U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB

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

                    For the fiscal year ended March 31, 2000

                         Commission File No.: 000-27481

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

            NEVADA                                              59-3560920
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

                       100 WEST LUCERNE CIRCLE, SUITE 600
                                ORLANDO, FL 32801
                    (Address of principal executive offices)

                                 (813) 230-9100
                           (Issuer's Telephone Number)

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

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

                          COMMON STOCK, $.01 PAR VALUE
                                (Title of Class)

         Check whether the issuer (1) has 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 is not 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. [ ]

         Revenues  for the  issuer's  fiscal  year  ended  March  31,  2000 were
$2,523,386.

         State the aggregate  market value of the voting and  non-voting  common
equity held by  non-affiliates  computed by  reference to the price at which the
common equity was sold, as of a specified  date within the last 60 days. On June
14, 2000: $28,100,000.

         State the number of shares  outstanding of each of the issuer's classes
of common  equity,  as of the latest  practicable  date.  USA Digital,  Inc. had
9,754,070 shares outstanding as of June 14, 2000.

                       DOCUMENTS INCORPORATED BY REFERENCE

         The  definitive  proxy  statement  pursuant  to  Regulation  14A  to be
delivered to the Commission  for filing which has not previously  been mailed to
the  Commission  is  incorporated  by  reference  into  Parts II and III of this
report.

Transitional Small Business Disclosure Format (check one):  Yes    No X
                                                               ---   ---


<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                               Page
                                                                                                                               ----
<S>                  <C>                                                                                                       <C>
PART I
         ITEM 1.     DESCRIPTION OF THE BUSINESS ..............................................................................  1
         ITEM 2.     DESCRIPTION OF PROPERTY ..................................................................................  7
         ITEM 3.     LEGAL PROCEEDINGS ........................................................................................  7
         ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......................................................  9

PART II
         ITEM 5.     MARKET FOR USA DIGITAL'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ...................................  9
         ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ....................  9
         ITEM 7.     FINANCIAL STATEMENTS ..................................................................................... 10
         ITEM 8.     CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ........................ 10

PART III
         ITEM 9.     DIRECTORS AND EXECUTIVE OFFICERS OF USA DIGITAL; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ....... 10
         ITEM 10.    EXECUTIVE COMPENSATION ................................................................................... 11
         ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........................................... 11
         ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................................................... 11
         ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K ......................................................................... 11
</TABLE>




<PAGE>

                                     PART I

ITEM 1.   DESCRIPTION OF THE BUSINESS

GENERAL

          On March 5, 1999, USA Digital,  Inc. (the "Company") was  incorporated
in the State of Nevada.  The Company is a holding  company  whose  mission is to
build a highly integrated convergent  communications  company. The Company seeks
to  acquire  Internet  service  providers,   telephone  interconnect  companies,
computer/network integrators, and switchless resellers.

          On March 4, 1999, Blazoon Systems Incorporated ("Blazoon"), a Colorado
corporation, an inactive publicly held company with no recent operating history,
acquired  100%  of  the  outstanding  common  stock  of  Diverse  Capital  Corp.
("Diverse"), a Florida corporation incorporated on July 9, 1998, in exchange for
1,235,000  shares of Blazoon common stock.  From its inception  through March 4,
1999,  Diverse  was  engaged  in  the  development  of  its  business  plan  and
infrastructure to become a convergent communications company.  Subsequent to the
acquisition,  the prior  shareholders of Diverse owned  approximately 55% of the
voting common stock of Blazoon.

          On March 9, 1999,  the Company  consummated  a merger  agreement  with
Blazoon with the Company as the surviving  entity.  The Company entered into the
March 9, 1999 transaction with Blazoon in order to: (1) redomicile  Blazoon as a
Nevada  Corporation in order to take  advantage of the more favorable  corporate
law and franchise tax of Nevada;  (2) effect the name change from Blazoon to USA
Digital,  Inc.; and (3) to create a public market for USA Digital,  Inc.  common
stock so that the Company could more easily raise the capital necessary to carry
out its business plan.

BUSINESS DESCRIPTION

         The Company is building a highly integrated,  facility-based convergent
communications  company  that will address the rapidly  expanding  communication
demands  of small  to  medium  size  businesses.  The  Company  believes  that a
convergence  is  occurring  in the  communication  industry as more  traditional
Internet providers become communications  companies and communication  companies
become  Internet  companies.  These factors are creating an environment in which
individuals and businesses and other organizations  perceive a need to establish
Internet  access and an Internet  presence.  Furthermore,  many  businesses have
Internet  requirements  that go beyond  the  simple  access  that most  Internet
service providers offer. These Internet  requirements include security,  network
consulting, high-bandwidth managed access and data services.

         These  services  are most  efficiently  provided by a vendor that has a
local presence so as to ensure these businesses that their Internet requirements
will  receive  priority  treatment.   The  Company  believes  that  through  the
implementation  of its  strategy  to  acquire,  or  roll-up,  computer  hardware
integrators,  telephone  interconnect (phone equipment vendors)  companies,  and
Internet  service  providers and other  synergistic  partners  combined with its
status as a full-service  communications company will enable it to capitalize on
this convergence.

         In addition,  the  Telecommunications  Act of 1996 (the "Telecom Act"),
the  first  comprehensive  rewrite  of  the  Communications  Act  of  1934,  has
dramatically  changed  the  ground  rules  for  competition  and  regulation  in
virtually  all  sectors  of  the   communications   industry,   from  local  and
long-distance   telephone  services,  to  cable  television,   broadcasting  and
equipment manufacturing.

                                       1

<PAGE>

         Under the Telecom Act, a  distinction  is made between  those  carriers
that own and operate their own switch  (facility-based)  and those entities that
do not own their own switch  (non-facility  based) and  utilize  someone  else's
switch.  Under this  legislation,  all  facility-based  carriers are entitled to
equal access to the incumbent local exchange carrier (e.g.,  BellSouth) network.
This  means  that the local  operating  company  must  allow all  facility-based
carriers access to their infrastructure (co-location) at wholesale rates so that
these new entrants  into the  telecommunications  arena can compete  effectively
against the incumbents.  Therefore,  under the Telecom Act, only  facility-based
carriers benefit from the legislative deregulation of the industry that provides
equal   access   to   the   incumbent   local   exchange    carriers    network.
Non-facility-based carriers must gain access or co-location to a switch in order
to benefit from the industry deregulations.

         The  Company  believes  that the  impact  of this  legislation  will be
three-fold.

                  o        Deregulation  will  allow  new-comers,  such  as  USA
                           Digital, to successfully  penetrate the communication
                           markets  if they can offer the  consumer  alternative
                           services at  competitive  prices with the emphasis on
                           quality service.

                  o        The valuations of non-facility based carriers will be
                           drastically  reduced  thus  make the  acquisition  of
                           these  entities both cost effective and attractive to
                           the Company at this time.  Previously,  some of these
                           companies had occupied a very profitable niche in the
                           market place  following the AT&T  divestiture  in the
                           mid-' 80's, but due to the Telecom Act's preferential
                           treatment of facility-based carriers, many switchless
                           resellers  have watched their  valuation  drop from a
                           high of 10 times  monthly  revenues to their  current
                           valuation of 1-3 times monthly revenues.

                  o        A company  that has the ability to satisfy all of the
                           consumers'  communications  needs by providing all of
                           these  products and services  (ie.  phone  equipment,
                           computer hardware/software  integration, local & long
                           distance  services,  and Internet  solutions) through
                           one  service  provider  will  possess  a  competitive
                           advantage and have a greater probability of long term
                           retention of that customer.

                  The Company  intends to capitalize on the  convergence  in the
communications  industry and  legislative  changes  through the  acquisition  of
strategic  partners  that have a recognized  presence  and customer  base in its
particular market and region,  and by offering these newly acquired  customers a
complete package of products and services.

PRODUCTS CURRENTLY OFFERED

                  The  Company  currently  offers  the  following  products  and
services to its customers.

         o        COMMUNICATIONS EQUIPMENT SALES AND SERVICE.

         The  Company  currently   provides   telecommunications   and  computer
equipment sales and service through its wholly owned  subsidiaries  TEAM,  Inc.,
Comsys Inc., and IBTS, which have been marketing their products and services for
14, 19, and 18 years, respectively. More specifically, these companies offer PBX
systems,  electronic key systems,  call technology servers,  voice mail systems,
automatic call distributors and network and computer wiring to their customers.


                                       2
<PAGE>

COMPUTER AND NETWORK INTEGRATION PRODUCTS AND SERVICES.

         The Company offers computer hardware and software,  network integration
technology  and  engineering  products  and  services  for small and medium size
businesses.  More specifically,  the Company offers network and computer wiring,
systems integration services and consulting, fire wall installation,  local area
network ("LAN") and wide area network  ("WAN"),  implementation  and maintenance
and  management  of  those  products  and  services   through  its  wholly-owned
subsidiary,  DSA  Computers,  Inc.  DSA has been  marketing  these  products and
services since 1991.

         o        INTERNET PRODUCTS AND SERVICES.

         The Company currently provides a full line of Internet services through
its wholly owned  subsidiary  Syncom,  Inc. doing  business as "GatorNet".  More
specifically,  through  Gator.net,  the Company  offers Dial up Internet  access
service  to the  business  and  residential  customers,  focused  on  easy  user
interface and access to  information on the World Wide Web.  Through  Gator.net,
USA Digital also  provides  Web  services,  including  Web page  production  and
hosting, Web page design, and Interactive Web-based business services,  database
management,  broadcast  audio and video  applications  and  Internet  marketing.
Gator.Net has been marketing these products for two years.

PRODUCTS TO BE OFFERED IN THE FUTURE

         The Company will continue to provide Internet services,  communications
equipment  products and services,  computer  hardware and software,  and network
integration  products and services.  In addition to these products and services,
the  Company  plans  to begin  offering  a full  line of  local,  long  distance
telephone services,  expanded Internet services (e.g, "VOIP" "DSL" & "ATM"), and
wireless solutions within the next 90 days.

         o        LOCAL, LONG DISTANCE AND WIRELESS TELEPHONE SERVICE

         The Company plans to become a provider of comprehensive  local and long
distance telephone services including:

                  o        Toll free 800/888 calling services;

                  o        Traditional One Plus long distance calling services;

                  o        WATS;

                  o        International telephone services;

                  o        Calling cards;

                  o        Debit cards and operator services;

                  o        Digital  private line services  (including ATM, Frame
                           Relay, WAN and LAN); and

                  o        Traditional local private line services.



