishes reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of these statements did
not impact the Company's financial position, results of operations or cash flows
and any effect was limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after December 15, 1997.


                                      F-8
<PAGE>


Note 1  Description of Business and Summary of Significant Accounting Policies
        (continued)

The only items included in comprehensive income or loss other than the Company's
net loss relates to $5,000 of foreign currency translation adjustments, which
for the years ended December 31, 1997 and 1998 is other comprehensive income,
and other comprehensive loss, respectively. The Company has disposed of its
foreign operations and the foreign currency translation adjustment has reversed
and been eliminated. As there are otherwise no items other than net income or
loss that comprise other comprehensive income, separate statements of
comprehensive income have not been presented.

In March and April of 1998, the Accounting Standards Executive Committee of the
American Institute of CPAs, issued Statement of Position 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1") and Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). Adoption of these standards will not have a material
impact on the Company's financial position, results of operations, or cash
flows. The standards are effective for transactions entered into in fiscal years
beginning after December 15, 1998.

Note 2  Financial Condition, Liquidity and Going Concern

The Company incurred net losses of $1,966,000, $2,922,000 and $322,000 for the
years ended December 31, 1996, 1997 and 1998, and continues to experience losses
from continuing operations and negative cash flows from operations. In May 1998,
the Company was notified that the Company's securities were delisted from the
Nasdaq SmallCap Market as a result of non-compliance with tangible net worth
continued listing requirements. These conditions raise substantial doubt about
the Company's ability to continue as a going concern.

The Company has taken actions to reduce negative cash flows, including disposing
of portions of the business, such as the sale of the internet services segment
and closing RIPTA operations, reducing general and administrative expenses, and
minimizing capital expenditures. The Company has pursued merger possibilities
and continues to do so. The ability of the Company to generate positive cash
flows from operations and net income, is dependent, among other things, on
market conditions, the recovery of recorded assets, cost control, and the
Company's ability to raise capital under acceptable terms. While the Company has
had some successes in these endeavors in the past, there can be no assurance
that its efforts will be successful in the future. These financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.

Note 3  Business Acquisitions

In June 1996, the Company acquired all of the outstanding common stock of
Pro.Net for 100,000 shares of the Company's common stock valued at approximately
$325,000. Shares of Company common stock issued were subject to a two year
resale restriction, and were recorded at their estimated fair value determined
on the basis of discounting (for, among other things, resale restrictions) the
market price of Company common stock. The total purchase price, including
assumed liabilities at their estimated fair values (which approximated book
value), was allocated to assets acquired based on estimates of fair value.
Assets acquired included tangible assets (which fair values are estimated to
approximate book value) and identifiable intangible assets, being primarily a
customer subscription base. The excess of purchase price over fair value of
assets acquired was allocated to non-current tangible and identifiable
intangible assets based upon their relative estimated fair values. Intangible
assets recorded in purchase accounting approximated $325,000 and was being
amortized over five years.

In June 1996, the Company acquired all of the outstanding common stock of Cyber
America for 50,000 shares of the Company's common stock valued at approximately
$163,000. Shares of Company common stock issued were subject to a two year
resale restriction, and were recorded at their estimated fair value determined
on the basis of discounting (for, among other things, resale restrictions) the
market price of Company common stock. The total purchase price, including
assumed liabilities at their estimated fair values (which approximate book
value), was allocated to assets acquired based on estimates of fair value.
Assets acquired include tangible assets (which fair values are estimated to
approximate book value) and identifiable intangible assets being primarily
products in

                                      F-9
<PAGE>


Note 3  Business Acquisitions (continued)

development. The estimated value of products in development which are not deemed
to have attained technological feasibility, as defined by generally accepted
accounting principles, was capitalized in purchase accounting in the amount of
approximately $183,000 and immediately expensed as product development cost
subsequent to recording the business combination. In September 1997 the Company
closed the operations of Cyber America as it was unable to reach profitability.

In September 1996, the Company acquired all of the outstanding common stock of
hip for 30,000 shares of the Company's common stock valued at approximately
$98,000. Shares of Company common stock issued were subject to a two year resale
restriction, and were recorded at their estimated fair value determined on the
basis of discounting (for, among other things, resale restrictions) the market
price of Company common stock. The total purchase price, including assumed
liabilities at their estimated fair values (which approximate book value), was
allocated to assets acquired based on estimates of fair value. Assets acquired
included tangible assets (which fair values are estimated to approximate book
value) and identifiable intangible assets, a customer base, and unidentifiable
intangible assets. Intangible assets recorded in purchase accounting
approximated $109,000 and was amortized over estimated productive lives, which
are not in excess of two years.

