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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.

FORM 10-KSB

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

For the fiscal year ended SEPTEMBER 30, 2001

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

Commission File No. 000-29433

USA BROADBAND, INC.(Exact name of Registrant as specified in its charter)

DELAWARE

84-1592698(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)


921 Transport Way, Suite 400, Petaluma, CA 94954(Address and zip code of principal executive offices)

Registrant's
telephone number, including area code:(707) 762-3997

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

Securities
registered pursuant to Section 12(g) of the Act: Shares of Common Stock, par value $.001

Indicate
by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports, and (2) has been subject to such filing requirements for the past
90 days. Yes /x/    No / /

Indicate
by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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-K or any amendment to this
Form 10-K. /x/

Revenue
for the year ended September 30, 2001: $1,261,000

As
of December 31, 2001, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $12,345,129.

As
of December 31, 2001, the number of shares outstanding of the Registrant's Common Stock was 4,963,043.

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PART I

ITEM 1.    DESCRIPTION OF BUSINESS

Business of the Company

We are seeking to position ourselves to become an industry leader in providing digital television, entertainment, data, Internet and broadband services. We are
seeking to develop a suite of popular digital services based on best-of-breed delivery technologies, such as direct broadcast satellite services and high speed wireline and
wireless access. We are focusing initially on the multiple dwelling unit ("MDU") market and, through our subsidiary, Cable Concepts, we currently serve approximately 12,000 subscribers in this market.
We are seeking to acquire or develop additional operating assets and subsidiaries to pursue market opportunities in strategic geographic markets.

We
will continue to focus on: (i) identifying assets to acquire in strategic markets; (ii) seeking additional business opportunities to deliver video and data services in
the MDU marketplace; and (iii) exploring business opportunities to provide video and data services in other market segments, such as planned community developments. The U.S. satellite-delivered
television market is expected to reach 25 million persons in 2005, up from 14 million persons currently, according to the Yankee Group. We have a systems operator agreement with DIRECTV and other
providers to deliver digital programming to subscribers. Unleashing the full power of the Internet requires broadband connectivity, which is expected to become a $20 to $30 billion market by 2005,
according to Pioneer Consulting. We will seek, over time, to bundle digital entertainment and high-speed Internet services to our subscribers.

We
acquired Cable Concepts in July 2001. Cable Concepts does business under the name Direct Digital Communications ("DDC"). DDC markets its services to apartment owners and
condominium developments. DIRECTV believes that DDC is DIRECTV's largest non-Regional Bell Operating Company MDU System Operator. In some areas, DDC provides "private cable" television
services to MDUs.

DDC
generates revenue via a revenue sharing agreement with DIRECTV as well as through delivering its own local programming and related services. DDC secures the right to deliver its
service to MDU customers with an average ten-year term exclusive Right of Entry ("ROE") marketing agreements. DDC deploys its in-building systems using a fiber/coax hybrid distribution
infrastructure, which offers up to 3,000 Mhz of bandwidth, coupled with interdiction and Ethernet connectivity. We believe this allows for a cost effective "last mile" delivery of services capability,
including, but not limited to, digital television and high-speed data that are in high demand by customers. DDC typically has provided system design and installation, systems management,
and ongoing customer service. In most cases, once a system is installed in a multi-tenant building, DDC markets its television services directly to building residents.

Over
the past nine years, DDC has expanded its operations to include a full range of services which includes installing and operating broadband telecommunications services. DDC's
strategy has foused on combining specialized industry knowledge with technical expertise and a localized approach to providing customer sales and service and high quality, high demand products and
services, such as DIRECTV.

As
of December 31, 2001, DDC had entered into 169 ROE agreements and is operating, or in the process of installing, 169 cable network systems in 26,939 apartment units in eleven
states. As of December 31, 2001, DDC has 12,393 owned and 665 managed subscribers. DDC receives direct payments from subscribers for local and community programming and revenue share payments
from DIRECTV for premium programming. Roughly three-quarters of the company's MDU properties have been "takeovers" from previous system operators (including cable television system operators) and
"overbuilds" of existing cable systems, while the remaining one-quarter have been new installations of

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intra-building broadband infrastructure. In the future, we intend to concentrate on acquiring existing systems and operating assets.

We
focus our marketing efforts on properties with demographics that favor services such as DIRECTV. We believe that consumers perceive DIRECTV to be a superior product to cable and
high-speed data to be a superior product to traditional dial-up modem service. Until recently, these services have been largely unavailable to most MDU residents. These factors
have created a large niche market for DDC to establish exclusive, long-term contract rights to sell these advanced video and data services. DDC's presence in this under-serviced market
also affords them the opportunity to sell and, in the future, to cross-sell other telecommunications products. Over 50% of DDC's ROE agreements provide for exclusive data service rights in
addition to digital television rights. We believe the market for data service rights is attractive and we intend to focus more attention on increasing our presence in that market.

Competition

We compete with other multichannel programming distributors, including other direct broadcast satellite operators, cable operators, wireless cable operators,
Internet and local and long-distance telephone companies, which may be able to offer more competitive packages or pricing than us. In addition, the direct broadcast satellite industry is
still evolving and recent or future competitive developments could adversely affect us.

Franchise
cable operators typically have an exclusive franchise to provide wire-line cable television within a particular municipality. The average franchise cable offering
has between 50 and 70 channels and is dominated by large competitors such as AT&T/TCI, Time Warner, Cox Cable, Media One and Comcast. Historically, the franchise cable offerings have been delivered
via a 550Mhz, one-way coaxial wire that limited the number of channel offerings and prohibited the franchise cable companies from offering other value added services, such as
high-speed Internet access, telephony and other video offerings. Digital cable services offer broader channel line-ups and premium services.

Franchise
cable operators have not historically focused on the MDU market and also have been reluctant to offer a revenue sharing program. However, despite the lack of focus on the MDU
market and the general reluctance to embrace the profit sharing business model, we believe that, due to their financial resources, franchise cable operators may provide a significant source of
competition.

History

We were originally incorporated under the name Double Ought Green Corporation on November 22, 1985 in the State of Utah for the purpose of acquiring
business entities or other investment activities. In February 1999, we changed our name to Sumex Corporation and in March 1999, to EZIX.COM, Inc. In July 1999, we acquired
Ecenter, Inc. and changed our name to Merlin Software Technologies, Inc. in December 1999. We changed our name to Optika Investment Company, Inc. in January 2000. We
adopted our present strategy in early 2001 and changed our name to USA Broadband, Inc. in July 2001 following our acquisition of DDC. In early January 2002, we announced that we have
integrated DDC's operations. As part of the integration, we are relocating DDC's headquarters to its previous field office located in Southern California, outscourcing certain office support
functions, recruiting a new controller and financial staff, and developing certain other new business relationships intended to increase DDC's profitability.

We
also are in the process of restructuring our executive management group. Our previous President and Chief Executive Officer, David M. Lerten, resigned from both positions in
December 2001 to pursue other interests. Mr. Lerten also resigned as a member of our board of directors. Upon Mr. Lerten's resignation, we installed Edward P. Mooney as our
Interim President and Chief Executive Officer. Mr. Mooney, who also is a member of our board, previously served as our Executive Vice

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President. We have commenced a search for a permanent president and chief executive officer with strong industry experience and relationships that will lead us through the next stages of our
corporate development.

ITEM 2.    DESCRIPTION OF PROPERTY

None

ITEM 3.    LEGAL PROCEEDINGS

None

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

Nonenot applicable

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PART II

ITEM 5.    MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our shares are traded in the over-the-counter market under the symbol (USBU). The table below shows the high and low closing prices for
each quarter for the fiscal years ended September 30, 2001 and 2000. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.

Quarter Ended

2001

Share Price9/30/01

High
Low

$$
4.45
4.006/30/01

High
Low

$$
4.25
4.253/31/01

High
Low


n/a
n/a12/31/00

High
Low


n/a
n/a


Quarter Ended

2000

Share Price9/30/00

High
Low

n/a
n/a6/30/00

High
Low

n/a
n/a3/31/00

High
Low

n/a
n/a12/31/99

High
Low

n/a
n/a


As
of December 31, 2001, we had approximately 255 record holders of our shares of common stock. We have not declared any cash dividends on our common stock since inception
and our board of directors has no present intention of declaring any dividends. For the foreseeable future, we intend to retain all earnings, if any, to develop and expand our business.