                                       3
<PAGE>

         In this regard,  the Company has entered into an agreement  with Lucent
Technologies,  Inc. for the purchase of $25 million of network  equipment over a
three-year  period.  Financing for this  equipment is being  provided by Gallant
Capital and Finance,  LLC.,  pursuant to an agreement  which  provides up to $30
million in financing.  The Company took delivery of Lucent's  initial  equipment
order on July 1, 2000.

         Additionally,  the Company has leased from Siemens one Digital  Central
Office Long Distance Switch, which is installed at the Company's Orlando office.
Once these switches are operational,  the Company will be able to provide all of
the above  products to its  customers in the Orlando,  Tampa,  Gainesville,  and
Miami markets of Florida.  The initial  switches are expected to be  operational
prior to September 1, 2000.

         Further,  once the switches are  operational,  the Company will have an
additional  revenue source by providing  Internet  services to companies who are
providing Internet service, web hosting and local and long distance service, but
which require access to local  telephone  company  connections.  The Company has
developed  a plan  designed  to enable it to expand and to provide  all of these
services to the remaining  eight states in the BellSouth  region within the next
30 months.

         The Company  has entered  into  sales/interconnection  agreements  with
BellSouth,  Sprint and GTE. These  agreements will allow the Company to purchase
network  services from  BellSouth,  Sprint and GTE at cost, as well as to resell
local and long  distance  services to its customers  under a wholesale  purchase
agreement.  These  agreements  are currently in full force,  however,  they will
require an initial  deposit  once the  Company's  switches are  operational  and
service is ordered.

          In order to provide local and long distance telephone services, it was
necessary  for the  Company to be  certified  as a  Competitive  Local  Exchange
Carrier  (CLEC) and  Inter-Exchange  Carrier (IXC) by the Florida Public Service
Commission and the FCC. The Company's CLEC and IXC applications were approved by
the  Florida  Public  Service  Commission  on March 3, 2000 and  April 4,  2000,
respectively.

         In order to  complement  its entry  into the  local  and long  distance
telephone  market,  the Company will offer wireless  telephone  solutions to its
customers.  The Company intends to enter into a resale agreement with a cellular
company to enable the  Company to provide  wireless  services  to its  customers
under the USA Digital, Inc. name. The Company will not be required to obtain any
additional licenses or other regulatory approvals to provide wireless services.

         The Company  does not  currently  generate  revenues  from  co-location
services,  local or long distance  services,  or wireless telephone products and
services.  The  Company  currently  offers  local  and long  distance  telephone
products  and  services to its  customers.  Local  service is offered  under the
re-sale  agreements  with Bell South,  Sprint or GTE.  Long  distance is offered
under a re-sale  agreement  with Qwest.  Until an  agreement  is reached  with a
cellular  company,  the Company will not be able to provide wireless services to
its customers or generate  revenues from the sale of such products and services.
Until  its local and long  distance  telephone  switches  are  operational,  the
Company will not be able to offer co-location services.

         o        INTERNET SERVICES

         On January 6, 2000,  the Company  acquired 100% of the stock in Syncom,
Inc. a Gainesville,  Florida based Internet  Service  provider d/b/a  Gator.net.
Through the  combination  of  Gator.net's  operation  and the  activation of the
Lucent  equipment the Company will be  positioned  to offer the following  broad
array of Internet services to its customers:



                                       4
<PAGE>

                  o        Dedicated   high-speed   broadband   Internet  access
                           services to the small and medium size business  user,
                           including the following:

                  o        ATM   (Asynchronous   Transfer  Mode)  is  a  network
                           protocol that allows the use of multiple transmission
                           protocols  such  as  TCP/IP   (Transmission   Control
                           Protocol/Internet   Protocol).   Utilizing   multiple
                           protocols   allows  for   bandwidth   on  demand  and
                           providing  voice,   data  and  video  over  the  same
                           circuit.  It is the latest  technology  in high-speed
                           broadband  transmission,  and being used as the basis
                           for next-generation networks and switching equipment.

                  o        SDSL  (Synchronous  Digital  Subscriber  Line)  is  a
                           high-speed   digital   telephone    connection   used
                           primarily  for Voice Over IP ("VOIP") and  high-speed
                           transmission   of  voice  and  data   over   standard
                           telephone lines.  Internet Service  Providers provide
                           this  service  to their  subscribers  to  allow  them
                           high-speed Internet connectivity. Transmission is 2.3
                           million bits per second (mbps) in both directions.

                  o        ADSL  (Asymmetric   Digital  Subscriber  Line)  is  a
                           high-speed   digital   telephone   connection,   used
                           primarily for the  high-speed  transmission  of voice
                           and data  over  standard  telephone  lines.  Internet
                           Service  Providers  provide  this  service  to  their
                           subscribers   to  allow  them   high-speed   Internet
                           connectivity.  Transmission is 1.544 million bits per
                           second  (mbps) in one direction and 576 thousand bits
                           per second (kbps) in the other,  although not as fast
                           as SDSL.

                  o        ISDN  (Integrated  Services Digital Network) is a 126
                           kbps digital telephone  connection used primarily for
                           the  transmission  of voice  and  data.  The speed is
                           twice as fast as the  traditional  modem used  today,
                           although not as fast as ADSL.

                  o        T-1 and  Fractional T-1  (Transmission  System 1) and
                           DS-1   (Digital   System   1),   are   high-capacity,
                           high-speed digital four wire circuits used to connect
                           an end user to the  local  telephone  company,  their
                           Internet  service  provider,  or their long  distance
                           company.   It  is  also  used  to  connect  telephone
                           companies  and Internet  companies  together.  T-1 by
                           design  transmits  a digital  signal over a four-wire
                           circuit  at the rate of  1,544,000  bits  per  second
                           (1.544 mbps). By utilizing  special equipment on each
                           end  of  the   circuit   called   channel   banks  or
                           multiplexers,  this one  circuit can be split into 24
                           individual  circuits  at  each  end.  Each  of the 24
                           circuits can either be digital or analog  (voice) and
                           utilizes 65 kbps of the 1.544 mbps.  T-1 is much more
                           cost-effective than utilizing individual lines. A T-1
                           can also be used to extend the distance limitation of
                           a DSL circuit,  provided the appropriate equipment is
                           at both ends.

                  o        DS3 (Digital System 3) is a high-capacity, high-speed
                           digital  4-wire circuit with 28 times the capacity of
                           a T-1 or DS-1. It is the equivalent of 672 individual
                           voice grade circuits.  Telephone companies,  Internet
                           service providers, and long-distance companies use it
                           to connect to one another.

                  o        Dial up access service to the residential  community,
                           focused  on  easy  user   interface   and  access  to
                           information  on the World Wide Web.  The  Company has
                           taken delivery of Lucent Technologies, Inc. equipment
                           that allows them to provide this service.



                                       5
<PAGE>

                  o        Web  services,  including  Web  page  production  and
                           hosting,  Web  page  design,   Interactive  Web-based
                           business  services,  (e.g.  credit card  processing),
                           database   management,   broadcast  audio  and  video
                           applications and Internet marketing.

                  o        Electronic commerce.

                  o        Voice over Internet.

                  o        IP telephony.

                  Simultaneously with its acquisition  program,  the Company has
developed its Internet infrastructure and Super Pop at its Gainesville,  Florida
facility.  This facility is designed to provide  access for the  co-location  of
independent Internet service providers and inter-exchange  carriers to allow for
the integration of high-speed  Internet access and Internet telephony  utilizing
fiber and broadband connectivity.

                  In addition to the businesses discussed above, the Company has
targeted other  businesses that it feels will be synergistic  with the Company's
business plan. These include Internet service providers,  telephone interconnect
companies,   computer   hardware  and  software   companies,   system/   network
integrators, and switchless resellers. To date, the Company's management through
its network of contacts, has identified many of these acquisition candidates and
has closed the  acquisitions of DSA Computers,  Inc.,  C.A.T.  Computers,  TEAM,
Inc.,  Comsys,  Inc., IBTS and Syncom,  Inc. in return for the Company's  stock.
Additionally,  the Company is currently negotiating several further acquisitions
where the consideration would solely be the Company's stock.

MARKET AREA

          The Company's  target market is small to medium size  businesses  that
need assistance  moving into the information age so that they can take advantage
of new markets as well as rapidly  changing  technologies.  These businesses are
generally accustomed to working with a local communication vendor to ensure that
its communication needs receive the highest priority. Through the acquisition of
computer  hardware/network   integrators,   telephones  interconnect  companies,
Internet service providers,  and switchless resellers,  the Company will build a
customer base that will purchase its  convergent  communications  products.  The
Company  intends to confine its  business to the  metropolitan  areas of Florida
(e.g. Orlando,  Tampa,  Gainesville,  Miami, etc.) for the next 9-12 months, and
thereafter,  it  intends  to  expand  into the  remaining  eight  states  in the
BellSouth  region,  which  includes  Florida,  Georgia,  North  Carolina,  South
Carolina, Alabama, Tennessee, Mississippi, Louisiana and Kentucky.

COMPETITION

                  Virtually every aspect of the  telecommunications  industry is
extremely  competitive,  and USA DIGITAL expects that competition will intensify
in the future. The Company faces significant competition from carriers and other
companies  with greater market share and financial  resources.  USA DIGITAL will
compete domestically with incumbent providers (Incumbent Local Exchange Carriers
"ILEC"),  which have historically dominated local  telecommunications,  and with
long distance carriers,  for the provision of long distance services.  Sometimes
the incumbent provider offers both local and long distance  services.  The ILECs
presently  have  numerous  advantages  as a result  of their  historic  monopoly
control over local exchanges.  A continuing  trend toward business  combinations
and  alliances in the  telecommunications  industry may create  significant  new
competitors  to the  Company.  Many  of the  Company's  existing  and  potential
competitors have financial,  personnel and other resources significantly greater
than those of USA Digital.


