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, 2001

                         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.)

                           601 S. HARBOUR ISLAND BLVD.
                                    SUITE 103
                              TAMPA, FLORIDA 33602
                    (Address of principal executive offices)
                                 (813) 221-8373
                           (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, $.001 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, 2001 were
$4,584,094.

     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 July 2,
2001: $8,953,529.

     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
10,844,820 shares outstanding as of June 30, 2001

                       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
                                -----------------
                                                                           PAGE
                                                                           ----
PART I......................................................................1
   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.......8

PART II.....................................................................8
   ITEM 5.        MARKET FOR USA DIGITAL'S COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS.......................................8
   ITEM 6.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS.......................9
   ITEM 7.        FINANCIAL STATEMENTS.....................................15
   ITEM 8.        CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE......................16

PART III...................................................................16
   ITEM 9.        DIRECTORS AND EXECUTIVE OFFICERS OF USA DIGITAL;
                  COMPLIANCE WITH SECTION 16(A)  OF THE EXCHANGE ACT.......16
   ITEM 10.       EXECUTIVE COMPENSATION...................................16
   ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT...............................................17
   ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........17
   ITEM 13.       EXHIBITS AND REPORTS ON FORM 8-K.........................18




<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF THE BUSINESS

GENERAL

          USA Digital, Inc. (the "Company" or "USA DIGITAL") is a highly
integrated convergent communications company. The Company operates in two
identifiable industry segments, principally within the state of Florida. The
Integrated Communications Services Segment provides businesses with
telecommunications equipment implementations and enhanced services. The
Information Integration Services Segment provides businesses with information
system equipment and integration services. The Company has acquired and seeks to
acquire Internet service providers, telephone interconnect companies,
computer/network integrators, and switchless resellers to operate within one or
both of these industry segments. Finally, the Company is certified as a
facilities-based Competitive Local Exchange Carrier (CLEC) in Florida, Georgia,
North and South Carolina. While the Company is not currently providing local
exchange services, as discussed below, the Company's ultimate state of business
provides for full-integrated telecommunication services to principally business
customers.

          On March 5, 1999, the Company was incorporated in the State of
Nevada.

          On March 4, 1999, Blazoon Systems Incorporated ("Blazoon"), an
inactive publicly held company with no recent operating history, acquired 100%
of the outstanding common stock of Diverse Capital Corp. ("Diverse"), 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) re-domicile 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.

         On July 9th 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). DSA is engaged in the sale of network integration equipment and
services and is included in the Company's Information Integration Services
Segment. The transaction was accounted for as a purchase.

       On August 5th 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 $158,000
($200,000 liquidation preference). TEAM is engaged in selling and servicing
telecommunications equipment and is included in the Company's Integrated
Communications Services Segment. The transaction was accounted for as a
purchase.

       On December 1, 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. CAT is engaged in the sale of network integration
equipment and services and is included in the Company's Information Integration
Services Segment. The transaction was accounted for as a purchase.

<PAGE>


       On January 6, 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
residential customers, and is included in the Company's Integrated
Communications Services Segment. The transaction was accounted for as a
purchase. In May 2001 Syncom sold its residential dial-up customer base to
Gainesville Regional Utility for net cash proceeds of $164,139. The loss of
$332,328 on this transaction was recorded during the year ended March 31, 2001
to reflect the impairment in the net book value of the assets.

       On April 20, 2000, the Company completed the purchase of the outstanding
common stock of International Business Telephone Systems (IBTS) in exchange for
62,000 shares of common stock valued at $379,750. IBTS is a telecommunications
interconnection company and is included in the Company's Integrated
Communications Segment. The transaction was accounted for as a purchase.

       On April 28, 2000, the Company completed the purchase of the outstanding
common stock of Communications Systems, Inc. (ComSys) in exchange for 158,000
shares of common stock valued at $1,008,412. ComSys is a telecommunications
interconnection company and is included in the Company's Integrated
Communications Segment. The transaction was accounted for as a purchase.

       On December 8, 2000, the Company completed the purchase of certain assets
of Progressive Technical Services, Inc. (PTSI) in exchange for 10,000 shares of
common stock valued at $53,164 and $20,000 cahs. PTSI is a telecommunications
interconnection company and is included in the Company's Integrated
Communications Segment. The transaction was accounted for as a purchase.

BUSINESS DESCRIPTION

         The Company is building a highly integrated, convergent communications
company, through a combination of merger and acquisition activities and internal
network design and development, which is planned to address the rapidly
converging and expanding telecommunication and information systems demands of
small to medium size businesses. The Company has a unique and multifaceted
business strategy that includes an aggressive Acquisition/Roll-up Plan of
private companies that poses the Company's industry focus. The acquired
operational companies will create immediate critical mass, and a revenue stream,
while providing a customer base into which USA DIGITAL will ultimately market
and cross-sell its planned comprehensive suite of Next Generation Business
Solutions and offerings, including information systems, such as Local Area
Networks, telecommunications systems and, ultimately, telecommunications
services, such as local and data services.

         USA DIGITAL is focused on providing a full suite of Next Generation
Business Solutions for the small to medium business customer. Most
communications companies typically have an "If I build it they will come"
strategy. USA DIGITAL has an acquisition program designed to acquire a customer
base it can migrate onto its network and to which it can market its Next
Generation Business Solutions. The Company plans to provide products and
services that will allow small to medium businesses to enter the Next generation
information age smoothly and cost effectively, which allows them to compete with
larger more established companies.

         The uniqueness of USA DIGITAL's approach is the acquisition strategy
combined with the economic model, through which USA DIGITAL will realize
immediate revenue and an existing customer base. USA DIGITAL began its
acquisition program in Florida and will expand throughout the BellSouth nine
state region.

                                       2

<PAGE>


         USA DIGITAL ultimately intends to offer the principally business
customers of the acquired companies local, long distance and enhanced-data
services through the Interconnection Agreements currently in place with various
Incumbent Local Exchange Carriers, including BellSouth, Verizon and Sprint.
These facility-based Agreements allow USA DIGITAL to provide these services
utilizing the Unbundled Network Element Protocol (UNE-P), where the Company is
able to lease access to certain specific elements of the Incumbent Local
Exchange Carriers network, without investing in expensive network equipment.
However, at some point in the future, the Company plans to build its proprietary
network when conditions support the acquisition of sufficient capital and
related technology proliferates in the market that supports the Company's
technology platforms.

          The second phase of the Company's strategy is to build a Next
Generation Internet Protocol Asynchronous Transfer Mode (IP/ATM) packet network,
initially throughout the southeastern United States, beginning in Florida. USA
DIGITAL will migrate the customers being serviced on the UNE-P to this Next
generation network, and then migrate the remaining customers of the acquired
companies onto the new network, by providing them cost effective bundled
business solutions. In this regard, in May 2000, the Company entered into an
agreement with Lucent Technologies, Inc. ("Lucent") for the purchase of $25
million of network equipment over a three-year period. Lucent introduced the
Company to Gallant Capital and Finance LLC ("Gallant Capital"). Financing for
the purchase of this network equipment was to be provided by Gallant Capital
pursuant to an agreement, which provided for up to $30 million in financing. The
Company took delivery of Lucent's initial equipment order on July 1, 2000.
However, on March 1, 2001 Lucent informed the Company that it had discontinued
the PathStar(TM) product line, and has requested the return of the equipment
that had already been delivered.

         In addition, Lucent has informed the Company that it will no longer
honor the Company's financing agreement with Gallant Capital. Although Lucent
has offered the Company an alternate solution to the canceled PathStar(TM)
product line, it has conditioned the alternate solution on the Company obtaining
additional financing acceptable to Lucent. Lucent has taken this position
despite the fact that Gallant Capital has informed USA Digital that its
financing for the Lucent equipment remains in place. Under the circumstances,
USA Digital believes it is in its best interest to immediately commence the
evaluation of network equipment of the other major vendors, and with interest
rates down, to look for other funding sources for whatever network solution it
decides to deploy.

         As a result of these developments involving Lucent and Galant, and the
general down turn in the telecommunications industry and economy, in part
causing the Company's recurring operating losses and negative operating cash
flows, the Company has been forced to terminate an existing lease on the Siemens
DCO/CS long distance switch, to suspend expansion and development of its
telecommunications network and to significantly curtail administrative and
network expenditures. If the Company does not obtain additional funding on
acceptable terms, it will be unable to complete its network infrastructure and
execute on its business strategies and objectives. See "Management's Discussion
and Analysis of Financial Condition and results of Operations-Liquidity and
Capital Resources."