During
the fiscal years ended September 30, 1999 through September 30, 2001, we sold the following securities in transactions exempt from the registration requirements of
the Securities Act:



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No
underwriting commissions or discounts were paid in connection with any of the above transactions, with the exception of the "finder's fee" discussed above. We also paid approximately
$35,000 in finder's fees in cash to certain finders and also issued securities to MBC for financial advisory services during the fiscal year ended September 30, 2001. Except as described above,
we relied upon the exemption from the registration requirements of the Securities Act under of Section 4(2) of the Securities Act with respect to the offer and sale of the unregistered
securities described above. We conducted no general solicitation or advertising in connection with the offering of any of the transactions described above. Each of the persons that acquired
unregistered securities had a pre-existing relationship with us, MBC or one of our "finders." In addition, each purchaser was required to complete a subscription document and confirm their status as a
"sophisticated investor." We provided each potential purchaser with an opportunity to meet with, and ask questions of, our management.

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

General

In July 2001, we acquired DDC. Prior to acquiring DDC, we did not have any material operations. Our results of operations for the fiscal year ended
September 30, 2001 reflect primarily the operations

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of DDC from July 1 through September 30, 2001. The DDC acquisition provides us with a platform to implement our strategy to become a provider of digital television, data and broadband
Internet services.

Results of operations

Comparison of Year Ended September 30, 2001 to the Year ended September 30, 2000.

During
the year ended September 30, 2001 and 2000, our net loss from operations was approximately $4.9 million and $2,000, respectively. We had no material operations
during the years ended September 30, 2000. As noted above, during the year ended September 30, 2001, we acquired DDC. During that period, our revenues were approximately
$1.2 million, which reflect one quarter of operations for DDC. Our total operating expenses were approximately $5.5 million. Selling, general and
administrative expenses totaling approximately $5.0 million comprised the largest portion of our expenses.

Liquidity and Capital Resources

Our financial statements have been presented on the going-concern basis. This contemplates the realization of assets and liquidation of liabilities in the normal
course of business. At September 30, 2001, we had a working capital deficit of approximately $6.7 million. Substantially all of our net loss for the fiscal year ended September 30, 2001
was generated following the acquisition of DDC. Our ability to continue as a going concern depends on our ability to raise the capital necessary to successfully implement our business plan and
ultimately achieve profitable operations. Subsequent to September 30, 2001, we implemented significant cost-cutting measures designed to increase operational efficiency. We also plan to focus
the geographic concentration of our operations and will sell assets that do not fit into our plan. We also received an additional $600,000 of proceeds from sale to our Series A preferred stock
and expect to complete an additional equity offering in the next year.

As
of September 30, 2001, we had two lines of credit aggregating $2.3 million. The first line ($2.0 million) expires on April 4, 2002. The second line ($300,000) expires on
February 15, 2002. Draws under each line bear interest at a rate equal to prime plus two hundred basis points (8% at September 30, 2001). As of September 30, 2001, we had drawn a total of
$2.3 million on these lines and were not in compliance with certain convenants under the loan agreements for each line. We also have a separate line of credit aggregating $200,000 which expires
on February 15, 2002. Draws on this line bear interest at a rate equal to 6.75% per annum. As of September 30, 2001, we had drawn a total of $147,000 on this line. We presently are
discussing with third parties a refinancing of these lines. As of September 30, 2001, we also had long-term debt of $1,725,000 which matures in April 2002 and which bears interest at a rate
equal to prime plus two hundred basis points (8% as of September 30, 2001). We also had a subordinated note in the principal amount of 750,000 which matured in December 2001. This note bears interest
at a rate equal to 11% per annum.

Cash flows from Operating Activities

Our operations utilized net cash of approximately $1.7 million for the year ended September 30, 2001. The use of cash was related primarily to
funding the net losses from our operations reduced by adjustments for non-cash expenses such as depreciation, stock-based compensation, an increase in accounts payable and amortization of note
discount.

Cash flows from Investing Activities

During the year ended September 30, 2001, we used cash from investing activities of approximately $2.7 million. This cash was used primarily to fund
advances to DDC prior to completing the acquisition,
as well as acquisition costs, to purchase property and equipment related to installation at MDU properties, and to increase restricted cash.

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Cash Flows from Financing Activities

During the year ended September 30, 2001 financing activities generated approximately $4.6 million. We generated these cash flows primarily from the
proceeds an offering of bridge notes ($1.5 million) and the offering of our Series A Preferred Stock (approximately $3.1 million). The Bridge Notes were subsequently converted
into shares of our Series A Preferred Stock. In connection with the offering of Bridge Notes, each investor received a warrant to purchase shares of our common stock at a ratio equal to 66,667
shares for every $100,000 in Bridge Notes. The proceeds from the Bridge Notes were subsequently loaned to DDC, which used the proceeds to pay operating expenses. The shares of Series A
Preferred Stock are convertible into shares of our common stock at a ratio equal to one share of common stock for each outstanding share of Series A Preferred Stock.

FACTORS AFFECTING AN INVESTMENT IN OUR SHARES

The market for our common stock is limited and price changes may be volatile

The shares of our common stock are not traded on an exchange or through the Nasdaq National Market or the Nasdaq Small Cap Market automated quotation systems.
Instead, our shares are traded over-the-counter and the market for these shares is not as developed as it would be if our shares were listed on an exchange or included in the Nasdaq National or Small
Cap market.

In
addition, the market price of our common stock is expected to be volatile for the foreseeable future. Factors such as quarterly fluctuations in results of operations, the announcement
of new contracts or changes in either earnings estimates or investment recommendations by stock market analysts, among others, may cause the market price of our common stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general, and the shares of companies in the technology sector in particular, have experienced extreme price fluctuations which may
continue for the foreseeable future. These broad market and industry fluctuations may adversely affect the market price of our common stock. Further, the share of our common stock currently falls
within the SEC's definition of a "penny stock" which may further limit the market for our common stock.

Our Credit Arrangements Limit Our Ability to Pay Dividends

We do not anticipate paying cash dividends on our common stock in the foreseeable future. In addition, our debt instruments restrict our ability to pay cash
dividends on our common stock. Moreover, we are a holding company, and our ability to pay dividends is dependent upon the receipt of dividends from our direct and indirect subsidiaries.

Our Substantial Indebtedness Could Adversely Affect Any Investment in Securities Outstanding From Time to Time

We may incur significant amounts of indebtedness in acquiring other assets or companies. This indebtedness could have inportant consequences. For example, it
could:



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A Change of Control May Be Difficult

Our certificate of incorporation contains, among other things, provisions authorizing the issuance of "blank check" preferred stock. We are also subject to
provisions of Delaware law which affect certain merger and other change of control transactions. These provisions could delay, deter of prevent a merger, consolidation, tender offer, or other business
combination or change of control involving the Company that our stockholders may consider to be in their best interests.

The Sale of a Substantial Number of Shares of Our Common Stock in the Public Market Could Adversely Affect the Market Price of Our Common Stock

Through September 30, 2001, a total of approximately 2.4 million shares of our common stock are issuable on exercise of options or warrants
previously issued by us or on conversion of previously issued preferred stock. Sales or the expectation of sales of a substantial number of shares of our common stock, including shares issuable upon
exercise or conversion of outstanding options, warrants or preferred stock likely would have an adverse effect on the prevailing trading price of our common stock.

Satellite and Direct Broadcast Satellite Technology Could Fail or Be Impaired

Direct broadcast satellite technology is highly complex and is still evolving. As with any such product or system, it might not function as expected or may not
last for its expected life. If any of the DIRECTV satellites are damaged or stop working partially or completely for any of a number of reasons, DIRECTV customers would lose programming. In turn, we
likely would lose customers, which could materially and adversely affect our operations, financial performance and the trading prices of our common stock.

Events of DIRECTV Could Adversely Affect Us

Because we are an intermediary for DIRECTV, events at DIRECTV that we do not control can adversely affect us. One of the most important of these is DIRECTV's
ability to provide programming that appeals to mass audiences. DIRECTV generally does not produce its own programming but rather purchases it from third parties. DIRECTV's success  and
therefore ours  depends in large part on DIRECTV's ability to make good judgments about programming sources and obtain programming on favorable terms. We have no control or influence over
DIRECTV.

