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

                                   FORM 10-KSB
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

       (Mark One)

         [ X ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended March 31, 1999

                                       OR

         [    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from ______ to______

                         COMMISSION FILE NUMBER 0-27375

                                USA DIGITAL, INC.
             (Exact name of registrant as specified in its charter)

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

                        P.O. BOX 172574, TAMPA, FL 33672
                (Address of principal executive office-zip code)
                            Telephone (813) 230-9100

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, PAR VALUE $.001 PER SHARE
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  twelve  months (or for such shorter  period that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes____ No__X__ .

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-B is not contained  herein,  and will not 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 [ X ]

         As of August 20,  1999,  the  aggregate  market value of the voting and
non-voting   common  equity  held  by   non-affiliates  of  the  Registrant  was
approximately $3,270,375.

         As of August 20, 1999,  2,802,000  shares of Registrant's  common stock
were outstanding.
--------------------------------------------------------------------------------




<PAGE>



                                USA DIGITAL, INC.
                          ANNUAL REPORT ON FORM 10-KSB
                            FOR THE FISCAL YEAR ENDED
                                 MARCH 31, 1999

                                TABLE OF CONTENTS


<TABLE>
<S>          <C>                                                                                              <C>
                                                     PART I
ITEM 1.           Business........................................................................................3
ITEM 2.           Properties......................................................................................7
ITEM 3.           Legal Proceedings...............................................................................8
ITEM 4.           Submission of Matters to a Vote of Security Holders.............................................8

                                                     PART II
ITEM 5.           Market For Registrant'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 And Supplementary Data....................................................12
ITEM 8.           Changes in And Disagreements With Accountants on Accounting
                  And Financial Disclosure.......................................................................12

                                                     PART III
ITEM 9.           Directors And Executive Officers of The Registrant.............................................13
ITEM 10.          Executive Compensation.........................................................................15
ITEM 11.          Security Ownership of Certain Beneficial Owners And Management.................................18
ITEM 12.          Certain Relationships And Related Transactions.................................................19

                                                     PART IV
ITEM 13.          Exhibits, Financial Statement Schedules And Reports on Form 8-K................................20
</TABLE>




                                        2

<PAGE>


                                     PART I

ITEM 1.  BUSINESS

GENERAL

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

         On March 4, 1999, Blazoon Systems Incorporated ("Blazoon"),  a Colorado
corporation,   consummated  an  Agreement  and  Plan  of   Reorganization   (the
"Acquisition") with Diverse Capital Corp.  ("Diverse"),  a private  corporation,
whereby Blazoon issued  1,235,000 shares of its common stock to the stockholders
of Diverse in exchange  for 100% of the issued and  outstanding  common stock of
Diverse,  and 625,000 shares of its Class A Preferred Stock in exchange for 100%
of the issued and outstanding preferred stock of Diverse. The preferred stock is
convertible to common stock at a one-for-one ratio beginning February 2, 2000 to
a maximum of 9.0% of the then outstanding common stock, has dividend preference,
is non-voting,  and is subject to redemption at a $4.00 liquidation value at the
Company's option beginning February 2, 2004. 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 to effect a redomicile  and name change of Blazoon,  with the Company as
the surviving entity.

BUSINESS DESCRIPTION

         The Company is building a highly integrated,  facility-based convergent
communications  company  that will address the rapidly  expanding  communication
demands of small to medium size  businesses.  The Company  plans to achieve this
goal  primarily  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 its complete package of products and
services. These include, but are not limited to:

          o       High-speed Internet Access
          o       Internet Solutions
          o       Electronic Commerce
          o       Voice over Internet
          o       Internet Telephony
          o       Co-Location
          o       Local and Long Distance Telephone Services
          o       Communications Equipment Sales and Service
          o       Computer and Network Integration and Wireless Solutions


                                        3

<PAGE>



         The  Company   believes  that  a   convergence   is  occurring  in  the
communication   industry  as  more   traditional   Internet   providers   become
communications  companies and communication companies become Internet companies.
These factors are creating an  environment in which  individuals  and businesses
and other  organizations  perceive a need to  establish  Internet  access and an
Internet presence.  Furthermore, many businesses have Internet requirements that
go beyond the simple access that most Internet service  providers  offer.  These
Internet  requirements  include  security,  network  consulting,  high-bandwidth
managed access and data services.  These services are most efficiently  provided
by a vendor that has a local  presence  so as to ensure  these  businesses  that
their  Internet  requirements  will  receive  priority  treatment.  The  Company
believes that its status as a full-service communications company will enable it
to capitalize on this convergence.

         In addition,  the  Telecommunications  Act of 1996 (the "Telecom Act"),
the  first  comprehensive  rewrite  of  the  Communications  Act  of  1934,  has
dramatically  changed  the  ground  rules  for  competition  and  regulation  in
virtually  all  sectors  of  the   communications   industry,   from  local  and
long-distance   telephone  services,  to  cable  television,   broadcasting  and
equipment  manufacturing.  One of the  market  sectors  that has been  adversely
affected by passage of The Telecom Act is the switchless resellers.  Previously,
these  companies  had  occupied  a very  profitable  niche in the  market  place
following the AT&T  Divestiture in the  mid-'80's,  but due to The Telecom Act's
preferential  treatment of facility based carriers,  these switchless  resellers
have watched their  valuation  drop from a high of 10 times monthly  revenues to
their  current  valuation of 1-3 times  monthly  revenues,  and thus creating an
excellent  opportunity to enter the communications arena at an undervalued price
point.

         The Company intends to grow through the continuation of its acquisition
program. In most instances,  acquisitions will be consummated solely in exchange
for the  Company's  stock.  Simultaneously,  the Company  intends to develop its
Internet infrastructure and Super Pop, a facility designed to provide access for
the  co-location,  for the  co-location of independent  ISPs and  Inter-Exchange
Carriers to allow for the integration of High-Speed Internet access and Internet
Telephony utilizing fiber and broad-band connectivity.  The ultimate goal is for
The Company to provide the following  communications  solutions  and  convergent
technologies to its newly acquired customer base:

          o       Dedicated  high-speed  broad  band  services  to the small and
                  medium size business  user,  such as ATM,  ADSL,  ISDN,  T1's,
                  Fractional T1's and DS3's.

          o       Dial up access service to the residential  community,  focused
                  on easy user  interface and access to information on the World
                  Wide Web.

          o       IP  Telephony  with the  ability  to offer  price  competitive
                  service to both the commercial and residential users.



                                        4

<PAGE>


          o       Comprehensive long distance services  including  800/888,  One
                  Plus,  WATS,  international,  calling  cards,  debit cards and
                  operator services. This unit would also


                                        5

<PAGE>



                  provide  digital  private line services,  including ATM, Frame
                  Relay, VPN, as well as traditional private line services.

          o       Web Services,  including production,  hosting, marketing and E
                  Commerce solutions.

          o       Computer/Network   Integration,   Technology  and  Engineering
                  Services for small and medium size  businesses  including fire
                  wall installations,  local area networks ("LAN") and wide area
                  network  ("WAN")   installation  along  with  maintenance  and
                  management of those facilities.

         The Company is  currently in the process of applying for its license to
operate as a Competitive  Local Exchange  Carrier (CLEC),  to do business in the
nine Bell South states.  That combined with its Siemens DCO-CS (Digital  Central
Office  Switch) will qualify The Company as a facility  based  carrier under The
Telecom Act and,  will further help provide the  foundation on which the Company
will grow.  This fully equipped  switch will provide a full compliment of Local,
Centrex,  ISDN, and Long Distance services, and is expected to be operational by
the beginning of the third quarter 1999.

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
various strategic vendors,  and Internet Service Providers  ("ISP"),  as well as
switchless resellers,  The Company will build a customer base that will purchase
its business solutions and applications. Initially, the Company will concentrate
its  activities  in the nine state  BellSouth  region  which  includes  Florida,
Georgia,  North  Carolina,  South  Carolina,  Alabama,  Tennessee,  Mississippi,
Louisiana and Kentucky.

COMPETITION

         The market  for  telecommunications  products  and  services  is highly
competitive and characterized by the frequent introduction of new products based
upon  rapidly  changing   technologies.   The  Company  competes  with  numerous
well-established  manufacturers  and suppliers of  telecommunications  products,
some  of  which  dominate  certain  market  segments.   Most  of  the  Company's
competitors possess  substantially greater financial,  marketing,  personnel and
other  resources  than the Company,  have  established  reputations  relating to
product   design,   development,   manufacture,   marketing   and   service   of
telecommunications  products  and have  significant  budgets  to permit  them to
implement extensive advertising and promotional campaigns to market new products
in response to competitors.

PERSONNEL



                                        6

<PAGE>



         As of August 20,  1999,  the Company had 24  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.  PROPERTIES

         The following  table sets forth certain  information  at March 31, 1999
regarding the Company's office  facilities,  which are leased by the Company and
certain other information relating to its property at that date.



