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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 AMENDMENT No. 1
                                  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, 32,014,978 shares issued and outstanding as of February 25, 2003.

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


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                                 AMENDMENT NO. 1
                 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.


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                                     PART I

                              FINANCIAL INFORMATION

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


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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,  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  discontinued
operations at Digital Hip Hop, the joint  venture we formed to produce  animated
music videos for the World Wide Web, and have  discontinued  operations  at,


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and  placed  into  liquidation,  Brilliant  Interactive  Ideas  Pty.  Ltd.,  our
Australian-based  production  company  which  employed a team of  animators  and
programmers  dedicated to animation  production.  We discontinued  operations at
Digital  Hip  Hop  based  on the  limited  prospects  of  additional  web  video
production work. We discontinued  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  closing of Digital  Hip Hop.  The  cessation  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, 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. We also recognize revenue in accordance with the following with respect
to our specific products and services:  when we enter into development contracts
for our  MultipathTM  Movies  under  which  we are  entitled  to  fixed  minimum
guaranteed  payments,  in accordance  with AICPA Statement of Position 97-2 (SOP
97-2), the minimum guaranteed payments are recognized as revenue when the CD-ROM
master is delivered  to the  distributor,  the terms of the sale are  considered
fixed, and collectibility is probable.


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     Unless cash is paid in advance,  our receivables are recorded as revenue is
earned.  We then  record  reserves  against  our  receivable  accounts  based on
historical  results.  If no  historical  results  are  available  at the  time a
receivable is booked, the general credit worthiness of the customer is evaluated
and an  appropriate  reserve  is  recorded,  if  any.  The  amount  of  reserves
ultimately required,  however, could differ materially from the amounts provided
for in the accompanying consolidated financial statements, which would result in
accounting adjustments recorded in future periods to reflect such difference. To
the extent the actual reserves are greater than the amount of reserve  recorded,
our financial statements will be negatively impacted.

RESULTS OF OPERATIONS

     REVENUES.  Production  fees are paid to us by customers in exchange for our
development  of animated  content,  including  banner ads,  in  accordance  with
customer  specifications.  The development  agreements generally specify certain
"milestones,"  such as the  completion  of a  script,  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 typically six to twelve weeks.
The  customer  is  invoiced  for each stage of the  production  process  after a
milestone has been achieved. In the case of Brilliant Banner ads, the production
period is typically two weeks, and our customary  payment  arrangements  require
50% of our fee to be paid at  commencement  of the project and the remaining 50%
to be paid  upon  completion.  We  recognize  revenue  from  the  production  of
Brilliant  Banners upon delivery of the completed  banner  advertisement  to the
client.

     Revenues  earned from the sale or  licensing  of our  software  tools,  are
recognized  when we  enter  into  the  sales  or  licensing  agreements.  If the
agreement  covers a period in excess of one year,  the revenue  associated  with
this  agreement  is  recognized  on a  straight-line  basis over the life of the
agreement.  In the case of our distribution and licensing  agreements with e-New
Media,  e-New Media paid us a  non-refundable  advance against future  royalties
from  sales of our  software  tools,  and this  advance is being  recognized  as
revenue  on a  straight-line  basis  over the  five  and six year  life of these
agreements.

     Advertising  revenues,  which  are  revenues  earned  from the  placing  of
Internet  advertising  on third party web sites,  are paid by the advertiser and
recognized by us on a pro rata basis as the advertising  commitment is fulfilled
in accordance with the terms of the  advertising  campaign  insertion  order. Ad
server licensing revenues,  which are revenues earned from the license of our ad
serving technology to third party web sites, are paid by the operator of the web
site and  recognized  by us when we invoice the licensee,  which usually  occurs
after the terms of the advertising campaign insertion order are fulfilled.

     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.


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     We enter into  distribution  contracts under which we are entitled to fixed
minimum guaranteed  payments.  The minimum guaranteed payments are recognized as
revenue when the CD-ROM master is delivered to the  distributor and the terms of
the sale are  considered  fixed.  We have derived our revenues  from  royalties,
development fees and software sales. We license our traditional  CD-ROM products
to  publishers  and  distributors  in exchange for  non-refundable  advances and
royalties based on product sales.  Royalties based on product sales are due only
to the extent that they exceed any associated  non-refundable  royalty  advance.
Royalties  related to  non-refundable  advances are  recognized  when the CD-ROM
master  is  delivered  to  the   licensees.   Royalty   revenues  in  excess  of
non-refundable advances are recognized upon notification by the distributor that
a royalty has been earned.

     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  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.


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     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.

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:


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--------------------------------------------------------------------------------
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                    Total         Less than          1-3
           Obligations                                    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  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


                                       9


<PAGE>


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 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.


                                       10


<PAGE>


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  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


                                       11


<PAGE>



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:

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


                                       12


<PAGE>


     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  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


                                       13


<PAGE>


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 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


                                       14


<PAGE>


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
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


                                       15


<PAGE>


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 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:


                                       16


<PAGE>


     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;

     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.


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<PAGE>


     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  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.


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<PAGE>


                                     PART II

                                OTHER INFORMATION

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.


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<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:  February 28, 2003               /s/ Robert Chmiel
                                     -------------------------------------------
                                     By:  Robert Chmiel
                                     Its: Chief Operating Officer and Chief
                                          Financial Officer (Principal Financial
                                          and Accounting Officer)


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<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:  February 28, 2003

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


                                       21


<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, Robert Chmiel, 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:  February 28, 2003

                                            /s/ Robert Chmiel
                                            -----------------------
                                            Robert Chmiel
                                            Chief Financial Officer


                                       22