Upon review of the Company's undiscounted cash flow estimates, management
determined that the net carrying value of goodwill for both Pro.Net and hip at
December 31, 1997 of $343,000 was not recoverable through operations and charged
the entire remaining unamortized balance to expense.

On the basis as if the business acquisitions of Pro.Net, Cyber America and hip
had occurred at the beginning of the year, unaudited pro forma net loss and net
loss per share for 1996 would have approximated $1.95 million and $(0.94). The
pro forma information is based on historical information and is not necessarily
indicative of results of operations that would have occurred had the
acquisitions occurred on January 1, 1996, nor is it necessarily indicative of
future results of operations of the combined companies. The pro forma financial
information does not include non-recurring expenses of approximately $183,000
recorded in 1996 immediately subsequent to recording the Cyber America business
combination relating to the estimated fair value of intangible assets acquired
associated with products in development which were not determined to have
attained technological feasibility.

Note 4  Disposition of Internet Services Segment

Pursuant to a September 1998 Asset Purchase Agreement, the Company's
wholly-owned subsidiary, DDN Canada, sold all of its assets and interests in its
internet services business to ProNet Communications, Inc. ("ProNet"), the
principals of which include DDN's former Chief Operating Officer and a former
DDN Director, both of whom are DDN shareholders (the "Principals"). ProNet
assumed DDN Canada liabilities relating to the internet business and released
the Company from, among other things, amounts owed by DDN to the Principals,
which approximated $100,000, and received $20,000 cash from the Company. The
excess of liabilities over the net book value of assets sold and disposition
costs is reported as gain on disposition of discontinued operations. The
accompanying statements of operations present the results of the internet
services segment operations as a one-line item net loss from discontinued
operations for all periods presented. The loss from discontinued operations for
the year ended December 31, 1997 includes $343,000 of expense relating to the
write-off of goodwill.

Note 5  Equipment

Equipment consists of the following (in thousands):
                                                                 December 31,
                                                           ---------------------
                                                              1997         1998
                                                              ----         ----
Equipment installed in public transit vehicles          $    1,440  $     1,473
Office equipment and other                                     250           72
                                                        ----------  -----------
                                                             1,690        1,545
Accumulated depreciation                                    (1,543)      (1,443)
                                                        ----------  -----------
Equipment, net                                          $      147  $       102
                                                        ==========  ===========


                                      F-10
<PAGE>

Note 6  Note Payable and Long-Term Debt

Long-term debt consists of the following (in thousands):

                                                             December 31,
                                                       -----------------------
                                                       1997               1998
                                                       ----               ----
5% promissory note due a company, due in full
   on October 2001, including accrued interest of
   $7 and $15, secured by equipment installed
   in public transit vehicles                       $   151            $   159

8.5% note due a bank, payable monthly
   including interest, due July 1999, secured by
   equipment and certificates of
   deposit                                               34                 13
                                                    -------            -------

Total                                                   185                172
Less current portion                                     21                 13
                                                    -------            -------

Long-term debt and accrued interest, 
  less current portion                               $  164             $  159
                                                    =======            =======

Scheduled long term debt maturities at December 31, 1998 approximate $13,000 in
1999 and $159,000 in 2001.

Total cash paid for interest approximated $51,000, $173,000 and $2,000 during
the years ended December 31, 1996, 1997 and 1998, respectively.

In February 1997, the Company amended the terms of its 11% note due a Company to
include an equity conversion feature, allowing the principal and interest due to
be converted to DDN common stock at a conversion price of $4.50 per share, the
fair market value at the date of amendment. In March 1997, the lender exercised
its options and the outstanding balance of principal and interest of $82,464 was
converted into 18,326 shares of DDN common stock.

During the year ended December 31, 1997, the Company repaid approximately
$54,000 of 5% convertible promissory notes and $195,000 of 8% promissory notes.