Programming Costs May Increase, Which Could Adversely Affect Our Direct Broadcast Satellite Business

Programmers could increase the rates that DIRECTV pays for programming. As a result, our costs would increase. This could cause us to increase our rates and lose
either customers or revenues. The law requires programming suppliers that are affiliated with cable companies to provide programming to all multi-channel distributors (including DIRECTV) on
nondiscriminatory terms. The rules implementing this law are scheduled to expire in 2002. If they are not extended, these programmers could increase DIRECTV's rates, and therefore ours. If we increase
our rates, we may lose customers. If we do not increase our rates, our costs, revenues and financial performance could be adversely affected.

We May Lose Our DIRECTV Rights After the Initial Term of Our Agreements

We may or may not be able to continue in the direct broadcast satellite business after the current DIRECTV satellites are replaced. If we can continue, we cannot
predict what it will cost us to do so. Our revenues and financial performance would be adversely affected if we are not able to continue in the direct broadcast business or if we cannot locate
suitable replacement programming for our customers.

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The Effects of New Federal Satellite Television Legislation on Our Business Is Unclear

On November 29, 1999, the former President Clinton signed the Satellite Home Viewer Improvement Act of 1999. This act contains provisions that will be phased in
over time. In addition, the FCC and other federal agencies have undertaken rule-makings and studies in connection with this legislation. We cannot predict the effect of this new law on our business at
this time.

The
act resolves many of the issues involved in years of litigation between the networks and the direct broadcast satellite industry regarding retransmission of network programming to
direct broadcast satellite subscribers. Generally, it also preserves the industry's right to retransmit distant network programming to subscribers in "unserved" areas. It also extends through December
31, 2004 the statutory right, for a copyright royalty fee, of the industry to retransmit independent programming (so-called superstations) to subscribers as "distant" signals. Further, satellite
carriers will be required to deliver signals only to households that cannot clearly receive over-the-air network signals with a rooftop antenna.

Among
other things, the act directs the FCC to take actions to prescribe the picture quality standard that the FCC uses to predict what households do not receive a strong enough network
broadcast signal over-the-air and therefore are eligible to receive distant network signals. The FCC has initiated a rule making proceeding to consider this standard. The effect on our business of
these FCC actions and other studies and rulemakings that the FCC will undertake cannot be predicted at this time.

We Could Lose Money Because of Signal Theft

If signal theft becomes widespread, our revenues would suffer. Signal theft has long been a problem in the cable and direct broadcast satellite industries.
DIRECTV uses encryption technology to prevent people from receiving programming without paying for it. The technology is not foolproof and there have been published reports that it has been
compromised.

Direct Broadcast Satellite Services Face Competition from Cable Operators

One of the competitive advantages of direct broadcast satellite systems is their ability to provide customers with more channels and better quality digital signal
than traditional analog cable television systems. Many cable television operators are making significant investments to upgrade their systems from analog to digital. This upgrade will significantly
increase the number of channels that cable television operators can provide to their customers and the quality of the transmission. In addition, many cable television operators are upgrading their
systems to provide their customers with high-speed Internet access. These upgrades could make cable television a more attractive alternative for property owners and consumers, which could have an
adverse effect on our direct broadcast satellite business.

Direct Broadcast Satellite Equipment Shortages Could Adversely Affect Our Direct Broadcast Business

There have been periodic shortages of direct broadcast satellite equipment and there may be such shortages in the future. During such periods, we may be unable to
accept new subscribers and, as a result, potential revenue could be lost. If we are unable to obtain direct broadcast satellite equipment in the future, or if we cannot obtain such equipment on
favorable terms, our subscriber base and revenues could be adversely affected.

We Face Certain Other Regulatory Risks

The direct broadcast satellite, television broadcast, and cable industries are subject to regulation by the FCC under the Communications Act of 1934 and, to a
certain extent, by state and local authorities. Proceedings to implement the Communications Act are ongoing, and we cannot predict the outcome of

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these proceedings or their affect on our business. DIRECTV depends on FCC licenses to operate its digital broadcast satellite service. If the FCC cancels, revokes, suspends, or fails or renew any of
these licenses, it would adversely affect our results of operations, financial condition and the trading price of our common stock.

We Have a History of Substantial Losses; We Expect Them to Continue; Losses Could Adversely Affect Our Stock Price and Access to Capital Markets

We have never made a profit. Because of interest expense on our substantial debt, we do not expect to have net income for the forseeable future. To the extent
investors measure our performance by net income or loss, rather than alternative measures based on cash flow of operating subsidiaries, continuing losses could adversely affect our access to capital
markets and the trading price of our common stock.

We May Not Be Able to Generate Enough Cash To Service Our Debt

Our ability to make payments on and to refinance our indebtedness, including securities outstanding from time to time, and to fund planned capital expenditures
and other activities will depend on our ability to generate cash. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. We cannot assure you that we will generate sufficient cash flow from operations or that future borrowings will be available to us under our credit facilities in amounts
sufficient to enable us to pay our indebtedness or to fund other needs.

We
may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including our credit
facilities, on commercially reasonable terms, if at all.

We Face Significant Competition; the Competitive Landscape Changes Constantly

Our direct broadcast satellite business faces competition from other current or potential multi-channel programming distributors, including other direct broadcast
satellite operators, direct-to-home distributors, cable operators, wireless cable operators, Internet and local and long-distance telephone companies. These competitors may be able to offer more
competitive packages, or pricing than we or DIRECTV can provide. In addition, the direct broadcast satellite industry is still evolving and recent or future competitive developments could adversely
affect us and, hence, the trading price of our common stock.

We Expect to Need Additional Capital in the Future and it May Not Be Available on Acceptable Terms

We anticipate incurring substantial costs in installing, operating and maintaining our direct broadcast satellite systems and in implementing our business plan.
We expect to need significant amounts of working capital for infrastructure, marketing, personnel, general and administrative costs, and to fund losses prior to achieving profitability.

We
will need to raise additional capital, either debt or equities. There is no assurance that additional capital will be available to us on favorable terms and conditions, if at all. An
inability to fund our capital needs would adversely affect our business and the trading price of our common stock.

We May Not Be Able to Compete Successfully Against Current and Future Competitors

The market for viewing audiences is rapidly evolving and very competitive. We face competition from cable providers as well as other satellite companies. We
expect competition in this market to intensity in the future.

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Large
telecommunications companies and cable operators such as AT&T and AOL-Time Warner have the ability and resources to compete in our market if they chose to do so. Many of our
competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in
the industry. In addition, a number of these competitors may combine or form strategic partnerships. As a result, our competitors may be able to offer, or bring to market earlier, products and
services that are superior to our own in terms of features, quality, pricing or other factors. Our failure to compete successfully with any of these companies would have a material adverse effect on
our business and the trading price of our common stock.

Increased
competition also may result in reduced commissions and loss of market share. Further, as a strategic response to changes in the competitive encironment, we may from time to
time make certain pricing, service or marketing decisions or acquisitions that could have a material adverse effect on our business and the trading price of our common stock.

Our Future Profitability Is Dependent on the Introduction and Acceptance of Our Broadband and Other Online Services

A portion of our projected future revenue is dependent on broadband and other internet services. Demand and market acceptance for these recently introduced
services and products which are delivered over the Internet is highly uncertain. Critical issues concerning the use of the Internet, such as ease of access, security, reliability, cost and quality of
service, exist and may affect the growth of Internet use or the attractiveness of conducting commerce online. In addition, the Internet and online services may not be accepted as a viable marketplace
for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. To the
extent that the Internet and online services continue to experience significant growth, there can be no assurance that the infrastructure of the Internet and online services will prove adequate to
support increased user demands. In addition, the Internet or online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle
increased levels of Internet or online service activity. Changes in, or insufficient availability of, telecommunications services to support the Internet or online services also could result in slower
response times and adversely affect usage of the Internet and online services generally and us in particular. If use of the Internet and online services does not continue to grow or grows more slowly
than expected, if the infrastructure for the Internet and online services does not effectively support growth that may occur, or if the Internet and online services do not become a viable commercial
market place, our business and the trading price of our common stock could be adversely affected.

We Need to Hire and Retain Qualified Personnel to Sustain Our Business

We are currently managed by a small number of key management and operating personnel. We do not maintain "key man" insurance on any employee. Our future success
depends, in part, on the continued service of our key executive, management, and technical personnel, many of whom have only recently been hired, and our ability to attract highly-skilled employees.
If any key officer or employee were unable or unwilling to continue in their present position, our business and the trading price of our common stock could be adversely affected. From time to time we
have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly-skilled employees. Competition for employees in our industry is intense. If we are unable to retain
our key employees or attract, assimilate or retain other highly qualified employees in the future, our business and the trading price of our common stock could be adversely affected.

