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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 AMENDMENT NO. 2
                                  FORM 10-QSB/A

[X]  Quarterly  Report Under Section 13 or 15(d) of the Securities  Exchange Act
     of 1934

                  For the quarterly period ended March 31, 2002

[_]  Transition  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

  For the transition period from __________________ to ______________________.

                         Commission file number 0-21637

                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
        (Exact Name of Small Business Issuer as Specified in its Charter)

          DELAWARE                                                95-4592204
(State or Other Jurisdiction of                               (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

                       TOPANGA CANYON BOULEVARD, SUITE 120
                        WOODLAND HILLS, CALIFORNIA 91367
                    (Address of Principal Executive Offices)

                                 (818) 615-1500
                (Issuer's Telephone Number, Including Area Code)

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for past 90 days.

                                Yes [X]   No [_]

         State the number of shares  outstanding of each of the issuer's classes
of common equity,  as of the latest  practicable  date:  Common Stock, par value
$0.001, 40,114,978 shares issued and outstanding as of June 25, 2003.

         Transitional Small Business Disclosure Format (check one):
                                Yes [_]   No [X]



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                                 AMENDMENT NO. 2
                 TO THE QUARTERLY REPORT ON FORM 10-QSB FILED BY
              BRILLIANT DIGITAL ENTERTAINMENT, INC. ON MAY 15, 2002

         The following Items amend the Quarterly  Report on Form 10-QSB filed by
Brilliant Digital Entertainment, Inc. (the "Company") on May 15, 2002 (the "Form
10-QSB"),  as  permitted  by  the  rules  and  regulations  promulgated  by  the
Securities and Exchange Commission.  The Form 10-QSB is hereby amended to insert
those  Items as set forth  herein.  All  capitalized  terms used  herein but not
defined shall have the meanings ascribed to them in the Form 10-QSB.


                                       2


<PAGE>


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                 (In thousands)


                                                                       MARCH 31,
                                                                         2002
                                                                       --------
ASSETS                                                               (unaudited)
Current assets:
    Cash and cash equivalents ................................         $    771
    Accounts receivable, net .................................               71
    Other assets, net ........................................              236
                                                                       --------
Total current assets .........................................            1,078
Property, plant and equipment, net ...........................              127
Other assets, net ............................................              405
                                                                       --------
Total assets .................................................         $  1,610
                                                                       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable .........................................         $    368
    Accrued expenses .........................................            1,096
    Deferred revenue .........................................              917
    Capital financing, net of discount .......................            1,123
    Current portion of notes payable .........................              137
                                                                       --------
Total current liabilities ....................................            3,641
Deferred revenue .............................................            2,326
Notes payable, less current portion ..........................               20
Other long term liabilities ..................................               50
                                                                       --------
Total liabilities ............................................            6,037
Commitments and contingencies
Stockholders' deficit:
    Common stock .............................................               22
    Additional paid-in capital ...............................           51,732
    Accumulated deficit ......................................          (55,888)
    Cumulative other comprehensive loss ......................             (293)
                                                                       --------
Total stockholders' deficit ..................................           (4,427)
                                                                       --------
Total liabilities and stockholders' deficit ..................         $  1,610
                                                                       ========

                 See Notes to Consolidated Financial Statements.


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                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

                                                              THREE MONTHS
                                                             ENDED MARCH 31,
                                                        -----------------------
                                                          2002           2001
                                                        --------       --------
                                                      (unaudited)    (unaudited)

Revenues .........................................      $    293       $    390

Costs and expenses:
     Costs of revenues ...........................            52             33
     Sales and marketing .........................            22            297
     General and administrative ..................           557          1,007
     Research and development ....................            90            678
     Depreciation and amortization ...............            17            120
                                                        --------       --------
                                                             738          2,135
                                                        --------       --------
Loss from operations .............................          (445)        (1,745)
Other income (expense):
     Export market development grant .............          --               33
     Gain on foreign exchange ....................          --               23
     Interest income (expense), net ..............          (866)            14
                                                        --------       --------
     Total other income (expense) ................          (866)            70
                                                        --------       --------
Loss from continuing operations ..................        (1,311)        (1,675)
Loss from discontinued operations ................          --             (460)
                                                        --------       --------
Net loss before income taxes .....................        (1,311)        (2,135)
Provision for income taxes .......................          --             --
                                                        --------       --------
Net loss .........................................        (1,311)        (2,135)

Foreign currency translation adjustment
     (net of tax effects) ........................            (4)           (62)
                                                        --------       --------
Comprehensive loss ...............................      $ (1,315)      $ (2,197)
                                                        ========       ========

Basic and diluted continuing operations
     loss per share ..............................      $  (0.07)      $  (0.10)
                                                        ========       ========
Basic and diluted for discontinued
     operations per share ........................      $  (0.00)      $  (0.03)
                                                        ========       ========
Basic and diluted net loss per share .............      $  (0.07)      $  (0.13)
                                                        ========       ========
Weighted average number of shares used in
     computing basic and diluted net loss
     per share ...................................        17,850         16,054
                                                        ========       ========

                 See Notes to Consolidated Financial Statements.


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<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                              THREE MONTHS
                                                             ENDED MARCH 31,
                                                          ---------------------
                                                            2002          2001
                                                          -------       -------
                                                        (unaudited)  (unaudited)
OPERATING ACTIVITIES
Net loss ...........................................      $(1,311)      $(2,135)
Adjustments to reconcile net loss to the
   net cash used in operating activities:
      Depreciation and other amortization ..........          936           478
      Loss from discontinued operations ............         --             460
      Loss (gain) on foreign exchange ..............         --              25
      Effect of warrants granted ...................           21           298
      Changes in operating assets and
        liabilities:
         Accounts receivable .......................            1          (138)
         Other assets ..............................            2          (229)
         Accounts payable and accruals .............           46          (219)
         Deferred revenue ..........................         (229)         (229)
         Other long-term liabilities ...............          (65)          (60)
                                                          -------       -------
Total adjustments ..................................          712           386
                                                          -------       -------
Net cash used in continuing activities .............         (599)       (1,749)
Net cash used in discontinued operations ...........         --            (490)
                                                          -------       -------
Net cash used in operating activities ..............         (599)       (2,239)

INVESTING ACTIVITIES
Purchases of equipment .............................         --             (12)
                                                          -------       -------
Net cash used in investing activities ..............         --             (12)

FINANCING ACTIVITIES
Proceeds from issuance of shares, net of
   costs ...........................................          800          --
Proceeds from the issuance of capital
   financing .......................................          400          --
Repayments of notes ................................          (11)          (14)
                                                          -------       -------
Net cash provided by financing activities ..........        1,189           (14)
                                                          -------       -------
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS .....................................          590        (2,265)

Translation adjustments ............................           (4)          (62)
Cash and cash equivalents at beginning
   of period .......................................          185         3,401
                                                          -------       -------
Cash and cash equivalents at end of
   period ..........................................      $   771       $ 1,074
                                                          =======       =======

Supplemental  disclosure of cash flow
information:  Cash paid during the period
for:
   Interest ........................................      $     4       $     4
                                                          =======       =======

                 See Notes to Consolidated Financial Statements.


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SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

         In May 2001,  we  issued  $2,264,150  in  principal  amount of  Secured
Convertible  Promissory  Notes (the "Original  Notes") with warrants to purchase
shares of our common stock.  A beneficial  conversion  feature of $1,056,000 was
recorded in  connection  with this  transaction,  which is being  amortized on a
straight-line basis over the life of the Original Notes.

         In December 2001, we issued an additional  $350,000 in principal amount
of  Secured  Convertible  Promissory  Notes as part of an overall  financing  of
$750,000,  the  balance  of which was  funded in 2002  (the "New  Notes"),  with
warrants to purchase shares of our common stock. A beneficial conversion feature
of $295,000 was recorded in  connection  with this  transaction,  which is being
amortized on a straight-line basis over the life of the New Notes.

         Also in December 2001, the  conversion  feature and warrants  issued in
connection  with the Original  Notes were  adjusted to the same terms as the New
Notes. As such, an additional  beneficial  conversion  feature of $1,632,000 was
recorded and will be amortized on a straight-line  basis over the remaining life
of the Original Notes.

         In January 2002, we issued the remaining  $400,000 in principal  amount
of  Secured  Convertible  Promissory  Notes  as part of the  overall  New  Notes
financing.  In accordance with EITF 98-5 and EITF 00-27, a beneficial conversion
feature of $337,000 was recorded in connection with this  transaction,  which is
being amortized on a straight-line basis over the life of the New Notes.

         In connection with these  promissory  Notes,  we amortized  $793,000 of
debt discount expense and $73,000 interest expense in the first quarter of 2002.


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<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2002


1.       BASIS OF PRESENTATION

         The accompanying  unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted  accounting  principles
for interim  financial  information and with the instructions to Form 10-QSB and
Item  310  of  Regulation  S-B.  Accordingly,  they  do not  include  all of the
information and footnotes required by generally accepted  accounting  principles
for  complete  financial  statements.   The  accompanying   unaudited  condensed
consolidated  financial  statements reflect all adjustments that, in the opinion
of management, are considered necessary for a fair presentation of the financial
position,  results of operations,  and cash flows for the periods presented. The
results of  operations  for such periods are not  necessarily  indicative of the
results  expected  for  the  full  fiscal  year or for any  future  period.  The
accompanying financial statements should be read in conjunction with the audited
consolidated  financial  statements  of Brilliant  Digital  Entertainment,  Inc.
included in the  Company's  Form 10-KSB for the fiscal year ended  December  31,
2001.