Note 7  Software License and Supply Agreement

Pursuant to terms of a 1993 agreement, as amended, the Company's Transit Network
Division licenses substantially all of its computer software, which is an
essential element of the digital information network, from Sunrise Systems, Inc.
("Sunrise Systems"), an electronics supplier and software development company.
The license provides the Company with exclusive rights to such software in
metropolitan areas of the United States and Canada with populations over 100,000
and nonexclusive rights elsewhere in the world. The software license was to
terminate immediately if the Company had not completed a major financing, as
defined, by December 1996 and paid Sunrise Systems $250,000 plus 8% of net
financing proceeds over $5 million, up to a maximum total payment of $300,000,
(the "Expanded License Payment"). In 1996, the Company paid Sunrise Systems
$225,000 representing the Expanded License Payment amount then due as a result
of the Company's receipt of its initial stock offering proceeds; the remaining
$75,000, together with accrued interest was due and paid in 1997.

In January 1997, agreement terms were amended to include an equity conversion
feature, allowing the principal and interest due to be converted to DDN common
stock at a conversion price of $4.20 per share, the fair market value at the
date of amendment. In January 1997, Sunrise Systems exercised its option and the
outstanding balance of principal and interest of $78,524 was converted into
18,697 shares of DDN common stock.



                                      F-11
<PAGE>

Note 8  Common Stock and Stock Options

In February 1996, the Company closed its initial public stock and warrant
offering and received net cash proceeds of approximately $5.8 million, after
deduction for underwriters commissions and certain other offering related costs.
The Company issued 1,322,500 shares of its common stock and 1,840,000 of its
common stock purchase warrants. The warrants entitle the holder to purchase one
share of the Company's common stock at an exercise price of $6 per share during
the five years commencing upon issuance. The warrants are redeemable after one
year, under certain circumstances. The Company utilized approximately $1.1
million of the proceeds to repay certain notes payable and related accrued
interest.

The Company has granted to certain of its promissory note holders, stockholders,
officers, directors, employees, suppliers, consultants and financial advisors
non-qualified options and warrants to purchase shares of Company common stock.
Options generally expire within 5 to 10 years of grant. During 1997, the Company
granted a total of 200,000 options to purchase common shares to non-employee
directors in exchange for services at an exercise price of $1.75 expiring in
2002, resulting in a $75,000 charge to expense for the period. During 1998, the
Company granted to non-employee directors in exchange for services a total of
30,000 options to purchase common shares at an exercise price of $0.25 per
share, expiring in 2003.

During the year ended December 31, 1997 the Company granted a total of 5,100
shares of common stock to two consultants, at various dates, in exchange for
services rendered. The aggregate fair value at the date the shares were issued
was $27,375, which amount was expensed in 1997.

During 1998, as a result of non-performance by what was to have been a service
provider to the Company, the Company rescinded and canceled 25,000 shares of
Company common stock which were issued in 1996 in exchange for services to be
provided. The estimated fair value of stock canceled has been recorded as a
decrease in common stock and expenses.

During 1994, the Company adopted a Combined Incentive and Non-Qualified Stock
Option Plan (the "1994 Plan") which permits the issuance of options to acquire
shares of Company common stock. The plan permits grants of incentive stock
options to employees and of non-qualified stock options to employees, directors,
consultants or independent contractors of the Company. The exercise price of
incentive stock options shall not be less than the fair market value of Company
common stock at the date of grant. The exercise price of non-qualified stock
options may be greater or less than the fair market value of Company common
stock at the date of grant. The duration of options shall be established by the
Board of Directors, and shall not exceed ten years. The 1994 Plan reserves
approximately 112,000 shares of common stock for grant and provides that terms
of each award be determined by the Board of Directors. Prior to 1996, the
Company granted approximately 104,000 1994 Plan options. No 1994 Plan options
have been exercised.

During 1996, the Company adopted a Combined Incentive and Non-Qualified Stock
Option Plan (the "1996 Plan") with provisions similar to the 1994 Plan. The 1996
Plan reserves approximately 250,000 shares of common stock for grant and
provides that terms of each award be determined by the Board of Directors.
During 1996, the Company granted approximately 220,000 1996 Plan options. No
1996 Plan options have been exercised.

During 1996, in connection with an agreement pursuant to which the Company
acquired certain financial consulting services, the Company issued options to
acquire 40,000 shares of its common stock at an exercise price of $6.00 per
share, exercisable for two years. The Company recorded the estimated fair value
of such options as expense and an increase in common stock. Further, for a
period of six to twelve months, the Company agreed to issue additional options
(40,000 for each of specified share prices) contingent upon the average closing
bid price per share of Company common stock attaining $7, $8, $9 and $10 for
twenty out of thirty consecutive day time periods. During 1997, these contingent
options were renegotiated and repriced, resulting in 50,000 options issued at an
exercise price of $5.23 and 50,000 options issued at an exercise price of $5.94,
all expiring in November 1998. The resulting charge to expense in 1997 was
$37,000.