                                       6
<PAGE>

The  Company  also faces  competition  from  competitors  in every area of their
businesses,   including  competitive  access  providers  operating  fiber  optic
networks, in some cases in conjunction with the local cable television operator.
Several  competitors  have announced the deployment of nationwide fiber networks
using advanced  state-of-the-art  technologies.  AT&T Corp.  ("AT&T") and Sprint
Corporation   ("Sprint")   have  indicated   their   intention  to  offer  local
telecommunications  services  in major  United  States  markets  using their own
facilities,  including,  in  AT&T's  case,  the  announced  acquisition  of  the
facilities and business of Teleport  Communications Group, Inc., or by resale of
the local exchange carriers' or other providers' services.

                  The Company may also be subject to additional  competition due
to the development of new  technologies  and increased  availability of domestic
and international  transmission  capacity.  For example, even though fiber optic
networks are now widely used for long distance transmission, it is possible that
the  desirability  of such  networks  could be  adversely  affected  by changing
technology.

                  The  telecommunications  industry  is  in a  period  of  rapid
technological  evolution,  marked by the introduction of new product and service
offerings and  increasing  satellite and fiber optic  transmission  capacity for
services  similar to those  provided by USA DIGITAL.  The Company cannot predict
which of many possible future product and service offerings will be important to
maintain  its  competitive  position  or what  expenditures  will be required to
develop  and provide  such  products  and  services.  For most of the  Company's
communications services, the factor's critical to customer's choice of a service
provider are cost, ease of use, speed of installation,  quality,  reputation and
in some cases, geography and network size.

PERSONNEL

         As of June 30,  2000,  the  Company  had 47  full-time  employees.  The
employees are not  represented by a collective  bargaining  unit and the Company
considers its relationship with its employees to be good.

ITEM 2.  DESCRIPTION OF PROPERTY

OFFICES/PROPERTY

                  The following  table sets forth certain  information  at March
31, 2000 regarding the Company's office facilities, which are owned or leased by
the Company and certain other information relating to its property at that date.


<TABLE>
<CAPTION>
                                                 ANNUAL             LEASE                SQUARE
                                                  RENT             EXPIRES              FOOTAGE
                                                  ----             -------              -------
<S>                                            <C>             <C>                      <C>
100 West Lucerne Circle, Suite 600
Orlando, FL  32801                             $ 38,892        December 31, 2004         1,852

6702 Benjamin Road, Suite 300
Tampa, FL 33634                                $ 66,000        December 31, 2002         2,400

10001 N.W. 50th Street, Suite 105 Sunrise,
Florida 33351                                  $ 30,000        November 30, 2002         3,400

503 S.W. 2nd Avenue
Gainesville, Florida                             Owned                --                 4,000
</TABLE>


ITEM 3.  LEGAL PROCEEDINGS



                                       7
<PAGE>

         The Company is not involved in any pending legal proceedings other than
routine legal  proceedings  occurring in the ordinary  course of business.  Such
routine  legal  proceedings  in the  aggregate  are believed by management to be
immaterial to the Company's financial condition and results of operations.



                                       8
<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.

                                     PART II

ITEM 5.  MARKET FOR USA DIGITALS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The  Company's  common stock is traded on the OTC  Electronic  Bulletin
Board  under the symbol  "UDIG."  The table  below  shows the high and low sales
price during the periods indicated.  The Company's common stock began trading on
March 26, 1999. At March 31, 2000, the last trading date in the Company's fiscal
year, the Company's  common stock closed at $6.25. At June 14, 2000,  there were
9,754,070 shares of the Company's common stock  outstanding,  which were held of
record by approximately 67 stockholders,  not including  persons or entities who
hold the stock in nominee or "street" name through various brokerage firms.

         The  following  table shows the market range for the  Company's  common
stock based on reported sales prices on the OTC Electronic Bulletin Board.


<TABLE>
<CAPTION>
                       PERIOD                            HIGH (1)               LOW (1)
                       ------                            --------               -------
<S>                                                   <C>                      <C>
Fiscal year ended March 31, 1999
         March 26, 1999 to March 31, 1999 ..........  $      1.7500            $     1.5000

Fiscal year ended March 31, 2000

         Quarter Ended June 30, 1999 ...............         3.2500                  1.5000

         Quarter Ended September 30, 1999 ..........         2.3750                  0.4375

         Quarter Ended December 31, 1999 ...........         1.9375                  0.8125

         Quarter Ended March 31, 2000 ..............        10.8750                  0.6875
</TABLE>

--------------------
(1)      All figures adjusted to reflect a 2 for 1 stock split effected on March
         3, 2000.

         The Company did not pay cash dividends in fiscal year 2000 and does not
intend to do so for the  foreseeable  future.  The Board of Directors  considers
paying dividends, dependent on the results of operations and financial condition
of the Company,  tax considerations,  industry standards,  economic  conditions,
regulatory restrictions and other factors.

                                       9

<PAGE>


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

         The following  discussion  and analysis  should be read in  conjunction
with the financial  statements and related notes included elsewhere in this Form
10-KSB. The Company may from time to time make written or oral  "forward-looking
statements."  These  forward-looking  statements  may be  contained in this Form
10-KSB  filing with the  Securities  and Exchange  Commission  the ("SEC"),  the
Annual  Report  to  Shareholders,  other  filings  with  the  SEC,  and in other
communications  by the  Company,  which are made in good faith  pursuant  to the
"safe harbor"  provisions  of the Private  Securities  Litigation  Reform Act of
1995. The words "may",  "could",  "should",  "would",  "believe",  "anticipate",
"estimate",  "expect", "intend", "plan", and similar expressions are intended to
identify forward-looking statements.

         Forward-looking  statements  include  statements  with  respect  to the
Company's  beliefs,  plans,  objectives,   goals,  expectation,   anticipations,
estimates  and   intentions,   that  are  subject  to   significant   risks  and
uncertainties.  The following factors, many of which are subject to change based
on  various  other  factors  beyond the  Company's  control,  and other  factors
discussed  in this  Form  10-KSB,  as well as other  factors  identified  in the
Company's filings with the SEC and those presented  elsewhere by management from
time to time,  could cause its financial  performance to differ  materially from
the plans, objectives,  expectations, estimates and intentions expressed in such
forward-looking statements:

         o    the  strength  of the United  States  economy  in general  and the
              strength  of the local  economies  in which the  Company  conducts
              operations;
         o    the timely  development  of and  acceptance  of new  products  and
              services and the  perceived  overall  value of these  products and
              services by users,  including  the  features,  pricing and quality
              compared to competitors' products and services;
         o    the willingness of users to substitute  competitors'  products and
              services for the Company's products and services;
         o    the  Company's  success in gaining  regulatory  approval  of their
              products and services, when required;
         o    the impact of technological changes;
         o    acquisitions; and
         o    the  Company's  success at  managing  the risks  involved in their
              business.

         The list of important  factors is not  exclusive.  The Company does not
undertake to update any forward-looking statement, whether written or oral, that
may be made from time to time by or on behalf of the Company.

GENERAL

         On March 5, 1999, USA Digital, Inc. (the "Company") was incorporated in
the State of Nevada.  The Company is a holding company whose mission is to build
a highly  integrated  convergent  communications  company.  The Company seeks to
acquire   Internet  service   providers,   telephone   interconnect   companies,
computer/network integrators, and switchless resellers.

                                       10

<PAGE>

          On March 4, 1999, Blazoon Systems Incorporated ("Blazoon"), a Colorado
corporation, an inactive publicly held company with no recent operating history,
acquired  100%  of  the  outstanding  common  stock  of  Diverse  Capital  Corp.
("Diverse"), a Florida corporation incorporated on July 9, 1998, in exchange for
1,235,000  shares of Blazoon common stock.  From its inception  through March 4,
1999,  Diverse  was  engaged  in  the  development  of  its  business  plan  and
infrastructure to become a convergent communications company.  Subsequent to the
acquisition,  the prior  shareholders of Diverse owned  approximately 55% of the
voting common stock of Blazoon.

          On March 9, 1999,  the Company  consummated  a merger  agreement  with
Blazoon with the Company as the surviving  entity.  The Company entered into the
March 9, 1999 transaction with Blazoon in order to: (1) redomicile  Blazoon as a
Nevada  Corporation in order to take  advantage of the more favorable  corporate
law and franchise tax of Nevada;  (2) effect the name change from Blazoon to USA
Digital,  Inc.; and (3) to create a public market for USA Digital,  Inc.  common
stock so that the Company could more easily raise the capital necessary to carry
out its business plan.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND MARCH 31, 1999

         Total assets  increased  $2.8 million to $3.6 million at March 31, 2000
from March 31, 1999. The increase is primarily  attributable  to the sale of the
Company's  common  stock in a private  placement  completed  in February of 2000
which raised gross proceeds of $1.4 million, the conversion of debt to equity in
the Company and  acquisitions  completed  by the Company  during the year.  More
specifically,  the Company  acquired DSA Computers,  Inc.  ("DSA"),  TEAM,  Inc.
("TEAM")  and  Syncom,  Inc.  (doing  business  as  Gator.net,  "Gator.net")  as
subsidiaries and the acquisition of the assets of Computer  Advanced  Technology
Corp.  ("CAT") during the year.  These  acquisitions  in assets of $0.2 million,
$0.1 million,  $0.5 million and $0.09 million,  respectively,  being acquired by
the Company at the acquisition date. The increase in the Company's cash and cash
equivalents of $0.8 million over the year ended March 31, 2000 was primarily due
to the  aforementioned  sale of common  stock,  conversion of debt to equity and
acquisitions.  In addition,  the Company's  property and equipment  increased by
approximately $0.7 million.

         Total liabilities  increased $0.9 million to approximately $1.7 million
at March 31, 2000 from March 31, 1999.  This  increase is  attributed  to a $0.3
million  increase in  accounts  payable and  accrued  expenses,  a $0.1  million
increase in current capitalized lease obligations and a $0.1 million increase in
non-current capitalized lease obligations associated with its order of telephone
switching  equipment.  In addition,  the redemption value of the preferred stock
issued in connection with the  acquisitions of DSA and TEAM was accounted for as
temporary equity in the amount of $0.3 million. The Company also incurred a $0.2
million liability for unearned revenue during the year.

