===============================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

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

                  For the quarterly period ended June 30, 2001

[ ]  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, 16,453,660 shares issued and outstanding as of August 6, 2001.

     Transitional Small Business Disclosure Format (check one):  Yes___   No X


===============================================================================


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                                                            PAGE

PART I    FINANCIAL INFORMATION...............................................3

Item 1.   Financial Statements................................................3

          Condensed Consolidated Balance Sheet (unaudited) as of
          June 30, 2001.......................................................3

          Condensed Consolidated Statements of Operations for the
          three and six months ended June 30, 2001 (unaudited) and
          June 30, 2000 (unaudited)...........................................4

          Condensed Consolidated Statements of Cash Flows for the
          six months ended June 30, 2001 (unaudited) and
          June 30, 2000 (unaudited)...........................................5

          Notes to Consolidated Financial Statements..........................7

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations..........................................10

PART II   OTHER INFORMATION..................................................23

Item 2.   Changes in Securities and Use of Proceeds..........................23

Item 6.   Exhibits and Reports on Form 8-K...................................23


                                     Page 2
<PAGE>


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

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


                                                                    JUNE 30,
                                                                      2001
                                                                  ------------
 ASSETS                                                           (unaudited)
 Current assets:
   Cash and cash equivalents.....................................  $    2,140
   Accounts receivable, net......................................         382
   Other assets, net.............................................         257
                                                                   -----------
Total current assets.............................................       2,779
Property, plant and equipment, net...............................         345
Other assets, net................................................         523
                                                                   -----------
Total assets.....................................................       3,647
                                                                   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable..............................................         258
   Accrued expenses..............................................       1,160
   Deferred revenue..............................................         917
   Debt discount.................................................        (703)
   Net liabilities of discontinued operations....................         310
   Current portion of notes payable..............................          94
                                                                   -----------
Total current liabilities........................................       2,036
Deferred revenue.................................................       3,014
Notes payable, less current portion..............................          58
Debt discount, less current portion..............................        (341)
Capital financing................................................       2,268
Other long term liabilities......................................          50
                                                                   -----------
Total liabilities................................................       7,085
Commitments and contingencies
Stockholders' deficit:
   Common stock..................................................          16
   Additional paid-in capital....................................      48,603
   Accumulated deficit...........................................     (51,811)
   Cumulative other comprehensive loss...........................        (246)
                                                                   -----------
Total stockholders' deficit......................................      (3,438)
                                                                   -----------
Total liabilities and stockholders' deficit.......................      3,647
                                                                   ===========

                 See Notes to Consolidated Financial Statements.


                                     Page 3
<PAGE>


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

                                                3 MONTHS      3 MONTHS      6 MONTHS      6 MONTHS
                                                  ENDED         ENDED         ENDED         ENDED
                                                 6/30/01       6/30/00      6/30/01        6/30/00
                                                -----------  ------------  ------------   -----------
                                                (UNAUDITED)  (UNAUDITED    (UNAUDITED)    (UNAUDITED)
<S>                                             <C>          <C>           <C>            <C>
 REVENUE:
    Revenues...............................     $     652    $      249    $    1,042     $     436
                                                -----------  ------------  ------------   -----------
COST OF REVENUES AND EXPENSES:
Cost of revenues...........................           384            69           417           205
Sales & marketing..........................           223           310           520           425
Website development........................            20            54            87           125
General and administrative.................         1,416         1,225         2,423         2,148
Research and development...................           299           785           909         1,676
Depreciation...............................            58            76           178           147
                                                -----------  ------------  ------------   -----------
Total cost of revenues and expenses........         2,400         2,519         4,534         4,726
                                                -----------  ------------  ------------   -----------
Loss from operations.......................        (1,748)       (2,270)       (3,492)       (4,290)
OTHER INCOME (EXPENSE):
Export market development grant............            --           122            31           122
Gain (loss) on foreign exchange............            19            (6)           44             1
Gain (loss) on sale of assets..............            25            --            25            --
Debenture expense..........................           (14)           --           (14)          (30)
Interest income (expense), net.............            15            80            29           127
                                                -----------  ------------  ------------   -----------
    Total other income (expense)...........            45           196           115           220
                                                -----------  ------------  ------------   -----------
Loss from continuing operations............        (1,703)       (2,074)       (3,377)       (4,070)
Gain (loss) from discontinued operations...           484        (2,378)           23        (4,599)
                                                -----------  ------------  ------------   -----------
Net loss before income tax.................        (1,219)       (4,452)       (3,354)       (8,669)
Provision for income tax...................            --            --            --            --
                                                -----------  ------------  ------------   -----------
Net loss...................................        (1,219)       (4,452)       (3,354)       (8,669)

Foreign currency translation adjustment....           (18)          (65)          (80)           19
                                                -----------  ------------  ------------   -----------
Comprehensive loss.........................     $  (1,237)   $   (4,517)   $   (3,434)    $  (8,650)
                                                ===========  ============  ============   ===========
Basic and diluted net loss continuing
operations.................................         (0.11)        (0.14)        (0.21)        (0.28)
                                                ===========  ============  ============   ===========
Basic and diluted net loss discontinuing
operations.................................          0.03         (0.16)           --         (0.33)
                                                ===========  ============  ============   ===========
Basic & diluted net loss per share.........     $   (0.08)   $    (0.30)   $    (0.21)    $   (0.61)
                                                ===========  ============  ============   ===========
Weighted average number of shares
used in computing basic and
diluted net loss per share.................        16,054        14,771        16,054        14,261
                                                ===========  ============  ============   ===========
</TABLE>



                 See Notes to Consolidated Financial Statements.