         The third phase of the Company's strategy is an out of region mergers
and acquisition program designed to acquire companies that believe in USA
DIGITAL's vision and strategy. The ultimate goal is to build a nationwide,
solutions based, Integrated Computer and Communications Provider (ICCP) Company
that will compete effectively in the growing communications and computer
marketplace utilizing our business solutions. Although the Company was able to
complete five acquisitions between March of 1999 and April of 2000, the
depressed capital markets and the Company's recurring operating losses and
negative operating cash flows made it difficult to complete additional
acquisitions since that time. As a result, the Company has made only one
acquisition since April of 2000, has sold the Syncom residential customer base
and has identified other assets of the Company for possible sale. While
management is aggressively pursing additional funding sources, there can be no
assurance that the Company's financial condition or the capital markets will
improve in a manner that will enable the Company to make additional
acquisitions.

                                       3

<PAGE>


         The 1996 "Telecommunications Act", combined with the technological
advances of Next generation broadband switching equipment has created a cost
effective window of opportunity that far exceeds anything previously experienced
in the communications or computer industries to date. Through the deployment of
Next generation packet technology and switching systems, USA DIGITAL's costs to
build and operate this network will be 50% less than the costs paid by existing
service providers who are utilizing older narrowband legacy equipment. This new
broadband technology allows USA DIGITAL to provide up to 12 voice lines and a
1.544 m.b. data channel over a single copper pair which creates a break even
point per switch hub of approximately 500 customers

         The Company has already begun to capitalize on these opportunities
through the completion of six acquisitions currently generating in excess of $4
million in annual revenue and having an active combined customer base of over
8,500 business customers. The Company believes that its these strategies and
elements that will allow USA DIGITAL to be one of the first of a new breed of
company called Integrated Computer and Communications Providers (ICCP), and
should provide early profitability and return on investment for its investors
and shareholders.

         The Company also 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, by identifiable industry segment:

         INTEGRATED COMMUNICATIONS SERVICES

         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.

         INFORMATION INTEGRATION 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. These services are also offered by Computer Advanced
Technology Solutions, Inc., a newly formed subsidiary that was a spin off of the
assets of CAT Computers from DSA Computers.

PRODUCTS TO BE OFFERED IN THE FUTURE

                  The Company will continue to provide 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, and long distance telephone
services, within the next 90 days.

                                       4

<PAGE>


                  LOCAL, AND LONG  DISTANCE SERVICES

         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.

         Prior to deploying its Next generation network, USA DIGITAL intends to
offer, to the customers of the acquired companies, local and long distance
services through the Interconnection Agreements already in place with various
Incumbent Local Exchange Carriers. These Agreements allow USA DIGITAL to provide
these services without investing in expensive network equipment and by utilizing
the Unbundled Network Element Platform (UNE-P) provided for in the Agreements,
USA DIGITAL will be able to build reasonably margined revenue (40%) prior to
network deployment.

         In this regard, the Company entered into interconnection/re-sale
agreements with GTE Corp. covering their 37 state region and Bell Atlantic Corp.
covering 7 of their 14 states. With the recent merger of Bell Atlantic and GTE
forming Verizon Communications, USA DIGITAL now has agreements covering the vast
majority of Verizon's U.S. locations. The Company has also executed agreements
with Bell South covering their 9-state region, Southwestern Bell Telephone Co.
covering their 13-state region, Sprint covering their 18-state region and Quest,
covering their 14-state region. These agreements give USA DIGITAL
interconnection agreements covering Arizona, Arkansas, Alabama, California,
Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana,
Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi,
Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, New York, North
Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina,
South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia,
Wisconsin, and Wyoming. Now that USA DIGITAL has agreements covering the vast
majority of the United States, it sets the stage for the Company's future
expansion plans. It will also allow the Company to take advantage of acquisition
opportunities that are outside of its initial footprint.

          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, Internet, 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.

                                       5


<PAGE>

         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 local and long distance 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. However, as
discussed above, the depressed capital markets and the Company's recurring
operating losses and negative operating cash flows have made it difficult to
complete additional acquisitions. While management is aggressively pursing
additional funding sources, there can be no assurance that the Company's
financial condition or the capital markets will improve in a manner that will
enable the Company to make additional acquisitions.

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, telephone 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

         Every aspect of the telecommunications and information integration
industries 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. 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.

                                       6

<PAGE>

         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, 2001, the Company had 43 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, 2001
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>

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

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

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

503 S.W. 2nd Avenue                              Owned         --                        4,000
Gainesville, Florida

601 S. Harbour Island Blvd., Suite 103           $40,000      September 30, 2005         2,000
Tampa, Florida 33602

</TABLE>


ITEM 3.  LEGAL PROCEEDINGS

         On or about January 12, 2001, Metropolitan Life Insurance Company filed
a one-count suit against USA DIGITAL in the Circuit Court of the Ninth Judicial
District in and for Orange County Florida, for damages in excess of $15,000. The
suit alleges breach of a lease for office space located at 135 West Central
Boulevard, Suite 840, Orlando, Florida. On February 2, 2001, USA DIGITAL
answered the Complaint, admitting that it had failed to pay its lease payments
for November and December 2000, but affirmatively asserting that USA DIGITAL
never took possession of the premises and Metropolitan Life has failed to


                                       7

<PAGE>


mitigate its damages by re-letting the premises. The parties settled the dispute
via arbitration on May 23, 2001 whereby the Company has agreed to pay
Metropolitan Life Insurance Company the sum of $55,000 as payment in full, on or
before August 24, 2001. This amount has been recognized as a liability in the
March 31, 2001 financial statements.

         On September 18, 2000, the Company filed a Complaint against H. Ralph
Cole, Jr. ("Cole") and June Cole in the Thirteenth Judicial Court in and for
Hillsborough County, Florida, styled USA DIGITAL, Inc. and Telephone Engineering
and Maintenance, Inc. v. H. Ralph Cole Jr. and June Cole, Case No. 00006974. The
lawsuit relates to an Acquisition Agreement dated June 7, 1999, whereby the
Company acquired the stock of Telephone Engineering and Maintenance, Inc.
("TEAM") from Cole, the sole owner of all issued and outstanding shares of TEAM.
The lawsuit also relates to a Stock Pledge Agreement, and Employment Agreement
executed in conjunction with the acquisition. The lawsuit is based on Cole's
breaches of the Acquisition Agreement and misrepresentations that induced the
Company to enter into the Acquisition Agreement and related agreements. The
Lawsuit seeks money damages for Cole's misrepresentations and misappropriation
of the Company and/or TEAM's property. The lawsuit also seeks possible
rescission of the acquisition. No discovery has occurred and the Cole's have
filed no positive claims against the Company or TEAM nor asserted any
affirmative defense to the lawsuit.

         On or about November 19, 2000, the parties agreed to settle the lawsuit
and executed a letter setting forth the settlement terms whereby the company
would allow Cole to convert his existing Convertible Preferred Class B Series 1
into 196,463 shares of common stock, not the 500,000 he would have otherwise
been entitled to (effectively canceling the 303,537 shares). The 196,463 shares
are to be put into an escrow account and are subject to a five-year leakage
agreement and to offset for claims or liabilities asserted or suffered by the
Company as a result of certain prior actions taken or omitted by Cole while an
employee or owner of TEAM. Although Cole signed a term sheet with the above
terms and conditions, he has refused to execute a final document. Therefore, the
Company is continuing with the lawsuit and expects to prevail.

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

         None



ITEM 5.  MARKET FOR USA DIGITAL'S 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, 2001, the last trading date in the Company's fiscal
year, the Company's common stock closed at $1.00. At June 30, 2001, there were
10,844,820 shares of the Company's common stock outstanding, which were held of
record by approximately 81 stockholders, not including persons or entities who
hold the stock in nominee or "street" name through various brokerage firms.

                                       8

<PAGE>


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


                     PERIOD                     HIGH (1)               LOW (1)

         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

         YEAR ENDED MARCH 31, 2001

         Quarter Ended June 30, 2000             8.0000                 5.0000

         Quarter Ended September 30, 2000        7.5312                 4.4375

         Quarter Ended December 31, 2000         6.7500                 1.1562

         Quarter Ended March 31, 2001            2.5000                 1.0000

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

     (1) All figures adjusted to reflect a 2 for 1 stock split effected on March
6, 2000.

         The Company did not pay cash dividends in fiscal years 2000 or 2001 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.

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.