                                      F-12
<PAGE>


Note 8  Common Stock and Stock Options (continued)

During September 1997 the Company repriced 216,423 of its options to purchase
common shares from various exercise prices to $2.13, the fair market value at
the date of repricing. During December 1997, the Company repriced 335,556 of its
options to purchase common shares from various exercise prices to $1.75 per
share, the fair market value at the date of repricing. During March 1998, the
Company repriced 515,695 of its options held by current officers and directors
from various exercise prices to $0.25 per share, the fair market value at the
date of repricing. The effect of increases in the stock price at December 31,
1998 over the exercise price for repriced options of approximately $80,000, is
recognized as expense for the year. The following tables represent exercise
prices as adjusted for repricings.

The following summarizes stock option and warrant transactions during the three
years ended December 31, 1997 (thousands of shares):

<TABLE>
<CAPTION>
                                                                   Exercise Price       Weighted Average
                                                  Shares              Per Share           Exercise Price
                                               -----------         ----------------     ----------------
<S>                                                  <C>            <C>                    <C>       
   Outstanding at January 1, 1996                      360          $0.09 to $19.68        $     5.00

   Granted                                             303          $4.50 to  $6.00        $     5.55
   Sold in initial public offering                   1,840               $6.00             $     6.00
   Expired                                              (5)              $8.94             $     8.94
                                               -----------         ----------------     ----------------

   Outstanding at December 31, 1996                  2,498          $0.09 to $19.68        $     5.79

   Granted                                             300          $1.75 to  $5.94        $     3.03
   Expired                                             (96)         $0.50 to  $5.50        $     4.74
                                               -----------         ----------------     ----------------

   Outstanding at December 31, 1997                  2,702          $0.09 to $19.68        $     5.19

   Granted                                              30               $0.25             $     0.25
   Expired                                            (178)         $2.72 to $9.93         $     6.32
                                               -----------         ----------------     ----------------
   Outstanding at December 31, 1998                  2,554          $0.09 to $19.68        $     4.75
                                               ===========         ================     ================
</TABLE>



Information relating to outstanding and exercisable stock options and warrants
at December 31, 1998, summarized by exercise price are as follows (thousands of
shares):

<TABLE>
<CAPTION>
                                                                              Weighted Average
         Range of                                                    Remaining Life
      Exercise Price                                  Shares            in Years          Exercise Price
   ------------------                                 ------         --------------       --------------
<S>                                                    <C>                <C>                  <C> 
   $  0.09 to $  0.27                                    586              2.6               $  0.25
   $  0.89 to $  1.75                                     20              3.2                  1.51
   $  4.47 to $  6.71                                  1,870              2.3                  5.99
   $  8.94 to $ 19.68                                     78              3.5                  9.51
                                                  ----------

                                                       2,554              2.4               $  4.75
                                                  ==========
</TABLE>







                                      F-13
<PAGE>


Note 8  Common Stock and Stock Options (continued)

All stock options issued have an exercise price not less than the fair market
value of the Company's common stock on the date of grant. In accordance with
accounting for options issued to employees utilizing the intrinsic value method,
there is no related compensation expense recorded in the Company's financial
statements. The fair value of option grants is estimated on the date of grant
utilizing the Black-Scholes option-pricing model with the following weighted
average assumptions for grants in 1996: expected life of options of 5 years,
expected volatility of 7.6%, risk-free interest rate of 6.4% and a 0% dividend
yield. The weighted average fair value at date of grant for options granted
during 1996 approximated $1.34 per option. No options were issued to employees
during 1997 and 1998. The following proforma disclosures do not include the
effect of options granted prior to 1995 that vest in subsequent years and
accordingly are not necessarily indicative of the financial impact had the
disclosure provisions of SFAS 123 been applicable to all years for previous
option grants. Had compensation cost for stock-based compensation been
determined based on the fair value at the grant dates consistent with the method
of SFAS 123, the Company's net loss and loss per share for the year ended
December 31, 1996 would have increased from $(1,966,000) to proforma
$(2,308,000) and from $(0.98) to proforma $(1.16), respectively. Net loss and
pro forma net loss for 1997 and 1998 were the same.