                                       11

<PAGE>

RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2000 AND MARCH 31, 1999

         The Company  incurred a net loss of $1.5  million,  or $0.26 per share,
for the year ended March 31, 2000 compared to $0.6 million,  or $0.26 per share,
for the period from July 9, 1998 (inception) to March 31, 1999.

         For the year ended March 31, 2000,  the Company  generated $2.5 million
in  total   revenues.   The  Company  did  not  generate  any  revenues  in  the
corresponding   period  of  1999,   in  which  the  Company  was  still  in  its
developmental  stage.  Of these  revenues,  $1.3 million  were  generated by the
integrated  communications  services  segment of the Company's  operations which
includes   Internet   products  and  services   offered  by  Gator.net  and  the
communications  equipment products and services offered by TEAM. The acquisition
of  Gator.net  in  January  of 2000  and TEAM in July of 1999  accounts  for the
increase in revenues  for this  segment  during the year. Net incom for TEAM and
Gator.net was $0.08 million during the year.

         During the year ended March 31, 2000,  the parent  company,  which will
offer local & long distance  telephone service and high speed Internet access to
its customers,  did not generate revenues as its network  infrastructure was not
yet operational.  Consequently,  the parent company sustained a $1.4 million net
loss for the year. The net loss for the parent  company was comprised  primarily
of fees paid to consultants  and expenses  incurred to develop the telephone and
Internet  infrastructure  of the Company.  The Company  projects that it will be
able to provide all of its services by September 1, 2000.

         $1.2 million of the Company's  revenues for the year were  generated by
the information  integration services of the Company's operations which includes
the network and computer  hardware and  software,  wiring,  systems  integration
services,  consulting,  fire wall  installation,  local area network ("LAN") and
wide area network ("WAN") implementation and maintenance and management of those
products  offered by DSA.  The  acquisition  of DSA accounts for the increase in
revenues for this segment during the year. This segment  incurred a $0.1 million
net loss during the year.

         The Company's total operating  expenses  increased $3.4 million to $4.0
million  for the year ended  March 31,  2000 from the  period  from July 9, 1998
(inception)  to March 31,  1999.  This  increase in expenses  is  attributed  to
increases in the cost of equipment sales and direct wages and network  operating
expenses reflecting  operational costs and professional fees incurred to support
the newly acquired companies.  The increase is also attributed to a $0.3 million
increase  in fees  paid to  consultants  to  assist  with the  formation  of the
infrastructure  of the Company.  Operating  expenses for the period from July 9,
1998  (inception) to March 31, 1999 were  comprised  primarily of consulting and
start up  costs.  $0.9  million  of  expenses  were paid in the form of stock or
options which were measured at fair value when issued.

         Net  loss  applicable  to  common  stockholders   reflects  $18,750  of
accretions of preferred stock.  Accretions are recorded on a straight-line basis
over three years.

                                       12

<PAGE>


SUBSEQUENT EVENTS

         The Company acquired Comsys, Inc. and International  Business Telephone
in April of 2000. Because these companies were acquired  subsequent to March 31,
2000, no revenues from either of these  companies are reflected in the Company's
financial  statements  included in this report.  These  entities  are  currently
generating  revenues and incurring  expenses for the  integrated  communications
services segment of the Company.

LIQUIDITY AND CAPITAL RESOURCES

         The  Company's  strategy  is to acquire  established  Internet  service
providers,  computer/network integrators,  telephone interconnect companies, and
switchless  resellers mostly in exchange for stock in USA Digital.  As such, the
Company does not  anticipate  requiring  large sums of money to  consummate  its
anticipated  acquisitions.   However,  the  Company  does  anticipate  incurring
expenses relating to the completion of future  acquisitions,  required deposits,
and completing its network infrastructure. To that end, the Company has received
a firm  commitment  on a $30.0  million line of credit of which $24.0 million is
committed to the purchase of Lucent  Technologies  equipment  and the  remaining
$6.0 million may be used for general  corporate  and working  capital  purposes.
Additionally,  the Company is planning to raise additional  capital in a private
placement of its common stock.  The Company believes that its line of credit and
the funds raised in the  proposed  private  placement  together  with  operating
revenues will be  sufficient  to fund its working  capital needs for the next 24
months.



                                       13
<PAGE>

ITEM 7.FINANCIAL STATEMENTS

         The consolidated  audited financial statements for the period March 31,
1999 to March 31, 2000 are  included  in pages F-1  through  F-22 of this Annual
Report on Form 10-KSB. This includes the following financial statements:

         Report of Independent Auditors
         Consolidated Balance Sheet -- At March 31, 2000;
         Consolidated  Statements of Operations -- Year Ended March 31, 2000 and
         period from July 9, 1998 (inception) to March 31, 1999;
         Consolidated  Statements  of  Changes in  Shareholders'  Equity -- Year
         Ended  March 31, 2000  and  period  from  July 9, 1998  (inception)  to
         March 31, 1999;
         Consolidated  Statements of Cash Flows -- Year Ended March 31, 2000 and
         period from July 9, 1998 (inception) to March 31, 1999; and
         Notes to Consolidated Financial Statements -- Year Ended March 31, 2000
         and period from July 9, 1998 (inception) to March 31, 1999.

ITEM 8.  CHANGES AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
         DISCLOSURE

         On May 3, 2000,  USA Digital  declined  to  reappoint  its  independent
public  accountant,  Weinberg & Company,  P.A.  ("Weinberg") for the fiscal year
ended  March 31,  2000.  The  decision to decline to  reappoint  Weinberg as the
Company's  independent  public  accountant was  recommended  and approved by the
Board of Directors.

         During the two most recent  fiscal  years  ending on March 31, 2000 and
March 31,  1999,  the  financial  statements  of the Company did not contain any
adverse opinion or a disclaimer of opinion, and the financial statements did not
contain any  qualified  or modified  opinion as to  uncertainty,  audit scope or
accounting  principles.  In addition,  there were no  disagreements  between the
Company  and  Weinberg  on any matter of  accounting  principles  or  practices,
financial  statement   disclosure,   or  auditing  scope  or  procedure,   which
disagreement,  if not  resolved to  Weinberg's  satisfaction,  would have caused
Weinberg to make  reference in connection  with its report to the subject matter
of the disagreement.

         Effective May 3, 2000, the Company  appointed  Ernst & Young LLP as the
Company's  independent  public  accountant  for the fiscal year ending March 31,
2000.

                                    PART III

ITEM 9.  DIRECTORS  AND  EXECUTIVE  OFFICERS  OF USA  DIGITAL;  COMPLIANCE  WITH
         SECTION 16(A) OF THE EXCHANGE ACT

         The information included in USA Digital, Inc.'s Proxy Statement for the
2000 Annual Meeting of Shareholders  ("Proxy  Statement") is incorporated herein
by reference:  "Proposal 1, Election of Directors" and the following  subsection
entitled  "Information  About  Board of  Directors  and  Management":  "Board of
Directors,"  "Committees of the Board," "Executive  Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance."



                                       14
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

         The  information  included in USA Digital,  Inc.'s  Proxy  Statement is
incorporated  herein  by  reference:   "Directors'   Compensation,"   "Executive
Compensation" (including the Summary Compensation Table), and "Benefit Plans".

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  information  included  in  USA  Digital,  Inc.'s  Proxy
Statement is incorporated  herein by reference:  "Stock Ownership of Management"
and "Security Ownership of Certain Beneficial Owners and Management."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  following   information   included  in  the  Proxy   Statement  is
incorporated herein by reference: "Transactions with Certain Related Persons."

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits.  The following  exhibits are either filed as part of
                  this report or are incorporated herein by reference:


      Exhibit No.                    Description
      -----------                   -------------
         3.1      Certificate of Incorporation of USA Digital, Inc. (1)

         3.2      Bylaws of USA Digital, Inc. (1)

         4.3      Specimen  of  Stock  Certificate  of  USA  Digital,  Inc.  (1)

         10.1     Employment  Agreement  between USA  Digital,  Inc. and Mark D.
                  Cobb (1)

         10.2     Consulting  Agreement  between  USA  Digital,  Inc.  and  Dunn
                  Capital Corporation (1)

         10.3     Consulting  Agreement  between  USA  Digital,  Inc.  and  Bell
                  Entertainment, Inc. (1)

         10.4     1998 Compensatory Stock Option Plan (1)

         10.5     1998 Employee Stock Compensation Plan (1)

         10.6     Agreement  and Plan of  Reorganization  by and  among  Blazoon
                  Systems,  Inc. and Diverse Capital  Corporation dated February
                  26, 1999 (1)

         10.7     Acquisition Agreement made and entered into as of July 2, 1999
                  by and among USA Digital, Inc., DSA Computer,  Inc., and David
                  Seal (1)

         10.8     Amendment to  Acquisition  Agreement by and among USA Digital,
                  Inc., DSA Computer, Inc. and David Seal (1)

         10.9     Employment  Agreement by and between DSA  Computers,  Inc. and
                  David Seal (1)

         10.10    Acquisition  Agreement  made  and  entered  into as of June 7,
                  1999, by and among, USA Digital,  Inc., Telephone  Engineering
                  and Maintenance, Inc., and H. Ralph Cole (1)



                                       15
<PAGE>

         10.11    Employment   Agreement  by  and  between  Telephone  Equipment
                  Maintenance, Inc., and H. Ralph Cole (1)

         10.12    Merger Agreement dated March 4, 1999 between USA Digital, Inc.
                  and Blazoon Systems, Inc. (1)

         10.13    Employment  Agreement  by and between USA  Digital,  Inc.  and
                  Peter J. Lyons

         10.14    Employment  Agreement  by and between USA  Digital,  Inc.  and
                  Kenneth D. Allen

         21.1     Subsidiaries of the Registrant (1)

         27.1     Financial  Data  Schedule   (Submitted  only  with  filing  in
                  electronic format)

--------------------
    (1)  Incorporated by reference  to the Registration  Statement on Form 10-SB
         (File #000-27375) as  filed with the Securities and Exchange Commission
         on September 17, 1999, as amended.