                                       9

<PAGE>

         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

       The Company is building a highly integrated, convergent communications
company that will address the rapidly expanding communication demands of small
to medium size businesses. The Company operates in two identifiable industry
segments, principally within the state of Florida. The Integrated Communications
Services Segment provides businesses with telecommunications equipment
implementations and enhanced services. The Information Integration Services
Segment provides businesses with information system equipment and integration
services. Through its Integrated Communications Services Segment, the Company
currently provides telecommunications and computer equipment sales and service
through its wholly owned subsidiaries, Telephone Engineering and Maintenance,
Inc. ("TEAM"), Communications Systems, Inc. ("Comsys"), and International
Business Telephone Systems, Inc. ("IBTS"), which have been marketing their
products and services for 14, 19, and 18 years, respectively. Through its
Information Integration Services segment, the Company also offers computer
hardware and software, network integration technology and engineering products
and services for small and medium size businesses through its wholly owned
subsidiaries, DSA Computers, Inc. ("DSA"), which has been selling these products
and services since 1991, and Computer Advanced Technology Solutions, Inc. a
newly formed subsidiary and spin off of DSA Computers.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001 AND MARCH 31, 2000

         Total assets decreased $371,091 to approximately $3.3 million at March
31, 2001 from March 31, 2000. The decrease is primarily attributable to the
removal and of network equipment of approximately


                                       10

<PAGE>

$997,000 (see Note 5), a decrease in cash of approximately $842,275 and a net
reduction of assets due to the sale of the SynCom's customer lists of $332,328
and a charge for asset impairments of $284,627(see Note 4). The decrease is
offset by net deferred financing costs of $423,385 resulting from the issuance
of convertible debentures (see Note 7). The decrease is further offset by the
acquisition of Comsys and IBTS during April 2000 and the acquisition of PTSI
during December 2000. The Company acquired 100% of the issued and outstanding
stock of ComSys, an interconnection company, in exchange for 158,000 shares of
the Company's common stock valued at $1,008,412. In addition, during April 2000,
the Company acquired IBTS in exchange for 62,000 common shares valued at
$379,750 and contingent shares of 15,000, carried at par value, based on the
subsidiary meeting certain future revenue and net income performance criteria
and the Company meeting certain minimum closing stock prices. Comsys has served
the Gainesville, Florida market for 19 years, while IBTS has served the Ft.
Lauderdale, Florida market for 18 years. Both Comsys and IBTS provide PBX
systems, electronic key systems, call technology servers, voice mail systems,
automatic call distributors and network and computer wiring. Finally, during
December 2000, the Company acquired certain assets comprising the business of
PTSI for 10,000 shares of common stock valued at $53,164 and cash of $20,000.
The Comsys, IBTS and PTSI acquisitions were accounted for as purchase business
combinations in which the purchase prices were allocated to acquired assets and
liabilities at their fair values. The transactions resulted in the recognition
of goodwill of $955,216, $353,680 and $2,149, respectively, which are being
amortized over fifteen years under current accounting standards. The results of
operations of acquired companies are included in the Companies results of
operations from the dates acquired.

         The decrease in the Company's cash and cash equivalents of $842,275
over the twelve month period ended March 31, 2001 was primarily attributable to
high operating costs, the costs associated with the acquisitions of Comsys and
IBTS, a related increase in inventories, and additional deposits required for
the Company to expand its network infrastructure. The Company's net property and
equipment decreased by approximately $697,070, which is a result of certain
equipment ordered under a capital lease obligation for which the Company had not
taken delivery (see Note 5).

         Equipment acquisitions, other than those of acquired businesses, for
the twelve-month period amounted to approximately $174,000.

         Total liabilities increased $247,175 to approximately $1.9 million at
March 31, 2001 from March 31, 2000. The increase is a net of an increase of
$776,798 in accounts payable and accrued expenses, an increase of $336,500 in
convertible debentures, an approximately $867,000 decrease in the capital lease
obligation and an approximately $140,000 decrease in unearned revenue.

RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2001 AND MARCH 31, 2000

         The Company incurred a net loss applicable to common stockholders of
approximately $3.5 million or $0.36 per share, for the twelve months ended March
31, 2001, as compared to a loss of approximately $1.5 million or $0.26 per share
for the twelve months ended March 31, 2000.

         For the twelve months ended March 31, 2001, the Company generated
approximately $4.6 million in total revenues. The Company generated
approximately $2.5 million in revenues in the corresponding period of 2000. The
increase is primarily a result of the inclusion of the operating results of the
acquisitions of Syncom in 2000 (for a full fiscal year in 2001), ComSys and IBTS
for the twelve-month period ended March 31, 2001 (see Note 3). Of the revenues
generated during the year ended March 31, 2001, $2.8 million were generated by
the integrated communications services segment of the Company's operations,
which includes Internet products and services offered by Syncom, Inc. (doing
business as "Gator.net") and the communications equipment products and services
offered by TEAM, ComSys and IBTS. Net loss for the communications services
segment for the twelve months was approximately $745,000. For the corresponding
period in the year ended March 31, 2000, revenues of approximately $1.3 million
were attributable to communications services and the related net loss was $1.3
million. The sale of the Syncom customer base will reduce revenues by
approximately $360,000 per year, while improving cash flow by approximately
$144,000 per year. Had the Company been able to turn up the Lucent equipment in
the prescribed time frame the sale would not have been necessary as the customer
base would have become cash flow positive.

                                       11

<PAGE>


         During the twelve months ended March 31, 2001, the parent company (on
unconsolidated basis) did not generate revenues, as its network infrastructure
was not yet operational. Consequently, the parent company, which incurs
principally all of the Company's general and administrative overhead expenses,
sustained a net loss of approximately $2.5 million for this period. The net loss
for the parent company was comprised primarily of salaries and wages,
professional fees, and consulting fees, incurred to develop the telephone and
Internet infrastructure of the Company and is allocated to the two segments for
financial reporting purposes. As a result of the termination of the Company's
agreement with Lucent and the Company's continuing operating losses and negative
operating cash flows, the Company has been forced to terminate its lease on the
Siemens DCO/CS long distance switch and to suspend expansion and development of
its telecommunications network. If the Company does not obtain additional
funding on acceptable terms, it will be unable to complete its network
infrastructure and the parent company will continue to sustain losses.

         The integration services segment of the Company's operations generated
revenues of approximately $1.8 million for the twelve months ended March 31,
2001. This segment 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. Net loss for the
twelve months ended March 31, 2001 for the integration services segment was
approximately $2.8 million.

         The Company's total operating expenses increased approximately $4.1
million to approximately $8.1 million for the twelve months ended March 31, 2001
compared to the twelve months ended March 31, 2000. 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. Asset impairment charges of
$616,955, relate to the sale of SynCom assets and the charge off of impaired
goodwill, are included in the operational costs for the twelve months ended
March 31, 2001 (see Note 4). No such charge was incurred in the twelve months
ended March 31, 2000. Depreciation and amortization increased $326,470 to
$388,952 for the twelve months ended March 31, 2001 compared to the twelve
months ended March 31, 2000. The increase in depreciation and amortization is
also attributable to the assets and intangibles of the newly acquired companies.
Interest expense for the twelve month period ended March 31, 2001 increased
approximately $234,000 to $275,208 compared to the twelve months ended March 31,
2000 and is primarily related to loan cost amortization and a beneficial
conversion charge of $151,625 on the convertible debentures' issuances of
$335,000 (see Note 7).


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.

                                       12

<PAGE>


         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.

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 loss for TEAM and
Gator.net was $0.05 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 $1.5 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 $0.06 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.

                                       13

<PAGE>


SUBSEQUENT EVENTS

       In May 2001 Syncom, Inc., a wholly owned subsidiary of USA DIGITAL which
was an Internet Service Provider (ISP) doing business as Gator.Net in
Gainesville Florida sold its residential dial-up customer base to Gainesville
Regional Utility for net proceeds of $164,139.

       On June 4, 2001, USA DIGITAL and Siemens entered into a mutual agreement
whereby USA DIGITAL would be allowed to terminate the lease on the Siemens
DCO/CS long distance switch without any further obligation on or before June 30,
2001. On June 30th 2001 the Company excercised its rights under the agreement
and asked Siemens to pick up the switch. The switch was not revenue producing
and this action was taken to reduce operating costs.





                                       14
<PAGE>



LIQUIDITY AND CAPITAL RESOURCES

         The Company's strategy is to acquire established Internet service
providers, computer/ network integrators, telephone interconnect companies, and
facility based carriers 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 necessary to complete its network infrastructure.

         The Company raised $375,000 in additional operating capital in a
private placement, which closed on January 2, 2001. The Company is currently
pursuing other avenues to attract debt and/or equity financing. However, due to
the volatility of the capital markets, there can be no assurance that the
Company will be successful in these endeavors.

         The Company has incurred operating losses and negative operating cash
flows since its inception and currently has a significant net working capital
deficiency. In addition, the Company does not have sufficient funds to operate
its business through March 31, 2002. The Company's continued existence is
dependent upon receiving additional funding to expand and operate its business.