         The Company has a history of losses, a negative net worth and may never
attain  profitability.  The Company has a limited  operating history and has not
attained  profitability.  Since inception,  the Company has incurred significant
losses and  negative  cash  flow,  and as of March 31,  2002 had an  accumulated
deficit  of  $55.9  million.  These  conditions,  combined  with  the  Company's
historical  operating  losses,  raise  substantial  doubt  about our  ability to
continue as a going concern. The accompanying  condensed  consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the  recoverability  and  classification  of assets and liabilities  that may
result from the outcome of this uncertainty.  The Company is seeking  additional
funding and believes that the receipt and application of additional  funding may
result in improved operating results. However, the Company cannot guarantee that
it will be  able  to  secure  additional  funding,  or that if such  funding  is
available, the terms or conditions will be acceptable to the Company.

2.       STOCKHOLDERS' EQUITY

         In March 2002, the Company sold an aggregate of 6,051,437 shares of its
common stock to Harris Toibb,  Markev Services LLC and David Wilson in a private
placement at a price per share of $0.1322, for aggregate proceeds to the Company
of $800,000.  In connection  with the  offering,  the Company also issued to the
investors,  warrants to  purchase up to an  aggregate  of  10,758,110  shares of
common stock at an exercise price of $0.148725 per share. The warrants expire in
on May 23, 2004.  Mark Dyne, the Company's  Chairman,  and Kevin  Bermeister,  a
director and the Company's Chief Executive Officer and President,  are owners of
Markev Services and Harris Toibb is a significant stockholder of the Company.

         Options  and  warrants  representing  common  shares of  3,384,140  and
58,514,828 were excluded from the average number of common and common equivalent
shares  outstanding  in the diluted EPS  calculation  for the three months ended
March 31, 2001 and 2002,  respectively,  because  they were  anti-dilutive.  The
increase in the warrants is due to warrants  issued in  connection  with capital
financing agreements transacted from May 1, 2001 through March 31, 2002.


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                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2002


3.       COMMITMENTS AND CONTINGENCIES

         At March 31, 2002,  the Company was obligated  under certain  licensing
agreements  to  make  minimum  payments  totaling  $71,000  for  use of  certain
properties and characters in development of the Company's products.

         The  Company has two fixed asset  financing  notes with future  minimum
payments as of March 31, 2002 as follows:

               YEAR                                 AMOUNT
         -----------------                       ------------

               2002                                    40,000
               2003                                    31,000
                                                 ------------
                                                      $71,000
                                                 ============

         The Company  leases its facilities  under  operating  lease  agreements
expiring through 2003.  Future minimum payments as of March 31, 2002 under these
leases are as follows:

               YEAR                                 AMOUNT
         -----------------                       ------------

               2002                                    62,000
               2003                                     7,000
                                                 ------------
                                                      $69,000
                                                 ============

         Rent  expense was $99,000 and $21,000 for the three  months ended March
31, 2001 and the three months ended March 31, 2002, respectively.

4.       GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

         The Company's operations consist of the operations of Brilliant Digital
Entertainment  Pty. Ltd. in Australia,  Brilliant  Digital  Entertainment in the
United States and The Auction Channel was in the United  Kingdom.  The following
schedule sets forth the revenues and long-lived  assets,  including those of the
discontinued operations of The Auction Channel, by geographic area:


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<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2002


                                                 UNITED                 UNITED
                                                 STATES     AUSTRALIA   KINGDOM
                                                --------    --------    --------
THREE MONTHS ENDED MARCH 31, 2001:
   Revenues from unaffiliated customers ....    $151,000    $ 10,000    $  9,000
   Revenues from affiliated customers ......     229,000        --          --
                                                --------    --------    --------
   Total revenues ..........................    $380,000    $ 10,000    $  9,000
                                                ========    ========    ========
THREE MONTHS ENDED MARCH 31, 2002:
   Revenues from unaffiliated customers ....    $ 58,000    $  6,000        --
   Revenues from affiliated customers ......     229,000        --          --
                                                --------    --------    --------
   Total revenues ..........................    $287,000    $  6,000        --
                                                ========    ========    ========
LONG-LIVED ASSETS AS OF:
   March 31, 2002 ..........................    $479,000    $ 53,000        --
                                                ========    ========    ========


         For each of the  periods  shown  above,  the movie  software  costs,  a
portion of the operating expenses and most of the research and development costs
were incurred and paid in Australia.  The production  costs  associated with the
web music videos,  duplication and packaging,  royalties due to third parties, a
major portion of the sales and marketing costs, and certain  corporate  expenses
were incurred and paid in the United States.

         For the three months ended March 31, 2002, e-New Media  represented 80%
of the revenues with distribution and licensing rights ($229,000). For the three
months ended March 31, 2001,  e-New Media  represented  59% of the revenues with
distribution  and  licensing  rights  ($229,000).   Infogrames  contributed  18%
($70,000)  of  revenues,  while  Warner  Bros.  Online  contributed  advertising
revenues of 12% ($46,000).

5.       SUBSEQUENT EVENTS

         In April 2002, the Company sold 2,116,045 shares of its common stock to
investors  in a private  placement  at a price per share of $0.1731  for 491,045
shares  and a price per  share of $0.20  for  1,625,000  shares,  for  aggregate
proceeds  to the Company of  $410,000.  In  connection  with the  offering,  the
Company also issued to the investors warrants to purchase up to 3,861,476 shares
of common  stock at exercise  prices of  $0.19474  per share (for  warrants  for
491,045 shares) and $0.2175 per share (for warrants for 1,625,000  shares).  The
warrants expire on May 23, 2004.


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<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The information contained in this Form 10-QSB is intended to update the
information  contained  in our Annual  Report on Form  10-KSB for the year ended
December 31, 2001 and presumes  that readers have access to, and will have read,
the "Management's  Discussion and Analysis of Financial Condition and Results of
Operations"  and other  information  contained in such Form 10-K.  The following
discussion  and  analysis  also should be read  together  with our  consolidated
financial  statements  and the notes to the  consolidated  financial  statements
included elsewhere in this Form 10-QSB.

         THIS  DISCUSSION  SUMMARIZES  THE  SIGNIFICANT  FACTORS  AFFECTING  THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT DIGITAL ENTERTAINMENT FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND
MARCH 31, 2001. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS ARE FORWARD LOOKING  STATEMENTS THAT INVOLVE RISKS AND  UNCERTAINTIES
AND ARE BASED UPON  JUDGMENTS  CONCERNING  VARIOUS  FACTORS  THAT ARE BEYOND OUR
CONTROL.  ACTUAL  RESULTS COULD DIFFER  MATERIALLY  FROM THOSE  PROJECTED IN THE
FORWARD  LOOKING  STATEMENTS  AS A RESULT OF,  AMONG OTHER  THINGS,  THE FACTORS
DESCRIBED BELOW UNDER THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS."

OVERVIEW

         Brilliant  Digital  Entertainment,  Inc. is a  developer  of rich media
advertising serving technologies, software authoring tools and content for three
dimensional, or 3D, animation on the World Wide Web. During the third quarter of
2001, we began marketing and  distributing our player,  the "Digital  Projector"
(required for the playback of our rich media content and advertisements) through
two large peer-to-peer,  or P2P, networks,  Sharman Networks, which operates the
KaZaA network (formerly  operated by Consumer  Empowerment B.V.), and StreamCast
Networks, which operates the Morpheus network. Previously, our primary method of
distribution  was  through  the  bundling  of the  Digital  Projector  with  our
animation  content which we syndicated to third party web sites. At December 31,
2001, we estimate that our Digital  Projector  had been  distributed  to tens of
millions of users based on KaZaA's weekly downloads as reported on Download.com,
as  additional  P2P connected  computers and other users  accessed the KaZaA and
Morpheus  networks.  Sharman  Networks  continues to distribute our player,  and
StreamCast Networks unilaterally decided to discontinue its distribution.

         We  commercialize  our  advertising  technology in two primary ways. We
license our rich media  advertising  server  technologies to web sites to enable
the selling and serving of our proprietary rich media advertising format, and we
license our rich media  content  authoring  tools - "b3d Studio" and "b3d Studio
Pro" - to  production  studios and  content  developers  interested  in creating
content for the Internet.  We launched our rich media 3D  advertising  banners -
Brilliant  Banners - into the market  during the first  quarter of 2001 to offer
advertisers  and web sites an  alternative to the current  Graphics  Interchange
Format,  or GIF,  banners  that are  prevalent  on web sites  today.  Rich media
advertising  banners  are web site  banner  ads that have full  audio and motion
animation.  We believe that our animated 3D banner advertisements perform better
than GIF banners because they include motion animation and full audio,  which is
more  engaging to a viewer.  We license our rich media ad serving  technologies,
through  our  wholly-owned  subsidiary  B3D,  Inc.,  to high  traffic web sites,
including  the P2P network of Sharman  Networks,  for the  serving of  Brilliant
Banners.  We are  also  introducing  our ad  format  to third  party ad  serving
companies,


                                       10


<PAGE>


making our technologies  available for them to commence selling and serving this
new rich media ad format. In November 2001, we became a Rich Media Silver Vendor
of  DoubleClick,  Inc.  This rich  media  certification  was  awarded  after our
technology passed the DoubleClick tests for functionality,  impression  tracking
and click tracking.