Note 9  Related Party Transactions

Two of the co-owners and executive officers of Sunrise Systems, the provider of
the Company's Expanded License as described in Note 6, are members of the
Company's Board of Advisors. Sunrise Systems owns options to acquire
approximately 60,000 shares of Company common stock (36,000 exercisable at $9.93
per share, 18,400 exercisable at $0.09 per share and 5,600 exercisable at $0.89
per share). During 1997, Sunrise Systems acquired 18,697 shares of Company
common stock in exchange for certain amounts owed.

Amounts due to related parties at December 31, 1997 consist of accounts payable
to certain shareholders for services provided to Pro.Net prior to the purchase
date.

The Company has made cash advances to its President, who is also one of the
Company's directors and shareholders. At December 31, 1996, 1997 and 1998,
amounts due from the officer approximated $42,000. During the year ended
December 31, 1998, compensation being paid to the Company's President was
reduced and then eliminated at the direction of the Board. The Company has
continued to request repayments on amounts due from this officer, although none
have been made to date. Nevertheless, during 1998, the entire amount of the
$42,000 receivable was reserved.


Note 10  Income Taxes

At December 31, 1998 and 1997, the Company had deferred tax assets of
approximately $2.9 million and $2.5 million, respectively, principally arising
from net operating loss carryforwards for income tax purposes. As management of
the Company cannot determine that it is more likely than not that the Company
will receive the benefit of these assets, a valuation allowance equal to the
deferred tax asset has been established at both December 31, 1998 and December
31, 1997.

As of December 31, 1998 the Company had net operating loss carryforwards
available to reduce taxable income in future years of $7.4 million, which begin
to expire in 2006. As a result of changes in stockholder ownership, utilization
of net operating loss carryforwards could be subject to annual limitation.




Note 11  Operating Lease Commitments

The Company leases an FM subcarrier for transmission to electronic display signs
located on-board public transit vehicles. The FM subcarrier lease is pursuant to
an agreement expiring December 2001, which requires annual payments of $30,000.
Also, the Company leases an office facility under an operating lease with
monthly payments of approximately $1,900 expiring in November 1999. Future
annual minimum lease payments for all leases approximate $51,000, $30,000 and
$30,000 for 1999, 2000 and 2001, respectively. Rent expense for the years ended
December 31, 1996, 1997 and 1998 was $54,000, $89,000 and $57,000, respectively.

                                      F-14
<PAGE>

Note 12  Commitments and Contingencies

In April 1998, the Company settled litigation initiated in a lawsuit filed in
the Supreme Court of British Columbia, Canada against the Company in 1997 by the
former stockholder of hip pertaining to the Company's 1996 acquisition. Pursuant
to terms of the settlement agreement, the Company paid approximately $40,000 and
received 30,000 shares of DDN common stock. The estimated value of stock
received has been recorded as Treasury stock based upon prevailing market prices
around the settlement agreement date. Settlement net costs are included in
financing, legal and administrative costs in the accompanying statement of
operations. In January 1999, the Company was advised that an action in damages
for breach of the settlement agreement may be commenced against the Company in
connection with the settlement agreement. As part of that settlement agreement,
the Company was required to transfer the "hip.com" domain name to the former
shareholder. The Company has not transferred the domain name and no longer has
registration rights to such domain name. The Company is attempting to contact
the party which has such registration rights. Counsel for the former shareholder
has advised the Company that if the Company is unable to cause the domain name
to be transferred, their only remedy will be an action in damages for breach of
settlement agreement. As no amounts were named and since no action has yet been
taken, the Company is unable to determine the consequences, monetary or
otherwise, which might result from the outcome of this uncertainty.