         Management is taking actions to conserve the Company's existing cash
flow from operations, while actively addressing possible funding sources.
Further expansion and development of the Company's telecommunications network
has been suspended, and administrative and network expenditures have been
significantly curtailed. In addition, management has sold the Syncom, Inc.
(d.b.a. "Gator.net") customer base, consisting primarily of residential
customers, to more appropriately focus on its core strategy of addressing the
rapidly expanding communications demands of small and medium size businesses.
Furthermore, this sale improved working capital by approximately $164,000. (see
Note 4) This sale took place subsequent to year-end and the Company has
identified other assets for possible sale. While management is aggressively
pursing additional funding sources, the Company cannot guarantee that it will be
able to obtain additional funding on acceptable terms.

         Without an infusion of working capital, the Company will not be able to
implement the current business plan nor continue as a going concern.

ITEM 7.  FINANCIAL STATEMENTS

         The consolidated audited financial statements for the period March 31,
2001 are included in pages F-1 through F-23 of this Annual Report on Form
10-KSB. This includes the following financial statements:

         Report of Aidman, Piser & Company, P.A.
         Report of Ernst & Young LLP
         Consolidated Balance Sheet-- At March 31, 2001;
         Consolidated Statements of Operations-- Year Ended March 31, 2001 and
         2000;
         Consolidated Statements of Changes in Stockholders' Equity -- Year
         Ended March 31, 2001 and 2000;
         Consolidated Statements of Cash Flows -- Year Ended March 31, 2001 and
         2000; and
         Notes to Consolidated Financial Statements.

                                      15

<PAGE>



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

         On May 8, 2001, USA DIGITAL declined to reappoint its independent
public accountant, Ernst & Young, LLP. ("E&Y") for the fiscal year ended March
31, 2001. The decision to decline to reappoint E&Y as the Company's independent
public accountant was recommended and approved by the Board of Directors.

         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, 2001 and
March 31, 2000, 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 E&Y on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement, if not
resolved to E&Y's satisfaction, would have caused E&Y to make reference in
connection with its report to the subject matter of the disagreement.

         Effective May 21, 2001, the Company appointed Aidman Piser & Company,
P.A. as the Company's independent public accountant for the fiscal year ending
March 31, 2001.

                                    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
2001 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."

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".

                                       16

<PAGE>


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."





                                       17

<PAGE>


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:

<TABLE>


                 EXHIBIT NO.                 DESCRIPTION
                    <S>         <C>

                    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)
                   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 (2)
                   10.14        Employment Agreement by and between USA Digital, Inc. and
                                Kenneth D. Allen (2)
                    21.1        Subsidiaries of the Registrant (1)

</TABLE>

---------------------
         (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.

         (2)  Incorporated by reference to the Annual Report on Form 10 KSB for
              the year ended March 31, 2000 as filed with the Securities and
              Exchange Commission on July 14, 2000.

         (b)      Reports on Form 8-K.
                  NONE.

                                       18

<PAGE>


         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.

                                   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.

          Name                        Title                            Date

/s/Peter J. Lyons              Chief Executive Officer and        July 16, 2001
-----------------------        a Director (principal
Peter J. Lyons                 executive officer)

/s/Mark D. Cobb                President, Director and            July 16, 2001
-----------------------        Chairman of the Board
Mark D. Cobb                   (principal accounting
                               officer)

/s/Donald E. Darden            Director                           July 16, 2001
-----------------------
Donald E. Darden



                                       19

<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:
   ------------------------------------------
      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>


                   Name                                         Title                          Date
<S>                                               <C>                                      <C>



----------------------------------------          Chief Executive Officer and a            July 16, 2001
Peter J. Lyons                                    Director (principal executive
                                                  officer)

                                                  President, Director and                  July 16, 2001
----------------------------------------          Chairman of the Board
Mark D. Cobb                                      (principal accounting officer)


                                                  Director                                 July 16, 2001
----------------------------------------
Donald E. Darden

</TABLE>


                                       20
<PAGE>

                                USA DIGITAL, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                       YEARS ENDED MARCH 31, 2001 AND 2000

                                    CONTENTS

<TABLE>
<CAPTION>

<S>                                                                                                       <C>
Report of Aidman, Piser & Company, P.A..................................................................F-2

Consolidated Financial Statements:

Consolidated Balance Sheet at March 31, 2001............................................................F-3

Consolidated Statements of Operations for the years ended March 31, 2001
   and 2000.............................................................................................F-4

Consolidated Statements of Changes in Stockholders' Equity for the years
   ended March 31, 2001 and 2000........................................................................F-5 - F-6

Consolidated Statements of Cash Flows for the years ended March 31, 2001
   and 2000.............................................................................................F-7 - F-8

Notes to Consolidated Financial Statements..............................................................F-9
</TABLE>



<PAGE>

                         Report of Independent Auditors
                         ------------------------------

The Board of Directors
USA Digital, Inc.

We have audited the accompanying consolidated balance sheet of USA Digital, Inc.
as of March 31, 2001 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.

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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USA Digital, Inc.
as of March 31, 2001 and the consolidated results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.

The accompanying financial statements have been prepared assuming that USA
Digital, Inc. will continue as a going concern. As discussed in Note 2, the
Company has incurred recurring operating losses and has a substantial need for
working capital. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
might arise from the outcome of this uncertainty.


                                       /s/ Aidman, Piser & Company, P.A.



Tampa, Florida
June 21, 2001

                                       F-2
<PAGE>



                                USA DIGITAL, INC.
                           CONSOLIDATED BALANCE SHEET
                                 MARCH 31, 2001

                                     ASSETS
<TABLE>
<CAPTION>

<S>                                                                                                <C>
Current assets:
   Cash and cash equivalents                                                                       $          14,170
   Accounts receivable, net of $100,000 allowances                                                           164,479
   Inventories, net                                                                                          136,130
   Employee receivables                                                                                       62,453
   Prepaid expenses and other current assets                                                                 109,976
   Assets held for sale                                                                                      164,139
                                                                                                   ------------------
     Total current assets                                                                                    651,347

Property and equipment, net                                                                                  707,590
Intangible assets, net                                                                                     1,387,461
Deferred financing costs, net                                                                                423,385
Deposits and other non-current assets                                                                         88,583
                                                                                                   ------------------
     Total assets                                                                                  $       3,258,366
                                                                                                   ==================

        LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses                                                           $       1,141,721
   Convertible debentures                                                                                    335,000
   Employee payables                                                                                          46,755
   Current maturities of long-term debt                                                                        9,519
   Note payable                                                                                              101,499
                                                                                                   ------------------
     Total current liabilities                                                                             1,634,494

Unearned revenue                                                                                              32,846
Other non-current liabilities                                                                                 80,493
Long-term debt, less current maturities                                                                       19,041
                                                                                                   ------------------
     Total liabilities                                                                                     1,949,583
                                                                                                   ------------------

Redeemable preferred stock, $0.001 par value, 50,000 shares
   authorized, issued and outstanding                                                                        182,709
                                                                                                   ------------------

Stockholders' equity:
   Common stock, $0.001 par value, 50,000,000 shares authorized,
     10,844,820 shares issued and outstanding                                                                 10,845
   Additional paid-in capital                                                                              6,872,449
   Accumulated deficit                                                                             (       5,574,511)
                                                                                                   ------------------
     Total stockholders' equity                                                                            1,308,783
                                                                                                   ------------------
     Total liabilities, redeemable preferred stock and stockholders'
       equity                                                                                      $       3,258,366
                                                                                                   ==================
</TABLE>

                 See notes to consolidated financial statements.