         In   February   2002,   we   formed   Altnet,   Inc.   to   operate   a
peer-to-peer-based  content  distribution network that allows Altnet to securely
and efficiently  distribute a content owner's music,  video,  software and other
digital  files to  computer  users.  Using  internally  developed  and  licensed
technology,  we intend to create a private,  or "closed"  peer-to-peer  network,
which allows us to centrally  control the  distribution of a digital file, which
has been  authorized  by its owner,  directly  from one computer  user (peer) to
another  (peer).  Our ability to control  which files are  distributed  over our
private  network,  as  well  as  our  use of  widely  available  digital  rights
management (or DRM) technologies from Microsoft Corporation, TryMedia and others
to protect  against  copyright  infringement,  will prevent the  distribution of
unauthorized files over our network and help to protect against the unauthorized
use of a digital  file  distributed  over our network  once it resides on an end
user's  computer.  We intend to exploit  Altnet by  partnering  with third party
operators of web sites and other Internet  applications to enable users of those
web sites and  applications  to search for and download  digital  files from the
Altnet network. We own 51% of the outstanding capital stock of Altnet and manage
all of its day-to-day operations, and the remaining 49% is owned by Joltid, Ltd.
(formally  known as  Blastoise,  Ltd.),  the  company  from  whom we  license  a
substantial portion of Altnet's peer-to-peer technology.

         We generate revenue from our Internet advertising business by licensing
our ad serving  technology,  which is used to display our Brilliant Banners,  to
third  party  operators  of web sites and other  Internet  applications,  and we
generate revenue from our software tools business by selling licenses to our b3d
software  tools.  We intend to  generate  revenue  from our Altnet  business  by
contracting  with content  owners to distribute  and sell their digital files to
computer users. We will charge the content owner a placement or distribution fee
based  on one or more of the  following:  (i) a  negotiated  fee for  each  file
downloaded,  (ii) a  negotiated  fee for each  license  issued once the end user
tries to play the file the first time after it has been downloaded,  and (iii) a
negotiated  percentage  of the sales  price a computer  user pays to  purchase a
digital file.

         We have  licensed  some of the world's  best known  characters  for the
production  and web  distribution  of episodic  animations,  called  MultipathTM
Movies,  that include SUPERMAN,  XENA: WARRIOR PRINCESS,  KISS, and ACE VENTURA,
and have  produced  animated  music videos of top selling  artists  including Ja
Rule,  Ludacris,  DMX and Li'l Romeo. These full-screen  productions,  developed
using our proprietary  suite of b3d software tools,  have small files for faster
download  relative to full video  files.  Currently we  distribute  our animated
content through Internet  syndication  partners  including Warner Bros.  Online,
Roadrunner and selected sites from the Universal Music Group.

         In  2001,  we  substantially   reduced  our  internal   production  and
syndication  of 3D animation,  which we used primarily to distribute our Digital
Projector,  in order to reduce our costs and our cash burn  rate.  We have begun
the process of discontinuing operations at Digital Hip Hop, the entity we formed
to produce  animated  music  videos  for the World Wide Web,  and have begun the
process of discontinuing  operations at Brilliant  Interactive  Ideas Pty. Ltd.,
our  Australian-based  production  company which employs a team of animators and
programmers  dedicated  to  animation  production.  We have begun the process of


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<PAGE>


discontinuing  operations  at Digital Hip Hop based on the limited  prospects of
additional web video production work. We have begun the process of discontinuing
operations  at  Brilliant  Interactive  Ideas  Pty.  Ltd.  because  of the under
utilization  of  animators  and   programmers   which  occurred   following  the
termination  of our  production  agreement  with  Warner  Bros.  Online  and the
substantial  reduction  of  operations  at  Digital  Hip  Hop.  The  substantial
reduction of operations at Brilliant Interactive Ideas Pty. Ltd. and Digital Hip
Hop has reduced costs in business  segments that were not generating,  and which
we concluded did not have the potential to generate,  significant revenues.  The
reduction in our content production and syndication activities has allowed us to
focus our efforts and allocate  our  resources  to the further  development  and
exploitation of our advertising  serving and authoring tools businesses,  and to
pursue the development of a private,  peer-to-peer  network business through our
Altnet subsidiary.

         We are a Delaware  corporation  that was incorporated in July 1996. Our
executive  offices  are located at 6355  Topanga  Canyon  Boulevard,  Suite 120,
Woodland Hills,  California  91367,  and our telephone number is (818) 615-1500.
Information on our web sites, www.brilliantdigital.com and www.b3d.com, does not
constitute part of this Form 10-QSB.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Our discussion  and analysis of our financial  condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues  and  expenses,   and  related  disclosure  of  contingent  assets  and
liabilities.  On an on-going basis,  we evaluate our estimates,  including those
related  to  reserves  for  bad  debts.  We base  our  estimates  on  historical
experience and on various other  assumptions  that are believed to be reasonable
under  the  circumstances,  the  results  of which  form the  basis  for  making
judgments  about the  carrying  values of assets  and  liabilities  that are not
readily  apparent  from other  sources.  Actual  results  may differ  from these
estimates  under  different  assumptions  or  conditions.  Our use of estimates,
however, is quite limited, as we have adequate time to process and record actual
results from operations.

         Our  critical  accounting  policies  are  described  in  Note  2 to the
consolidated  financial statements included in Item 7 of our Form 10-KSB for the
fiscal year ended  December 31, 2001.  We believe our most  critical  accounting
policies include revenue recognition,  the corresponding accounts receivable and
our use of the  consolidation  method when accounting for our  subsidiaries.  We
believe the following critical  accounting  policies affect our more significant
judgments  and  estimates  used in  preparation  of our  consolidated  financial
statements.

         Under SEC Staff  Accounting  Bulletin  No. 101 and AICPA  Statement  of
Position  97-2(SOP  97-2),  generally  we  recognize  revenue  when  all  of the
following  criteria are met: (1) persuasive  evidence of an arrangement  exists,
(2) delivery has occurred or services have been rendered, (3) the seller's price
to the buyer is fixed or  determinable,  and (4)  collectibility  is  reasonably
assured.  In the case of each of our product and  service  lines we  establish a
contract or insertion order with our customers with specifics for  requirements,
a fixed price, a delivery schedule,  and terms for payment.  Unless cash is paid
in advance,  our  receivables  are  recorded as revenue is earned.  We regularly
evaluate  the  collectibility  of our  receivables  based  on a  combination  of
factors.  When a customer's  account becomes past due, we initiate dialogue with
the customer to determine the cause.  If we determine  that the customer will be
unable to meet its  financial  obligations  to us, due to a  bankruptcy  filing,
deterioration in the customer's operating results or financial position or other


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<PAGE>


material events  impacting their business,  we record a specific reserve for bad
debt to reduce the related  receivable  to the amount we expect to recover given
all  information  presently  available.  If  circumstances  related to  specific
customers  change,  our estimates of the  recoverability  of  receivables  could
materially  change.  We do not have material  exposure to any single customer or
group of customers at this time.

RESULTS OF OPERATIONS

         REVENUES

         ADVERTISING  REVENUE:  We derive  advertising  revenue by  serving  our
Brilliant Banner  advertisements on web sites and other Internet applications on
behalf of our advertiser  clients.  Our clients pay us a fee based on a cost per
thousand  impressions  (CPM)  or  specified   conversions  delivered  (CPA).  In
accordance with SOP 97-2 we recognize this revenue when the impressions are made
or conversions delivered, and reflect this revenue in the Operating Statement as
Development fees and other revenue.

         DISTRIBUTION FEES: We have granted distribution rights to our Multipath
Movie products and b3d Toolset to distributors in exchange for a  non-refundable
minimum  fixed fee and a  percentage  of sales of the  products  within  certain
territories.

         In  accordance  with SOP 97-2,  revenue  related to the  non-refundable
minimum  fixed  fee is  recognized  when the  master  file is  delivered  to the
customer,  the terms of the sale are considered  fixed,  and  collectibility  is
probable. Additional revenue, based on a percentage of sales, is recognized upon
notification  by the  distributor  that a royalty  has been  earned  by us.  For
distribution agreements,  which cover a period of time in excess of one year and
are  exclusive  for  a  geographic   territory,   we  recognize   revenue  on  a
straight-line  basis  over  the  life  of  the  agreement.  In the  case  of our
distribution  agreement with e-New Media,  e-New Media paid us a  non-refundable
advance  for   distribution   rights  to  our  Multipath   Movies  in  specified
territories.  This  advance is being  recognized  as revenue on a  straight-line
basis over the six-year  term of the  agreement.  We reflect this revenue in the
Operating Statement as Distribution and technology revenue from a related party.