    (b)  Reports on Form 8-K.

         NONE.

         This Form 10-KSB contains certain forward looking statements consisting
of estimates with respect to the financial condition,  results of operations and
business of USA Digital,  Inc.  that are subject to various  factors which could
cause actual results to differ  materially from these  estimates.  These factors
include: changes in general,  economic and market conditions, or the development
of an adverse interest rate environment that adversely affects the interest rate
spread  or  other  income   anticipated   from  USA  Digital's   operations  and
investments.


                                       16
<PAGE>

                                   SIGNATURES

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

USA DIGITAL, INC.

By: /s/  Peter J. Lyons
    ---------------------------------------
    Peter J. Lyons, Chief Executive Officer

         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>
                  Name                                      Title                          Date
                  ----                                      -----                          ----
<S>                                              <C>                                <C>
/s/ Peter J. Lyons                                Chief Executive Officer and a     July 14, 2000
----------------------------------------          Director (principal executive
Peter J. Lyons                                    officer)

/s/ Mark D. Cobb                                  President and a Director          July 14, 2000
----------------------------------------          (principal accounting officer)
Mark D. Cobb

/s/Donald E. Darden
----------------------------------------          Director                          July 14, 2000
Donald E. Darden

/s/  Daniel J. Montague
----------------------------------------          Director                          July 14, 2000
Daniel J. Montague
</TABLE>


                                       17
<PAGE>


                                USA Digital, Inc.

                        Consolidated Financial Statements

                      Year ended March 31, 2000 and Period
                 from July 9, 1998 (inception) to March 31, 1999




                                    CONTENTS

<TABLE>
<S>                                                                                                            <C>
Report of Independent Auditors..................................................................................F-2
Report of Independent Auditors..................................................................................F-3

Consolidated Financial Statements

Consolidated Balance Sheet......................................................................................F-4
Consolidated Statements of Operations...........................................................................F-5
Consolidated Statements of Changes in Stockholders' Equity......................................................F-6
Consolidated Statements of Cash Flows...........................................................................F-7
Notes to Consolidated Financial Statements......................................................................F-9
</TABLE>

                                                                             F-1

<PAGE>


                         REPORT OF INDEPENDENT AUDITORS




To the Board of Directors
USA Digital, Inc.

We have audited the accompanying consolidated balance sheet of USA Digital, Inc.
as of March 31,  2000 and the related  consolidated  statements  of  operations,
changes in  stockholders'  equity and cash flows for the year then ended.  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 audit.  The financial  statements  of USA Digital,  Inc. for the period from
July 9, 1998 (inception) to March 31, 1999, were audited by other auditors whose
report  dated July 15,  1999 except for Notes 6 and 5(D) as included in the 1999
financial  statements,  as to which the dates are August 5, 1999 and October 18,
1999, respectively expressed an unqualified opinion on those statements.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. These 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 consolidated 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 audit provides a reasonable  basis
for our opinion.

In our opinion,  the 2000 financial statements referred to above present fairly,
in all material  respects,  the consolidated  financial position of USA Digital,
Inc. as of March 31, 2000 and the consolidated results of its operations and its
cash  flows for the year then  ended in  conformity  with  accounting  standards
generally accepted in the United States.

                                               /s/ Ernst & Young LLP


Tampa, Florida
July 12, 2000


                                                                             F-2
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors of:
  USA Digital, Inc.

We  have  audited  the  accompanying   statements  of  operations,   changes  in
stockholders'  equity and cash flows of USA Digital,  Inc. (a Development  Stage
Company) for the period from July 9, 1998  (inception) to March 31, 1999.  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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
These 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 consolidated  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 audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the results of operations and cash flows of USA Digital,
Inc.  for the  period  from  July 9,  1998  (inception)  to  March  31,  1999 in
conformity with generally accepted accounting principles.



                                                     WEINBERG & COMPANY, P.A.




Boca Raton, Florida
July 15, 1999 except for Notes 6 and 5(D)
as to which the dates are August 5, 1999
and October 18, 1999, respectively


                                                                             F-3
<PAGE>

                                USA DIGITAL, INC.

                           CONSOLIDATED BALANCE SHEET

                                 March 31, 2000

<TABLE>
<S>                                                                                           <C>
                                             ASSETS
Current assets:
   Cash and cash equivalents                                                                    $     856,445
   Accounts receivable, net of $125,000 allowances                                                    214,917
   Inventories, net                                                                                    46,486
   Employee receivables                                                                                35,967
   Other current assets                                                                                 7,125
                                                                                                ----------------
Total current assets                                                                                1,160,940

Property and equipment, net                                                                         1,404,660
Intangible assets, net                                                                                987,482
Deposits and other non-current assets                                                                  76,375
                                                                                                ----------------
Total assets                                                                                    $   3,629,457
                                                                                                ================

              LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses                                                        $     373,923
   Employee payables                                                                                   50,173
   Current portion of capital lease obligations                                                       165,313
                                                                                                ----------------
Total current liabilities                                                                             589,409

Capital lease obligations                                                                             831,440
Unearned revenue                                                                                      167,781
Non-current liabilities                                                                                82,956
Equipment loans                                                                                        30,822
Redeemable preferred stock, $0.001 par value, 90,000 shares authorized,
   issued and outstanding                                                                             303,750

Stockholders' equity:
   Common stock, $0.001 par value, 50,000,000 shares authorized,
      7,928,000 shares issued and outstanding                                                           7,928
   Additional paid-in capital                                                                       3,786,567
   Deferred consulting expense                                                                       (127,111)
   Accumulated deficit                                                                             (2,044,085)
                                                                                                ----------------
Total stockholders' equity                                                                          1,623,299
                                                                                                ----------------
Total liabilities, redeemable preferred stock and stockholders' equity                          $   3,629,457
                                                                                                ================
</TABLE>


See accompanying notes.


                                                                             F-4
<PAGE>

                                USA DIGITAL, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

       Year ended March 31, 2000 and Period from July 9, 1998 (inception)
                               to March 31, 1999

<TABLE>
<CAPTION>
                                                                                      Periods ended March 31,
                                                                                      2000              1999
                                                                                ------------------------------------
<S>                                                                                <C>                <C>
Revenues                                                                           $   2,523,386      $        --

Costs and expenses:
   Cost of equipment sales and direct wages                                            1,529,698               --
   Network operating expenses                                                          1,016,760           18,424
   Consulting services                                                                   748,210          433,623
   Bad debts expense                                                                     125,000           24,311
   Telephone service                                                                     106,026            4,575
   Travel and entertainment                                                              102,791            2,912
   Professional services                                                                  80,958           27,589
   Rent expense                                                                           74,543               --
   Automobiles and equipment                                                              67,669            5,000
   Depreciation and amortization                                                          62,481              250
   Interest expense                                                                       40,850               --
   Other expenses                                                                         37,718            2,000
   Executive compensation                                                                     --           37,333
                                                                                ------------------------------------
                                                                                       3,992,704          556,017
                                                                                ------------------------------------
Net loss                                                                           $  (1,469,318)     $  (556,017)
                                                                                ====================================

Reconciliation of net loss to net loss applicable to common
   stockholders:
   Net loss                                                                        $  (1,469,318)     $  (556,017)
   Preferred stock accretions                                                            (18,750)              --
                                                                                ------------------------------------
Net loss applicable to common stockholders                                         $  (1,488,068)     $  (556,017)
                                                                                ====================================
Net loss per common share--basic and diluted                                       $       (0.26)     $     (0.26)
                                                                                ====================================
Weighted average common shares outstanding--basic and diluted
                                                                                       5,733,216        2,182,354
                                                                                ====================================
</TABLE>



See accompanying notes.


                                                                             F-5
<PAGE>

                                USA DIGITAL, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

       Year ended March 31, 2000 and Period from July 9, 1998 (inception)
                                to March 31, 1999

<TABLE>
<CAPTION>
                                                                       Additional      Deferred
                                             Common Stock               Paid-in       Consulting         Accumulated
                                        Shares           Amount         Capital         Expense            Deficit         Total
                                   -------------------------------------------------------------------------------------------------
<S>                                  <C>              <C>           <C>              <C>            <C>              <C>
Balance, July 9, 1998                        --        $     --      $         --     $       --     $        --      $        --
Common stock issuance - founders      1,770,000             885                --             --              --              885
Stock issued to consultants              50,000              25            24,975             --              --           25,000
Options issued to consultants                --              --           614,378       (296,641)             --          317,737
Stock issued for business-ODT           650,000             325                --             --              --              325
Stock issued for business-
  Blazoon                             2,000,000           1,000            (1,000)            --              --               --
Issuance of common stock for
  cash                                  289,000             145           144,355             --              --          144,500
Stock issued to consultants             540,000             270            94,906             --              --           95,176
Net loss                                     --              --                --                       (556,017)        (556,017)
                                   -------------------------------------------------------------------------------------------------
Balance, March 31, 1999               5,299,000           2,650           877,614       (296,641)       (556,017)          27,606
Issuance of common stock for
  cash                                2,005,000           1,003         1,680,997             --              --        1,682,000
Stock issued to consultants and
  other service providers               820,000             410           473,840             --              --          474,250
Stock issued for business-SYNCOM        110,000              55           329,945             --              --          330,000
Stock issued for business-CAT            50,000              25            24,975             --              --           25,000
Stock issued for property and
  equipment                              66,000              33            88,092             --              --           88,125
Stock issued to employees                50,000              25            24,975             --              --           25,000
Conversions of debt to equity           100,000              50            49,950             --              --           50,000
Stock issued for debt service            78,000              38            38,962             --              --           39,000
Rescission of business
  combination-ODT                      (650,000)           (325)               --             --              --             (325)
Options issued to employees                  --              --           180,500             --              --          180,500
Options issued to consultants                --              --             4,125             --              --            4,125
Accretions of redeemable
  preferred stock                            --              --                --             --         (18,750)         (18,750)
Amortization of deferred
  compensation                               --              --                --        169,530              --          169,530
Two-for-one stock split                      --           3,964            (3,964)            --              --               --
Other activity                               --              --            16,556             --              --           16,556
Net loss                                     --              --                --             --      (1,469,318)      (1,469,318)
                                   -------------------------------------------------------------------------------------------------
Balance, March 31, 2000               7,928,000        $  7,928      $  3,786,567     $ (127,111)    $(2,044,085)     $ 1,623,299
                                   =================================================================================================
</TABLE>


See accompanying notes.