                                       F-3

<PAGE>


                                USA DIGITAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                       YEARS ENDED MARCH 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                                    2001                  2000
                                                                             ------------------    ------------------
<S>                                                                                  <C>                   <C>
Revenues                                                                     $       4,584,094     $       2,523,386
                                                                             ------------------    ------------------
Costs and expenses:
   Cost of equipment sales                                                           2,901,407             1,529,698
   Salaries and wages                                                                1,631,968               854,394
   Professional services                                                               632,790                80,958
   Asset impairment charges                                                            616,955                     -
   Consulting services                                                                 597,718               748,210
   Depreciation and amortization                                                       388,951                62,481
   Interest expense                                                                    275,208                40,850
   Rent expense                                                                        260,021                74,543
   Travel and entertainment                                                            126,969               102,791
   Telephone service                                                                   117,958               106,026
   Bad debts expense                                                                   104,112               125,000
   Automobiles and equipment                                                            74,893                67,669
   Employee benefits                                                                    57,745                     -
   Insurance                                                                            52,168                21,781
   Office expense                                                                       61,109                57,880
   Commissions                                                                          44,590                10,529
   Advertising                                                                          44,550                43,179
   License and taxes                                                                    36,408                49,690
   Utilities                                                                            33,609                 7,111
   Bank charges                                                                         23,116                 9,914
   Other expenses                                                                       16,941                     -
                                                                             ------------------    ------------------
                                                                                     8,099,186             3,992,704
                                                                             ------------------    ------------------
Loss before income taxes                                                     ($      3,515,092)    ($      1,469,318)
Income tax benefit                                                                         --                     --
Net Loss                                                                     (     $3,515,092)     ($      1,469,318)
                                                                             ==================    ==================
Loss before income taxes
Reconciliation of net loss to net loss applicable
   to common stockholders:
     Net loss                                                                ($      3,515,092)    ($      1,469,318)
     Preferred stock accretions                                              (          15,334)    (          18,750)
                                                                             ------------------    ------------------
Net loss applicable to common stockholders                                   ($      3,530,426)    ($      1,488,068)
                                                                             -=================    ==================

Net loss per common share - basic and diluted                                ($           0.35)    ($           0.26)
                                                                             ==================    ==================
Weighted average common shares outstanding - basic
   and diluted                                                                      10,012,914             5,733,216
                                                                             ==================    ==================
</TABLE>
                 See notes to consolidated financial statements.

                                       F-4
<PAGE>


                                USA DIGITAL, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                       YEARS ENDED MARCH 31, 2001 AND 2000

<TABLE>
<CAPTION>

                                                      Common Stock               Additional
                                            -------------------------------        Paid-in            Deferred
                                                 Shares           Amount           Capital          Compensation
                                            ----------------  -------------  ------------------    ------------------

<S>                                               <C>         <C>            <C>                 <C>
Balances, April 1, 1999                           5,299,000   $      2,650   $         877,614   ($        296,641)

Issuance of common stock for cash                 2,005,000          1,003           1,680,997                   -

Stock issued to consultants and other
   service providers                                820,000            410             473,840                   -

Stock issued for business - SYNCOM                  110,000             55             329,945                   -

Stock issued for business - CAT                      50,000             25              24,975                   -

Stock issued for property and equipment              66,000             33              88,092                   -

Stock issued to employees                            50,000             25              24,975                   -

Conversions of debt to equity                       100,000             50              49,950                   -

Stock issued for debt service                        78,000             38              38,962                   -

Rescission of business combination -
   ODT                                        (     650,000)          (325)                  -                   -

Options issued to employees                               -              -             180,500                   -

Options issued to consultants                             -              -               4,125                   -

Accretions of redeemable preferred
   stock                                                  -              -                   -                   -

Amortization of deferred compensation                     -              -                   -             169,530

Two-for-one stock split                                   -          3,964   (           3,964)                  -

Other activity                                            -              -              16,556                   -

Net loss                                                  -              -                   -                   -
                                            ================  =============  ==================    ==================
Balances, March 31, 2000                          7,928,000   $      7,928   $       3,786,567   ($        127,111)
                                            ================  =============  ==================    ==================



                                               Accumulated
                                                 Deficit              Total
                                           -----------------   -----------------

Balance, April 1, 1999                     ($       556,017)      $      27,606

Issuance of common stock for cash                         -           1,682,000

Stock issued to consultants and other
   service providers                                      -             474,250

Stock issued for business - SYNCOM                        -             330,000

Stock issued for business - CAT                           -              25,000

Stock issued for property and equipment                   -              88,125

Stock issued to employees                                 -              25,000

Conversions of debt to equity                             -              50,000

Stock issued for debt service                             -              39,000

Rescission of business combination -
   ODT                                                    -       (         325)

Options issued to employees                               -             180,500

Options issued to consultants                             -               4,125

Accretions of redeemable preferred
   stock                                   (         18,750)      (     18,750)

Amortization of deferred compensation                     -             169,530

Two-for-one stock split                                   -                   -

Other activity                                            -              16,556

Net loss                                   (      1,469,318)       (  1,469,318)
                                           =================       -------------
Balances, March 31, 2000                   ($     2,044,085)       $  1,623,299
                                           =================       =============
</TABLE>

                 See notes to consolidated financial statements.

                                       F-5

<PAGE>


                                USA DIGITAL, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 YEARS ENDED MARCH 31, 2001 AND 2000 (CONTINUED)

<TABLE>
<CAPTION>

                                                      Common Stock              Additonal
                                            -------------------------------      Paid-In       Deferred
                                                 Shares           Amount         Capital      Compensation
                                            ----------------  -------------  -------------   ---------------

<S>                                               <C>         <C>            <C>             <C>
Balances, April 1, 2000 (continued)               7,928,000   $      7,928   $  3,786,567    ($     127,111)

Issuance of common stock for cash                    93,750             94        374,906                 -

Stock issued to consultants and other
   service providers                                220,500            220        339,875                 -

Stock issued for business - COMSYS                  158,000            158      1,008,254                 -

Stock issued for business - IBTS                     62,000             62        379,688                 -

Stock held in escrow - IBTS                          15,000             15   (         15)                -

Stock issued for assets                              12,000             12         65,277                 -

Forfeiture of unvested shares               (        50,000)  (         50)            50                 -

Exercise of options                               1,624,070          1,624         10,876                 -

Stock issued to employees                             9,000              9         52,367                 -

Conversions of debt to equity                        25,500             26         31,849                 -

Stock issued for loan costs                         355,000            355        532,146                 -

Beneficial conversion feature on convertible
   debt                                                   -              -        151,625                 -

Conversion of preferred stock to common
   stock                                            400,000            400        135,976                 -

Options issued to consultants                             -              -          3,000                 -

Accretions of redeemable preferred stock                  -              -              -                 -

Amortization of deferred compensation                     -              -              -           127,111

Other activity                              (         8,000)  (          8)             8                 -

Net loss                                                  -              -              -                 -
                                            ----------------  -------------  -------------   ---------------

Balances, March 31, 2001                         10,844,820   $     10,845   $  6,872,449    $            -
                                            ================  =============  =============   ===============


                                                      Accumulated
                                                        Deficit           Total
                                                   ----------------  ---------------
Balance, April 1, 2000 (continued)                 ($    2,044,085)  $    1,623,299

Issuance of common stock for cash                                -          375,000

Stock issued to consultants and other
   service providers                                             -          340,095

Stock issued for business - COMSYS                               -        1,008,412

Stock issued for business - IBTS                                 -          379,750

Stock held in escrow - IBTS                                      -                -

Stock issued for assets                                          -           65,289

Forfeiture of unvested shares                                    -                -

Exercise of options                                              -           12,500

Stock issued to employees                                        -           52,376

Conversions of debt to equity                                    -           31,875

Stock issued for loan costs                                      -          532,501

Beneficial conversion feature on convertible
   debt                                                          -          151,625

Conversion of preferred stock to common
   stock                                                         -          136,376

Options issued to consultants                                    -            3,000

Accretions of redeemable preferred stock           (        15,334)  (       15,334)

Amortization of deferred compensation                            -          127,111

Other activity                                                   -                -

Net loss                                           (     3,515,092)  (    3,515,092)
                                                   ----------------  ---------------

Balances, March 31, 2001                           ($    5,574,511)  $    1,308,783
                                                   ================  ===============
</TABLE>

                 See notes to consolidated financial statements.