         PRODUCTION  FEES:  We have  received  revenue for the  development  and
creation  of  Music  Videos  for  Digital  Hip Hop and for 3D  Brilliant  Banner
advertisements.  We receive  production fees in exchange for the development and
creation of animated content including banner ads and animated music web videos,
in accordance with customer specifications. The development agreements generally
specify certain "milestones",  such as completion of the script or incorporation
of the music, which must be achieved throughout the production process. As these
milestones  are  achieved,  we  recognize  the  portion of the  development  fee
allocated to each milestone.  In the case of music videos, the production period
is 6 to 12 weeks and the customer  signs off on the  milestones as they are met,
and the customer is invoiced for that stage of production. In the case of banner
ads, the  production  period is much shorter,  perhaps two weeks,  so we usually
require 50% payment up front and 50% upon  completion.  We recognize the revenue
upon  delivery  of the  file to the  client.  We  reflect  this  revenue  in the
Operating Statement as Development fees and other revenue.

         DEVELOPMENT  FEES: We have received  revenue for the development of new
animated content for viewing in short segments,  or Webisodes,  on the Internet.
We  are no  longer  developing  Webisodes.  We  have  entered  into  development
contracts for series of Webisodes developed over a


                                       13


<PAGE>


period of time under which we are entitled to fixed minimum guaranteed payments.
In accordance with SOP 97-2, the minimum  guaranteed  payments are recognized as
revenue when the master file is delivered  for each  Webisiode to the  publisher
for use on their web sites,  the terms of the sale are  considered  fixed  (upon
signing of the contract),  and collectibility is probable.  We develop or create
the Webisodes based on the publishers' scripted storyboards. The publishers have
approval  rights and review the Webisodes as they are  developed.  The publisher
reviews the  content,  look and feel or style of the  Webisode,  script,  music,
voice-overs,  and all other facets of the  Webisode.  We recognize  revenue from
these sales upon delivery of the master file. Additionally, we receive an agreed
upon percentage of revenue received by the publisher from  advertising  attached
to the  Webisodes,  which we  recognize  when the  publisher  notifies us that a
royalty has been earned.  We reflect this revenue in the Operating  Statement as
Development fees and other revenue.

         SOFTWARE  SALES:  We receive or have received  revenue from the sale or
license of our software as follows:

                  b3d tools, our software products which enable a user to create
3D animation,  are downloaded over the internet.  We recognize  revenue once the
product is delivered and paid for by the end user.  Upon  payment,  the end user
receives  a key to  unlock  the  toolset,  which  the  end  user  can use for an
unlimited period. We reflect this revenue in the Operating Statement as Software
sales.

                  Multipath  Movies are 3D animated movies developed by us using
of b3d  tooset.  We no longer  produce  copies of existing  Multipath  Movies or
develop  new  Multipath  Movies.  All  Multipath  Movie  development  costs were
capitalized  and have since been  expensed.  The master  file for each movie was
delivered to our Woodland  Hills  office and CD-ROMs were  duplicated,  boxed in
jewel cases and shipped to wholesalers.  We recognized  revenue upon delivery of
the CD-ROMs to the wholesaler.  The wholesalers  delivered the product to retail
stores for sale to end users.  We  provided a reserve for returns and bad debts.
We reflected  Multipath  Movie  revenues in the Operating  Statement as Software
sales.

                  We have  entered  into  licensing  agreements  with  web  site
publishers for the display of Webisodes and Multipath  Movies on the publishers'
web sites.  We  received an agreed upon  percentage  of revenue  received by the
publisher from advertising attached to the Webisodes and Multipath Movies. Under
some agreements,  we received a fixed non-refundable minimum guaranteed payment.
In accordance withSOP 97-2, the minimum  guaranteed  payments were recognized as
revenue when the master file was  delivered to the  publisher,  the terms of the
sale  were   considered   fixed  (upon  the  signing  of  the   contract),   and
collectibility  was probable.  We recognized  revenues for advertising  when the
publisher  notified us that a royalty had been earned. We reflect these revenues
in the Operating  Statement as Development fees and other revenue.  We no longer
license Multipath Movies to publishers, and only license Webisodes to publishers
on a very limited basis.

                  We have entered into licensing  agreements  with  distributors
for conversion of our Multipath Movies to the DVD format and for distribution to
retailers.   We  entered  into   contracts   under  which  we  received   fixed,
non-refundable  minimum  guaranteed  payments.  In accordance with SOP 97-2, the
minimum guaranteed  payments were recognized as revenue when the master file was
delivered to the distributor,  the terms of the sale were considered fixed (upon
signing of the  contract),  and  collectibility  was probable.  We reflect these
revenues in the Operating  Statement as


                                       14


<PAGE>


Development  fees and other  revenue.  We are no longer  selling  our  Multipath
Movies in the DVD format.

                  In the case of our  software  licensing  agreement  with e-New
Media,  e-New  Media  paid us a  non-refundable  advance  for  rights to our b3d
toolset to produce its own  Multipath  Movies and to resell the  toolset  within
specified  territories.  We  are  recognizing  this  advance  as  revenue  on  a
straight-line  basis over the five-year term of the  agreement.  We reflect this
revenue in the Operating Statement as Distribution and technology revenue from a
related party.

         We intend to derive  revenue  from our Altnet  business by charging the
content  owner a  placement  or  distribution  fee  based  on one or more of the
following: (i) a negotiated fee for each file downloaded,  (ii) a negotiated fee
for each license  issued once the end user tries to play the file the first time
after it has been  downloaded,  and (iii) a negotiated  percentage  of the sales
price a computer user pays to purchase a digital file. Revenues earned from fees
charged for file downloads and licenses  issued to end users,  which are paid by
the content owner, will be recognized as each download occurs or license issues.
With  respect to revenues  earned from  purchases of digital  files  pursuant to
revenue  share  agreements  with content  owners,  we will  recognize  only that
portion of the purchase  price to which we are entitled  under our  agreement at
the time of payment by the end user.

         Revenues  decreased  25% from $390,000 for the three months ended March
31, 2001 to $293,000  for the three  months  ended March 31,  2002.  The primary
source of revenue is our distribution and technology agreements with e-New Media
which  resulted in revenue of $229,000 in the three  months ended March 31, 2001
and the three months ended March 31, 2002, and from  advertising  revenues.  The
decrease in revenues is due to a reduction in advertising revenue resulting from
the  non-recurrence of a one-time  advertising sale for $70,000,  which occurred
during the three months ended March 31, 2001.

         COST  OF  REVENUES.   Cost  of  revenues  consists   primarily  of  the
amortization  of licensing  royalties  to third  parties and the direct costs of
banner advertising. Cost of revenues increased from $33,000 for the three months
ended March 31, 2001 to $52,000 for the three months ended March 31, 2002.  This
represents  an  increase  of  $19,000,  or 58%,  which is  primarily  due to the
development of banner ads created for Internet  advertisers at a cost of $26,000
for the  three  months  ended  March  31,  2002.  This  increase  is offset by a
reduction in royalty expense, from $26,000 in 2001 to $18,000 in 2002, as two of
our licensing  agreements were fully amortized  during 2001 and the three months
ended March 31, 2002. We also incurred initial costs of $5,000 pertaining to the
newly formed company, Altnet, Inc.

         SALES AND MARKETING.  Sales and marketing  expenses were reduced by 93%
from $297,000 for the three months ended March 31, 2001 to $22,000 for the three
months ended March 31, 2002. In the first quarter of 2001, we incurred  $255,000
in expense for warrants  issued in connection  with our  agreement  with Yahoo!,
which was fully amortized during 2001. The decrease is also  attributable to the
reduction in our use of outside  sales and  marketing  consultants.  The $22,000
incurred in the three months  ended March 31, 2002 is  primarily  due to fees to
sales consultants and our initial marketing efforts for Altnet, Inc.

          GENERAL  AND  ADMINISTRATIVE.   General  and  administrative  expenses
primarily  include  salaries  and  benefits  of  management  and  administrative
personnel,   rent,   insurance  costs  and


                                       15


<PAGE>


professional fees. General and administrative expenses decreased $450,000 or 45%
from  $1,007,000  for the three  months ended March 31, 2001 to $557,000 for the
three months ended March 31, 2002. This decrease is primarily  attributable to a
decrease in salaries  and  employee  benefits of $359,000  due to a reduction in
headcount  in  the  Los  Angeles  office  and a  decrease  in  insurance  costs.
Additionally,  rent  expense  was  reduced  by  $78,000  due to the  closing  of
production space in Australia and reduction of office space in Los Angeles.  The
decrease  was  partially  offset by an  increase  in legal fees  relating to our
financing  transactions  in the three  months  ended  March  31,  2002 and costs
incurred related to Altnet, Inc.

         RESEARCH AND  DEVELOPMENT.  Research and development  expenses  include
salaries and  benefits of  personnel  conducting  research  and  development  of
software products.  Research and development costs also include costs associated
with creating our software tools used to develop MultipathTM Movies, 3D animated
content for banner ads and  Internet  web site  development  costs.  These costs
decreased 87% from $678,000 for the three months ended March 31, 2001 to $90,000
for the three  months  ended March 31, 2002  primarily  due to a decrease in web
site development  costs,  research and development  personnel and overhead costs
associated  with  research and  development.  We decreased  the headcount of our
research and development  personnel in our Sydney,  Australia office during 2001
from 53 employees to 7 employees at March 31, 2002.