<TABLE>
<CAPTION>
                                                 ANNUAL RENT             LEASE EXPIRES           SQUARE FOOTAGE
                                                 -----------             -------------           --------------

<S>                                             <C>                   <C>                         <C>
6702 Benjamin Road, Suite 300                      $66,000             December 31, 1999             2,400
Tampa, FL 33634

10001 N.W. 50th Street, Suite 105                  $30,000             November 30, 1999             3,400
Sunrise, Florida 33351
</TABLE>

         At March  31,  1999,  the net  book  value  of the  Company's  computer
equipment and other  furniture,  fixtures and equipment at its existing  offices
totaled $752,256. For more information,  see Note 2 of the Notes to Consolidated
Financial Statements.

ITEM 3.  LEGAL PROCEEDINGS

         On February 2, 1999 Diverse Capital  Corporation  ("Diverse")  acquired
Orlando Digital Telephone  Corporation ("ODT") in exchange for 325,000 shares of
Diverse  common  stock and  625,000  shares of Diverse  Convertible  Preferred A
stock.  The  325,000  shares of common  stock were  issued to ODT  shareholders.
Diverse  reserved  the right at the time of the  closing to obtain an  appraisal
substantiating that the approximate value of ODT was $2.8 million. Subsequently,
USA Digital, Inc., the successor to Diverse, obtained an appraisal which did not
substantiate  such value,  and, on May 14, 1999, in the Circuit Court in and for
Hillsborough  county,  Florida,  filed a  complaint  against  ODT and its former
shareholders  seeking rescission of the ODT acquisition.  The Defendants filed a
Motion to Dismiss,  which was served on the Company on June 19,  1999. A hearing
on  defendants'  motion is set for September 27, 1999.  Defendants  have not yet
filed an Answer or asserted any  counterclaims or defenses.  In addition to such
other  relief  that the Court may grant in the event that the  Company  does not
prevail,  including enforcement of the acquisition agreement, the Company may be
required to issue 625,000 shares of Class A Convertible  Preferred  Stock to the
ODT shareholders.

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



                                        7

<PAGE>



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

         None.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'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, 1999, the last trading date in the Company's fiscal
year, the Company's common stock closed at $3.25. At August 20, 1999, there were
2,802,000 shares of the Company's common stock  outstanding,  which were held of
record by approximately 49 stockholders,  not including  persons or entities who
hold the stock in nominee or "street" name through various brokerage firms.


<TABLE>
<CAPTION>
                                                                                            PRICE RANGE
                                                                                            -----------
                               QUARTER ENDED                                        HIGH                  LOW
                               -------------                                        ----                  ---
Fiscal year ended March 31, 1999:
<S>                                                                              <C>
     Fourth Quarter ended March 31, 1999(1)...............................       $ 3.50                $ 3.00
</TABLE>

-----------------
(1) Fourth quarter data is for the period of March 26, 1999 to March 31, 1999.

         The  Company  did not pay  dividends  in fiscal  year 1999 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.




                                        8

<PAGE>



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

         The following  discussion  and analysis  should be read in  conjunction
with the financial  statements and related notes included elsewhere in this Form
10-KSB.  This discussion  contains  forward-looking  statements based on current
expectations,  which involve  risks and  uncertainties.  Actual  results and the
timing of certain events could differ materially from the  forward-looking  as a
result of a number of factors.

OVERVIEW

         The Company was incorporated  under the laws of Nevada on March 5, 1999
and is a holding  company  that intends to build a highly  integrated,  facility
based, convergent  communications company. The Company intends to grow primarily
through the acquisition of Internet service  providers,  telephone  interconnect
companies,  computer/network  integrators,  and switchless  resellers,  and then
selling its products and services to its newly  acquired  customer  base.  These
products  and  service  will  include :  high-speed  Internet  access,  Internet
solutions,   electronic  commerce,  voice  over  Internet,  Internet  telephony,
co-location,   local  and  long  distance  telephone  services,   communications
equipment  sales and servicing,  computer and network  integration  and wireless
solutions.

         The Company has entered  into a lease  agreement  with  Siemens for the
lease of DCO telephone switch.  This switch will be located in Orlando,  Florida
and is expected to be operational by the 4th quarter 1999. The operation of this
switch will qualify the Company as facility-based  under the  Telecommunications
Act of 1996. Further, the Company is currently in negotiations with Siemen's for
the  lease of three  additional  remote  switches  that will be used to link its
network in the State of Florida.

         On June 2, 1999,  the Company  purchased a secured  interest in Syncom,
Inc., a Florida  corporation  that owns and operates  Gator.net.  Gator.net is a
Gainesville,  Florida  Internet  service  provider that currently has a customer
base of 2,500  subscribers.  Syncom,  Inc.  is  currently  operating  under  the
protection  of Chapter 11 of the United States  Bankruptcy  Code in the Northern
District of Florida.  Through the  operation of its  Siemen's DCO switch  and/or
with its  BellSouth  reseller  agreement,  the Company  possesses the ability to
reduce  Gator.net's  monthly  telephone circuit expenses by nearly 70%, and thus
make Gator.net  profitable at its current operating levels.  Syncom has recently
submitted a plan of reorganization to the Bankruptcy Court that if accepted will
enable the Company to purchase 100% of Syncom.

         On  July  12,  1999  the  Company  completed  the  acquisition  of  DSA
Computers,  Inc., a Sunrise, Florida based computer and network integrator.  DSA
will operate as a wholly-owned  subsidiary of the Company. In 1998 DSA generated
more than $1.3 million in revenues  with gross profit  margins of  approximately
25%. The purchase  price of the  acquisition  was 40,000 shares of the Company's
Class B Convertible Preferred Stock, Series 2.



                                        9

<PAGE>



         On August 5, 1999 the Company  completed its  acquisition  of Telephone
Engineering and Maintenance,  Inc. (T.E.A.M.),  a Tampa, Florida based telephone
interconnect company that has been in business since 1986. T.E.A.M. will operate
as a  wholly-owned  subsidiary  of the  Company.  During its 1998  fiscal  year,
T.E.A.M.  generated  nearly  $800,000 in  operating  revenues  with gross profit
margins in excess of 20%. The purchase price of the acquisition is 50,000 shares
of the Company's Class B Convertible Preferred Stock, Series 1.

STATEMENT OF OPERATIONS

         The Company did not  generate  any  revenues for the period ended March
31, 1999, as it was in the process of establishing the necessary  infrastructure
that  will  enable it to meet its  acquisition  goals  over the next 24  months.
During the above  period the Company  incurred  $168,917  in expenses  that were
mainly associated with the development of the aforementioned infrastructure. The
Company sustained a net loss of $0.12 per share for the period.

CASH FLOW ACTIVITY

         During the period ended March 31, 1999, the Company  received  proceeds
of $144,500 from the sale of common stock  pursuant to Regulation D, Rule 504 of
the  Securities  Act of 1933, as amended.  The net result to the Company for the
period was an increase in its cash position of $62,970. Additionally, $90,176 in
expenses  that  were  incurred  as a result  of  various  consulting  fees  were
exchanged for common stock in the Company.

LIQUIDITY AND CAPITAL RESOURCES

         The  Company's  strategy  is to acquire  established  Internet  service
providers,  computer/network integrators,  telephone interconnect companies, and
switchless  resellers mostly in exchange for stock in USA Digital.  As such, the
Company does not  anticipate  requiring  large sums of money to  consummate  its
anticipated  acquisitions.   However,  the  Company  does  anticipate  incurring
expenses relating to the completion of future  acquisitions,  required deposits,
and switching  activities.  To that end, the Company has  currently  initiated a
Private Placement to raise an additional $1 million in capital.

IMPACT OF NEW ACCOUNTING STANDARDS

         The Financial  Accounting  Standards  Board has recently issued several
new  accounting  pronouncements.  Statement  No. 130,  "Reporting  Comprehensive
Income" establishes  standards for reporting and display of comprehensive income
and its  components,  and is effective for fiscal years beginning after December
15, 1997.  Statement No. 131,  "Disclosures  about Segments of an Enterprise and
Related  Information"  establishes  standards  for the way that public  business
enterprises  report  information  about operating  segments in annual  financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic  areas,  and  major  customers,   and  its  effective  for  financial
statements for


                                       10

<PAGE>



periods  beginning  after  December 15,  1997.  Statement  No. 132,  "Employers'
Disclosure About Pensions and Other Postretirement  Benefits" revises employers'
disclosure requirements about pension and other postretirement benefit plans and
in effective for fiscal years beginning  after December 15, 1997.  Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities"  establishes
accounting  and  reporting  standards  for  derivative  instruments  and related
contracts  and hedging  activities.  This  statement is effective for all fiscal
quarters and fiscal years  beginning  after June 15, 1999. The Company  believes
that its adoption of these pronouncements will not have a material effect on the
Company's financial position or results of operations.

YEAR 2000 ISSUE

         The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive  and complex as virtually  every  computer  operation
will be affected in some way by the rollover of the two-digit  year value to 00.
The issue is whether  computer  systems will properly  recognize  date-sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail.

         The Company uses standard off the shelf accounting software package for
all of its accounting requirements. Management has contacted the software vendor
and determined  that the accounting  software is Microsoft  based and management
continually  monitors  the Year 2000  status of such  software.  Management  has
verified  Year 2000 status with is primary  vendors,  including  Siemens,  as it
relates to its telephone  switches,  and has not identified any Year 2000 issues
with those  vendors.  Costs of  investigating  internal and  external  Year 2000
compliance  issues  have not been  material  to date.  As a  result,  management
believes that the effect of  investigating  and resolving  Year 2000  compliance
issues on the Company will not have a material  effect on the  Company's  future
financial position or results of operations.