                                       F-6




<PAGE>


                                USA DIGITAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                       YEARS ENDED MARCH 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                                    2001                  2000
                                                                             ------------------    ------------------
<S>                                                                          <C>                   <C>
Operating activities:
   Net loss                                                                  ($      3,515,092)    ($      1,469,318)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
       Stock-based employment, consulting service and
         debt service                                                                  798,697               892,405
       Provisions for bad debts                                                       104,812               125,000
       Depreciation and amortization                                                   388,951                62,481
       Asset impairment charges                                                        616,955                     -
       Changes in operating assets and liabilities:
         Accounts receivable                                                            20,073     (         246,536)
         Inventories                                                                     2,215                33,160
         Employee receivable/payable                                         (          29,904)               23,779
         Other current and non-current assets                                (         150,310)    (           9,632)
         Accounts payable and accrued expenses                                         591,258               127,355
         Unearned revenue                                                    (         139,955)               45,118
                                                                             ------------------    ------------------

Net cash used in operating activities                                        (       1,312,300)    (         416,188)
                                                                             ------------------    ------------------

Investing activities:
   Purchases of business (net of $15,339 cash acquired)                      (          53,239)    (         218,665)
   Purchases of equipment                                                    (         174,161)    (         275,159)
                                                                             ------------------    ------------------

Net cash used in investing activities                                        (         227,400)    (         493,824)
                                                                             ------------------    ------------------

Financing activities:
   Proceeds from issuance of common stock                                              375,000             1,682,000
   Proceeds from exercise of stock options                                              12,500                     -
   Proceeds from the issuance of subordinated notes                                          -                50,000
   Proceeds from issuance of convertible debentures                                    336,500                     -
   Payments on long term debt                                                (          26,575)    (          30,546)
                                                                             ------------------    ------------------

Net cash provided by financing activities                                              697,425             1,701,454
                                                                             ------------------    ------------------

Increase (decrease) in cash and cash equivalents                             (         842,275)              791,442
Cash and cash equivalents, beginning of year                                           856,445                65,003
                                                                             ------------------    ------------------
Cash and cash equivalents, end of year                                       $          14,170     $         856,445
                                                                             ==================    ==================
</TABLE>

                                   (Continued)

                                       F-7



<PAGE>

<TABLE>
<CAPTION>
                                USA DIGITAL, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                       YEARS ENDED MARCH 31, 2001 AND 2000
                                                                                    2001                  2000
                                                                             ------------------    ------------------
<S>                                                                          <C>                   <C>
Non-cash investing activities:
   Purchase (return) of telecommunications equipment
     under capital leases                                                    ($        829,566)    $          246,753
                                                                             ==================    ==================
   Purchase of assets with 12,000 shares (2001) and
     66,000 shares (2000) of common stock                                    $          65,289     $           88,125
                                                                             ==================    ==================
   Purchases of businesses by issuance of 220,000 (2001)
     and 160,000 (2000) shares of common stock                               $       1,388,162     $          355,000
                                                                             ==================    ==================
   Purchases of businesses by issuance of 90,000
     shares of preferred stock                                               $               -     $          285,000
                                                                             ==================    ==================

Non-cash financing activities:
   Rescission of ODT purchase transaction and
     cancellation of 650,000 shares of common stock                          $               -     $              325
                                                                             ==================    ==================
   Conversion of convertible debentures into 25,500
     shares of common stock (2001) and conversion
     of subordinated debentures into 100,000 shares
     of common stock (2000)                                                  $          31,875     $           50,000
                                                                             ==================    ==================
   Conversion of preferred stock into 400,000 shares
     of common stock                                                         $         136,376     $               -
                                                                             ==================    ==================
   Issuance of common stock for deferred financing
     costs                                                                   $         532,501     $               -
                                                                             ==================    ==================

   Accretion of redeemable preferred stock                                   $          15,334     $           18,750
                                                                             ==================    ==================

Certain stock options were exercised in a net transaction where no proceeds were received by the Company.  (See Note 5)

Other cash flow information:
   Cash paid for interest                                                    $            2,653    $            3,350
                                                                             ==================    ==================
</TABLE>

                 See notes to consolidated financial statements.

                                       F-8


<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


1.     NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

       Nature of business:

       USA Digital, Inc. (the Company) operates in two identifiable industry
       segments: the integrated communications services segment and the
       information integration services segment. Products and services in the
       integrated communications segment include telecommunications system
       integration services and enhanced data 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.

       Revenue recognition:

       The Company recognizes revenue on integrated communications services in
       the period that the services and products are provided and earned.
       Revenue on information integration services is recognized when the
       services and equipment are provided and earned. Revenue on arrangements
       involving implementation services and equipment are 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.

       Principles of consolidation:

       The consolidated financial statements include the accounts of the Company
       and its subsidiaries all of which are wholly-owned. 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.

                                       F-9

<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


1.     NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       (CONTINUED):

       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, 2001 inventories
       are net of a $25,000 allowance for obsolescence.

       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 acquired workforce,
       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 ranging from 2 to 15 years.

       Long-lived assets:

       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 market value of the asset.

                                      F-10
<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       (CONTINUED):

       Financial instruments:

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

       Advertising:

       The Company expenses advertising as incurred. During the years ended
       March 31, 2001 and 2000, advertising expenses amounted to approximately
       $44,500 and $43,000, respectively.

       Use of estimates:

       The accompanying financial statements have been prepared in accordance
       with accounting principles generally accepted in the United States, which
       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.

       Stock-based compensation:

       The Company accounts for employee stock-based compensation in accordance
       with Accounting Principles Board Opinion No. 25, Accounting for Stock
       Issued to Employees and related interpretations. Accordingly, in cases
       where exercise prices equal or exceed fair market value at the option
       grant date, the Company recognizes no compensation expense for the stock
       option grant. In cases where the exercise prices are less than the fair
       market value at the option grant date, that difference is recognized as
       compensation expense over the period of performance or the vesting
       period.

       The Company accounts for issuances of common stock and common stock
       options to non-employees 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).

                                      F-11
<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


1.      NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       (CONTINUED):

       Income taxes:

       The Company recognizes deferred tax assets, subject to valuation
       allowances, and liabilities for the expected future tax consequences of
       events that have been recognized in the Company's financial statements or
       tax returns.

       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.

       New Accounting Standards

       On June 29, 2001, the Financial Accounting Standards Board issued
       Statement 141 "Business Combinations" and Statement 142 "Goodwill and
       Other Intangible Assets." Statement 141 is effective for any business
       combination accounted for under the purchase method of accounting that is
       completed after June 30, 2001. Statement 142 will not be effective until
       the Company's fiscal year ended March 31, 2003, although early adoption
       for the fiscal year ended March 31, 2002 is permissible. While management
       of the Company is currently reviewing the impending effects of these
       newly issued standards, the standards will eliminate the
       pooling-of-interests method of business combinations, disallow the
       periodic recording of amortization expense on goodwill, and require new
       methods of reviewing all intangible assets for impairments.

       Reclassifications:

       Certain prior year amounts have been reclassified in order to conform
       with the 2001 presentation.

2.     MANAGEMENT'S PLANS REGARDING LIQUIDITY AND CAPITAL RESOURCES:

       The accompanying financial statements have been prepared assuming that
       the Company will continue as a going concern. However, the Company has
       incurred operating losses and negative operating cash flows since its
       inception and currently has a significant net working capital deficiency.
       In addition, the Company does not have sufficient funds to operate its
       business through March 31, 2002. These conditions raise substantial doubt
       about the Company's ability to continue as a going concern. The Company's
       continued existence is dependent upon receiving additional funding to
       expand and operate its business.

       Management is taking actions to conserve the Company's existing cash flow
       from operations, while actively addressing possible funding sources.
       Further expansion and development of the Company's telecommunications
       network has been suspended, and administrative and network expenditures
       have been significantly curtailed. In addition, management has sold
       Syncom (see Note 4) subsequent to March 31, 2001 and has identified other
       assets of the Company for possible sale. While management is aggressively
       pursing additional funding sources, there can be no assurance that the
       Company will be able to obtain additional funding on acceptable terms.
       The accompanying financial statements do not include any adjustments to
       reflect the possible future effects on the recoverability and
       classification of assets or the amounts and classification of liabilities
       that might arise from the outcome of this uncertainty.

                                      F-12
<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


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
       $158,000 ($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.

       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 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 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 other non-current liabilities.

                                      F-13
<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


3.     BUSINESS COMBINATIONS (CONTINUED):

       During April 2000, the Company completed the purchase of the outstanding
       common stock of Communications Systems, Inc. (COMSYS) in exchange for
       158,000 shares of common stock valued at $1,008,412. COMSYS is a
       telecommunications interconnection company. The transaction was accounted
       for as a purchase, where the purchase price of $1,008,412 was allocated
       to the fair values of net tangible and intangible assets, consisting of
       workforce and trademarks, acquired. The excess of the purchase price over
       the fair values of assets acquired amounted to $955,216 and is being
       amortized over 15 years. The purchase agreement provides for contingent
       consideration of $50,000 and $100,000 based upon operating performance of
       the acquired business for the years ended March 31, 2001 and 2002,
       respectively. The operating performance was not achieved for the year
       ended March 31, 2001. Any future contingent consideration, if any, will
       be recorded in the period that the operating performance is achieved.

       During April 2000, the Company completed the purchase of the outstanding
       common stock of International Business Telephone Systems (IBTS) in
       exchange for 62,000 shares of common stock valued at $379,750. IBTS is
       telecommunications interconnection company. The transaction was accounted
       for as a purchase, where the purchase price of $379,750 was allocated to
       the fair values of the net tangible and intangible assets, consisting of
       workforce and trademark, acquired. The excess of the purchase price over
       the fair values of assets acquired amounted to $353,680 and is being
       amortized over 15 years. The purchase agreement provides for contingent
       consideration of 15,000 shares of common stock, which shares were issued
       to an escrow agent at par value, based upon operating performance of the
       acquired business for the year ended March 31, 2001. The operating
       performance was not achieved for the year ended March 31, 2001.