         DEPRECIATION  AND   AMORTIZATION.   Depreciation   expense  relates  to
depreciation of fixed assets such as computer  equipment and cabling,  furniture
and fixtures and leasehold improvements. These fixed assets are depreciated over
their estimated useful lives (up to five years) using the straight-line  method.
Depreciation  expense  decreased  86% from  $120,000  for the three months ended
March 31,  2001 to  $17,000  for the three  months  ended  March 31,  2002.  The
decrease is  attributable  to completion of depreciation of certain fixed assets
prior to the three  months  ended March 31, 2002 and the disposal of other fixed
assets.

         OTHER INCOME AND EXPENSE.  Other income and expense  includes  interest
income and interest  expense and debt discount on capital  financing,  gains and
losses on foreign exchange  transactions,  and export development grants paid to
our subsidiary,  Brilliant  Interactive Ideas Pty. Ltd., by the Australian Trade
Commission for its participation in certain export activities.  Other income and
expense  decreased  from income of $70,000 for the three  months ended March 31,
2001 to a loss of $866,000 for the three  months ended March 31, 2002.  The loss
is due to a non-cash  debt  discount  expense of $793,000  and accrued  interest
expense  of  $73,000  incurred  in  connection  with our sale of  $3,014,150  in
principal amount of Convertible  Promissory Notes in 2001.  During the remaining
three  fiscal  quarters  of 2002,  we will  incur an  additional  $2,082,000  in
non-cash debt discount  expense in connection  with this financing  transaction.
During the first quarter of 2001, we earned  $33,000 for the trade export grant,
recognized  $23,000 in gain on foreign exchange  transactions and earned $14,000
of interest income, net of expense.

         NET LOSS ON  DISCONTINUED  OPERATIONS.  The  Auction  Channel  has been
accounted  for as a  discontinued  operation  pursuant  to  Management's  formal
adoption on December  31, 2000 of a plan to dissolve  the  business  unit. A net
loss of $460,000 was  recognized  for the three months ended March 31, 2001. The
net assets of The Auction  Channel  were sold in the second  quarter of 2001 and
the company was subsequently dissolved.


                                       16


<PAGE>


LIQUIDITY, CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

         As  of  March  31,  2002,  our  cash  and  cash   equivalents   totaled
approximately  $771,000. This is an increase of $586,000 as compared to December
31,  2001.  The  increase  is due to  debt  and  equity  financing  transactions
consummated  during the quarter in which we raised an aggregate  of  $1,200,000,
partially offset by a net loss of $1,311,00.

         Cash flows from operating,  financing and investing  activities for the
three  months  ended March 31,  2002 and 2001 are  summarized  in the  following
table:

     ACTIVITY:                                   2002              2001
     ---------                                   ----              ----

     Continuing Operations ............      $  (599,000)      $(1,749,000)
     Discontinuing Operations .........      $      --         $  (490,000)
     Investing ........................      $      --         $   (12,000)
     Financing ........................      $ 1,189,000       $   (14,000)


         Net cash of  $599,000  used in  operating  activities  during the three
months  ended  March  31,  2002 was  primarily  attributable  to a net loss from
operations of $1,311,000. This is compared to a net use of cash during the three
months  ended  March  31,  2001  of  $1,749,000  attributable  to a net  loss of
$2,135,000  and  an  additional  use  of  cash  of  $490,000   attributable   to
discontinued operations.

         Net cash used to purchase computer equipment amounted to $12,000 in the
three months ended March 31, 2001.

         We are  required  as of March  31,  2002 to make  minimum  payments  of
$37,000 under various licensing agreements.

         At March 31, 2002, we had rental commitments for our office facility of
$69,000 and two  promissory  notes for the  financing  of office  furniture  and
computer  equipment in the amount of $36,000 and $35,000 payable over the next 2
years. Our contractual obligations are as follows:

                 CONTRACTUAL                                 LESS THAN     1-3
                 OBLIGATIONS                        TOTAL     1 YEAR      YEARS
                 -----------                       -------    -------    -------
Capital Leases ................................    $71,000    $40,000    $31,000
Operating Lease ...............................    $69,000    $62,000    $ 7,000
                                                   -------    -------    -------

         In March 2002, we sold an aggregate of 6,051,437 shares of common stock
to Harris Toibb,  Markev Services LLC and David Wilson in a private placement at
a price per share of  $0.1322,  for  aggregate  proceeds to us of  $800,000.  In
connection  with the  offering,  we also  issued to the  investors  warrants  to
purchase up to an aggregate  of  10,758,110  shares  common stock at an exercise
price of $0.148725 per share. The warrants expire in on May 23, 2004. Mark Dyne,
our Chairman,  and Kevin Bermeister,  a director and our Chief Executive Officer
and President,  are owners of Markev  Services and Harris Toibb is a significant
stockholder of the company.

         In April 2002, we sold an additional  2,116,045  shares of common stock
to investors in a private  placement at a price per share of $0.1731 for 491,045
shares  and a price per  share of $0.20


                                       17


<PAGE>


for  1,625,000  shares,  for aggregate  proceeds to the Company of $410,000.  In
connection with the offering,  the Company also issued to the investors warrants
to purchase up to 3,861,476  shares common stock at exercise  prices of $0.19474
per share (for warrants for 491,045  shares) and $0.2175 per share (for warrants
for 1,625,000 shares). The warrants expire on May 23, 2004.

         Our  operations  generated  negative  cash flow during the three months
ended March 31, 2001 and 2002,  and we expect a  significant  use of cash during
the  upcoming  2002 fiscal  year as we initiate  the  business  opportunity  for
Altnet, Inc., as well as continue to develop our software tools and continue our
marketing efforts for our tools and 3D rich media banners ads. We anticipate our
current  cash  reserves,  plus our  expected  generation  of cash from  existing
operations,  will be sufficient to fund our  anticipated  expenditures  into the
third quarter of 2002.  Consequently,  we will require additional equity or debt
financing  during 2002, the amount and timing of which will depend in large part
on our spending program. Our recent financings have been significantly  dilutive
to our  stockholders  and if additional funds are raised through the issuance of
equity  securities,  our  stockholders  may  experience  significant  additional
dilution.  Furthermore, there can be no assurance that additional financing will
be available when needed or that if available, such financing will include terms
favorable to our  stockholders  or us. If such  financing is not available  when
required or is not available on acceptable terms, we may be unable to develop or
enhance our products and services,  take advantage of business  opportunities or
respond to  competitive  pressures,  any of which could have a material  adverse
effect on our business, financial condition and results of operations, and would
most likely  result in our having to file for  bankruptcy  protection  under the
Bankruptcy Code

         The accompanying  consolidated  financial statements have been prepared
assuming  that we will  continue  as a going  concern,  which  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business.  The carrying  amounts of assets and  liabilities  presented in the
financial  statements  do not  purport to  represent  realizable  or  settlement
values.  The report of our  Independent  Certified  Public  Accountants  for the
December  31,  2001  financial  statements  included  an  explanatory  paragraph
expressing substantial doubt about our ability to continue as a going concern.

NEW 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 we recognize  acquired  intangible assets apart from goodwill
if the acquired intangible assets meet certain criteria. SFAS 141 applies to all
business  combinations  initiated after June 30, 2001 and for purchase  business
combinations  completed on or after July 1, 2001.  It also requires  that,  upon
adoption of SFAS 142, we 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 we 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


                                       18


<PAGE>


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 us
to complete a transitional goodwill impairment test nine months from the date of
adoption.  We are 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 SFAS No. 143,  "Accounting  for Asset
Retirement Obligations". SFAS No. 143 requires the fair value of a liability for
an asset  retirement  obligation  to be  recognized in the period in which it is
incurred  if a  reasonable  estimate of fair value can be made.  The  associated
asset  retirement  costs are  capitalized as part of the carrying  amount of the
long-lived  asset.  SFAS No. 143 is effective for fiscal years  beginning  after
June 15, 2002. We believe the adoption of this  Statement  will have no material
impact on our financial statements.

         In October  2001,  the FASB issued SFAS No.  144,  "Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets".  SFASB 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.  SFASB 144 is effective  for  financial  statements  issued for fiscal
years  beginning  after  December  15,  2001 and,  generally,  are to be applied
prospectively.  We believe the adoption of this  Statement will have no material
impact on our financial statements.

CAUTIONARY STATEMENTS AND RISK FACTORS

         Several   of  the   matters   discussed   in  this   document   contain
forward-looking  statements  that  involve  risks  and  uncertainties.   Factors
associated with the  forward-looking  statements that could cause actual results
to differ  materially  from those  projected  or  forecast  are  included in the
statements  below.  In addition to other  information  contained in this report,
readers should carefully consider the following cautionary statements.

         IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DELAY
IMPLEMENTATION  OF OUR BUSINESS PLAN,  REDUCE OVERHEAD  SIGNIFICANTLY OR SUSPEND
OPERATIONS. We currently have a number of obligations that we are unable to meet
without  generating  additional  revenues or raising additional  capital.  If we
cannot  generate  additional  revenues or raise  additional  capital in the near
future,  we may become  insolvent.  As of March 31,  2002,  our cash balance was
approximately  $771,000 and our outstanding  accounts payable,  accrued expenses
and current debt totaled  $2,724,000.  Historically,  we have funded our capital
requirements  with debt and equity  financing.  Our ability to obtain additional
equity or debt financing  depends on a number of factors including our financial
performance  and the overall  conditions in our industry.  If we are not able to
raise  additional  financing or if such financing is not available on acceptable
terms,  we may  liquidate  assets,  seek or be forced  into  bankruptcy,  and/or
continue  operations  but suffer  material harm to our  operations and financial
condition. These measures could have a material adverse affect on our ability to
continue as a going concern.