         In  addition  to the  effect  of  Year  2000  issues  on the  Company's
accounting  and  management  systems,  year 2000 issues may effect the Company's
products and programs as they are  primarily  computer  related.  The  Company's
products have been developed and tested with regard to year 2000 compliance. All
products were deemed to be Year 2000  compliant.  The costs of such  development
and testing and  validating  were minimal and absorbed as part of the  Company's
normal quality control procedures.

         The  Company  has funded its Y2K plan from  available  cash and has not
separately  accounted for these costs in the past. To date, these costs have not
been material.  Any additional costs that may be incurred are not anticipated to
be material.  The Company may  experience  material  problems and costs with Y2K
compliance that could adversely  affect its business,  results of operations and
financial condition.



                                       11

<PAGE>



         The Company has not yet fully  developed a contingency  plan to address
situations  that may  result if it is unable to  achieve  Y2K  readiness  of its
critical  operations.  Finally,  the Company is also subject to external  forces
that  might  generally  affect  industry  and  commerce,   such  as  utility  or
transportation   company   Y2K   compliance   failures   and   related   service
interruptions.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Financial Statements of USA Digital,  Inc. as of March 31, 1999 are
included in pages F-1 through F-19 of this report.

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

         There have been no  disagreements  concerning  any matter of accounting
principle  or  financial  statement  disclosure  between  the  Company  and  its
independent auditors.



                                       12

<PAGE>



                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

         Mark D.  Cobb,  age 50,  has been the  President  and  Chief  Executive
Officer of the Company since its inception.  Mr. Cobb, has more than 20 years of
telecommunications experience. From 1996-1998 he was employed as Chief Operating
Officer  by TSC,  a full  service  facility  based  carrier,  located  in Tampa,
Florida.  Under Mr. Cobb's  leadership TSC grew from billing $100,000 monthly to
$2.5  million  a month  in just a  12-month  period.  Prior  to that he was Vice
President Sales & Marketing for Phone One, Inc. which was acquired by Intermedia
Communications,  Inc.  in  December  of 1994,  where he  pioneered  a  wholesale
division  and  generated  more than $23  million in  contracts  in less than six
month. Mr. Cobb has also held management positions with AT&T, ITT, ATC/Microtel,
Southern  Bell and  Metromedia.  In  addition  to his  successful  career in the
telecommunications  industry,  Mr. Cobb enjoyed a distinguished career as a U.S.
Army officer and helicopter pilot, flying 2,000 hours of combat time in Vietnam.
Mr.  Cobb left  active  duty as a Captain  at the age of 23  having  earned  the
following  military  awards:  Distinguished  Flying  Cross,  Bronze Star, 38 Air
Medals,  Air Medal with Combat V for Valor, Navy Commendation  Medal with Combat
V, Vietnamese Cross of  Gallantry/Bronze  Star, Army  Commendation  Medal,  Good
Conduct Ribbon and National Defense Ribbon.

         Donald E. Darden,  age 53, has been a director of the Company since its
inception. From 1973 to present, Mr. Darden has run an architectural firm.

         Peter J. Lyons,  age 54, has been a director of the Company  since July
1, 1999. Mr. Lyons has more than 35 years of telecommunications  experience, and
is currently an  independent  telecommunications  consultant.  From 1998-June 1,
1999 Mr.  Lyons was the  President & General  Manager of the Broad Band  Carrier
Division of Siemens  ICN.  From  1996-1998  he was Vice-  President of DCO & AIN
Business Units for Siemens Telecom Networks, where he was credited with bringing
in $31  million  net  profit  from  previously  abandoned  Narrowband  Switching
Product.  From  1988-1996  Mr.  Lyons was  Director of OCC/CAP  Sales at Siemens
Stromberg-Carlson.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

         Kenneth  D.  Allen,  age 43,  has  served as Vice  President  of Switch
Operations of the Company since its inception.  Mr. Allen has more than 21 years
of managerial experience in the telecommunications  industry with an emphasis on
operations,  MIS and technical support.  From 1996-1998 he was Vice President of
Operations/Business  Development at Melbourne International Communications Ltd.,
Melbourne,  Florida where his duties included  responsibility for all operations
including MIS, Switching,  Network  Management,  Technical and Customer Service.
Prior  to that  Mr.  Allen  was  employed  at  Ameritech  Communications,  Inc.,
Rosemont,  Illinois as a Director of Product Marketing Manager where he designed
and managed a network that handled a $75 million  customer  base.  Additionally,
Mr. Allen has held managerial positions with Phonetel Technologies,


                                       13

<PAGE>



Inc.,  LCI  International  and MCI  Communications.  Mr. Allen has the following
certifications:  DSC 400/600 switch, SS7 signaling,  DMS-250 switch, DCO Siemens
switch, SAT 565 1.8 and 2.4, FiberOptic Transmission Systems.

         H. Ralph Cole,  age 54, has served as the  President of T.E.A.M.,  Inc.
since 1986.  Mr. Cole formed  T.E.A.M.  in 1986 a premier  interconnect  company
servicing Tampa,  florida and its outlying areas. From 1984-1986 Mr. Cole was an
executive for Telplus, a large nationwide interconnect company located in Tampa.
From 1974-1984 Mr. Cole  functioned as a top consultant to United  Technologies.
Prior to joining United Technologies, Mr. Cole was employed by GTE for more than
4 1/2 years designing land and microwave transmission systems.

         David Seal, age 43, has served as President DSA  Computers,  Inc. since
1991. In 1991 Mr. Seal formed DSA Computers,  Inc., a full service  hardware and
network  sales and  service  company.  Eight  years  later DSA  services  all of
Florida, as well as some parts of the Caribbean.



                                       14

<PAGE>



ITEM 10. EXECUTIVE COMPENSATION

         The  following  table  sets  forth  the cash  compensation  paid by the
Company for services  rendered in all  capacities  during the three months ended
March 31, 1999 to the President and Chief Executive Officer of Company. No other
executive  officer of the Company had annual  salary and bonus  during the three
months ended March 31, 1999 aggregating in excess of $100,000.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                                    LONG TERM COMPENSATION
                                                                                         ------------------------------------------

                                                    ANNUAL COMPENSATION(1)               AWARDS        PAYOUTS
                                       --------------------------------------------------------------------------------------------

                 (a)                     (b)        (c)         (d)            (e)           (g)         (h)            (i)
                                                                             OTHER
                                                                             ANNUAL                     LTIP
                                                  SALARY                  COMPENSATION     OPTIONS     PAYOUTS        ALL OTHER
     NAME AND PRINCIPAL POSITIONS        YEAR       ($)      BONUS($)        ($)(1)        (#)(2)        ($)     COMPENSATION($)(3)
     ----------------------------        ----       ---      --------        ------        ------        ---     ------------------
<S>                                     <C>    <C>         <C>             <C>           <C>           <C>     <C>
Mark D. Cobb
President and Chief Executive Officer.   1999   $108,000     $ ---            ---         750,000        ---             ---
</TABLE>


-----------
(1)      For fiscal year 1999,  there were no: (a) perquisites with an aggregate
         value for any named  individual  in excess of the  lesser of $50,000 or
         10% of the total of the individual's salary and bonus for the year; (b)
         payments   of   above-market    preferential   earnings   on   deferred
         compensation;  (c)  payments  of  earnings  with  respect to  long-term
         incentive  plans prior to  settlement  or  maturation;  (d) tax payment
         reimbursements; or (e) preferential discounts on stock.
(2)      Includes  750,000 shares of Common Stock subject to options  granted to
         Mr. Cobb pursuant to the employment  agreement  between the Company and
         Mr.  Cobb  dated  January  5,  1999.  The  options  granted  under  the
         employment  agreement  are  intended  to  qualify as  "incentive  stock
         options"  under  Section 422 of the Internal  Revenue  Code, as amended
         (the "Code") to the maximum  extent  possible,  and any options that do
         not qualify  will  constitute  non-qualified  stock  options.  Of these
         options,  125,000  became  exercisable  on  January  5,  1999  with the
         remaining options becoming  exercisable at annual increments  beginning
         on January  15, 1999 to January  15,  2002 at varying  exercise  prices
         ranging from $1.50 per share to $3.00 per share. Such options generally
         remain  exercisable  until the tenth  anniversary of the grant date. In
         the case of a change in control,  as defined in the Stock  Option Plan,
         all options granted become immediately exercisable.
(3)      Includes (i) the dollar value of premiums,  if any, paid by the Company
         with respect to term life  insurance  (other than group term  insurance
         coverage  under  a  plan  available  to   substantially   all  salaried
         employees) for the benefit of the executive officer.