                                                                             F-6
<PAGE>

                                USA DIGITAL, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

       Year ended March 31, 2000 and Period from July 9, 1998 (inception)
                               to March 31, 1999

<TABLE>
<CAPTION>
                                                                                      Periods ended March 31
                                                                                      2000              1999
                                                                                ------------------------------------
<S>                                                                                <C>                <C>
CASH FLOW FROM OPERATING ACTIVITES
Net loss                                                                           $  (1,469,318)     $  (556,017)
Adjustments to reconcile net loss to net cash used in operating activities:
     Stock-based employment, consulting service and debt service                         892,405          437,913
     Provisions for bad debts                                                            125,000           24,311
     Depreciation and amortization                                                        62,481              250
     Changes in operating assets and liabilities:
         Accounts receivable                                                            (246,536)              --
         Inventories                                                                      33,160               --
         Employee receivable/payable                                                      23,779               --
         Other current and non-current assets                                             (9,632)         (57,065)
         Accounts payable and accrued expenses                                           127,355           96,718
         Unearned revenue                                                                 45,118               --
                                                                                ------------------------------------
Net cash used in operating activities                                                   (416,188)         (53,890)

CASH FLOW FROM INVESTING ACTIVITIES
Purchases of businesses                                                                 (218,665)              --
Purchases of equipment                                                                  (275,159)          (2,506)
Increase in loans receivable                                                                  --          (24,311)
                                                                                ------------------------------------
Net cash used in investing activities                                                   (493,824)         (26,817)

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock                                                 1,682,000          145,710
Proceeds from the issuance of subordinated notes                                          50,000               --
Payments on capital leases and notes payable                                             (30,546)              --
                                                                                ------------------------------------
Net cash provided by financing activities                                              1,701,454          145,710

Increase in cash and cash equivalents                                                    791,442           65,003
Cash and cash equivalents--beginning of year                                              65,003               --
                                                                                ------------------------------------
Cash and cash equivalents--end of year                                             $     856,445      $    65,003
                                                                                ====================================
</TABLE>


See accompanying notes.


                                                                             F-7
<PAGE>

                                USA DIGITAL, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)

       Year ended March 31, 2000 and Period from July 9, 1998 (inception)
                               to March 31, 1999

<TABLE>
<CAPTION>
                                                                                      Periods ended March 31
                                                                                      2000              1999
                                                                                --------------------------------------
<S>                                                                              <C>                  <C>
NONCASH INVESTING ACTIVITIES
Purchase of telecommunications equipment under capital leases                    $       246,753      $     750,000
                                                                                ======================================
Purchase of equipment and building with 66,000 shares of common stock                     88,125                 --
                                                                                ======================================
Purchases of businesses by issuance of 160,000 shares of common stock                    355,000                 --
                                                                                ======================================
Purchases of businesses by issuance of 90,000 shares of preferred stock                  285,000                 --
                                                                                ======================================


NONCASH FINANCING ACTIVITIES
Conversion of subordinated debentures into 100,000 shares of common stock                 50,000                 --
                                                                                ======================================
Rescission of ODT purchase transaction and cancellation of 650,000 shares of
   common stock                                                                              325                 --
                                                                                ======================================
1999 recapitalization in connection with purchase of business for 2,000,000
   shares of common stock.                                                                    --                 --
                                                                                ======================================
Accretion of redeemable preferred stock                                                   18,750                 --
                                                                                ======================================

OTHER CASH FLOW INFORMATION
Cash paid for interest                                                                    $3,350                 --
                                                                                ======================================
</TABLE>


See accompanying notes.


                                                                             F-8
<PAGE>

                                USA DIGITAL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 March 31, 2000


1. BUSINESS AND ORGANIZATION

Business

USA  Digital,  Inc.  (the  Company)  operates in two  segments:  the  integrated
communications   services  segment  and  the  information  integration  services
segment.  Products and services in the integrated communications segment include
local,  long-distance  and enhanced  telecommunications  services.  Products and
services in the information  integration  services  segment include  consulting,
network architecture design and computer equipment sales. The Company's services
and products are  delivered  principally  to business  customers in the State of
Florida.

The Company operated as a development stage enterprise prior to the acquisitions
of businesses described in Note 3, at which time development stage reporting was
discontinued.

Organization

On March 4, 1999, Blazoon Systems Incorporated  (Blazoon),  an inactive publicly
held company with no operating  history,  consumated the  acquisition of Diverse
Capital Corp. In connection with the acquisition, Blazoon (i) tendered 1,235,000
shares of common  stock to the  stockholders  of Diverse in exchange for 100% of
the issued and outstanding  common stock of Diverse,  and (ii) tendered  625,000
shares of its Class A  Preferred  Stock in  exchange  for 100% of the issued and
outstanding  preferred  stock of Diverse.  The preferred stock is convertible to
common stock on a one-for-one ratio for a one year period beginning  February 2,
2000.  The  preferred  stock has a dividend  preference,  is  nonvoting,  and is
subject to  redemption  at a $4.00  liquidation  value at the  Company's  option
beginning February 2, 2004. Subsequent to the acquisition agreement,  the former
shareholders  of Diverse owned  approximately  55% of the voting common stock of
Blazoon.  Under  Generally  Accepted  Accounting  Principles,  a  Company  whose
stockholders  receive over 50% of the stock of the legal  acquirer in a business
combination is considered the acquirer for accounting purposes. Accordingly, the
transaction  is accounted  for as an  acquisition  of Blazoon by Diverse,  and a
recapitalization of Diverse.

On March 5, 1999, the Company incorporated under the laws of Nevada. On March 9,
1999,  the Company  consummated  a merger  agreement  with  Blazoon,  a State of
Colorado  corporation,  to effect a redomicile and name change of Blazoon,  with
USA Digital, Inc. as the surviving entity.


                                                                             F-9
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



1. BUSINESS AND ORGANIZATION (CONTINUED)

The consolidated  balance sheet  subsequent to the acquisition  includes the net
assets of Blazoon and the Company at historical  costs and the operations of the
Company  since its  inception  and the  operations  of Blazoon since the date of
acquisition.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The  accompanying  financial  statements  have been prepared in accordance  with
accounting  principles  generally accepted in the United States. The preparation
of financial  statements  in accordance  with  accounting  principles  generally
accepted  in the  United  States  requires  management  to  make  estimates  and
assumptions  that affect the reported  assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its wholly owned subsidiaries.  All significant  intercompany  transactions have
been eliminated.

Cash Equivalents

For purposes of the  statement of cash flows,  the Company  considers all highly
liquid debt  instruments  acquired with an original  maturity of three months or
less to be cash equivalents.

Revenue Recognition

The Company  recognizes  revenue on  integrated  communications  services in the
period  that  the  service  is  provided  and  earned.  Revenue  on  information
integration services is generally recognized when the services and equipment are
provided.  Revenue on arrangements involving services and equipment generally is
recognized  upon  completion  of the  implementation.  Finally,  in the  case of
equipment  sales,  revenue is recorded upon  delivery.  In all  instances  where
customer  acceptance  criteria are present,  the Company  defers  revenue  until
formal  acceptance  has  been  received.  Unearned  revenue  represents  amounts
collected from customers for integrated  communication services,  which have not
yet been rendered.  Costs of revenues  include wages of direct employees and the
cost of information systems and telecommunications equipment.

Inventories

Inventories, consisting principally of telecommunications and computer equipment
held for sale,  are carried at the lower of cost (using the first-in,  first-out
method)  or  market.  As of March 31,  2000  inventories  are net of  $25,000 in
reserves for obsolescence.


                                                                            F-10
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property and Equipment

Property and equipment are stated at cost.  Equipment  held under capital leases
is stated at the lower of fair  value of the asset or the net  present  value of
the future  minimum lease  payments at the inception of the lease.  Depreciation
and  amortization  are  calculated  using the  straight-line  method  over lives
ranging from 4 to 7 years for equipment and building  improvements  and 30 years
for buildings.

Intangible Assets

Intangible  assets,  consisting  principally of  trademarks,  customer lists and
goodwill, arose in connection with business combinations.  Intangible assets are
stated  at  cost  and  amortized  using  the  straight-line  method  over  their
respective estimated useful lives.

Long-lived Assets

In accordance  with  Statement of Financial  Accounting  Standards No. 121 (SFAS
121),  Accounting  for the  Impairment of Long-lived  Assets and for  Long-lived
Assets to be Disposed of, the Company reviews its long-lived assets,  consisting
principally of property and equipment and intangible assets, for impairment when
events or changes in  circumstances  indicate  that the  carrying  value of such
assets may not be  recoverable.  This  review  consists of a  comparison  of the
carrying value of the asset with the asset's expected future  undiscounted  cash
flows,  without  interest.  Estimates  of expected  future cash flows  represent
management's best estimate based upon reasonable and supportable assumptions and
projections.  If the expected future cash flows exceed the carrying value of the
asset,  no impairment is recognized.  If the carrying value of the asset exceeds
the  expected  future cash flows,  an  impairment  exists and is measured by the
excess of the  carrying  value over the fair  value of the asset.  There were no
impairments in any period presented.

Financial Instruments

The carrying value of the Company's  financial  instruments,  including cash and
cash equivalents, accounts receivable, accounts payable, loans and capital lease
obligations approximate their fair market values.

                                                                            F-11
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

The Company  accounts for income taxes under  Statement of Financial  Accounting
Standards No. 109,  Accounting for Income Taxes (SFAS 109). SFAS 109 is an asset
and liability  approach that requires the recognition of deferred tax assets and
liabilities  for the expected  future tax  consequences of events that have been
recognized in the Company's financial statements or tax returns.

Advertising

The Company  expenses  advertising as incurred.  During the year ended March 31,
2000, advertising expenses amounted to approximately $43,000.