         WE HAVE A HISTORY OF LOSSES,  A NEGATIVE NET WORTH AND MAY NEVER ATTAIN
PROFITABILITY.  We have a  limited  operating  history  and  have  not  attained
profitability. Since inception, we have incurred significant losses and negative
cash  flow,  and as of March 31,  2002 we had an  accumulated


                                       19


<PAGE>


deficit  of $55.9  million.  Additionally,  as of the date of this  report,  our
current   liabilities   exceed  our  current   assets.   We  have  not  achieved
profitability  and  expect  to  continue  to  incur  operating  losses  for  the
foreseeable future as we fund operating and capital expenditures in the areas of
software   tools   development,    brand   promotion,   sales   and   marketing,
administration,  deployment  of our Altnet  peer-to-peer  network and  operating
infrastructure.  Our business model assumes that consumers and advertisers  will
be attracted to our rich media advertising formats (Brilliant Banners), and that
animators and those who produce banner advertisements will use our b3d tools and
technology in the development of other b3d-produced  content. Our business model
also assumes that a significant  portion of our future  revenues will be derived
from our Altnet peer-to-peer business,  which is not operational.  This business
model is not yet  proven and we cannot  assure you that we will ever  achieve or
sustain  profitability  or that our  operating  losses will not  increase in the
future or be inconsistent with the expectations of the public market.  Primarily
as a result of our continued losses, our independent public accountants modified
the  opinion  on our  December  31,  2001  financial  statements  to  include an
explanatory paragraph wherein they expressed substantial doubt about our ability
to continue as a going concern.

         OUR  RECENT  CAPITAL  RAISING  EFFORTS  HAVE  RESULTED  IN  SUBSTANTIAL
DILUTION TO OUR  STOCKHOLDERS  AND OUR FUTURE  CAPITAL NEEDS WOULD INCREASE THIS
DILUTION.  During 2001, we raised $3.0 million  through the sale of  convertible
promissory notes and common stock purchase warrants. The promissory notes, which
mature on November  10,  2002,  and accrued  interest  may be  converted  by the
holders at any time into a number of shares of our common  stock  determined  by
dividing the amount due under the notes, including interest, by a price equal to
the  lesser of $.20 and the lowest 5 day volume  weighted  average  price of our
common stock as reported by the American  Stock  Exchange at any time during the
term of the notes. At May 6, 2002, the principal and interest  outstanding under
the Notes could be  converted by the holders  into  26,937,385  shares of common
stock,  which would represent 52.1% of our outstanding  common stock immediately
following the  conversion.  The warrants have an expiration date of May 23, 2004
and entitle the holders to purchase up to an aggregate of 200% of their invested
capital in shares of our Common  Stock at a per share  exercise  price  equal to
112.5% of the conversion  price. The exercise of the warrants would increase the
number  of  shares  outstanding  and  result in  further  dilution  to our other
stockholders.  Additionally,  during  the first  quarter  of 2002,  we raised an
additional  $800,000  through the sale of  6,051,437  shares of common stock and
common stock purchase  warrants.  These warrants have an expiration  date of May
23, 2004 and entitle the holders to purchase up to an  aggregate  of  10,758,110
shares  of our  Common  Stock at a per share  exercise  price of  $0.148725.  We
anticipate  that  during  remainder  of 2002,  we will need to raise  additional
capital,  as our current operations do not generate positive cash flow. As such,
any  additional   capital  raising  efforts  would  cause  further  dilution  to
stockholders.

         The following table  illustrates our  capitalization as of May 6, 2002,
and identifies  the number of shares issued and  outstanding as of such date, as
well as the number of shares that may be issued in the future upon conversion of
outstanding convertible promissory notes and exercise of outstanding options and
warrants:


                                       20


<PAGE>


SECURITY                               SHARES OF             PERCENTAGE OF FULLY
                                     COMMON STOCK               DILUTED SHARES
----------------------------         ------------            -------------------

Outstanding Common Stock               24,731,142                  25.6%
Convertible Promissory Notes           33,024,575                  34.2%
Outstanding Warrants(1)                35,885,272                  37.2%
Outstanding Options                     2,944,000                   3.0%
                                     ------------            -------------------
  Fully Diluted Shares of
     Common Stock(2)                   96,584,989                 100.0%
------------------
1    For  purposes  of this  table,  we have  only  included  warrants  that are
     "in-the-money"  (the  exercise  price of the warrants is below the price of
     our common stock),  and the number of shares of common stock underlying the
     outstanding  warrants has been  calculated on a "cashless"  exercise basis,
     whereby  the  holder of each  warrant  receives  upon  exercise a number of
     shares of common  stock  with a value  equal to (i) the total  value of the
     shares  underlying  the warrants less (ii) the aggregate  exercise price of
     the  warrants,  and is  calculated  based on the closing sales price of our
     common  stock on the  American  Stock  Exchange  on May 6, 2002,  which was
     $0.36.
2    This number  excludes  410,375  shares that have been reserved for issuance
     under our 1996 Stock Option Plan that  currently  are not the subject of an
     outstanding stock option or other award.

         IF WE  BECOME  INSOLVENT,  WE  WILL BE IN  DEFAULT  UNDER  OUR  SECURED
CONVERTIBLE  PROMISSORY  NOTES,  WHICH  COULD  RESULT IN OUR  OBLIGATION  TO PAY
IMMEDIATELY ALL AMOUNTS THEN OUTSTANDING UNDER THE NOTES. If we generally do not
pay,  or become  unable to pay,  our debts as such  debts  become  due,  we will
default under our  outstanding  Secured  Convertible  Promissory  Notes,  in the
aggregate  principal  amount of $3.0 million.  If a default occurs,  all amounts
owed to the holders of the notes would  immediately  become due and payable.  If
the debt becomes due before its stated maturity in November 2002, we likely will
not have  sufficient  funds to repay the  indebtedness,  which will  entitle the
holders of the notes to exercise  all of their  rights and  remedies,  including
foreclosure  on all of our  assets  which we  pledged  as  collateral  to secure
repayment of the debt.

         ALTNET IS AN UNPROVEN  BUSINESS  VENTURE  AND MAY  REQUIRE  SIGNIFICANT
CAPITAL TO BE  SUCCESSFULLY  IMPLEMENTED.  Our Altnet  peer-to-peer  business is
unproven and we cannot  guaranty that it will be successful.  The success of the
business will depend,  in part, on our ability to enter into end user agreements
with a sufficient  number of  qualified  personal  computer  owners to allow the
network to work efficiently and effectively,  acceptance by corporate  customers
of our services,  the technical viability of the commercially  available digital
rights management, or DRM, software we employ to protect the proprietary content
that will pass through the Altnet network and reside on network  computers,  and
our underlying peer-to-peer technology.  Additionally, we do not have sufficient
capital to internally fund Altnet's  development  and operations.  Consequently,
the capital  necessary  to launch and fund Altnet will need to come from outside
sources.  We cannot make assurances that sufficient capital will be available at
all or on terms acceptable to us to fund Altnet's development and operations.

         OUR BUSINESS MODEL CONTEMPLATES  RECEIVING A SIGNIFICANT PORTION OF OUR
FUTURE  REVENUES FROM RICH MEDIA  INTERNET  ADVERTISEMENTS  DEVELOPED AND SERVED
USING  OUR  SOFTWARE  TOOLS AND FROM  INTERNET  ADVERTISING  SERVICES.  INTERNET
ADVERTISING  IS  DEPENDENT  ON THE ECONOMIC  PROSPECTS  OF  ADVERTISERS  AND THE
ECONOMY IN GENERAL  AND  RECENTLY  HAS  EXPERIENCED  A


                                       21


<PAGE>


SIGNIFICANT  DECLINE.  A CONTINUED  DECREASE IN EXPENDITURES BY ADVERTISERS OR A
PROLONGED  DOWNTURN IN THE ECONOMY COULD CAUSE US TO FAIL TO ACHIEVE OUR REVENUE
PROJECTIONS. We are increasing our emphasis on generating revenues from the sale
of our b3d tools for the creation of rich media Internet advertisements and from
the sale of technologies and services to Web publishers, third party advertising
representation firms,  advertisers and agencies. In recent quarters,  the market
for  Internet  advertising  has  experienced  lower  demand,  lower  prices  for
advertisements  and the reduction of marketing  and  advertising  budgets.  As a
consequence,  expenditures for Internet advertisements have decreased. We cannot
be certain that future  decreases  will not occur and that  spending on Internet
advertisement  will return to  historical  levels.  A  continued  decline in the
economic  prospects of  advertisers  or the economy in general could cause us to
fail to achieve our advertising-related revenue projections.