CERTAIN EMPLOYEE BENEFIT PLANS AND EMPLOYMENT AGREEMENTS

         Employment  Agreement.  On January 5, 1999 the Company  entered into an
employment agreement with its President. The effective date of this agreement is
November  10,  1998,  and it for a period of five  years at which time it can be
renewed by mutual agreement of both parties.  The agreement may be terminated at
any time by mutual  written  agreement  by the  parties.  The  consideration  is
$96,000  annually paid at regular payroll periods.  As additional  compensation,
the  Company  is  issuing  a total  of  750,000  options  vesting  and  becoming
exercisable at annual intervals ranging from January 5, 1999 to January 15, 2002
at varying  exercise prices ranging from $1.00 per share to $3.00 per share. All
options expire five years following their initial vesting date.



                                       15

<PAGE>



         Consulting Agreements. On January 5, 1999, effective November 10, 1998,
the Company  entered  into a five year  consulting  agreement  with Dunn Capital
Corporation  whereby  the Company  will be  provided  with advice with regard to
corporate finance,  evaluations of business  partners,  mergers and acquisitions
and such other  matters as requested.  This  agreement may be extended by mutual
written agreement of the parties.  As consideration  for the services  provided,
the Company  issued  150,000  shares of the Company's  common stock as a signing
bonus. The Company pays a monthly fee of $8,000 in semi-monthly installments. As
additional  compensation,  the  Company  issued  a  total  of  750,000  options,
exercisable  at annual  intervals  ranging  from January 5, 1999 to February 15,
2002 at varying  exercise prices from $1.00 to $3.00. The Company also agreed to
pay the organization a 2% finders fee, payable in cash or stock at the Company's
election, on the total value of any acquisition,  merger,  reverse-merger and/or
equity or debt financing  introduced to the Company,  excluding  Orlando Digital
Telephone  and Blazoon  Systems,  Incorporate.  In addition,  the Company  shall
provide the  organization  with a monthly  unaccounted for expense  allowance of
$2,500.

         On January 5, 1999,  effective  November 10, 1998, the Company  entered
into a two year consulting  agreement with Bell Entertainment,  Inc. whereby the
Company  will  be  provided  with  advice  with  regard  to  corporate  finance,
evaluations  of  business  partners,  mergers  and  acquisitions  and such other
matters as requested. This agreement may be extended by mutual written agreement
of the parties. As consideration for the services provided the Company shall pay
a monthly fee of $5,000,  plus  $200/hour  for any time in excess of 50 hours in
any calendar  month. As additional  compensation,  the Company issued a total of
437,500 options, exercisable at annual intervals ranging from January 5, 1999 to
February 15, 2002 at varying exercise prices between $1.00 to $3.00.

         1998  Compensatory  Stock  Option  Plan.  The Stock Option Plan ("Stock
Option  Plan") has been  adopted by the Board of  Directors  of the  Company and
approved by the Company's stockholders.  The purpose of the Stock Option Plan is
to promote the growth of the Company and its affiliates by linking the incentive
compensation of officers, key executives and directors with the profitability of
the  Company.  The  Stock  Option  Plan is not  subject  to  ERISA  and is not a
tax-qualified plan. The Company has reserved an aggregate of 1,500,000 shares of
Common Stock for issuance upon the exercise of stock  options  granted under the
Plan.

         The Stock  Option  Plan is  administered  by the members of the Board's
Compensation Committee who are disinterested directors ("Option Committee"). The
Stock Option Plan does not provide for the grant of  "incentive  stock  options"
within the  meaning of Section  422 of the  Internal  Revenue  Code of 1986,  as
amended (the  "Code"),  and provides only for the grant of  non-qualified  stock
options  to  purchase  Common  Stock  of the  Company  ("Options")  to  eligible
employees.  The Option  Committee has discretion  under the Stock Option Plan to
establish  certain  material  terms  of the  Options  granted  to  officers  and
employees   provided  such  grants  are  made  in  accordance  with  the  Plan's
requirements.

         All  costs of the  Stock  Option  Plan are  borne by the  Company.  The
Company has reserved the right to amend or  terminate  the Plan,  in whole or in
part, subject to the requirements of all applicable laws.


                                       16

<PAGE>



         The following  table  summarizes the grants that were made to the Named
Executive Officer during fiscal 1999.

                      OPTION/SAR GRANTS IN FISCAL YEAR 1999


<TABLE>
<CAPTION>
                                                                     INDIVIDUAL GRANTS
                                      -------------------------------------------------------------------------
                                           NUMBER OF          PERCENT OF
                                          SECURITIES             TOTAL
                                          UNDERLYING         OPTIONS/SARS
                                         OPTIONS/SARS         GRANTED IN          EXERCISE OR
                                            GRANTED           FISCAL YEAR         BASE PRICE       EXPIRATION
NAME                                        (#)(1)                (%)          ($ PER SHARE) (2)      DATE
----                                  ------------------- ------------------- ------------------  -----------
<S>                                 <C>                   <C>                <C>                <C>
Mark D. Cobb
President and Chief Executive Officer      750,000               40.0               2.17           1/15/2007
</TABLE>

(1)      The options  granted  under the  employment  agreement  are intended to
         qualify as "incentive  stock options" under Section 422 of the Internal
         Revenue Code, as amended (the "Code") to the maximum  extent  possible,
         and any options that do not qualify will constitute non-qualified stock
         options.  Of these options,  125,000  became  exercisable on January 5,
         1999  with  the  remaining  options  becoming   exercisable  at  annual
         increments beginning on January 15, 1999 to January 15, 2002 at varying
         exercise  prices ranging from $1.50 per share to $3.00 per share.  Such
         options generally remain exercisable until the fifth anniversary of the
         vesting  date.  In the case of a change in  control,  as defined in the
         Stock Option Plan, all options granted become immediately exercisable.
(2)      Represents  the  weighted-average  exercise  price of options  granted.
         Actual exercise prices range from $1.00 per share to $3.00 per share.

         1998  Employee  Stock   Compensation  Plan.  The  1998  Employee  Stock
Compensation Plan (the "Compensation Plan") is intended to further the growth of
the Company and its  affiliates  by  supporting  and  increasing  the  Company's
ability to attract,  retain and  compensate  officers  and key  employees of the
Company.   The  Compensation  Plan  is  not  subject  to  ERISA  and  is  not  a
tax-qualified  plan. The Company has reserved  1,000,000  shares of Common Stock
for issuance under the Compensation Plan.

         The Compensation Committee of the Board of Directors ("Committee") will
be responsible for the  administration  of the  Compensation  Plan and will have
sole power to award Common  Stock under the  Compensation  Plan.  Subject to the
express  provisions of the  Compensation  Plan,  the  Committee  shall have full
authority and sole and absolute  discretion to interpret the Compensation  Plan,
to  prescribe,  amend and rescind rules and  regulations  relating to it, and to
make all other  determinations which it believes to be necessary or advisable in
administering this Plan. The determination of those eligible to receive an award
shall rest in the sole discretion of the Committee, subject to the provisions of
the Compensation Plan. Awards may be made as compensation for services rendered,
directly or in lieu of other compensation  payable, as a bonus in recognition of
past service or performance or may be sold to an employee as herein provided.


                                       17

<PAGE>



         The  following  table  provides the value for  "in-the-money"  options,
which  represent  the positive  spread  between the  exercise  price of any such
existing stock options and the fiscal year-end price of the Common Stock,  which
was $3.25 per share.  The first  installment  of options  became  exercisable on
January 5, 1999. The Named Executive Officer did not exercise any vested options
during the fiscal year ended March 31, 1999.


     AGGREGATED OPTIONS IN 1999 FISCAL YEAR AND 1999 FISCAL YEAR END OPTIONS


<TABLE>
<CAPTION>
                                                     NUMBER OF SECURITIES                 VALUE OF UNEXERCISED
                                                    UNDERLYING UNEXERCISED                    IN-THE-MONEY
                                                    OPTIONS/SARS AT FISCAL               OPTIONS/SARS AT FISCAL
                                                           YEAR-END                            YEAR-END(1)
                                                              (#)                                  ($)
NAME                                               EXERCISABLE/UNEXERCISABLE            EXERCISABLE/UNEXERCISABLE
----                                               -------------------------            -------------------------
Mark D. Cobb
<S>                                               <C>                                  <C>
President and Chief Executive Officer.......           250,000 / 500,000                    500,000 / 312,500
</TABLE>

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

(1)      The  closing  price  per share of  Common  Stock on March 31,  1999 was
         $3.25, and options have exercise prices ranging from $1.00 to $3.00 per
         share, which equals spreads of $2.25 per share to $0.25 per share.




                                       18

<PAGE>



ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table shows the number of shares of the Company's  Common
Stock  beneficially  owned by each person known to be the beneficial owner of 5%
of the company's  common stock,  each  director and executive  officer,  and all
directors  and  executive  officers of the Company as a group,  as of August 20,
1999.  Except as  otherwise  indicated,  each person and each group shown in the
table has sole voting and investment  power with respect to the shares of Common
Stock listed next to their name.