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ITEM 7.    FINANCIAL STATEMENTS

|(a) |  | (1) The following financial statements of the Company and its subsidiaries have been filed as part of this report (see Item 8 "Financial Statements and Supplementary Data"):      
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | Independent Auditors Report                                                                                                                                                        
|    |  | Consolidated Balance Sheet as of September 30, 2001.                                                                                                                               
|    |  | Consolidated Statements of Operations for the years ended September 30, 2001 and 2000.                                                                                             
|    |  | Consolidated Statements of Stockholders' Equity (Deficit) for the years ended September 30, 2001 and and 2000.                                                                     
|    |  | Consolidated Statements of Cash Flows for the years ended September 30, 2001 and 2000.                                                                                             
|    |  | Notes to Consolidated Financial Statements.                                                                                                                                        
|(2) |  | Schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.

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

Not Applicable

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PART III

ITEM 9.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated herein by reference to the materials appearing in our definitive proxy statement to be filed with the
Securities and Exchange Commission under the caption "Election of Directors" and "Management."

ITEM 10.    EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the materials appearing in our definitive proxy statement to be filed with the Securities
and Exchange Commission under the caption "Management."

ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by reference to the materials appearing in our definitive proxy statement to be filed with the
Securities and Exchange Commission under the caption "Security Ownership of Certain Beneficial Owners and Management."

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to the materials appearing in our definitive proxy statement to be filed with the
Securities and Exchange Commission under the caption "Certain Relationships and Related Transactions."

ITEM 13.    EXHIBITS AND REPORTS ON FORM 10-K

|(a) |  | Exhibits
|--- |  | --------

| | Exhibit Number |  | Description of Document                                                                                                                                                                                                                                                                      
| | -------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1            |  | Agreement and Plan of Reorganization By and Among Optika Investment Company, Inc., DD Acquisition, Inc., Cable Concepts, Inc. and the Shareholders of Cable Concepts, Inc., dated March 1, 2001. Incorporated
by reference from the Company's Current Report on Form 8-K dated July 27, 2001.
| | 2.2            |  | Agreement and Plan of Merger. Incorporated by reference from the Company's Current Report on Form 8-K dated July 27, 2001.                                                                                                                                                                   
| | 3.1            |  | Certificate of Incorporation of USA Broadband, Inc. Incorporated by reference from the Company's Current Report on Form 8-K dated July 27, 2001.                                                                                                                                             
| | 3.2            |  | Amended and Restated Bylaws of USA Broadband, Inc. Incorporated by reference from the Company's Current Report on Form 8-K dated July 27, 2001.                                                                                                                                              
| | 3.3            |  | Certificate of Designation, Preferences and Other Rights of the Company's Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. Incorporated by reference from the Company's Current Report on Form 8-K
dated July 27, 2001.                                      
| | 4.1            |  | Form of Warrant to purchase shares of Common Stock of the Company. Filed herewith.                                                                                                                                                                                                           
| | 4.2            |  | Form of Option to purchase the Company's Common Stock. Filed herewith.                                                                                                                                                                                                                       

14

---

| | 4.3  |  | Registration Rights Agreement entered into with each of the Company's Series A Convertible Preferred shareholders. Filed herewith.        
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1 |  | Advisory Agreement with Maroon Bells Capital, LLC dated January 29, 2001. Filed herewith.                                                 
| | 10.2 |  | Letter Agreement with Landry Montana Partners dated April 15, 2001. Filed herewith.                                                       
| | 10.3 |  | Employment Agreement with Edward P. Mooney dated as of April 1, 2001. Filed herewith.                                                     
| | 10.4 |  | Stock Option Agreement with Edward P. Mooney dated as of April 1, 2001. Filed herewith.                                                   
| | 10.5 |  | Separation Agreement with David M. Lerten dated as of December 19, 2001. Filed herewith.                                                  
| | 10.6 |  | Stock Option Agreement with David M. Lerten dated as of December 19, 2001. Filed herewith.                                                
| | 10.7 |  | Stock Pledge and Security Agreement with David M. Lerten dated as of December 19, 2001. Filed herewith.                                   
| | 10.8 |  | Promissory Note of David M. Lerten dated as of December 19, 2001. Filed herewith.                                                         
| | 16.1 |  | Letter on change in certifying accountant. Incorporated by reference from the Company's Current Report on Form 8-K dated December 6, 2001.

|(b) |  | Reports on Form 8-K
|--- |  | -------------------

On July 27, 2001, the Company filed a Report on Form 8-K relating to the acquisition of Cable Concepts, Inc. and certain change of control
events relating to the acquisition and to the cancellation of shares of the Company's stock.

15

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

| |  | USA BROADBAND, INC.
| |  | -------------------
| |  | By:                
| |  | Its:               

Dated: January 23, 2002

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

|SIGNATURE                |  | TITLE                                         |  | DATE            
|------------------------ |  | --------------------------------------------- |  | ----------------
|                         |  |                                               |  |                 
|/s/EDWARD P. MOONEY      |  | President, Chief Executive Officer & Director |  | January 23, 2002
|/s/BHASU PANCHAL         |  | Principal Financial Officer                   |  | January 23, 2002
|/s/DOUGLAS COLE          |  | Director                                      |  | January 23, 2002
|/s/JOHN EVANS            |  | Director                                      |  | January 23, 2002
|/s/JON ERIC (RIC) LANDRY |  | Director                                      |  | January 23, 2002
|/s/RUSSELL MYERS         |  | Director                                      |  | January 23, 2002

16

---



INDEX TO FINANCIAL STATEMENTS

|                                                                                                          |  | PAGE
|--------------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditor's Report                                                                              |  | F-2 
|Independent Auditor's Report                                                                              |  | F-3 
|Consolidated Balance SheetSeptember 30, 2001                                                             |  | F-4 
|Consolidated Statements of OperationsFor the Years Ended September 30, 2001 and 2000                     |  | F-5 
|Consolidated Statements of Stockholders' Equity (Deficit)For the Years Ended September 30, 2001 and 2000 |  | F-6 
|Consolidated Statements of Cash FlowsFor the Years Ended September 30, 2001 and 2000                     |  | F-7 
|Notes to Consolidated Financial Statements                                                                |  | F-8 

F-1

---



INDEPENDENT AUDITOR'S REPORT

Board
of Directors
USA Broadband, Inc.
Petaluma, California

We
have audited the accompanying consolidated balance sheet of USA Broadband, Inc. and Subsidiaries as of September 30, 2001, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USA Broadband, Inc. and Subsidiaries as of
September 30, 2001, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

HEIN + ASSOCIATES
LLP
Denver, Colorado

January
14, 2002

F-2

---



INDEPENDENT AUDITORS' REPORT

To
the Board of Directors
Optika Investment Company, Inc.
Salt Lake City, Utah

We
have audited the accompanying balance sheet of Optika Investment Company, Inc. (a Utah Corporation) as of September 30, 2000 and the related statements of operations,
stockholders' equity, and cash flows for the periods ending September 30, 2000 and 1999. These financial statements are the responsibility of the management of Optika Investment
Company, Inc. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Optika Investment Company, Inc. as of
September 30, 2000, and the results of their operations and cash flows for the periods ending September 30, 2000 and 1999 in conformity with generally accepted accounting principles.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 7, the Company's recurring losses and
lack of working capital raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to those matters are also described in Note 7. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/
Crouch, Bierwolf & Associates
November 17, 2000