         WE WILL NOT BE ABLE TO GENERATE  REVENUES FROM OUR BRILLIANT BANNERS IF
THEY DO NOT ACHIEVE MARKET ACCEPTANCE.  The success of our Brilliant Banner rich
media ad format and our ability to generate revenues through sale and serving of
these advertisements will be determined by consumer reaction and acceptance.  To
generate revenues, we must develop advertisements that appeal to the advertising
community and the consumer, which is unpredictable.  Additionally, our Brilliant
Banner  advertisements face competition from other online advertising  companies
like Unicast and Viewpoint. Other factors that influence our ability to generate
revenues from our Brilliant Banners include:

         o        Acceptance of the Brilliant Banner  advertising  format by web
                  sites;

         o        Performance  of the  Brilliant  Banner versus other rich media
                  advertising formats and traditional 2D advertisements; and

         o        Our  ability to broadly  disseminate  our  Digital  Projector,
                  which is necessary to view our Brilliant Banners.

         OUR  FAILURE TO  MAINTAIN  STRATEGIC  RELATIONSHIPS  WITH  DISTRIBUTION
PARTNERS  COULD  REDUCE  THE  NUMBER  OF  DIGITAL  PROJECTORS  WE  ARE  ABLE  TO
DISSEMINATE  TO CONSUMERS,  WHICH WOULD REDUCE THE NUMBER OF USERS THAT ARE ABLE
TO VIEW OUR MEDIA  CONTENT,  DECREASE  THE  VALUE OF OUR  BRILLIANT  BANNERS  TO
ADVERTISERS AND LIMIT THE NUMBER OF USER'S FOR OUR ALTNET PEER-TO-PEER BUSINESS.
We distribute our Digital Projector and the software necessary to create and run
our Altnet peer-to-peer business primarily by bundling it with Sharman Networks'
KaZaA  Media  Desktop.  We rely on  computer  users'  demand for the KaZaA Media
Desktop to increase the installed  base of our (1) Digital  Projector,  which is
necessary to view b3d-produced  content such as our Brilliant  Banners,  and (2)
Altnet software, which is necessary to connect users to our private peer-to-peer
network.  Our business,  results of operations and financial  condition could be
materially   adversely   affected  if  we  do  not  maintain  our   distribution
relationship  with Sharman Networks on acceptable terms or if this  relationship
does not achieve the projected  distribution of our Digital Projector and Altnet
software.  Additionally,  a disruption  in the  distribution  of the KaZaA Media
Desktop or a  decrease  in demand for the  product  by users  would  necessarily
impact the future  distribution of our technology.  The KaZaA Media Desktop,  as
well as other  peer-to-peer  software  products,  is currently  the subject of a
lawsuit;  METRO-GOLDWYN-MAYER  STUDIOS, INC. ET. AL. V. GROKSTER,  LTD. ET. AL.,
filed in the United States District Court for the Central District of California
(Western Division) by twenty-eight  entertainment companies claiming that, among
other things, the


                                       22


<PAGE>


KaZaA  Media  Desktop  facilitates,  contributes  to  and  encourages  copyright
infringement.  On November 18, 2001,  there was an additional  complaint  filed,
LIEBER ET. AL. V. CONSUMER  EMPOWERMENT  B.V. ET. AL. To the extent that Sharman
Networks is precluded from  distributing  the KaZaA Media Desktop as a result of
this  litigation,  it would  prevent  the  further  distribution  of the Digital
Projector  and Altnet  peer-to-peer  software with the KaZaA product which could
have a material adverse affect on our business and financial condition.

         OUR STOCK PRICE MAY DECLINE  SIGNIFICANTLY  IF WE ARE DELISTED FROM THE
AMERICAN STOCK  EXCHANGE.  Our common stock  currently is quoted on the American
Stock Exchange.  For continued inclusion on the American Stock Exchange, we must
meet certain  tests,  including  maintaining  a sales price for our common stock
above  $1.00 per  share,  and net  tangible  assets of at least $4  million.  We
currently are not in compliance  with both the bid price and net tangible assets
requirements.

         If we continue to fail to satisfy the listing standards on a continuous
basis,  the American  Stock  Exchange  may, at its sole  discretion,  delist our
common stock from the exchange. If this occurs,  trading of our common stock may
be conducted  on (i) the NASDAQ  SmallCap  Market,  if we qualify for listing at
that time, which we currently do not, (ii) in the over-the-counter market on the
"pink sheets", or (iii) if available, the NASD's "Electronic Bulletin Board." In
any of those cases, investors could find it more difficult to buy or sell, or to
obtain  accurate  quotations  as to the value of our common  stock.  The trading
price per share of our common stock likely would be reduced as a result.

         WE MAY NOT BE ABLE TO COMPETE  EFFECTIVELY  WITH OTHER  COMPANIES  THAT
OFFER SOFTWARE TOOLS AND SERVICES  SIMILAR TO OURS. The markets for our software
tools are highly  competitive and  characterized  by pressure to incorporate new
features and  accelerate the release of new and enhanced  products.  A number of
companies currently offer content development products and services that compete
directly or  indirectly  with one or more of our tools sets.  These  competitors
include,  among others,  Macromedia,  Inc., Adobe Systems, Inc. as well as Pulse
Entertainment,  Inc.  and  Viewpoint  Corporation.  As we  compete  with  larger
competitors  such as  Macromedia  across a broader  range of  product  lines and
different platforms, we may face increasing competition from such companies.

         WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH MICROSOFT,  REAL NETWORKS
AND OTHER  COMPANIES IN THE MEDIA DELIVERY  MARKET.  The market for software and
services for the delivery of media over the Internet is constantly  changing and
highly competitive.  Companies such as Microsoft  Corporation and Real Networks,
Inc.  have   substantial   penetration  in  the  media  delivery   market,   and
significantly  greater  resources  than we do. More  companies  are entering the
market for,  and  expending  increasing  resources  to develop,  media  delivery
software and services.  We expect that  competition  will continue to intensify.
Because our b3d content, such as our Brilliant Banners, can only be viewed using
our Digital  Projector,  if we do not achieve a widespread  distribution  of our
media player,  there will not be substantial demand for b3d-produced  content or
our software tools.

         IF WE DO NOT IMPROVE OUR SOFTWARE  TOOLS TO PRODUCE NEW,  MORE ENHANCED
3D ANIMATED CONTENT, OUR REVENUES WILL BE ADVERSELY AFFECTED. The software tools
that enable us to create 3D content,  such as our Brilliant  Banners,  have been
developed  over the past five  years.  Additional  refinement  of these tools is
necessary  to  continue  to  enhance  the  b3d  format.  If  we  cannot  develop


                                       23


<PAGE>


improvements  to these  software  tools,  our  Brilliant  Banners  and all other
b3d-produced  content  may not  obtain or  maintain  market  acceptance  and our
revenues will be adversely affected.

         ERRORS OR DEFECTS IN OUR  SOFTWARE  TOOLS AND PRODUCTS MAY CAUSE A LOSS
OF MARKET ACCEPTANCE AND RESULT IN FEWER SALES OF OUR PRODUCTS. Our products are
complex and may contain undetected errors or defects when first introduced or as
new versions are released.  In the past, we have  discovered  software errors in
some of our new  products and  enhancements  after their  introduction  into the
market. Because our products are complex, we anticipate that software errors and
defects will be present in new products or releases in the future. While to date
these errors have not been  material,  future errors and defects could result in
adverse  product  reviews and a loss of, or delay in,  market  acceptance of our
products.

         TO DEVELOP  PRODUCTS THAT CONSUMERS  DESIRE,  WE MUST MAKE  SUBSTANTIAL
INVESTMENTS IN RESEARCH AND DEVELOPMENT TO KEEP UP WITH THE RAPID  TECHNOLOGICAL
DEVELOPMENTS  THAT ARE TYPICAL IN OUR INDUSTRY.  The software  market and the PC
industry are subject to rapid  technological  developments.  To develop products
that  consumers  desire,  we must  continually  improve and enhance our existing
products  and  technologies  and  develop new  products  and  technologies  that
incorporate these technological developments.  We cannot be certain that we will
have the financial and technical resources available to make these improvements.
We must make improvements to our technology while remaining competitive in terms
of performance and price.  This will require us to make  investments in research
and  development,  often times well in advance of the widespread  release of the
products in the market and any revenues these products may generate.

         OUR STOCK PRICE AND TRADING VOLUME FLUCTUATE WIDELY AND MAY CONTINUE TO
DO SO IN THE FUTURE. AS A RESULT, WE MAY EXPERIENCE  SIGNIFICANT DECLINES IN OUR
STOCK PRICE.  The market  price and trading  volume of our common  stock,  which
trades  on  the  American  Stock  Exchange,  has  been  subject  to  substantial
volatility,  which  is  likely  to  continue.  This  volatility  may  result  in
significant  declines in the price of our common  stock.  Factors that may cause
these fluctuations include:

         o        variations in quarterly operating results;

         o        the gain or loss of significant contracts;

         o        changes in management;

         o        announcements of technological  innovations or new products by
                  us or our competitors;

         o        recommendations by securities industry analysts;

         o        dilution to existing stockholders  resulting from the issuance
                  of additional shares of common stock; and

         o        short sales and hedging of our common stock.

         Additionally,  the  stock  market  has  experienced  extreme  price and
trading volume fluctuations that have affected the market price of securities of
many technology companies.  These fluctuations have, at times, been unrelated to
the operating  performances  of the specific  companies


                                       24


<PAGE>


whose stock is affected. The market price and trading volume of our stock may be
subject to these fluctuations.