Loss per Share

The Company has applied the  provisions of  Statements  on Financial  Accounting
Standards No. 128, Earnings Per Share, which establishes standards for computing
and presenting  earnings or loss per share.  Basic earnings or loss per share is
computed by dividing  income or loss  available  to common  shareholders  by the
weighted  average  number of  common  shares  outstanding  for the  period.  The
calculation  of diluted  earnings  per share  includes  the  effects of dilutive
common stock equivalents, of which there were none during the periods presented.

Comprehensive Income

Statements on Financial  Accounting  Standards No. 130, Reporting  Comprehensive
Income  (SFAS  130) was  issued  in June  1997.  SFAS 130  requires  that  total
comprehensive   income  be  disclosed  with  equal  prominence  as  net  income.
Comprehensive income is defined as changes in stockholders' equity, exclusive of
transactions with owners such as capital contributions and dividends. During the
periods  presented,  the Company's  comprehensive  income (loss) equaled its net
loss.


                                                                            F-12
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock Split

All share and per share  information  presented  in the  accompanying  financial
statements has been retroactively  restated to reflect a two-for-one stock split
of the Company's common stock which occurred on March 3, 2000.

Stock-based Compensation

The Company accounts for stock-based  compensation in accordance with Accounting
Principles  Board Opinion No. 25,  Accounting  for Stock Issued to Employees and
related interpretations,  because the alternative fair value accounting provided
under  Statements  on Financial  Accounting  Standards  No. 123  Accounting  for
Stock-based Compensation (SFAS 123) is not required. Accordingly, in cases where
exercise  prices equal or exceed fair market  value,  the Company  recognizes no
compensation  expense for the stock  option  grant.  In cases where the exercise
prices are less than the fair market value,  compensation  expense is recognized
over the period of performance or the vesting period.

The Company  accounts for  issuances of common stock and common stock options to
non-employee  consultants and equipment  vendors in accordance with SFAS 123 and
related interpretations.  Pursuant to SFAS 123, the value of common stock issued
for  non-employee  services and equipment is based upon quoted market prices for
the Company's  common stock.  The value of options  issued to  non-employees  is
based upon a fair-value model for stock options  (principally the  Black-Scholes
model).

New Accounting Pronouncement

Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
establishes  accounting and reporting  standards for derivative  instruments and
related  contracts and hedging  activities.  This statement is effective for all
fiscal  quarters and fiscal  years  beginning  after June 15, 1999.  The Company
believes that its future adoption of this pronouncement will not have a material
effect on the Company' financial position or results of operations.

Reclassifications

Certain prior year amounts have been  reclassified  in order to conform with the
2000 presentation.


                                                                            F-13
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



3. BUSINESS COMBINATIONS

During July 1999, the Company  completed the purchase of the outstanding  common
stock of Telephone Engineering and Maintenance, Inc. (TEAM) for 50,000 shares of
Series B  Redeemable  Convertible  Common  Stock  valued at $ 158,500  ($200,000
liquidation  preference).  The Company also incurred $100,000 in legal and other
transaction    expenses.    TEAM   is   engaged   in   selling   and   servicing
telecommunications  equipment.  The  transaction was accounted for as a purchase
where the  purchase  price was  allocated to the fair values of net tangible and
intangible  assets  acquired.  The  excess of the  purchase  price over the fair
values of assets acquired  amounted to $228,000 and is being amortized using the
straight-line method over 15 years.

During July 1999, the Company  completed the purchase of the outstanding  common
stock of DSA  Computers,  Inc.  (DSA) for 40,000  shares of Series B  Redeemable
Convertible Common Stock valued at $126,500 ($160,000  liquidation  preference).
The Company also incurred $59,000 in legal and other transaction  expenses.  DSA
is  engaged in the sale of  network  integration  equipment  and  services.  The
transaction  was  accounted  for as a  purchase  where  the  purchase  price was
allocated to the fair values of net tangible and intangible assets acquired. The
excess of the purchase price over the fair values of assets acquired amounted to
$119,000 and is being amortized using the straight-line method over 15 years.

During October 1999, the Company,  through a wholly owned subsidiary,  completed
the purchase of certain assets of Computer  Advanced  Technology Corp. (CAT) for
cash of  approximately  $61,000  and  50,000  shares of common  stock  valued at
approximately $25,000. The transaction was accounted for as a purchase where the
purchase  price was allocated to the fair values of net tangible and  intangible
assets acquired. No significant goodwill arose from this purchase.


                                                                            F-14
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



3. BUSINESS COMBINATIONS (CONTINUED)

During January 2000, the Company completed the purchase of Syncom, Inc. (SYNCOM)
for common stock valued at approximately $330,000 and cash advances of $123,000.
SYNCOM is an  Internet  Service  Provider  (ISP)  serving  principally  business
customers.  The  transaction  was accounted for as a purchase where the purchase
price was  allocated to the fair values of net tangible  and  intangible  assets
acquired.  The excess of the  purchase  price,  plus  approximately  $130,000 of
assumed  liabilities,  over the fair values of net tangible  assets acquired was
preliminarily  recorded as customer lists in the amount of $465,000 and goodwill
of $146,388.  These amounts are being amortized using the  straight-line  method
over 5 years and 15  years,  respectively.  The  assumed  liabilities  which are
preliminary,  arose in connection with a bankruptcy  proceeding involving SYNCOM
prior  to  its  acquisition  by  the  Company.  The  amounts  pertaining  to the
bankruptcy  proceeding  have  extended  payment  terms and are  included  in the
accompanying balance sheet as non-current liabilities.

The  operating  results  of the above  acquisitions  have been  included  in the
Company's  consolidated  financial statements from the date of each acquisition,
respectively.

On an  unaudited  pro forma  basis,  assuming  that the above  acquisitions  had
occurred  on April 1,  1999,  consolidated  revenues,  net loss and net loss per
common share (basic and diluted) would have been  $4,021,000,  $(1,595,400)  and
$(0.28), respectively.  However, pro forma operating information is not intended
to be indicative  of the results of operations  that would have occurred had the
aforementioned  purchase  transactions occurred on April 1, 1999. In the opinion
of management,  the unaudited pro forma effects of the  aforementioned  purchase
transactions on the prior year financial statements are not meaningful.


                                                                            F-15
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at March 31, 2000:


<TABLE>
<S>                                                                        <C>
         Telecommunications equipment                                      $ 1,202,495
         Buildings and improvements                                            220,000
                                                                       ------------------
                                                                             1,422,495
         Less accumulated depreciation                                          17,835
                                                                       ------------------
         Property and equipment, net                                         1,404,660
                                                                       ==================
</TABLE>

Depreciation  expense for the year ended March 31, 2000 and the period from July
9, 1998 (inception) to March 31, 1999 was $17,585 and $250, respectively.

The Company leases telephone-switching  equipment under a capital lease expiring
during 2004. The cost basis of the property that was held under capital lease as
of March 31, 2000 was $996,753 ($750,000 at March 31, 1999).

Minimum  future lease  payments under the capital lease (using an 11.5% rate) as
of March 31, 2000 are as follows:

<TABLE>
<S>                                                                                       <C>
         For the year ended March 31
         2001                                                                              $    263,916
         2002                                                                                   263,916
         2003                                                                                   263,916
         2004                                                                                   296,916
         2005                                                                                   263,916
         Later                                                                                       --
                                                                                        -------------------
         Total minimum lease payments                                                         1,319,580
         Less amount representing interest                                                     (322,827)
                                                                                        -------------------
         Present value of net minimum lease payment                                        $    996,753
                                                                                        ===================
</TABLE>


                                                                            F-16
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



5. INTANGIBLE ASSETS

Intangible assets consisted of the following at March 31, 2000:


<TABLE>
<CAPTION>
                                                                                                  Lives
                                                                                        -------------------
<S>                                                                        <C>                       <C>
         Goodwill                                                          $   493,178               15
         Customer lists                                                        499,200                5
         Trademark and other                                                    40,000               10
                                                                       ------------------
                                                                             1,032,378
         Less accumulated amortization                                          44,896
                                                                       ------------------
         Intangible assets, net                                            $   987,482
                                                                       ==================
</TABLE>

Amortization  expense for the year ended  March 31,  2000 was  $44,896  (none in
1999).

6. STOCKHOLDERS' EQUITY

Preferred Stock

The Company has authorized  5,000,000  undesignated  shares of Class A Preferred
Stock,  $.001 par value and 5,000,000  undesignated  shares of Class B Preferred
Stock,  $.001 par value.  During July 1999,  the Board of  Directors  designated
90,000  shares  of Class B  Preferred  Stock as Class B  Convertible  Redeemable
Preferred Stock.  The designated  shares are entitled to one vote per share, are
convertible  into common stock on a  five-to-one  (ten-to-one  post split) basis
after July 2000, and are redeemable by the holder or Company after April 2002 at
the $4 per share liquidation preference.

The  Class  B  Convertible  Redeemable  Preferred  Stock  were  utilized  in the
purchases of TEAM and DSA during July 1999 and recorded outside of equity at the
present value of future liquidation obligation, or $285,000. The Company records
periodic  accretions to increase the carrying  amount of the preferred  stock to
its liquidation obligation ($360,000) over three years.


                                                                            F-17
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



6. STOCKHOLDERS' EQUITY (CONTINUED)

Stock Compensation

The 1998 Compensatory Stock Option Plan (the Plan) has been adopted by the Board
of Directors of the Company and approved by the Company's stockholders. The Plan
was  developed  to provide a means  whereby  directors,  officers,  consultants,
advisors or agents,  employees or professional  service providers of the Company
may be granted  nonqualified  stock  options  to  purchase  common  stock of the
Company. The Plan does not provide for the issuance of "Incentive stock options"
within the meaning of Section 422 of the Internal  Revenue Code. As of March 31,
2000 and 1999,  the Company has  reserved  1,500,000  shares of common stock for
issuance upon the exercise of options granted under the Plan.

The exercise price of options  granted under the Plan shall not be less than 85%
of the Fair  Market  Value of a share of common  stock on the date the option is
granted.  The  exercise  period,  expiration  date and vesting  period  shall be
determined by the Compensation Committee of the Board of Directors, however, the
vesting  period may not exceed 10 years.  If the vesting period is not stated in
the granting resolution, then the option shall vest immediately.