F-3

---



USA BROADBAND, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEET

|                                                                    |                                                                                     | SEPTEMBER 30,
2001                                                                                                             |                           
|------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | --------------------------
|ASSETS                                                              |                                                                                    
|CURRENT ASSETS:                                                     |                                                                                     |                                                                                                                                |                           
|                                                                    | Cash                                                                                |                                                                                                                                | $                         
|                                                                    | Restricted cash                                                                     |                                                                                                                                |                           
|                                                                    | Accounts receivable, net of allowance for doubtful accounts of $671,000             |                                                                                                                                |                           
|                                                                    | Prepaid expenses and other current assets                                           |                                                                                                                                |                           
|                                                                    |                                                                                     |                                                                                                                                |                           
|                                                                    |                                                                                     |                                                                                                                                | Total current assets      
|PROPERTY AND EQUIPMENT:                                             |                                                                                     |                                                                                                                                |                           
|                                                                    | Cable properties                                                                    |                                                                                                                                |                           
|                                                                    | Cable equipment                                                                     |                                                                                                                                |                           
|                                                                    | Leasehold improvements                                                              |                                                                                                                                |                           
|                                                                    | Furniture and equipment                                                             |                                                                                                                                |                           
|                                                                    | Computer software and equipment                                                     |                                                                                                                                |                           
|                                                                    | Vehicles                                                                            |                                                                                                                                |                           
|                                                                    |                                                                                     |                                                                                                                                |                           
|                                                                    |                                                                                     |                                                                                                                                | 13,715,000                
|                                                                    | Less accumulated depreciation                                                       |                                                                                                                                |                           
|                                                                    |                                                                                     |                                                                                                                                |                           
|                                                                    |                                                                                     |                                                                                                                                | Net property and equipment
|GOODWILL                                                            |                                                                                     |                                                                                                                                | 9,850,000                 
|OTHER ASSETS                                                        |                                                                                     |                                                                                                                                | 296,000                   
|                                                                    |                                                                                     |                                                                                                                                |                           
|TOTAL ASSETS                                                        |                                                                                     | $                                                                                                                              | 24,400,000                
|                                                                    |                                                                                     |                                                                                                                                |                           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                |                                                                                    
|CURRENT LIABILITIES:                                                |                                                                                     |                                                                                                                                |                           
|                                                                    | Line-of-credit                                                                      |                                                                                                                                | $                         
|                                                                    | Current portion of long-term debt and capital lease obligations                     |                                                                                                                                |                           
|                                                                    | Accounts payable                                                                    |                                                                                                                                |                           
|                                                                    | Accrued liabilities                                                                 |                                                                                                                                |                           
|                                                                    | Deferred revenues                                                                   |                                                                                                                                |                           
|                                                                    |                                                                                     |                                                                                                                                |                           
|                                                                    |                                                                                     |                                                                                                                                | Total current liabilities 
|LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,net of current portion |                                                                                     |                                                                                                                                | 1,598,000                 
|DEFERRED REVENUES                                                   |                                                                                     |                                                                                                                                | 574,000                   
|OTHER LIABILITIES                                                   |                                                                                     |                                                                                                                                | 188,000                   
|COMMITMENTS AND CONTINGENCIES(Notes 6 and 9)                        |                                                                                     |                                                                                                                                |                           
|STOCKHOLDERS' EQUITY (DEFICIT):                                     |                                                                                     |                                                                                                                                |                           
|                                                                    | Preferred stock, $.001 par value; 50,000,000 shares authorized                      |                                                                                                                                |                           
|                                                                    |                                                                                     | Series A convertible preferred stock; 7,000,000 shares designated; 3,283,899 outstanding, liquidation preference of $4,922,000 |                           
|                                                                    |                                                                                     | Series B preferred stock; 2,625,000 shares designated; 2,625,000 outstanding, liquidation preference of $2,717,000             |                           
|                                                                    |                                                                                     | Series C preferred stock; 7,875,000 shares designated; 7,875,000 outstanding, liquidation preference of $7,875,000             |                           
|                                                                    | Common stock, $.001 par value; 100,000,000 shares authorized; 4,963,000 outstanding |                                                                                                                                |                           
|                                                                    | Additional paid in capital                                                          |                                                                                                                                |                           
|                                                                    | Accumulated deficit                                                                 |                                                                                                                                |                           
|                                                                    |                                                                                     |                                                                                                                                |                           
|                                                                    |                                                                                     |                                                                                                                                | Total stockholders' equity
|                                                                    |                                                                                     |                                                                                                                                |                           
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          |                                                                                     | $                                                                                                                              | 24,400,000                
|                                                                    |                                                                                     |                                                                                                                                |                           

See accompanying notes to these financial statements.

F-4

---



USA BROADBAND, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS

|                                             |                                     | FOR THE YEARS ENDED SEPTEMBER 30, |                     
|-------------------------------------------- | ----------------------------------- | --------------------------------- | --------------------
|
|REVENUES                                     |                                     | $                                 | 1,261,000           
|COST OF REVENUES                             |                                     |                                   | 544,000             
|                                             |                                     |                                   |                     
|                                             |                                     |                                   | Gross profit        
|OPERATING EXPENSES:                          |                                     |                                   |                     
|                                             | Selling, general and administrative |                                   |                     
|                                             | Depreciation                        |                                   |                     
|                                             |                                     |                                   |                     
|                                             |                                     | Total operating expenses          |                     
|                                             |                                     |                                   |                     
|                                             |                                     |                                   | Loss from operations
|                                             |                                     |                                   |                     
|OTHER INCOME (EXPENSE):                      |                                     |                                   |                     
|                                             | Interest expense, net               |                                   |                     
|                                             | Other income (expense), net         |                                   |                     
|                                             |                                     |                                   |                     
|NET LOSS                                     |                                     |                                   | (4,912,000          
|ACCRUED CUMULATIVE PREFERRED STOCK DIVIDENDS |                                     |                                   | (168,000            
|                                             |                                     |                                   |                     
|NET LOSS APPLICABLE TO COMMON SHAREHOLDERS   |                                     | $                                 | (5,080,000          
|                                             |                                     |                                   |                     
|NET LOSS PER COMMON SHARE                    |                                     | $                                 | (.43                
|                                             |                                     |                                   |                     
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING   |                                     |                                   | 11,859,000          
|                                             |                                     |                                   |                     

---

See accompanying notes to these financial statements.

F-5

---

USA BROADBAND, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000

|                                          |                                                                    | Series A Preferred
Stock |           | Series B Preferred
Stock |           | Series C Preferred
Stock |           | Common Stock |   | Additional
Paid In |           | Accumulated |           | Total
Stockholders' |          
|----------------------------------------- | ------------------------------------------------------------------ | ------------------------ | --------- | ------------------------ | --------- | ------------------------ | --------- | ------------ | - | ------------------ | --------- | ----------- | --------- | ------------------- | ---------
|
|BALANCE, at October 1, 1999               |                                                                    |                         |           | $                        |          |                          |          |              | $ |                   |           |            |           | $                   |         
|                                          | Net loss                                                           |                          |          |                          |           |                         |           |             |   |                    |          |             |          |                     |          
|                                          |                                                                    |                          |           |                          |           |                          |           |              |   |                    |           |             |           |                     |          
|BALANCE, at September 30, 2000            |                                                                    |                         |           |                          |          |                          |          |              |   |                   |           |            |           |                     |         
|                                          | Cancellation of common shares                                      |                          |          |                          |           |                         |           |             |   |                    |          |             |          |                     |          
|                                          | Shares issued in acquisition of DDC                                |                          | 33,334    |                          |           | 50,000                   |           | 2,625,000    |   |                    | 2,391,000 |             | 7,875,000 |                     |          
|                                          | Option issued to employees                                         |                          |          |                          |           |                         |           |             |   |                    |          |             |          |                     |          
|                                          | Options issued to non-employees                                    |                          |          |                          |           |                         |           |             |   |                    |          |             |          |                     |          
|                                          | Series A stock issued for conversion of debt                       |                          | 1,048,118 |                          |           | 1,528,000                |           |             |   |                    |          |             |          |                     |          
|                                          | Proceeds from sale of Series A Preferred                           |                          | 2,149,666 |                          |           | 3,224,000                |           |             |   |                    |          |             |          |                     |          
|Series A issued in lieu of offering costs |                                                                    | 8,000                    |           |                          |          |                          |          |              |   |                   |           |            |           |                     |         
|                                          | Offering costs                                                     |                          |          |                          |           | (136,000                 | )         |             |   |                    |          |             |          |                     |          
|                                          | Fair value of warrants issued for debt discount                    |                          |          |                          |           |                         |           |             |   |                    |          |             |          |                     |          
|                                          | Fair value of warrants issued for services                         |                          |          |                          |           |                         |           |             |   |                    |          |             |          |                     |          
|                                          | Shares issued as additional consideration for debt                 |                          |          |                          |           |                         |           |             |   |                    |          |             |          |                     |          
|                                          | Fair value of warrants issued as additional consideration for debt |                          |          |                          |           |                         |           |             |   |                    |          |             |          |                     |          
|                                          | Shares issued in payment of liabilities                            |                          | 44,781    |                          |           | 67,000                   |           |             |   |                    |          |             |          |                     |          
|                                          | Loss on extinguishment of debt                                     |                          |          |                          |           |                         |           |             |   |                    |          |             |          |                     |          
|                                          | Net loss                                                           |                          |          |                          |           |                         |           |             |   |                    |          |             |          |                     |          
|                                          |                                                                    |                          |           |                          |           |                          |           |              |   |                    |           |             |           |                     |          
|BALANCE, at September 30, 2001            |                                                                    | 3,283,899                |           | $                        | 4,733,000 |                          | 2,625,000 |              | $ | 2,391,000          |           | 7,875,000   |           | $                   | 7,875,000
|                                          |                                                                    |                          |           |                          |           |                          |           |              |   |                    |           |             |           |                     |          

See accompanying notes to these financial statements.