         IF  OUR  STOCK  DOES  NOT  SUSTAIN  A   SIGNIFICANT   TRADING   VOLUME,
STOCKHOLDERS  MAY BE UNABLE TO SELL LARGE  POSITIONS IN OUR COMMON STOCK. In the
past,  our common  stock has not  experienced  significant  trading  volume on a
consistent  basis and has not been actively  followed by stock market  analysts.
The average  trading  volume in our common stock may not increase or sustain its
current  levels.  As a result,  we cannot be certain  that an  adequate  trading
market will exist to permit  stockholders  to sell large positions in our common
stock.

         FLUCTUATIONS IN OPERATING  RESULTS MAY RESULT IN UNEXPECTED  REDUCTIONS
IN REVENUE AND STOCK PRICE VOLATILITY. We operate in an industry that is subject
to significant  fluctuations in operating results from quarter to quarter, which
may lead to  unexpected  reductions  in  revenues  and stock  price  volatility.
Factors that may influence our quarterly operating results include:

         o        the  introduction  or  enhancement  of software  products  and
                  technology by us and our competitors;

         o        the use by animators  of our  toolsets to create  b3d-produced
                  content;

         o        the market's acceptance of our 3D Brilliant Banner advertising
                  format; and

         o        our  ability to launch  and  operate  our Altnet  peer-to-peer
                  business.

         Additionally,  a  majority  of the unit  sales for a product  typically
occurs in the  quarter in which the  product  is  introduced.  As a result,  our
revenues  may  increase  significantly  in a  quarter  in which a major  product
introduction occurs and may decline in following quarters.

         DECREASES IN THE PRICE OF OUR COMMON STOCK COULD  INCREASE  SHORT SALES
OF OUR COMMON STOCK BY THIRD PARTIES,  WHICH COULD RESULT IN FURTHER  REDUCTIONS
IN THE PRICE OF OUR COMMON STOCK. Our sales of common stock at a discount to the
market price of our common  stock,  which may be  necessary to raise  additional
capital to fund  operations,  could result in  reductions in the market price of
our common  stock.  Downward  pressure  on the price of our common  stock  could
encourage short sales of the stock by third parties.  Material  amounts of short
selling could place further downward  pressure on the market price of the common
stock.  A short  sale is a sale of stock  that is not owned by the  seller.  The
seller  borrows the stock for  delivery at the time of the short sale,  and buys
back the stock when it is necessary to return the borrowed shares.  If the price
of the common stock declines between the time the seller sells the stock and the
time the seller subsequently  repurchases the common stock, then the seller sold
the shares for a higher  price than he  purchased  the shares and may  realize a
profit.

         WE  WILL  NOT  BE  ABLE  TO  GENERATE  SIGNIFICANT  REVENUES  FROM  OUR
TECHNOLOGY  BUSINESS IF OUR B3D TOOLSET DOES NOT ACHIEVE MARKET ACCEPTANCE.  Our
b3d toolset may have programming errors, may be incompatible with other software
or hardware  products in the market,  may face slow adoption in the  marketplace
and may face competition from other toolmakers. Other factors that influence our
ability to generate revenues from our b3d toolset include:

         o        our marketing strategies;


                                       25


<PAGE>


         o        the quality of our products and competing products;

         o        critical reviews;

         o        the  availability of alternative  forms of  entertainment  and
                  leisure time activities;

         o        our  ability  to sell  advertising  and  sponsorships  for the
                  content;

         o        our  ability to  increase  the  installed  base of our Digital
                  Projector, which is necessary to view b3d-produced content;

         o        our  b3d  toolset  may  contain  features,   functionality  or
                  workflow  conventions  that may not be widely  accepted by our
                  target audience;

         o        our ability to  continue  to develop,  enhance and deliver the
                  toolset in accordance with established milestones; and

         o        the marketplace's reluctance to adopt a new toolset.

         OUR  PROPRIETARY  TECHNOLOGY  MAY  NOT  BE  ADEQUATELY  PROTECTED  FROM
UNAUTHORIZED  USE BY OTHERS,  WHICH  COULD  INCREASE  OUR  LITIGATION  COSTS AND
ADVERSELY  AFFECT OUR SALES.  Our  ability to compete  with other  entertainment
software companies depends in part upon our proprietary technology. Unauthorized
use by others of our  proprietary  technology  could  result in an  increase  in
competing  products and a reduction in our sales. We rely on trademark,  patent,
trade  secret and  copyright  laws to protect  our  technology,  and require all
employees and third-party developers to sign nondisclosure agreements. We cannot
be certain,  however,  that these precautions will provide meaningful protection
from unauthorized use by others. We do not copy-protect our software,  so it may
be possible for  unauthorized  third  parties to copy our products or to reverse
engineer or otherwise  obtain and use information that we regard as proprietary.
Our  customers  may take  inadequate  precautions  to  protect  our  proprietary
information.  If we  must  pursue  litigation  in  the  future  to  enforce  our
intellectual  property rights,  to protect our trade secrets or to determine the
validity and scope of the proprietary  rights of others,  we may not prevail and
will likely make  substantial  expenditures  and divert valuable  resources.  In
addition,  many foreign  countries' laws may not protect us from improper use of
our proprietary  technologies overseas. We may not have adequate remedies if our
proprietary rights are breached or our trade secrets are disclosed.

         IF OUR PRODUCTS  INFRINGE ANY PROPRIETARY  RIGHTS OF OTHERS,  A LAWSUIT
MAY BE BROUGHT  AGAINST US THAT COULD REQUIRE US TO PAY LARGE LEGAL EXPENSES AND
JUDGMENTS AND REDESIGN OR DISCONTINUE  SELLING OUR PRODUCT.  We believe that our
products,  including  our software  tools,  do not  infringe any valid  existing
proprietary rights of third parties. Any infringement claims,  however,  whether
or not  meritorious,  could result in costly  litigation  or require us to enter
into  royalty or licensing  agreements.  If we are found to have  infringed  the
proprietary rights of others, we could be required to pay damages,  redesign the
products or  discontinue  their sale.  Any of these  outcomes,  individually  or
collectively, could have a material adverse effect on our business and financial
condition.

         WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE
PRICE  OF OUR  COMMON  STOCK.  Our  ability  to issue up to  700,000  shares  of
preferred  stock and some  provisions of our  certificate of  incorporation  and
bylaws and of  Delaware  law could make it more  difficult  for a third party to
make an unsolicited  takeover  attempt of us. These  anti-takeover


                                       26


<PAGE>


measures may depress the price of our common stock by making third  parties less
able to acquire us by offering  to purchase  shares of our stock at a premium to
its market  price.  Our Board of  Directors  can issue up to  700,000  shares of
preferred  stock and determine the price,  rights,  preferences,  privileges and
restrictions,  including voting rights, of those shares without any further vote
or action by our stockholders.  Our Board of Directors could issue the preferred
stock with voting, liquidation, dividend and other rights superior to the rights
of our common  stock.  The rights of holders of our common stock will be subject
to,  and may be  adversely  affected  by,  the  rights of  holders  of the share
purchase rights and of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing desirable flexibility in connection
with possible  acquisitions  and other  corporate  purposes,  could make it more
difficult  for a third  party to acquire a majority  of our  outstanding  voting
stock.


                                       27


<PAGE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits - The following exhibits are filed as part of this report:

         10.1     Contractor,   Confidential  Information  and  Non-Solicitation
                  Agreement,   dated  as  of  February  28,  2002,  between  the
                  Registrant and Abe Sher, an individual (previously reported on
                  Form 10-QSB).

         99.1     Certificate of our Chief Executive Officer and Chief Financial
                  Officer pursuant to  Section 906 of the  Sarbanes-Oxley Act of
                  2002.


(b)      Reports on Form 8-K

         The  Company  filed a Current  Report  on Form 8-K on March  11,  2002,
         reporting the consummation of a financing transaction.


                                       28


<PAGE>


                                   SIGNATURES

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

                                           BRILLIANT DIGITAL ENTERTAINMENT, INC.


Date:  July 3, 2003                          /s/ Tyler Tarr
                                           ----------------------------
                                           By:  Tyler Tarr
                                           Its: Chief Financial Officer
                                                (Principal Financial
                                                and Accounting Officer)


                                       29


<PAGE>


                        Certification of CEO Pursuant to
                 Securities Exchange Act Rules 13a-14 and 15d-14
                             as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Kevin Bermeister, certify that:

         1. I have reviewed this quarterly  report on Form 10-QSB/A of Brilliant
Digital Entertainment, Inc.;

         2. Based on my knowledge,  this  quarterly  report does not contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
quarterly report; and

         3. Based on my knowledge, the financial statements, and other financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.

Date:  July 3, 2003

                                                      /s/ Kevin Bermeister
                                                     -----------------------
                                                     Kevin Bermeister
                                                     Chief Executive Officer


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<PAGE>


                        Certification of CFO Pursuant to
                 Securities Exchange Act Rules 13a-14 and 15d-14
                             as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Tyler Tarr, certify that:

         1. I have reviewed this quarterly  report on Form 10-QSB/A of Brilliant
Digital Entertainment, Inc.;

         2. Based on my knowledge,  this  quarterly  report does not contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
quarterly report; and

         3. Based on my knowledge, the financial statements, and other financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.

Date:  July 3, 2003

                                                      /s/ Tyler Tarr
                                                     -----------------------
                                                     Tyler Tarr
                                                     Chief Financial Officer


                                       31