<TABLE>
<CAPTION>
                                                                     AMOUNT AND NATURE              PERCENT OF
                                                                       OF BENEFICIAL               COMMON STOCK
       NAME                        POSITION                             OWNERSHIP(1)               OUTSTANDING(2)
       ----                        --------                             ------------               --------------
<S>                        <C>                                      <C>                          <C>
Bell Entertainment, Inc.     Consultant                                  270,500(3)                         9.4%
John D. Brasher, Jr.         Shareholder                                 220,000                            7.9%
Dunn Capital Corp.           Consultant                                  843,000(4)                        27.6%
J.R. Nelson                  Shareholder                                 247,500                            8.8%
Mark D. Cobb                 Director, President and                     850,000(5)                        27.9%
                             Chief Executive Officer
Donald E. Darden             Director                                     45,000                            1.6%
Peter J. Lyons               Director                                     50,000                            1.8%
Kenneth D. Allen             Vice President                               50,000                            1.4%
H. Ralph Cole                President (T.E.A.M.)                            -(6)                             *
David Seal                   President (DSA Computers)                       -(7)                             *
All directors and executive officers                                     945,000                           31.0%
as a group ( persons)
</TABLE>

---------------------
* Less than one percent of outstanding Common Stock.

(1)      All persons  shown in the above  table have sole voting and  investment
         power, except as otherwise indicated.
(2)      Percentages  with  respect to each person or group of persons have been
         calculated on the basis of 2,802,000  shares of Common Stock, the total
         number of shares of the Company's common stock outstanding as of August
         20,  1999,  plus the number of shares of Common Stock which such person
         or group has the right to acquire within 60 days after August 20, 1999.
(3)      Includes  options to purchase  62,500  shares of the  Company's  Common
         Stock at $1.00 per share.  Does not include options to purchase 187,500
         shares of the Company's  Common Stock at prices  ranging from $1.00 per
         share to $3.00 per share.
(4)      Includes  options to purchase  250,000  shares of the Company's  Common
         Stock at $1.00 per share.  Does not include options to purchase 500,000
         shares of the Company's  Common Stock at prices  ranging from $1.50 per
         share to $3.00 per share.
(5)      Includes  options to purchase  250,000  shares of the Company's  Common
         Stock at $1.00 per share . Does not include options to purchase 500,000
         shares of the Company's  Common Stock at prices  ranging from $1.50 per
         share to $3.00 per share.
(6)      Does not include: 50,000 shares of voting Class B Convertible Preferred
         Stock, Series 1 with each convertible into five shares of the Company's
         Common Stock beginning on August 5, 2000.
(7)      Does not include 40,000 shares of voting Class B Convertible  Preferred
         Stock,  Series 2 with each share  convertible  into five  shares of the
         Company's  Common Stock beginning on July 12, 2000. All shares of Class
         B Convertible  Preferred  Stock have a  liquidation  value of $4.00 per
         share and are subject to cash  redemption at the  liquidation  value at
         the election of either the Company or the holder  beginning three years
         from  the  date  of  issuance  upon  thirty  days  written  demand  for
         redemption by either party.



                                       19

<PAGE>



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On January 5, 1999,  effective  November 10, 1998, the Company  entered
into a five year consulting  agreement with Dunn Capital Corporation whereby the
Company  will  be  provided  with  advice  with  regard  to  corporate  finance,
evaluations  of  business  partners,  mergers  and  acquisitions  and such other
matters as requested. This agreement may be extended by mutual written agreement
of the parties.  As consideration for the services provided,  the Company issued
150,000  shares of the Company's  common stock as a signing  bonus.  The Company
pays a  monthly  fee of  $8,000  in  semi-monthly  installments.  As  additional
compensation,  the Company  issued a total of 750,000  options,  exercisable  at
annual  intervals  ranging  from January 5, 1999 to February 15, 2002 at varying
exercise  prices  from  $1.00 to  $3.00.  The  Company  also  agreed  to pay the
organization  a 2%  finders  fee,  payable  in cash or  stock  at the  Company's
election, on the total value of any acquisition,  merger,  reverse-merger and/or
equity or debt financing  introduced to the Company,  excluding  Orlando Digital
Telephone  and Blazoon  Systems,  Incorporate.  In addition,  the Company  shall
provide the  organization  with a monthly  unaccounted for expense  allowance of
$2,500.

         On January 5, 1999,  effective  November 10, 1998, the Company  entered
into a two year consulting  agreement with Bell Entertainment,  Inc. whereby the
Company  will  be  provided  with  advice  with  regard  to  corporate  finance,
evaluations  of  business  partners,  mergers  and  acquisitions  and such other
matters as requested. This agreement may be extended by mutual written agreement
of the parties. As consideration for the services provided the Company shall pay
a monthly fee of $5,000,  plus  $200/hour  for any time in excess of 50 hours in
any calendar  month. As additional  compensation,  the Company issued a total of
437,500 options, exercisable at annual intervals ranging from January 5, 1999 to
February 15, 2002 at varying exercise prices between $1.00 to $3.00.

         On March 22, 1999, June 25, 1999 and August 18, 1999, respectively, the
Company issued 25,000,  25,000 and 25,000 shares of common stock,  respectively,
to Bell  Entertainment,  Inc.  at $1.00 per  share in  connection  with  private
placements of the Company's common stock pursuant to Rule 504 of Regulation D of
the Securities Act of 1933, as amended.  Bell  Entertainment paid for the shares
by converting accrued, but unpaid consulting fees to equity in the Company.


                                       20

<PAGE>



                                     PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Listed below are all financial statements and exhibits filed as part of this
report:

      (1)        The balance  sheets of USA  Digital,  Inc. as of March 31, 1999
                 and the related consolidated  statement of operations,  changes
                 in  stockholders'  equity and cash  flows for the three  months
                 ended March 31, 1999,  together  with the related notes and the
                 independent  auditors'  report  of  Weinberg  &  Company,  P.A.
                 independent certified public accountants.

      (2)        The balance sheet of USA Digital,  Inc. as of June 30, 1999 and
                 the related  statement of operational  changes in stockholders'
                 equity and cash flow for the three months then ended,  together
                 with the related notes and review report of Weinberg & Company,
                 P.A. independent certified public accountants.

      (3)        Exhibits

<TABLE>
<CAPTION>
      EXHIBIT NO.                                   DESCRIPTION
      -----------                                   -----------

     <S>            <C>
       3.1              Certificate of Incorporation of USA Digital, Inc.

       3.2              Bylaws of USA Digital, Inc.

       4.3              Specimen of Stock Certificate of USA Digital, Inc.

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

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

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

      10.4              1998 Compensatory Stock Option Plan*


      10.5              1998 Employee Stock Compensation Plan*

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

      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*

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

      10.9              Employment  Agreement  by  and  between  DSA   Computers,
                        Inc. and David Seal*

     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*

     10.11              Employment    Agreement   by   and   between    Telephone
                        Equipment Maintenance, Inc., and H. Ralph Cole*

      21.1              Subsidiaries of the Registrant*

      23.1              Consent of Weinberg & Company, P.A.

      27.1              Financial Data Schedule

</TABLE>

*     Incorporated by reference to the Registration  Statement on  Form 10-SB as
      filed with the Securities and Exchange Commission on September 17, 1999.

(b)   The Company filed no reports on Form 8-K during the fourth  quarter of the
      fiscal year ended March 31, 1999.



                                       21

<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange  Act of 1934,  the  Registrant  certifies  that it has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Tampa, State of Florida, on September 16, 1999.

                             USA Digital, Inc.


                             By: /s/ Mark D. Cobb
                                 -----------------------------------------------
                             Mark D. Cobb, President and Chief Executive Officer

      Pursuant to the  requirements  of the Securities  Exchange Act of 1934, as
amended,  this report has been signed by the following persons in the capacities
and on the dates indicated.

<TABLE>
<CAPTION>
              Name                                        Title                                       Date
              ----                                        -----                                       ----

<S>                                   <C>                                                <C>
/s/ Mark D. Cobb                         Director, President and Chief Executive            September 16, 1999
-------------------------------------    Officer (principal executive officer and
Mark D. Cobb                             principal accounting officer)


                                         Director
-------------------------------------
Donald E. Darden

/s/ Peter J. Lyons                       Director                                           September 16, 1999
-------------------------------------
Peter J. Lyons
</TABLE>




                                       22


<PAGE>


                                USA DIGITAL, INC.

                              FINANCIAL STATEMENTS

                              AS OF MARCH 31, 1999

<PAGE>



                                USA DIGITAL, INC.
                                    CONTENTS
                        -----------------------------------


  PAGE       1 -  INDEPENDENT AUDITORS' REPORT

  PAGE       2 -  BALANCE SHEET AS OF MARCH 31, 1999

  PAGE       3 -  STATEMENT OF CHANGES IN STOCKHOLDERS'
                  EQUITY FOR THE PERIOD FROM JULY 9, 1998
                  (INCEPTION) TO MARCH 31, 1999

  PAGE       4 -  STATEMENT OF OPERATIONS
                  FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION)
                  TO MARCH 31, 1999

  PAGE       5 -  STATEMENT OF CASH FLOWS
                  FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION)
                  TO MARCH 31, 1999

  PAGES 6 - 19 -  NOTES TO FINANCIAL STATEMENT
                  AS OF MARCH 31, 1999


<PAGE>


                          INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying balance sheet of USA Digital,  Inc. as of March
31, 1999 and the related  statements  of  operations,  changes in  stockholders'
equity and cash flows for the period from July 9, 1998  (inception) to March 31,
1999.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

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

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



                                                     WEINBERG & COMPANY, P.A.