F-6

---



USA BROADBAND, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                   |                                                                          | FOR THE YEARS ENDED SEPTEMBER 30,                              |                    
|-------------------------------------------------- | ------------------------------------------------------------------------ | -------------------------------------------------------------- | -------------------
|
|OPERATING ACTIVITIES:                              |                                                                          |                                                                |                    
|                                                   | Net loss                                                                 |                                                                | $                  
|                                                   | Adjustments to reconcile net loss to net cash from operating activities: |                                                                |                    
|                                                   |                                                                          | Depreciation                                                   |                    
|                                                   |                                                                          | Stock based compensation                                       |                    
|                                                   |                                                                          | Amortization of note discount                                  |                    
|                                                   |                                                                          | Amortization of deferred financing costs                       |                    
|                                                   |                                                                          | Allowance for bad debt                                         |                    
|                                                   |                                                                          | Stock and warrants issued as additional consideration for debt |                    
|                                                   |                                                                          | Changes in operating assets and liabilities:                   |                    
|                                                   |                                                                          |                                                                | Accounts receivable
|                                                   |                                                                          |                                                                | Accounts payable   
|                                                   |                                                                          |                                                                | Accrued liabilities
|                                                   |                                                                          |                                                                | Deferred revenues  
|                                                   |                                                                          |                                                                | Other liabilities  
|                                                   |                                                                          |                                                                | Other              
|                                                   |                                                                          |                                                                |                    
|                                                   |                                                                          |                                                                |                    
|                                                   |                                                                          |                                                                |                    
|INVESTING ACTIVITIES:                              |                                                                          |                                                                |                    
|                                                   | Cash acquired in DDC acquisition                                         |                                                                |                    
|                                                   | Advances to DDC prior to acquisition                                     |                                                                |                    
|                                                   | Purchases of property and equipment                                      |                                                                |                    
|                                                   | Acquisition costs                                                        |                                                                |                    
|                                                   | Increase in restricted cash                                              |                                                                |                    
|                                                   | Payment of life insurance premiums                                       |                                                                |                    
|                                                   |                                                                          |                                                                |                    
|                                                   |                                                                          | Net cash used in investing activities                          |                    
|                                                   |                                                                          |                                                                |                    
|FINANCING ACTIVITIES:                              |                                                                          |                                                                |                    
|                                                   | Net borrowings on line-of-credit                                         |                                                                |                    
|                                                   | Proceeds from long-term debt borrowings                                  |                                                                |                    
|                                                   | Principal payments on long-term debt and capital lease obligations       |                                                                |                    
|                                                   | Proceeds from common stock issuance, net of costs                        |                                                                |                    
|                                                   |                                                                          |                                                                |                    
|                                                   |                                                                          | Net cash provided by financing activities                      |                    
|                                                   |                                                                          |                                                                |                    
|NET INCREASE (DECREASE) IN CASH                    |                                                                          |                                                                | 181,000            
|CASH,at beginning of year                          |                                                                          |                                                                |                   
|                                                   |                                                                          |                                                                |                    
|CASH,at end of year                                |                                                                          | $                                                              | 181,000            
|                                                   |                                                                          |                                                                |                    
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                          |                                                                |                    
|                                                   | Cash paid for interest                                                   |                                                                | $                  
|                                                   |                                                                          |                                                                |                    
|                                                   | Cash paid for income taxes                                               |                                                                | $                  
|                                                   |                                                                          |                                                                |                    
|NON-CASH TRANSACTIONS:                             |                                                                          |                                                                |                    
|                                                   | Series A Preferred stock issued for conversion of notes payable          |                                                                | $                  
|                                                   |                                                                          |                                                                |                    
|                                                   | Stock issued for acquisition of DDC                                      |                                                                | $                  
|                                                   |                                                                          |                                                                |                    
|                                                   | Stock issued in payment of liabilities                                   |                                                                | $                  
|                                                   |                                                                          |                                                                |                    

See accompanying notes to these financial statements.

F-7

---



USA BROADBAND INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  SEPTEMBER 30, 2001

1.ORGANIZATION AND NATURE OF OPERATIONS:

USA
Broadband, Inc. ("USAB" or the "Company") was originally incorporated in 1985 for the purposes of acquiring business entities or other investment activities. In early 2001, the
Company adopted a new business strategy to become a provider of digital television, data and broadband interactive services. In July 2001, the Company changed its name from Optika Investment Company,
Inc. to USA Broadband, Inc.

On
July 18, 2001, the Company acquired all of the outstanding common stock of Cable Concepts, Inc. (d/b/a Direct Digital Communications, Inc.) ("DDC"), as more fully described in Note 3.
DDC is in the business of constructing and managing cable systems for both owned properties and for real estate developers and cable operators throughout the United States. DDC, under a System
Operator Agreement with DIRECTV, installs and manages DIRECTV systems, as well as acting as a commissioned sales representative for DIRECTV programming packages.

The
Company is subject to risks inherent in any business enterprise. These risks include, but are not limited to, regulatory requirements, technology changes, increasing competition and
changes in customer demand.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of ConsolidationThe accompanying financial statements include the accounts of the Company and the Company's
wholly-owned subsidiaries, Cable Concepts, Inc. and Direct Digital Midwest. All material intercompany transactions and accounts have been eliminated in consolidation.

Revenue RecognitionOperations revenues are recognized as services are earned, generally on a monthly basis.

Cost of RevenuesCost of revenues includes direct materials and direct labor on cable systems built and sold and direct labor
on maintaining cable systems built and held.

Property and EquipmentProperty and equipment is stated at historical cost. Significant additions and improvements are
capitalized. Repairs and maintenance are expensed as incurred. Upon disposition of equipment, gains or losses are reflected in the statement of operations.

Depreciation
is computed on property and equipment using the straight-line method over the following estimated useful lives:

Cable equipment

3 to 7 yearsFurniture and equipment

3 to 7 yearsComputer software and equipment

3 to 5 yearsVehicles

5 yearsLeasehold improvements

Life of lease (generally 5-10 years)Cable properties

Life of Right of Entry Agreement
(generally 10 to 12 years)


Impairment of Long-Lived AssetsIn the event that facts and circumstances indicate that the cost of assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to

F-8

---

the asset's carrying amount to determine if a write-down to market or discounted cash flow value is required.

Concentration of Credit RiskFinancial instruments that potentially subject the Company to a concentration of credit risk
principally consist of accounts receivable. The Company provides credit in the form of accounts receivable to real estate developers, construction companies and cable operators. The Company also
performs ongoing credit evaluations of its customers' financial condition, and generally does not require collateral to support customer receivables. An allowance for doubtful accounts is maintained
for potential credit losses.

Deferred RevenueDeferred revenues arise from the Company's reimbursement received for certain fixed assets purchased. These
amounts are amortized into income on the straight-line basis over three years, which represents the estimated useful life of the related assets.

Statement of Cash FlowsFor purposes of the statements of cash flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash equivalents.

Income TaxesThe Company accounts for income taxes under the liability method whereby deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that will be in effect when the differences are expected
to reverse.

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

Stock-Based CompensationThe Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123,Accounting for Stock-Based Compensation for Grants to Employees. The Company applies Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for its employee stock benefit plans. Grants to non-employees are
accounted for under the fair value method.

Impact of Recently Issued Accounting PronouncementsIn June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill
and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after July 1, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the
Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.

SFAS
142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the
Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS
142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires the Company to

F-9

---

complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim
quarter after adoption of SFAS 142.

In
August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (SFAS 143). This statement establishes standards of
accounting for asset retirement obligations arising from the acquisition, construction, or development and/or the normal operation of a long-lived asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. Management does not believe that the adoption of SFAS 143 will have a material effect of the financial statements.

In
October 2001, the FASB also approved SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets.SFAS 144
replaces SFAS 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.The new accounting model for
long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30,Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, for the disposal of segments of a business. Statement 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no
longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. Statement 144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The
provisions of Statement 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. At this time, the Company
cannot estimate the effect of this statement on its financial position, results of operations, or cash flows.