       During December 2000, the Company completed the purchase of certain
       assets of Progressive Technical Services, Inc. (PTSI) in exchange for
       10,000 shares of common stock valued at $53,164 and $20,000 in cash. PTSI
       is a telecommunications interconnection company. The transaction was
       accounted for as a purchase, where the purchase price of $73,164 was
       allocated to the fair values of the net tangible and intangible assets,
       consisting of workforce and trademark, acquired. The excess of the
       purchase price over the fair values of the assets acquired amounted to
       $2,149 and is being amortized over 15 years. PTSI had only normal sales
       and earnings during the year ended March 31, 2000 and from April 1, 2000
       through the December 2000 acquisition date.

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

                                      F-14

<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


3.     BUSINESS COMBINATIONS (CONTINUED):

       The table below reflects unaudited pro forma combined results of
       operations as if the acquisitions had taken place on April 1, 1999.

<TABLE>
<CAPTION>
                                                            Year ended March 31,
                                                         2001                  2000
                                                  ------------------    ------------------
<S>                                               <C>                   <C>
       Revenues                                    $      4,584,094      $      5,253,201
                                                  ------------------    ==================
       Costs and expenses                          $      7,947,561      $      6,764,051
                                                  ------------------    ==================
       Net loss applied to common stockholders    ($      3,348,133)    ($      1,510,850)
                                                  ------------------    ==================
       Net loss applied to common stockholders
         per share - basic and diluted            ($           0.34)    ($           0.27)
                                                  ==================    ==================
</TABLE>

4.     ASSET IMPAIRMENT CHARGES:

       Despite the Company's extensive efforts to enter certain
       telecommunications services markets, including but not limited to local
       and long distance services, the depressed capital markets have rendered
       the Company unable to generate sufficient capital to sufficiently develop
       its telecommunications network infrastructure. In addition, as further
       discussed below, the Company exited its remaining telecommunications data
       service business with the sale of SYNCOM. As a result of these
       conditions, management of the Company has considered the adequacy of the
       assumptions underlying cash flow projections to support the carrying
       value of goodwill associated with telecommunication services businesses
       and has reached the conclusion that goodwill impairments of $284,627 are
       necessary. These charges were recorded in the Company's fourth quarter.

       During April 2001, the Company sold the assets, including customer lists
       and trade name, of SYNCOM. The sale resulted in a loss to the Company of
       $332,328, which was recorded during the Company's fourth quarter. The net
       estimated recoverable value of the long-lived assets sold of $164,139 has
       been reflected as assets held for sale in the accompanying consolidated
       balance sheet.

5.     PROPERTY AND EQUIPMENT:

       Property and equipment consisted of the following at March 31, 2001:

                  Telecommunications equipment      $         220,000
                  Buildings and improvements                  630,050
                                                    ------------------
                                                              850,050
                  Less accumulated depreciation     (         142,460)
                                                    ------------------
                                                    $         707,590
                                                    ==================

       Depreciation expense for the years ended March 31, 2001 and 2000 was
       $124,311 and $17,585, respectively.

                                      F-15
<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


5.     PROPERTY AND EQUIPMENT (CONTINUED):

       In August 1999, equipment of approximately $997,000 and a related capital
       lease obligation were recorded on the Company's balance sheet, pursuant
       to a purchase agreement with a telecommunications equipment vendor.
       Through March 31, 2001, equipment in the amount of approximately $144,000
       has been delivered and placed in service. The Company has been advised by
       the vendor that the remainder of the equipment covered under this lease
       will not be delivered. The associated balance sheet assets and
       liabilities have been adjusted by approximately $873,000 to reflect the
       asset reduction and related reduction in the capital lease obligation.
       The Company subsequently executed an agreement with the vendor for the
       outstanding balance of $101,499 as a note payable as of March 31, 2001.
       The note bears interest at 8%, is due June 30, 2001 and is collateralized
       by the telecommunications equipment.

6.     INTANGIBLE ASSETS:

       Intangible assets consisted of the following at March 31, 2001:

                                                                        Lives
                                                                    ------------
            Goodwill                           $    1,316,959         15 years
            Customer lists                             34,000          5 years
            Trademark and other                        80,000         10 years
            Workforce                                  63,080          5 years
            Domain name                                12,125          2 years
            Acquisition costs                          24,290         15 years
                                               --------------
                                                    1,530,454
            Less accumulated amortization             142,993
                                               --------------
                                               $    1,387,461
                                               ==============

       Amortization expense for the years ended March 31, 2001 and 2000 was
$264,641 and, $44,896, respectively.

                                      F-16
<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


7.     CONVERTIBLE DEBENTURES:

       Convertible debentures at March 31, 2001 consist of the following:

       Convertible debentures, payable
       upon maturity including accrued
       interest, maturing February 2002,
       bearing interest at 10%,
       collateralized by a building                       $   315,000

       Convertible debentures, payable
       upon maturity including accrued
       interest, maturity February 2002,
       bearing interest at 10%.                                20,000
                                                          -----------
                                                          $   335,000
                                                          ===========

       The debentures are convertible at the debenture holder's option into
       335,000 shares of common stock. In connection with the issuance of
       convertible debentures, the Company issued 335,000 shares of common stock
       to the debenture holders. The value of this common stock issued of
       $532,501, based upon the trading prices on the date issued, will be
       amortized as a financing cost over the term of the convertible
       debentures. The Company made a charge of $151,625 to interest expense
       during the year ended March 31, 2001 as a result of a beneficial
       conversion feature associated with these debentures.

8.     LONG-TERM DEBT:

       Long-term debt consists of various equipment loans with financing
       companies with interest rates ranging from 7% - 9.4%, with varying
       monthly payments and maturity dates through 2005.

       Future maturities of long-term debt are as follows:

           Year ending March 31,
           ---------------------
                   2002                     $            9,519
                   2003                                  8,268
                   2004                                  6,631
                   2005                                  4,142
                                            ------------------
                                            $           28,560
                                            ==================

                                      F-17

<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


9.   STOCKHOLDERS' EQUITY:

       Common stock:

       In July 2000, the Company commenced a private placement, pursuant to Rule
       506 of Regulation D of the Securities Act of 1933, as amended, to offer
       1,000,000 shares of the Company's common stock at a purchase price of
       $4.00 per share. The Company received $375,000 in gross proceeds from the
       private placement. Due to volatility in the stock market, the Company
       closed the private placement on January 2, 2001.

       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 was utilized in the
       purchases of TEAM and DSA during July 1999 and is recorded outside of
       equity at the present value of future liquidation obligation, or
       $258,000. The Company records periodic accretions to increase the
       carrying amount of the preferred stock to its liquidation obligation
       ($360,000) over three years.

       In August 2000, 40,000 shares of Class B Convertible Redeemable Preferred
       Stock were converted into 400,000 shares of common stock. The common
       stock issued was adjusted to reflect the February 2000 stock split.

       Stock based compensation:

       The 1998 Compensatory Stock Option Plan (the Plan) was canceled by the
       Board of Directors of the Company. As of March 31, 2001 and 2000, no
       options were granted under the Plan.

                                      F-18
<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000



9.     STOCKHOLDERS' EQUITY (CONTINUED):

       Stock based compensation (continued):

       As discussed in Note 1, the Company accounts for employee stock options
       based on the intrinsic value method prescribed by APB25. Had compensation
       cost for the Company's employee 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 and net loss per share for the years ended March
       31, 2001 and 2000 would have been increased to the pro-forma amounts
       indicated below.

<TABLE>
<CAPTION>
                                                                   2001                  2000
                                                            ------------------    ------------------
<S>                                                         <C>                   <C>
       Net loss applicable to
       common stockholders               As reported        ($      3,530,426)    ($      1,488,068)
                                         Pro forma          ($      3,531,350)    ($      2,152,392)

       Net loss applicable to
       common stockholders
       per share                         As reported        ($           0.35)    ($           0.26)
                                         Pro forma          ($           0.35)    ($           0.38)
</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.

       The fair market value of each stock option granted during 2001 and 2000
       was estimated on the date of grant using the Black-Scholes Option-Pricing
       Model using the following weighted-average assumptions: expected dividend
       yield 0%, risk-free interest rate of 6%, volatility 101% and expected
       life of three years.