Boca Raton, Florida
July 15, 1999


                                        F-1
<PAGE>





                                USA DIGITAL, INC.
                                  BALANCE SHEET
                              AS OF MARCH 31, 1999

                                     ASSETS

<TABLE>
<S>                                                <C>
CURRENT ASSETS
 Cash                                              $   65,003
 Loan receivables                                      24,311
 Prepaid expenses                                      78,359
                                                   ----------

    Total Current Assets                              167,673

PROPERTY AND EQUIPMENT - NET                          752,256

OTHER ASSETS - DEFERRED INTEREST ON
 CAPITAL LEASE OBLIGATION                             218,391
                                                   ----------

TOTAL ASSETS                                       $1,138,320
                                                   ----------
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
 Accounts payable and accrued expenses             $   96,718
 Capitalized lease obligation-current                  49,485
                                                   ----------

    Total Current Liabilities                         146,203

OTHER LIABILITIES
 Capitalized lease obligation-non current             940,200
                                                   ----------
    Total Liabilities                               1,086,403
                                                   ----------
STOCKHOLDERS' EQUITY
   Preferred stock-Class A, $.001 par value
    5,000,000 shares authorized, none
    issued and outstanding                               --
   Preferred stock-Class B, $.001 par value
    5,000,000 shares authorized, none issued
    and outstanding                                      --
   Common stock, $0.001 par value, 50,000,000
    shares authorized, 2,649,500 shares issued
    and outstanding                                     2,650
   Additional paid-in capital                         263,236
   Accumulated deficit                               (213,969)
                                                   ----------

     Total Stockholders' Equity                        51,917
                                                   ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $1,138,320
                                                   ==========
</TABLE>


                 See accompanying notes to financial statements.

                                        F-2


<PAGE>

                                USA DIGITAL, INC.
                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
         FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO MARCH 31, 1999



<TABLE>
<CAPTION>
                                                               ADDITIONAL
                                        COMMON STOCK            PAID-IN          ACCUMULATED
                                     SHARES     AMOUNT          CAPITAL            DEFICIT              TOTAL
                                     ------     ------          -------          -----------           -------
<S>                                  <C>       <C>             <C>                <C>
Common Stock Issuance                885,000   $   885         $     --           $                   $     885

Stock Issued For:
 Cash                                144,500       145            144,355               --              144,500
 Consulting fees and expenses        295,000       295            119,881               --              120,176
 Acquisition of Orlando
  Digital Telephone                  325,000       325               --                 --                  325

 Issuance of Common Stock
  to stockholders of Blazoon       1,000,000     1,000             (1,000)              --                 --

Net loss for the period
  ended March 31, 1999                  --        --                 --             (213,969)          (213,969)
                                  ----------   -------         ----------         ----------          ---------

BALANCE, March 31, 1999            2,649,500   $ 2,650         $  263,236         $ (213,969)         $  51,917
                                  ==========   =======         ==========         ==========          =========
</TABLE>




                 See accompanying notes to financial statements.

                                        F-3

<PAGE>



                                USA DIGITAL, INC.
                             STATEMENT OF OPERATIONS
         FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO MARCH 31, 1999
         --------------------------------------------------------------


<TABLE>
<S>                                                                 <C>
Income                                                              $      --
                                                                    -----------

Expenses
  Executive compensation                                                 37,333
  Consulting fees                                                       115,886
  Professional fees                                                      27,589
  Office and other operational expenses                                  18,424
  Auto expenses                                                           5,000
  Telephone                                                               4,575
  Insurance                                                               1,654
  Travel and entertainment                                                2,912
  Depreciation                                                              250
  Repairs and maintenance                                                   223
  Bank charges                                                              123
                                                                    -----------

      Total Expenses                                                    213,969
                                                                    -----------
NET LOSS                                                            $  (213,969)
                                                                    ===========

NET LOSS PER COMMON SHARE-BASIC AND DILUTED                         $     (0.16)
                                                                    ===========

WEIGHTED AVERAGE COMMON
 SHARES OUTSTANDING-BASIC AND DILUTED                                 1,336,887
                                                                    -----------
</TABLE>


                 See accompanying notes to financial statements

                                        F-4
<PAGE>






                                USA DIGITAL, INC.
                             STATEMENT OF CASH FLOWS
         FOR THE PERIOD FROM JULY 9, 1998 (INCEPTION) TO MARCH 31, 1999





<TABLE>
<S>                                                                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                             $(213,969)
 Adjustments to reconcile net loss
  to net cash used in
  operating activities:
  Depreciation and amortization                                             250
  Consulting fees and expenses
   incurred in exchange for common stock                                120,176
  Changes in assets and liabilities
   (Increase) decrease in:
    Prepaid expenses                                                    (57,065)
   Increase (decrease) in:
    Accounts payable and accrued expenses                                96,718
                                                                      ---------
   Net cash used in operating activities                                (53,890)
                                                                      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of equipment                                                   (2,506)
 Increase in loans receivable                                           (24,311)
                                                                      ---------
   Net cash used in investing
    activities                                                          (26,817)
                                                                      ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of common stock                                   1,355
 Proceeds from additional paid in capital                               144,355
                                                                      ---------

   Net cash provided by financing
    activities                                                          145,710
                                                                      ---------
INCREASE IN CASH AND CASH EQUIVALENTS                                    65,003

CASH AND CASH EQUIVALENTS -
 BEGINNING OF PERIOD                                                       --
                                                                      ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD                             $  65,003
                                                                      =========
</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

The Company acquired telephone  switching equipment for debt under a capitalized
lease in the amount of $989,685.

                 See accompanying notes to financial statements.

                                        F-5


<PAGE>

                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (A) Business Organization And Activity

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

         (B) Business Combinations

         On March 4, 1999,  Blazoon  Systems  Incorporated  (Blazoon),  a public
         shell,  consummated  an  Agreement  and  Plan  of  Reorganization  (the
         Acquisition)   with  Diverse   Capital  Corp.   (Diverse),   a  private
         corporation  incorporated  on  July 9,  1998,  whereby  Blazoon  issued
         1,235,000  shares of its common stock to the stockholders of Diverse in
         exchange  for  100% of the  issued  and  outstanding  common  stock  of
         Diverse,  and 625,000 shares of its Class A Preferred Stock in exchange
         for 100% of the issued and outstanding  preferred stock of Diverse. The
         preferred  stock is convertible to common stock at a one-for-one  ratio
         for  a one  year  period  beginning  February  2,  2000,  has  dividend
         preference,  is  non-voting,  and is subject to  redemption  at a $4.00
         liquidation  value at the Company's option beginning  February 2, 2004.
         Subsequent to the Acquisition,  the prior shareholders of Diverse owned
         approximately  55%  of  the  voting  common  stock  of  Blazoon.  Under
         Generally Accepted Accounting Principles,  a Company whose stockholders
         receive  over 50% of the  stock of the  legal  acquirer  in a  business
         combination  is  considered  the  acquirer  for  accounting   purposes.
         Accordingly,  the  transaction  is accounted for as an  acquisition  of
         Blazoon by Diverse,  and a  recapitalization  of  Diverse.  The balance
         sheet subsequent to the acquisition  includes the net assets of Blazoon
         and Diverse at historical costs and the operations of Diverse since its
         inception and the operations of Blazoon since the date of acquisition.

         On March 9,  1999  the  Company  consummated  a merger  agreement  with
         Blazoon,  a State of Colorado  corporation,  to effect a redomicile and
         name change of Blazoon, with the Company as the surviving entity.



                                        F-6



<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)

         (C)  Use of Estimates

         The accompanying  financial statements have been prepared in accordance
         with  generally  accepted  accounting  principles.  The  preparation of
         financial  statements in accordance with generally accepted  accounting
         principles  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.

         (D)  Cash and Cash Equivalents

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

         (E)  Earnings Per Share

         Earnings  per share are computed  using the weighted  average of common
         shares  outstanding  as defined by Financial  Accounting  Standards No.
         128, "Earnings per Shares".

         (F)  Income Taxes

         The Company  accounts  for income  taxes under  Statement  of Financial
         Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
         SFAS  109  is  an  asset  and  liability  approach  that  requires  the
         recognition  of deferred  tax assets and  liabilities  for the expected
         future tax  consequences  of events  that have been  recognized  in the
         Company's  financial  statements or tax returns.  Inc estimating future
         tax  consequences,  SFAS 109 generally  considers  all expected  future
         events other than  enactments  of changes in the tax law or rates.  Any
         available   deferred  tax  assets   arising  from  net  operating  loss
         carryforwards has been offset by a deferred tax valuation  allowance on
         the entire amount.




                                        F-7




<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)

         (G)  Concentration of Credit Risk

         The Company  maintains  its cash in bank  deposit  accounts  which,  at
         times,  may  exceed  federally  insured  limits.  The  Company  has not
         experienced  any losses in such accounts and believes it is not exposed
         to any significant credit risk or cash and cash equivalents.