Liquidity and Basis of PresentationThe Company's financial statements have been presented on the going concern basis, which
contemplates the realization of assets and liquidation of liabilities in the normal course of business. At September 30, 2001, the Company had a working capital deficit of approximately $6,700,000.
The Company's net loss for fiscal 2001 was approximately $4,900,000, most of which was generated in the last three months of the year, subsequent to the acquisition of DDC.

The
Company's ability to continue as a going concern is dependent upon its ability to raise the capital necessary to successfully implement its business plan, and ultimately to achieve
profitable operations. Management's plans in this regard are set forth below.

Subsequent
to September 30, 2001, management implemented significant cost cutting measures designed to increase operational efficiency. Management also plans a combination of assets
sales and purchases designed to increase the geographic concentration of its operations, which will allow additional efficiencies. The Company received an additional $600,000 of proceeds from its
Series A preferred private placement and expects to complete an additional equity offering in the next year. Management believes that these actions will allow the Company to achieve positive
cash flow from operations within the next year, and to continue as a going concern.

3.ACQUISITION OF DIRECT DIGITAL COMMUNICATIONS:

On
July 18, 2001, the Company acquired all of the outstanding common stock of DDC for an aggregate of 1,082,500 shares of common stock and 7,875,000 shares of Series C preferred stock.
The Company also issued 2,625,000 shares of Series B preferred stock, 33,334 shares of Series A preferred stock and 27,500 shares of common stock in exchange for $2,200,000 of DDC notes payable and
related accrued interest.

F-10

---

The
transaction was accounted for as a purchase. The total purchase price, including transaction costs, was $12,382,000. The excess of the purchase price over the fair value of the net
assets acquired was $9,850,000. In accordance with Statement of Financial Accounting Standards No. 142, the goodwill is not being amortized, but will be subject to annual impairment analysis.

The
following unaudited pro forma summary financial information presents the consolidated results of operations of the Company as if the business combination had occurred as of the
beginning of the fiscal years of DDC ended June 30, 2001 and 2000. The pro forma information has been presented based on the June 30 fiscal year of DDC rather than the September 30 fiscal year of USAB
because USAB had no significant operations prior to the acquisition of DDC, and conversion of DDC financial statements to a September 30 year-end would not provide meaningful information. In addition,
as DDC
is currently the sole and primary operating subsidiary of the Company, the Company may contemplate in the future to change its fiscal year-end to June 30 to match that of DDC.

2001

2000Total revenues

$
4,220,000

$
1,568,000Net loss


(5,344,000
)

(3,459,000
)Net loss per share


(1.12
)

(.73
)


F-11

---

4.LINE OF CREDIT:

At
September 30, 2001, the Company had two lines-of-credit with a financial institution, the first being a $2,000,000 line-of-credit agreement (the "agreement") which expires on April 4,
2002. The line-of-credit is collateralized by all Company assets. The second line-of-credit promissory note agreement for $300,000 expires on February 15, 2002 and is collateralized by all Company
assets and a $300,000 certificate of deposit pledged by a shareholder. Advances under both agreements accrue interest at the bank's prime rate plus 2.0% (8.00% at September 30, 2001). The agreement
requires the Company to meet certain financial covenants regarding minimum tangible net worth and ratio of total liabilities to tangible net worth. The line-of-credit is personally guaranteed by
stockholders of the Company.

As
of September 30, 2001, the Company was not in compliance with the net worth ratio financial covenant and certain other terms and conditions of the loan agreement.

At
September 30, 2001, the Company also had a $147,000 line-of-credit with another financial institution, which expires on February 15, 2002. The line-of-credit is collateralized by a
$200,000 certificate of deposit. Advances under the agreement accrue interest at 6.75%. The line-of-credit is personally guaranteed by stockholders of the Company.

5.LONG-TERM DEBT:

Long-term
debt consists of the following:

|                                                                                                                                                                                             |  | September 30,
2001 |           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------
|Note payable, with interest at prime plus 2%. Principal and interest payments due monthly through April 2002. Collateralized by all Company assets and a $500,000 certificate of deposit.    |  | $                  | 1,725,000 
|Subordinated note payable, related party, principal and interest at 11% due December 2001, unsecured. The note is subordinate to the line-of-credit and any subsequently issued senior debt. |  |                    | 750,000   
|Other                                                                                                                                                                                        |  |                    | 7,000     
|                                                                                                                                                                                             |  |                    |           
|                                                                                                                                                                                             |  |                    | 2,482,000 
|Less current portion                                                                                                                                                                         |  |                    | (1,176,000
|                                                                                                                                                                                             |  |                    |           
|Long-term portion                                                                                                                                                                            |  | $                  | 1,306,000 
|                                                                                                                                                                                             |  |                    |           

Maturities
of long-term debt outstanding at September 30, 2001 are as follows:

Years Ended September 30,2002

$
1,176,0002003


469,0002004


837,000$
2,482,000


F-12

---

6.COMMITMENTS:

The
Company leases certain office equipment under capital leases. The liabilities under capital leases are recorded at the present value of the minimum lease payments and consist of the
following:

|                                                                                                                                                                         |  | September 30,
2001 |         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | --------
|Capital lease obligations, collateralized by capital assets purchased, payable in monthly installments of $11,719, including interest at 11%, due through November 2004. |  | $                  | 375,000 
|Capital lease obligations, collateralized by telephone equipment, payable in monthly installments of $1,841, including interest at 14%, due through August 2003.         |  |                    | 40,000  
|Capital lease obligations, primarily for computer and equipment, payable in monthly installments of $541, including interest at 22.91%, due September 2003.              |  |                    | 9,000   
|Capital lease obligations, primarily for computer and equipment, payable in monthly installments of $270 including interest at 14.34%, due through November 2001.        |  |                    | 1,000   
|                                                                                                                                                                         |  |                    |         
|                                                                                                                                                                         |  |                    | 425,000 
|Less current portion                                                                                                                                                     |  |                    | (133,000
|                                                                                                                                                                         |  |                    |         
|Long-term portion                                                                                                                                                        |  | $                  | 292,000 
|                                                                                                                                                                         |  |                    |         

Future
minimum payments due as of September 30, 2001 are as follows:

2002

$
170,0002003


161,0002004


141,0002005


23,000495,000Less amount representing interest


(70,000
)Present value of future minimum lease payments

$
425,000


Operating LeasesThe Company leases certain facilities and equipment under operating leases expiring
at various dates through 2006. The future minimum payments required under operating leases are as follows:

Years Ended September 30,2002

$
218,0002003


221,0002004


112,0002005


41,0002006


1,000$
593,000


Rent
expense for the years ended September 30, 2001 and 2000 was approximately $57,000 and $0, respectively.

CommitmentsOn January 29, 2001, the Company entered into an advisory agreement with a merchant banking firm to provide
certain advisory and business development services in exchange for a

F-13

---

monthly advisory fee. In addition, the merchant banker will be paid a success fee upon the completion of the financing and in connection with certain merger and acquisition and business development
activities on behalf of the Company.

In
2001, the Company entered into an employment agreement with its CEO. As amended in December 2001, the agreement granted the CEO options to purchase 85,000 shares at $1.50, vesting
immediately, 75,000 shares at $2.50, vesting in April 2002, and 75,000 shares at $3.50 vesting in April 2003. The options vest ratably over a 60-month period. In December 2001, the CEO
purchased 166,667 shares of Series A Preferred Stock in exchange for a promissory note, collateralized by such stock, in the amount of $250,000, bearing interest at 6%, payable quarterly. The amount
of the principal represents the purchase price of the Series A shares; the sum of the note evidencing the obligation will be reduced on January 2, 2002 to $127,500.

Effective
April 1, 2001, the Company entered into a consulting agreement with an entity affiliated with the Chairman for advice related to financings, mergers and acquisitions. This
agreement requires payments of $10,000 per month through April 2002. The Chairman also received options to purchase 150,000 shares of common stock at $.50 per share.

Effective
April 1, 2001, the Company entered into an employment agreement with the Executive Vice President. The Agreement is for a term of one year and provides the Executive vice
President with a base salary of $120,000 per year, renewable annually, with bonuses as determined by the Board of Directors. In addition, the Company granted to the Executive Vice President an option
to acquire 100,000 shares of the common stock at a price of $1.50 per share. The option is immediately vested and has a term of ten (10) years.