                                      F-19
<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


9.     STOCKHOLDERS' EQUITY (CONTINUED):

       Stock based compensation (continued):

       A summary of the options issued under the employment and consulting
       agreements as of March 31, 2001 and 2000 and changes during the years is
       presented below:
<TABLE>
<CAPTION>
                                                         March 31, 2001                          March 31, 2000
                                               -----------------------------------    -----------------------------------
                                                                      Weighted                              Weighted
                                                                       Average                               Average
                                                   Number of          Exercise           Number of          Exercise
                                                    Options             Price              Options            Price
                                               -----------------  ----------------  -----------------   -----------------
<S>                                           <C>                 <C>                <C>                <C>
       Stock options:
         Balance at beginning of
           period                                      5,640,000  $           1.40          3,875,000   $            1.06
         Granted                                         305,000              5.77          1,765,000                2.16
         Exercised(1)                                  1,900,000              1.42                  -                   -
                                               -----------------  ----------------  -----------------   -----------------
       Balance at end of period                        4,045,000  $           1.76          5,640,000   $            1.40
                                               =================  ================  =================   =================
</TABLE>

(1) During the year ended March 31, 2001, three consultants of the Company
exercised a total of 1,875,000 stock options, which were granted pursuant to
certain consulting agreements, in a net stock transaction whereby the recipients
did not pay cash but gave the Company stock having a fair market value equal to
the exercise price. The recipients were issued a net total of 1,599,070 shares
of the Company's common stock, which was recorded by the Company as common stock
at par with an offsetting charge to additional paid-in capital.

<TABLE>
<CAPTION>
<S>                                                    <C>        <C>                       <C>         <C>
       Options exercisable at end
         of period                                     1,270,000  $           1.74          2,495,000   $            0.85

       Weighted average fair value
         of options granted during
         the period                                               $           0.34                      $            1.08

</TABLE>
                                      F-20
<PAGE>


                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


9.     STOCKHOLDERS' EQUITY (CONTINUED):

       Stock based compensation (continued):

       The following table summarizes information about stock options
outstanding:

<TABLE>
<CAPTION>
                                                              March 31, 2001
       -----------------------------------------------------------------------------------------------------------------------
                                       Options Outstanding                                        Options Exercisable
       ----------------------------------------------------------------------------   ----------------------------------------
                                                Weighted Avg.        Weighted                                  Weighted
            Range of                              Remaining           Average                                  Average
            Exercise          Number             Contractual         Exercise               Number             Exercise
             Price         Outstanding              Life               Price              Exercisable            Price
       ----------------- ---------------  --------------------  ------------------      ---------------   -------------------
       <S>                     <C>              <C>             <C>                    <C>               <C>
       $       0.50-1.50       2,355,000        1.16 yrs.       $       1.36                  700,000     $       1.26
               1.51-3.00       1,385,000        1.76 yrs.               2.27                  520,000             1.85
               3.01-4.50         255,000        2.77 yrs.               3.44                       -                -
               4.51-6.75          50,000            -                   6.75                   50,000             6.75
       ----------------- ---------------  --------------------  -------------------   ---------------     --------------------
                               4,045,000        1.90 yrs.       $       1.83                1,270,000     $       1.74
                         ===============  ====================  ===================   ===============     ====================
<CAPTION>
                                                              March 31, 2000
       -----------------------------------------------------------------------------------------------------------------------
                                       Options Outstanding                                        Options Exercisable
       ----------------------------------------------------------------------------   ----------------------------------------
                                                Weighted Avg.          Weighted                                Weighted
            Range of                              Remaining             Average                                Average
            Exercise          Number             Contractual           Exercise             Number             Exercise
             Price         Outstanding              Life                 Price            Exercisable            Price
       ----------------- ---------------  --------------------  ------------------    ---------------     -------------------
       <S>                     <C>              <C>             <C>                    <C>               <C>
       $       0.50-1.50       3,875,000        5.32 yrs.       $       1.06                2,000,000     $       0.73
               0.50-3.00       1,425,000        6.49 yrs.               2.02                  425,000             1.32
               1.25-1.50          40,000        5.26 yrs.               1.38                   20,000             1.25
               1.50-3.50         300,000        6.61 yrs.               2.92                   50,000             1.50
       ----------------- ---------------  --------------------  -------------------   ---------------     --------------------

                               5,640,000        5.68 yrs.       $       1.40                2,495,000     $       0.85
                         ===============  ====================  ===================   ===============     ====================
</TABLE>

                                      F-21


<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


10.    INCOME TAXES:

<TABLE>
<CAPTION>

<S>                                                                                    <C>           <C>
       Deferred tax assets consist of the following at March 31, 2001:

         Net operating loss carryover                                                                $       1,800,000
         Non-deductible reserves                                                                                47,000
         Other                                                                                                  41,000
                                                                                                     ------------------
         Net deferred tax assets                                                                             1,888,000
         Valuation allowance                                                                         (       1,888,000)
                                                                                                     ------------------
                                                                                                     $               -
                                                                                                     ==================

       Income tax (expense) benefit consists of the following:
                                                                                            2001             2000
                                                                                      ---------------   ---------------
         Current:
           Federal                                                                    $            -    $            -
                                                                                      ---------------   ---------------

         Deferred:
           Deferred                                                                          193,000    (       90,000)
           Benefit of net operating loss carryover                                    (    1,127,000)   (      480,000)
           Change in valuation allowance                                                   1,318,000           570,000
                                                                                      ---------------   ---------------
                                                                                                   -                 -
                                                                                      ---------------   ---------------
                                                                                      $            -    $            -
                                                                                      ===============   ===============

       The expected income tax benefit at the statutory tax rate differed from
       income taxes in the accompanying statements of operations as follows:

                                                                                     Percentage of loss before
                                                                                           income taxes
                                                                           --------------------------------------------
                                                                                   2001                    2000
                                                                           --------------------    --------------------
         Statutory tax rate                                                               34.0%                  34.0%
         State tax                                                                         3.6%                   3.6%
         Change in deferred tax asset
           valuation allowance                                             (             37.6%)    (             37.6%)
                                                                            -------------------    --------------------

         Effective tax rate in accompanying
                    statement of operations                                                  0%                     0%
                                                                           ====================    ====================
</TABLE>

At March 31, 2001 the Company had net operating loss carryforwards of
approximately $4,800,000. These carryforwards expire in various years through
2021.

                                      F-22


<PAGE>

                                USA DIGITAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MARCH 31, 2001 AND 2000


11.    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, 2001.

<TABLE>
<CAPTION>

                                                                            Year ended March 31, 2001
                                                       --------------------------------------------------------------------
                                                            Integrated               Information
                                                          Communications             Integration
                                                             Services                 Services              Consolidated
                                                       --------------------     ---------------------   -------------------
<S>                                                    <C>                      <C>                     <C>
       Revenues from external customer                 $          2,785,217     $           1,798,877   $        4,584,094
                                                       ====================     =====================   ==================
       Depreciation and amortization                   $            277,810     $             111,141   $          388,951
                                                       ====================     =====================   ==================
       Asset impairment charges                        $            616,955     $                   -   $          616,955
                                                       ====================     =====================   ==================
       Net loss                                        $            745,337     $           2,769,755   $        3,515,092
                                                       ====================     =====================   ==================
       Interest expense                                $              6,592     $             268,626   $          275,208
                                                       ====================     =====================   ==================
       Total assets as of March 31, 2001               $          2,042,323     $           1,216,043   $        3,258,366
                                                       ====================     =====================   ==================

                                                                            Year ended March 31, 2000
                                                       --------------------------------------------------------------------
                                                            Integrated               Information
                                                          Communications             Integration
                                                             Services                 Services              Consolidated
                                                       --------------------     ---------------------   -------------------
       Revenues from external customer                 $          1,286,806     $           1,236,580   $         2,523,386
                                                       ====================     =====================   ===================
       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
                                                       ====================     =====================   ===================
       Total assets as of March 31, 2000               $          3,343,143     $             286,314   $         3,629,457
                                                       ====================     =====================   ===================
</TABLE>

12.    OPERATING LEASES:

       The Company leases various office space from unrelated parties under
       non-cancelable operating leases that expire over the next ten years. Rent
       expense relating to these leases approximated $237,000 and $52,000 for
       the years ended March 31, 2001 and 2000, respectively.

       The Company also leases office space from a stockholder under a
       non-cancelable operating lease that expires in 2004. Rent expense
       relating to this lease was approximately $23,000 for 2001 and 2000.

       Future minimum lease payments under these operating leases are as
       follows:

       Year ending March 31,
       ---------------------
              2002                               $           269,244
              2003                                           278,170
              2004                                           208,477
              2005                                           202,618
              2006                                           114,193
           Thereafter                                        352,800
                                                 -------------------
                                                 $         1,425,502
                                                 ===================

                                      F-23