         (H)  Stock Options

         In accordance with Statement of Financial Accounting Standards No. 123,
         "Accounting For Stock Based  Compensation",  the Company has elected to
         account for Stock Options under Accounting Principles Board Opinion No.
         25 "(APB Opinion No. 25)" and related interpretations.

         (I)  New Accounting Pronouncements

         The Financial  Accounting  Standards  Board has recently issued several
         new   accounting   pronouncements.   Statement   No.  130,   "Reporting
         Comprehensive  Income" establishes  standards for reporting and display
         of comprehensive income and its components, and is effective for fiscal
         years   beginning   after   December  15,  1997.   Statement  No.  131,
         "Disclosures  about Segments of an Enterprise and Related  Information"
         establishes  standards  for the way that  public  business  enterprises
         report   information  about  operating  segments  in  annual  financial
         statements  and  requires  that  those   enterprises   report  selected
         information  about  operating  segments  in interim  financial  reports
         issued to  shareholders.  It also  establishes  standards  for  related
         disclosures  about products and services,  geographic  areas, and major
         customers,  and is  effective  for  financial  statements  for  periods
         beginning  after  December 15,  1997.  Statement  No. 132,  "Employers'
         Disclosures About Pensions and Other  Postretirement  Benefits" revises
         employers'   disclosure    requirements   about   pension   and   other
         postretirement   benefit  plans  and  is  effective  for  fiscal  years
         beginning  after December 15, 1997.  Statement No 133,  "Accounting for
         Derivative  Instruments and Hedging Activities"  establishes accounting
         and  reporting   standards  for  derivative   instruments  and  related
         contracts and hedging  activities.  This statement is effective for all
         fiscal quarters and fiscal years

                                        F-8




<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)

         (I)  New Accounting Pronouncements - (CONT'D)

         beginning  after June 15, 1999.  The Company  believes  that its future
         adoption of these pronouncements will not have a material effect on the
         Company's financial position or results of operations.

NOTE 2 - PROPERTY AND EQUIPMENT

         Property and  equipment  are stated at cost and  depreciated  using the
         declining  balance method over the estimated  economic useful life of 5
         to 7 years when placed in service.  Maintenance and repairs are charged
         to expense as incurred. Major improvements are capitalized.

         Property and equipment at March 31, 1999 consisted of the following:

<TABLE>
<S>                                                                   <C>
                  Computer equipment                                  $   2,506
                  Equipment held under
                    capital lease                                       750,000
                                                                      ---------
                                                                        752,506

Less: Accumulated depreciation                                             (250)
                                                                      ---------
Total property and equipment                                          $ 752,256
                                                                      =========
</TABLE>

         Depreciation  expense  for the three  months  ended  March 31, 1999 was
         $250. (See Note 3)

NOTE 3 - CAPITAL LEASE OBLIGATION

         The  Company is the lessee of  telephone  switching  equipment  under a
         capital lease expiring  during 2004. The assets and  liabilities  under
         the capital lease are recorded at the lower of the present value of the
         minimum lease  payments or the fair value of the asset.  The asset will
         be  depreciated  using the declining  balance method over the estimated
         economic  useful life,  and is expected to be placed in service in late
         1999. Hence no depreciation has been provided for as of March 31, 1999.
         The value of the property that was held under capital lease as of March
         31, 1999 was $750,000.

                                        F-9

<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 3 - CAPITAL LEASE OBLIGATION - (CONT'D)

         Minimum  future lease  payments under the capital lease as of March 31,
1999 are as follows:

<TABLE>
<S>                                                                   <C>
For the year ended March 31, 2000                                     $  49,485
                             2001                                       197,940
                             2002                                       197,940
                             2003                                       197,940
                             2004                                       197,940
               Subsequent to 2005                                       148,440
                                                                      ---------

Total minimum lease payments                                            989,685

Less: Amount representing interest                                     (239,685)
                                                                      ---------
Present value of net minimum
  lease payment                                                       $ 750,000
                                                                      =========
</TABLE>

         The interest  rate on the capital lease is  approximately  11.5% and is
         imputed at the inception of the lease and included in prepaid  expenses
         and other assets.  The lease  payments do not begin until 90 days after
         the installation and subsequent operation of the equipment, expected to
         be in late 1999.

NOTE 4 - STOCKHOLDERS' EQUITY

         (A)  Common and Preferred Stock

         The Company has authorized 50,000,000 shares of common stock, $.001 par
         value;  5,000,000  of Class A  Preferred  Stock,  $.001 par value;  and
         5,000,000  shares of Class B  Preferred  Stock,  $.001 par  value.  The
         preferred  stock will have such rights and preferences as determined by
         the Board of Directors.

         In connection  with an acquisition  transaction  (Note 5D), the Company
         may be required to issue 625,000 shares of Class A Preferred Stock.

         A  series  of  Class B  Preferred  Stock  was  designated  as  "Class B
         Convertible  Redeemable  Preferred  Stock,  Series 1" and  consists  of
         50,000 shares,  $.001 par value per share.  These shares are redeemable
         any time  after  April  20,  2002  upon 30 days  written  notice to the
         Company, and such shares are designated at $4.00 per share. The Company
         also has the right

                                       F-10


<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)

         (A) Common and Preferred Stock - (CONT'D)

         of redemption under rights similar to the preferred  shareholders.  The
         shares  have the  right,  at the option of the holder at any time after
         July 9, 2000,  to convert each  outstanding  share of Class B Preferred
         Stock,  Series 1 into five fully paid and  nonassessable  shares of the
         Company's common stock. Additionally, each holder of these shares shall
         be entitled to vote at all meetings of the  shareholders and shall have
         one vote for each share held (See Note 6).

         A  series  of  Class B  Preferred  Stock  was  designated  as  "Class B
         Convertible  Redeemable  Preferred  Stock,  Series 2" and  consists  of
         40,000  shares,  $.001 par value per  share.  At any time after July 2,
         2002, upon 30 days written notice to the Company,  holders of shares of
         Class B  Preferred  Stock,  Series 2 may,  at the  option of the holder
         thereof,  require  that the  Company  redeem in whole or in part,  such
         shares as designated at $4.00 per share. The Company also has the right
         of redemption under rights similar to the preferred  shareholders.  The
         holders of these  shares  have the right,  at their  option at any time
         after  July 9,  2000,  to  convert  each  outstanding  share of Class B
         Preferred Stock, Series 2 into five fully paid and nonassessable shares
         of the  Company's  common  stock.  Additionally,  each  holder of these
         shares  shall be entitled to vote at all  meetings of the  shareholders
         and shall have one vote for each share held (See Note 6).

         (B) Stock Compensation

         (i) Stock Option Plan

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

                                       F-11


<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)

         (B) Stock Compensation - (CONT'D)

             (i) Stock Option Plan - (CONT'D)

         1,500,000  shares of common  stock for  issuance  upon the  exercise of
         options granted under the Plan.

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

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

         (ii) Stock Options Granted Under Employment and Consulting
         Agreements

         During  1999 the  Company  issued  1,937,500  incentive  stock  options
         pursuant to certain employment and consulting agreements.

         In  accordance  SFAS 123,  the  Company  applies APB Opinion No. 25 and
         related  interpretations in accounting for the options issued under the
         employment and consulting agreements. Accordingly, no compensation cost
         has been  recognized  for  options  issued  under  the  employment  and
         consulting  agreements as of March 31, 1999. Had compensation  cost for
         the Company's Plan been determined based on the fair value at the grant
         dates for  awards  under  that  plan,  consistent  with  SFAS 123,  the
         Company's  net loss for the year ended  March 31,  1999 would have been
         increased to the pro-forma amounts indicated below.



                                       F-12

<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)

         (B) Stock Compensation - (CONT'D)

         (ii) Stock Options Granted Under  Employment and Consulting  Agreements
         (CONT'D)

<TABLE>
<S>                                                                    <C>
         Net loss                           As reported                $   168,917
                                            Pro forma                  $ 1,165,792

         Net loss per share                 As reported                $      0.12
                                            Pro forma                  $      0.83
</TABLE>

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

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

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

<TABLE>
<CAPTION>
                                                                         Weighted
                                                         Number of        Average
                                                          Options      Exercise Price
                                                          -------      --------------
<S>                                                      <C>          <C>
Stock Options
 Balance at beginning of period                                --          $       --
 Granted                                                 1,937,500         $     2.13
 Exercised                                                      --                 --
 Forfeited                                                      --         $       --
                                                         ---------         ----------
 Balance at end of period                                1,937,500         $     2.13
                                                         =========         ==========

Options exercisable at end
 of period                                                 687,500         $   1.23
</TABLE>


                                       F-13


<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 4 - STOCKHOLDERS' EQUITY (CONT'D)

         (B) Stock Compensation - (CONT'D)

         Stock  Options  Granted  Under  Employment  and  Consulting  Agreements
         (CONT'D)

         Weighted average fair value
          of options granted during the period                 $0.51

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

<TABLE>
<CAPTION>
           Options Outstanding              Options Exercisable
           -------------------              -------------------
                          Weighted
              Number       Average   Weighted    Number    Weighted
  Range of  Outstanding   Remaining  Average  Exercisable Average
  Exercise  at March 31, Contractual Exercise At March 31 Exercise
   Price       1999         Life      Price      1999     Price
 ---------   --------     --------   -------   --------  --------
<S>        <C>         <C>          <C>       <C>       <C>
$1.00-$3.00 1,937,500   6.25 Years   $  2.13   637,500   $  1.23
</TABLE>

         (iii) Employee Stock Compensation Plan

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





                                       F-14

<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 5 - COMMITMENTS AND CONTINGENCIES

         (A)  Year 2000 Issue

         The Company is aware of the issues associated with the programming code
         in existing  computer systems as the millennium (Year 2000) approaches.
         The "Year 2000"  problem is pervasive  and complex as  virtually  every
         computer  operation will be affected in some way by the rollover of the
         two-digit year value to 00. The issue is whether  computer systems will
         properly recognize date-sensitive  information when the year changes to
         2000.  Systems that do not properly  recognize such  information  could
         generate erroneous data or cause a system to fail.