7.STOCKHOLDERS' EQUITY:

Preferred StockThe Company has authorized 50,000,000 shares of preferred stock, par value $.001 per share, with 7,000,000
shares designated as Series A Convertible Preferred Stock, 2,625,000 shares designated as Series B Preferred Stock, and 7,875,000 shares designated as Series C Preferred Stock.

Series
A Convertible Preferred StockThe Series A Convertible Preferred Stock holders shall be entitled to receive cumulative dividends of 8% per year, payable quarterly when
and if declared by the Board of Directors. The dividends are payable in cash or shares of Series A Convertible Preferred Stock, at the election of the Board of Directors. The Series A Convertible
Preferred Stock has a preference in liquidation preference of $1.50 per share plus any unpaid dividends, over common stock and any other series of preferred stock. Each share of Series A Convertible
Preferred Stock is convertible into one share of common stock, at the option of the holder, at any time. The Series A Convertible Preferred
Stock shall automatically be converted into common stock upon the closing of a public offering of common stock with proceeds in excess of $15,000,000 at not less than $10.00 per share.

Series B
Preferred StockThe Series B Preferred Stock is redeemable at the option of the Company at rates ranging from 80% of the liquidation preference during 0-6
months after issuance to 110% of the liquidation preference after 19 months. If the Series B Preferred Stock is not redeemed within 24 months of issuance, the holders shall be entitled to receive
cumulative dividends of $0.14 per share per year, payable in cash when and if declared by the Board of Directors. The Series B Preferred Stock has a preference in liquidation of $1.00 per share plus
any unpaid dividends, over the Series C Preferred Stock and common stock, but after the Series A Preferred Stock.

Series C
Preferred StockThe Series C Preferred Stock is redeemable at the option of the Company at rates ranging from 80% of the liquidation preference during 0-6
months after issuance to

F-14

---

110% of the liquidation preference after 19 months. No shares of Series C Preferred may be redeemed until all of the Series B Preferred Stock has been redeemed. If the Series B Preferred Stock
is not redeemed within 24 months of issuance, the holders shall be entitled to receive cumulative dividends of $0.14 per share per year, payable in cash when and if declared by the Board of
Directors. If the Series B Preferred Stock has not been redeemed, no dividends on the Series C Preferred Stock or common stock shall be declared or paid. The Series C Preferred
Stock has a preference in liquidation of $1.00 per share plus any unpaid dividends over common stock, but after the Series A Preferred Stock and the Series B Preferred Stock. Holders of the
Series C Preferred Stock may exchange a portion of their shares for common stock.

The
Company is required to utilize ten percent of the net proceeds received from future sales or grants of equity (excluding equity issued to employees, consultants, directors, officers,
or in connection with any business combination) through July 2004 as follows:



Stock Option PlansIn 2001, the Company adopted the Long-Term Incentive Plan (the "Incentive Plan"). The Incentive Plan
provides for the granting of options, restricted stock, stock appreciation rights, or other stock-based awards to employees. The Plan reserved 1,500,000 shares for future issuance of awards.

In
2001, the Company adopted the 2001 Director Option Plan, which provides for the granting of non-qualified stock options to Company's outside directors. The Director Option Plan
reserved 1,000,000 shares for future issuance.

Following
is a summary of stock option activity:

|                        |                     |         |         |         |         | Range of
Exercise Prices |     |    
|----------------------- | ------------------- | ------- | ------- | ------- | ------- | ------------------------ | --- | ---
|
|
|
|Balances, June 30, 2000 |                     |        |         |        |         |                          |    |    
|                        | Granted             |         | 565,000 |         | 275,000 |                          | $   | .50
|                        | Exercised           |         |        |         |        |                          |     |   
|                        | Terminated/Canceled |         |        |         |        |                          |     |   
|                        |                     |         |         |         |         |                          |     |    
|Balances, June 30, 2001 |                     | 565,000 |         | 275,000 |         | $                        | .50 |    
|                        |                     |         |         |         |         |                          |     |    
|Vested options          |                     | 395,208 |         | 275,000 |         | $                        | .50 |    
|                        |                     |         |         |         |         |                          |     |    

F-15

---

If not previously exercised, options expire as follows:

Year Ending
September 30,

Number of
Shares

Weighted
Average
Exercise
Price2006

385,000

$
.772011

455,000


1.42840,000


All
employee options were fully vested at September 30, 2001.

If
not cancelled or forfeited non-employee options outstanding at September 30, 2001 will vest as follows:

Year

Options

Vested Average
Exercise
PriceVested at September 30, 2001

395,208

1.162002

62,500

.902003

62,500

.902004

37,500

1.002005

7,292

1.50565,000

1.12


During
the years ended September 30, 2001 and 2000, the Company recognized compensation expense of $169,000 and $0, respectively, related to employee options.

Pro Forma Stock-Based Compensation DisclosuresThe Company applies APB Opinion 25 and related interpretations in accounting
for stock options which are granted to employees. Accordingly, no compensation cost is recognized for grants of options to employees if the exercise prices were not less than the market value of the
Company's common stock on the measurement dates. Had compensation cost been determined based on the fair value at the measurement dates consistent with the method of SFAS No. 123, the Company's net
loss and loss per share would have been changed to the pro forma amounts indicated below.

Years Ended September 30,2001

2000Net loss applicable to common shareholders:As reported

$
(5,080,000
)
$
Pro forma


(5,264,000
)

Net loss per common share applicable to common shareholders:As reported

$
(.43
)
$
Pro forma


(.44
)




For
purposes of the above pro forma amounts, the weighted average fair value of 375,000 options granted to employees with an exercise price less than the market price for the years ended
September 30, 2001 was $1.26. All remaining options were issued with an exercise price equal to the market price and had a weighted average fair value of 1.96. The fair value of each employee option
granted in 2001

F-16

---

and 2000 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

Year Ended
September 30,
2001Expected volatility

88%Risk-free interest rate

4.67%-4.98%Expected dividends

0.0%Expected terms

5-10 years


Stock Purchase WarrantsThe Company has granted warrants, which are summarized as follows for the years ended
September 30, 2001 and 2000:

Warrants
Outstanding

Weighted
Average
Exercise
PriceBalances, September 30, 2000



$
Granted

1,044,666


.01Granted

510,000


1.50Exercised




Terminated/Canceled




Balances, September 30, 2001

1,554,666

$
.50


Warrants
outstanding at September 30, 2001 have exercise prices ranging from $.01 to $1.50 as follows:

Shares

Exercise
Price

Expiration
Date1,000,000

$
.01

January 2006510,000


1.50

January 200644,666


.01

September 20061,554,666


The
fair value of each warrant granted was estimated on the date of grant, using the Black-Scholes option-pricing model with the following assumptions:

2001Expected volatility

88
%Risk-free interest rate

4.96
%Expected dividends

Expected terms (in years)

5.0


The
fair value of warrants issued during fiscal 2001 of $1,484,000 (calculated using the Black-Scholes method) were recorded as expense.

F-17

---

8.INCOME TAXES:

As of September 30, 2001, the components of the deferred tax asset were as follows:

2001Net operating loss carryforward

$
3,700,000Allowance for bad debts


250,000Valuation allowance


(3,950,000
)Net deferred tax asset

$



Due
to the recent operating losses incurred by the Company and the uncertainties regarding future taxable income, the Company has recorded a valuation allowance equal to net deferred tax
assets. The increase in the valuation allowance of $3,800,000 from September 30, 2000 through September 30, 2001 and $0 from September 30, 1999 to September 30, 2000 was
due primarily to the increase in the net operating loss carryforward. Net operating loss carryforwards total approximately $10,000,000 at September 30, 2001, and expire from 2005 through 2021.
Usage of the net operating loss carryforward will be restricted due to the change in ownership of DDC and the Company in 2001.

9.LEGAL MATTERS:

From
time to time, the Company is involved in various legal matters arising in the normal course of business. In the opinion of management, the ultimate resolution of these matters is
not expected to have a material adverse effect on these financial statements.

10.FAIR VALUE OF FINANCIAL INSTRUMENTS:

The
estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be
determined with
precision. The carrying amounts of the accounts receivable, accounts payable, line-of-credit, and accrued liabilities approximate fair value because of the short-term maturities of these instruments.
The fair value of notes payable approximates their carrying value as generally their interest rates reflect the Company's current effective annual borrowing rate, and due to their short-term
maturities.

11.SUBSEQUENT EVENT:

Pursuant
to a severance agreement entered into with the former president of DDC, in December 2001, the Company issued 100,000 options with an exercise price of $3.25 per share.

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