As of March 31, 2000 and 1999, no options have been granted under the Plan.

During the year ended March 31, 2000, the Company issued 1,765,000 stock options
to certain directors,  employees and one consultant of the Company, resulting in
a total of 5,640,000 stock options outstanding as of March 31, 2000.

In  accordance  with SFAS 123,  for  options  issued to  employees,  the Company
applies APB Opinion No. 25 and related  interpretations  in  accounting  for the
options issued. Accordingly,  compensation cost of $180,500 was recognized as of
March 31, 2000,  computed in  accordance  with the intrinsic  value method.  Had
compensation  cost for the Company's  options been determined  based on the fair
market  value of the options at the grant date,  consistent  with SFAS 123,  the
Company's  net loss for the years  ended March 31, 2000 and 1999 would have been
increased to the pro-forma amounts indicated below.


                                                                            F-18
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



6. STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
                                                                              Period ended March 31
                                                                             2000              1999
                                                                       ------------------------------------
<S>                                     <C>                                <C>                 <C>
         Net loss                       As reported                        $ (1,469,318)       $ (556,017)
                                        Pro forma                            (2,152,392)         (740,757)

         Net loss per share             As reported                        $      (0.26)       $    (0.26)
                                        Pro forma                                 (0.38)            (0.34)
</TABLE>

The effect of applying  Statement No. 123 is not likely to be  representative of
the effects on reported net income for future years due to, among other  things,
the effects of vesting.

For options issued to consultants,  the Company  applies SFAS 123.  Accordingly,
consulting expense of $317,737 was charged to operations during the period ended
March 31,  1999 with  deferred  consulting  expense of $296,641  presented  as a
deduction from stockholders'  equity at March 31, 1999. The deferred  consulting
expense is  recognized  ratably  over the  vesting  period of the stock  options
through 2002. For the year ended March 31, 2000  consulting  expense of $169,530
has been  recognized,  resulting in deferred  consulting  expense of $127,111 at
March 31, 2000.  In addition,  $4,125 was charged to operations  for  additional
stock options granted and vested during the year ended March 31, 2000.

For financial statement disclosure purposes, the fair market value of each stock
option granted during 2000 and 1999 was estimated on the date of grant using the
Black-Scholes  Option-Pricing  Model  in  accordance  with  SFAS 123  using  the
following  weighted-average  assumptions:  expected dividend yield 0%, risk-free
interest rate of 5.59%, volatility 101% and expected term of three years.

A summary of the options issued under the  employment and consulting  agreements
as of March 31, 2000 and 1999 and changes during the years is presented below:


                                                                            F-19
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



6. STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
                                                     March 31, 2000                        March 31, 1999
                                           ------------------------------------ -------------------------------------
                                                             Weighted Average                      Weighted Average
                                           Number of Options  Exercise Price    Number of Options   Exercise Price
                                           ------------------------------------ -------------------------------------
<S>                                              <C>               <C>                <C>                <C>
Stock options:
   Balance at beginning of period                3,875,000         $1.06                     --          $  --
   Granted                                       1,765,000          2.16              3,875,000           1.06
   Exercised                                            --            --                     --             --
   Forfeited                                            --            --                     --             --
                                           ------------------------------------ -------------------------------------
Balance at end of period                         5,640,000         $1.40              3,875,000          $1.06
                                           ==================================== =====================================

Options exercisable at end of period

Weighted average fair value of options
   granted during the period                                       $1.08                                 $0.26
</TABLE>

The following table summarizes  information  about stock options  outstanding at
March 31, 2000:

<TABLE>
<CAPTION>
                     Options Outstanding                                  Options Exercisable
      --------------------------------------------------- ----------------------------------------------------
                           Number         Weighted            Weighted         Number         Weighted
          Range of     Outstanding at      Average             Average     Exercisable at      Average
          Exercise        March 31,       Remaining            Exercise       March 31,        Exercise
           Price            2000       Contractual Life         Price            2000            Price
      --------------------------------------------------- --------------------------------------------------
<S>                       <C>             <C>                   <C>           <C>               <C>
       $0.50 - $1.50      3,875,000       5.32 Years            $1.06         2,000,000         $0.73
        0.50 - 3.00       1,425,000       6.49 Years             2.02           425,000          1.32
        1.25 - 1.50          40,000       5.26 Years             1.38            20,000          1.25
        1.50 - 3.50         300,000       6.61 Years             2.92            50,000          1.50
                      ----------------------------------- --------------------------------------------------
                          5,640,000       5.68 Years            $1.40         2,495,000         $0.85
                      =================================== ==================================================
</TABLE>



                                                                            F-20
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



6. STOCKHOLDERS' EQUITY (CONTINUED)

The following table summarizes  information  about stock options  outstanding at
March 31, 1999:

<TABLE>
<CAPTION>
                     Options Outstanding                                 Options Exercisable
      --------------------------------------------------- ---------------------------------------------------
                           Number         Weighted            Weighted         Number         Weighted
          Range of     Outstanding at      Average             Average     Exercisable at      Average
          Exercise        March 31,       Remaining            Exercise       March 31,        Exercise
           Price            1999       Contractual Life         Price            1999            Price
      --------------------------------------------------- ---------------------------------------------------
<S>                       <C>             <C>                   <C>           <C>               <C>
       $0.50 - $1.50      3,875,000       6.25 Years            $1.06          1,375,000         $0.61
</TABLE>

Employee Stock Compensation Plan: The 1998 Employee Stock Compensation Plan (the
Employee  Compensation  Plan) has been  adopted by the Board of Directors of the
Company and approved by the  Company's  stockholders.  The plan was developed to
provide a means whereby directors,  officers,  consultants,  advisors or agents,
employees or professional service providers of the Company may be granted common
stock of the  Company.  Grants  under the  Employee  Compensation  Plan shall be
determined by the Compensation Committee of the Board of Directors.  As of March
31, 2000 and 1999, the Company has reserved 1,000,000 shares of common stock for
issuance under the Employee  Compensation Plan and no shares may be issued under
the Employee  Compensation Plan after April 30, 2003. No shares have been issued
under the Employee Compensation Plan as of March 31, 2000 and 1999.

7. INCOME TAXES

As of March 31, 2000,  the Company had net deferred tax assets of  approximately
$570,000, which resulted primarily from net operating loss carryforwards.

Generally accepted accounting principles require a valuation allowance to reduce
the deferred tax assets reported if, based on the weight of the evidence,  it is
more likely than no that some portion or all of the deferred tax assets will not
be realized.  After  consideration of all evidence,  both positive and negative,
management has determined that a valuation  allowance of $570,000 is appropriate
as of March 31, 2000.

As of March 31,  2000,  the Company has a net  operating  loss  carryforward  of
approximately $689,000 for tax purposes which will be available to offset future
taxable income. These carryforwards expire through the year 2020.

8. LITIGATION

On February 2, 1999,  Diverse Capital  Corporation,  the Company's  predecessor,
acquired  Orlando Digital  Telephone  Corporation  (ODT) in exchange for 650,000
shares of  Diverse  common  stock and  625,000  shares  of  Diverse  Convertible
Preferred  A Stock.  The  650,000  shares of  common  stock  were  issued to ODT
shareholders. Diverse reserved the right at the time of the closing to obtain an
appraisal  substantiating  that the  approximate  value of ODT was $2.8 million.
Subsequently, the Company obtained an appraisal, which did not substantiate such
value,  and,  on May 14,  1999,  in the  Circuit  Court in and for  Hillsborough
County,  Florida  filed a  complaint  against  ODT and its  former  shareholders
seeking  rescission of the ODT  acquisition.  The  Defendants  filed a Motion to
Dismiss,  which was served on the Company on June 19, 1999. During October 1999,
the counterparties  agreed to rescind the purchase transaction at which time the
Company cancelled the related common shares.

                                                                            F-21
<PAGE>

                                USA DIGITAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



9. SEGMENT INFORMATION

The table below summarizes the Company's  segment data related to the integrated
communications  services and information  integration  services  segment for the
year ended March 31, 2000. During 1999, the Company was in the development stage
without identifiable segments.

<TABLE>
<CAPTION>
                                                                                  Year ended March 31, 2000
                                         -------------------------------------------------------------------------------------------
<CAPTION>                                   Communications                  Integration
                                               Services                      Services            Eliminations          Consolidated
                                         --------------------------------------- ---------------------------------------------------
<S>                                         <C>                             <C>                  <C>                    <C>
Revenues from external customers             $ 1,286,806                     $1,236,580                  --              $2,523,386
Intersegment revenue                                  --                         22,797           $ (22,797)                     --
Depreciation and amortization                     51,066                         11,415                  --                  62,481
Net loss                                       1,329,887                        139,431                  --               1,469,318
Interest expense                                  39,021                          1,829                  --                  40,850
Stock-based employment,
consulting service and debt service              892,405                             --                  --                 892,405

Total assets as March 31, 2000                 3,343,143                        286,314                  --               3,629,457

</TABLE>


10. SUBSEQUENT EVENTS

During  April 2000,  the  Company  purchased  the  outstanding  common  stock of
Communications  Systems, Inc. (ComSys), an interconnection  company, for Company
common  stock  valued at  approximately  $988,000.  The Company  will follow the
purchase method of accounting for this purchase.  However, the components of the
allocation of the purchase price are currently preliminary.

During  April 2000,  the  Company  purchased  the  outstanding  common  stock of
International  Business  Telephone  Systems,  Inc.  (IBTS),  an  interconnection
company, for Company common stock valued at approximately  $400,000. The Company
will follow the purchase  method of accounting for this purchase.  However,  the
components of the allocation of the purchase price are currently preliminary.

During May 2000, the Company  received a firm commitment on a $30.0 million line
of credit  that  expires in five  years.  Purchases  under the  credit  line are
subject to approval by the lender.  During June 2000, the Company  committed $24
million  of the line  for the  purchase  of  telecommunications  equipment.  The
balance of the line is  available  for general  corporate  and  working  capital
purposes.


                                                                            F-22