         The Company uses standard off the shelf accounting software package for
         all  of its  accounting  requirements.  Management  has  contacted  the
         software  vendor and determined  that the  accounting  software is Year
         2000 compliant. All internal management software is Microsoft based and
         management  continually monitors the Year 2000 status of such software.
         Management  has verified Year 2000 status with its primary  vendors and
         has not identified  any Year 2000 issues with those  vendors.  Costs of
         investigating  internal and external Year 2000  compliance  issues have
         not been  material to date. As a result,  management  believes that the
         effect of  investigating  and resolving Year 2000 compliance  issues on
         the Company  will not have a material  effect on the  Company's  future
         financial position or results of operations.

         In  addition  to the  effect  of  Year  2000  issues  on the  Company's
         accounting  and  management  systems,  year 2000  issues may effect the
         Company's products and programs as they are primarily computer related.
         The Company's  products  have been  developed and tested with regard to
         year  2000  compliance.  All  products  were  deemed  to be  Year  2000
         compliant.  The costs of such  development  and testing and  validating
         were  minimal and  absorbed  as part of the  Company's  normal  quality
         control procedures.

         (B)  Employment Agreement

         On January 5, 1999 the Company  entered  into an  employment  agreement
         with its  President.  The effective  date of this agreement is November
         10,  1998,  and is for a period of five  years at which  time it can be
         renewed by mutual  agreement  of both  parties.  The  agreement  may be
         terminated at any time by

                                       F-15

<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 5 - COMMITMENTS AND CONTINGENCIES - (CONT'D)

         (B)  Employment Agreement - (CONT'D)

         mutual written  agreement by the parties.  The consideration is $80,000
         annually   to  paid  at  regular   payroll   periods.   As   additional
         compensation,  the Company is issuing a total of 750,000  options which
         become  exercisable at annual intervals ranging from January 5, 1999 to
         January 15, 2002 at varying  exercise  prices  between  $1.00 to $3.00.
         (See Note 4(B))

         (C) Consulting Agreements

         On  January 5, 1999 the  Company  entered  into a six month  consulting
         agreement with an individual  whereby the Company will be provided with
         identification,  and introduction to a public shell for the purposes of
         effecting a reverse merger.  As consideration for the services provided
         the Company issued 10,000 shares of the Company's common stock in March
         1999.

         On January 5, 1999,  effective  November 10, 1998, the Company  entered
         into a five year  consulting  agreement with a consulting  organization
         whereby  the  Company  will be  provided  with  advice  with  regard to
         corporate  finance,  evaluations  of  business  partners,  mergers  and
         acquisitions and such other matters as requested. This agreement may be
         extended by mutual written  agreement of the parties.  As consideration
         for the services  provided,  the Company  issued  150,000 shares of the
         Company's  common stock as a signing bonus.  The Company pays a monthly
         fee of $8,000 in semi-monthly installments. As additional compensation,
         the Company issued a total of 750,000 options, which become exercisable
         at annual  intervals  ranging from January 5, 1999 to February 15, 2002
         at varying  exercise  prices  from $1.00 to $3.00.  (See Note 4(B)) The
         Company also agreed to pay the  organization a 2% finders fee,  payable
         in cash or stock at the Company's  election,  on the total value of any
         acquisition,  merger,  reverse-merger  and/or equity or debt  financing
         introduced to the Company,  excluding  Orlando  Digital  Telephone (See
         Note 5D) and Blazoon Systems,  Incorporated (See Note 1A). In addition,
         the Company shall provide the organization  with a monthly  unaccounted
         for expense allowance of $2,500.



                                       F-16


<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 5 - COMMITMENTS AND CONTINGENCIES - (CONT'D)

         (C) Consulting Agreements - (CONT'D)

         On January 5, 1999,  effective  November 10, 1998, the Company  entered
         into  a  two  year   consulting   agreement  with  another   consulting
         organization  whereby  the Company  will be  provided  with advice with
         regard to corporate finance,  evaluations of business partners, mergers
         and  acquisitions  and such other matters as requested.  This agreement
         may  be  extended  by  mutual  written  agreement  of the  parties.  As
         consideration for the services provided the Company shall pay a monthly
         fee of $5,000,  plus  $200/hr for any time in excess of 50 hours in any
         calendar month. As additional compensation,  the Company issued a total
         of  437,500  options,  which  become  exercisable  at annual  intervals
         ranging from  January 5, 1999 to February 15, 2002 at varying  exercise
         prices between $1.00 to $3.00. (See Note 4(B))

         On March 22,  1999,  the Company  entered  into a six month  consulting
         agreement with a public relations organization whereby the Company will
         be  provided  with  advice  with  regard  to  public   relations,   the
         development  and  implementation  of  strategic  plans,  and such other
         matters as requested.  This agreement may be extended by mutual written
         agreement of the parties.  As considerations for the services provided,
         the Company issued 60,000 shares of the Company's common stock.

         (D)  Litigation

         On February 2, 1999  Diverse  Capital  Corporation  (Diverse)  acquired
         Orlando  Digital  Telephone  Corporation  (ODT) in exchange for 325,000
         shares  of  Diverse   common  stock  and  625,000   shares  of  Diverse
         Convertible  Preferred A stock. The 325,000 shares of common stock were
         issued to ODT  shareholders.  Diverse reserved the right at the time of
         the closing to obtain an appraisal  substantiating that the approximate
         value of ODT was $2.8 million.  Subsequently,  USA Digital,  Inc.,  the
         successor to Diverse (See Note 1B), obtained an appraisal which did not
         substantiate  such value, and, on May 14, 1999, in the Circuit Court in
         and for Hillsborough County, Florida, filed a complaint against ODT and
         its former shareholders seeking rescission of the ODT acquisition.  The
         Defendants filed a Motion to Dismiss, which

                                       F-17
<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999

NOTE 5 - COMMITMENTS AND CONTINGENCIES - (CONT'D)

         (D)  Litigation- (CONT'D)

         was served on the Company on June 19,  1999.  A hearing on  defendants'
         motion is set for September 27, 1999.  Defendants have not yet filed an
         Answer or asserted any  counterclaims or defenses.  In addition to such
         other  relief  that the Court may grant in the event  that the  Company
         does not prevail,  including enforcement of the acquisition  agreement,
         the  Company  may be  required  to  issue  625,000  shares  of  Class A
         Convertible Preferred Stock to the ODT shareholders.

NOTE 6 - SUBSEQUENT EVENTS

         On April 20, 1999 the Company entered into an agreement to acquire 100%
         of the  issued  and  outstanding  stock of  Telephone  Engineering  and
         Maintenance,  Inc. (T.E.A.M.), a Florida corporation engaged since 1986
         in the  business  of selling  and  servicing  telephone  equipment,  in
         exchange for 50,000  shares of the Company's  Convertible  Preferred B,
         Series 1 Stock. The transaction is scheduled to close on or before July
         22, 1999.

         On June 2, 1999 the Company  entered  into an  agreement  with  Premium
         Internet,  Corp.  (Premium)  to purchase  Premium's  $160,000  security
         interest  in  Syncom,  Inc.,  a  Florida  corporation  currently  doing
         business as Gator.net,  an Internet  Service  Provider in  Gainesville,
         Florida.  Syncom,  Inc is currently  under  reorganization  pursuant to
         Chapter 11 of the

         United States  Bankruptcy  Code.  The purchase  price for this security
         interest  was  $80,000,  payable  over 6  months  from  the date of the
         transaction. Under the terms of the agreement, Premium has assigned its
         security interest in the name "Gator.net", the ISP's customer base, and
         some equipment, to the Company.  Additionally,  as of the closing date,
         the Company  entered  into  various  agreements  with other  parties to
         purchase  $130,000 in  unsecured  debt of Syncom,  Inc.  for the sum of
         $30,100.

         On July 9, 1999 the Company purchased all of the issued and outstanding
         stock  of  DSA  Computers,   Inc.  (DSA.),  a  Florida  based  computer
         hardware/network  integration  company that has been in business  since
         1991. The purchase price for the

                                       F-18

<PAGE>


                                USA DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                              AS OF MARCH 31, 1999



NOTE 6 - SUBSEQUENT EVENTS - (CONT'D)

         acquisition was 40,000 shares of the Company's Convertible Preferred B,
         Series 2 Stock.


                                       F-19