During the year ended December 31, 1997 the Company entered into a letter of
intent with Advanced Communication and Information Services ("ACIS") to acquire
all of the issued and outstanding voting stock of ACIS in exchange for DDN
common shares. Under provisions of the letter of intent, the Company forwarded
ACIS $1,048,000 pursuant to terms of five promissory notes to be used as working
capital pending the completion of the acquisition. Subsequently, ACIS issued to
the Company 1,000,000 shares of ACIS common stock and withdrew from the letter
of intent. In accordance with the terms of the agreement, the operating cash
forwarded to ACIS was to be repaid in full, however, ACIS has defaulted on that
debt. In April 1998, the Company received a judgment from the King County
Superior Court in the State of Washington against ACIS, ordering them to pay the
Company the amount of the loan, plus interest, plus a $300,000 cancellation fee.
As Company management was unable to determine either the financial stability of
ACIS, or the amount, if any, the Company would eventually recover, the entire
amount of the receivable was reserved during the 1997 fourth quarter. Collection
efforts with respect to promissory notes receivable from ACIS have not resulted
in any recovery. The Company continues to pursue various collection actions,
including, but not limited to, additional litigation and acquisition of debtor
assets and/or businesses. There can be no assurance that the Company will be
successful in recovering any, all, or part of this judgment.

In December 1997, as a result of continuing cash flow losses, the Company closed
its operation in Providence, Rhode Island and notified the Rhode Island Public
Transit Authority ("RIPTA") that it would not be able to complete the contract
that it had been previously awarded. No provision was required to reduce the
carrying value of this operation to net realizable value.

The Company has a contract to provide services with the Dallas Area Rapid
Transit authority ("DART") that includes a provision for a 4% royalty paid to
DART on certain gross advertising receipts. The agreement expires in October
2001.



Note 12  Commitments and Contingencies (continued)

In connection with a proposed merger, the Company acquired for $250,000 cash, in
private placement transactions, 625,000 shares of Internet Sports Network, Inc.
("ISN") common stock, which are included in investments in marketable equity
securities. Costs incurred of $69,000, primarily legal and accounting, relating
to the merger were capitalized and included in other assets. In February 1999,
as a result of ongoing discussions between DDN and ISN boards of directors, the
parties agreed to terminate the merger agreement. As part of the termination
agreement, among other things, the Company received approximately $335,000 cash
and delivered shares of ISN common stock to ISN such that the Company retained
ownership of 150,000 shares of ISN common stock. The excess of the fair value of
consideration received over the recorded value of related assets will be
recorded as investment income during 1999.

                                      F-15
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In January 1999, the Company was named as one of approximately 150 defendants in
a lawsuit brought before the United States Bankruptcy Court for the Northern
District of Texas Dallas Division by the Chapter 7 Trustee for the estate of
Dally Advertising, Inc. ("Dally"). Through this action, the Trustee seeks to
avoid as preferences and to recover certain payments made by Dally within 90
days of the January 1997 filing of its bankruptcy petition. Dally was one of the
Dallas Transit Network customers. The Complaint to Recover seeks $28,656 of
payments allegedly made to the Company. The Company has responded to the Court
regarding this matter, among other things, denying the allegations of
preferential transfer, asserting its own affirmative defenses, and requesting
the Court to deny the relief requested by the Plaintiff. The Company is unable
to determine the consequences, monetary or otherwise, which might result from
the outcome of this uncertainty.

The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. Company management currently believes that
resolution of such legal matters will not have a material adverse impact on the
Company's financial position, results of operations or cash flows.

Note 13  Segment, Geographic and Significant Customer Information

The Company operated in two business segments, transit networks and Internet
services, which also correspond to the regional segments of the United States
(principally Dallas) and Canada (principally Vancouver). There are no
significant sales between the two segments, and the United States segment
includes the corporate office for DDN. As described in Note 4, in September 1998
the Company disposed of its internet services business. The following table
summarizes certain selected financial information of the Company's balance sheet
and operating results, on a segment basis (in thousands):

                                            United States                 Canada
                                            -------------                 ------
Year ended December 31, 1996
     Sales                                     $   493                   $   190
     Operating loss                              1,255                       852
     Depreciation and amortization                 257                       170
     Capital expenditures                           13                         2

Year ended December 31, 1997
     Sales                                     $   524                   $   365
     Operating loss                              2,286                       667
     Depreciation and amortization                 184                       133
     Capital expenditures                           52                        23
     Total identifiable assets                   1,062                       168

Year ended December 31, 1998
     Sales                                     $   574                   $   239
     Operating loss                                409                        50
     Depreciation and amortization                 120                        20
     Capital expenditures                          131                         -
     Total identifiable assets                     671                         -

Revenues from major customers exceeding 10% of total revenue for 1996, 1997 and
1998 included one customer, Dallas County Community College District, accounting
for approximately 12%, 13% and 17% of consolidated revenues in the respective
years.

                                      F-16
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