                                     Page 4
<PAGE>


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

                                                                                 SIX MONTHS
                                                                               ENDED JUNE 30,
                                                                          -------------------------
                                                                             2001         2000
                                                                          -----------  ------------
                                                                          (unaudited)  (unaudited)
OPERATING ACTIVITIES
<S>                                                                         <C>           <C>
Net loss................................................................    $ (3,354)     $ (8,669)
Adjustments to reconcile net loss to the net cash
   used in operating activities:
     Depreciation and other amortization................................         776           259
     Loss from discontinued operations..................................         363         4,599
     Amortization of movie software costs...............................          --           153
     Loss (gain) on foreign exchange....................................          40            --
     Effect of warrants granted.........................................       1,563           113
     Changes in operating assets and liabilities:
       Accounts receivable..............................................          30        (1,835)
       Other assets.....................................................        (313)         (672)
       Accounts payable and accruals....................................        (345)          572
       Deferred revenue.................................................        (458)        4,824
       Other long-term liabilities......................................      (1,178)            6
                                                                            ---------     ---------
Total adjustments.......................................................         478         8,019
                                                                            ---------     ---------
Net cash used in continuing activities..................................      (2,876)         (650)
Net cash used in discontinued operations................................        (311)       (4,461)
                                                                            ---------     ---------
Net cash used in operating activities...................................      (3,187)       (5,111)

INVESTING ACTIVITIES
Purchases of equipment..................................................         (21)         (233)
                                                                            ---------     ---------
Net cash used in continuing operations for investing....................         (21)         (233)
Net cash used in discontinued activities for investing..................          --          (262)
                                                                            ---------     ---------
Net cash used in investing activities...................................         (21)         (495)

FINANCING ACTIVITIES
Proceeds from issuance of shares, net of costs..........................          --         7,370
Capital financing.......................................................       2,268            --
Repayments of notes.....................................................         (27)         (105)
                                                                            ---------     ---------
Net cash provided by financing activities...............................       2,241         7,265
                                                                            ---------     ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................        (967)        1,659
Translation adjustments.................................................         (80)           56
Cash and cash equivalents at beginning of period........................       3,187         2,506
                                                                            ---------     ---------
Cash and cash equivalents at end of period..............................     $ 2,140       $ 4,221
                                                                            =========     =========
Supplemental disclosure of cash flow information:
     Cash paid during the period for interest...........................      $   10       $    16
                                                                          ===========  ============
</TABLE>



                       See Notes to Consolidated Financial Statements.



                                     Page 5
<PAGE>


SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

        We issued warrants to purchase 50,000 shares of our common stock during
the quarter in connection with a consulting agreement and incurred $19,500 in
warrant expense.

        In May, 2001, we issued warrants to purchase 2,850,393 shares of our
common stock in connection with Secured Convertible Promissory Notes and
incurred a beneficial conversion feature expense of $ 10,690. In future
quarters, this expense will be $176,000 per quarter through November 10, 2002.


                                     Page 6
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2001


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 our Form 10-KSB for the fiscal year ended December 31, 2000.

2.      STOCKHOLDERS' EQUITY

        Options and warrants representing common shares of 3,526,000 and
6,221,000 were excluded from the average number of common and common equivalent
shares outstanding in the diluted EPS calculation for the six months ended June
30, 2000 and 2001, respectively, because they were anti-dilutive.

3.      COMMITMENTS AND CONTINGENCIES

        At June 30, 2001, we were obligated under certain licensing agreements
to make minimum payments totaling $37,000 for use of certain properties and
characters in development of our products.

        The Company has two fixed asset financing notes with future minimum
payments as of June 30, 2001 as follows:

                               YEAR                          AMOUNT
                           --------------                  -----------
                               2001                           $27,000
                               2002                            54,000
                               2003                            31,000
                                                           -----------
                                                             $112,000
                                                           ===========

        The Company leases its facilities under operating lease agreements
expiring through 2003. Future minimum payments as of June 30, 2001 under these
leases are as follows:

                               YEAR                          AMOUNT
                           --------------                  -----------
                               2001                          $163,000
                               2002                           255,000
                               2003                            51,000
                                                           -----------
                                                             $469,000
                                                           ===========


                                     Page 7
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2001



        Rent expense was $315,000 and $281,000 for the six months ended June 30,
2000 and the six months ended June 30, 2001, respectively.

4.      GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

        The Company's operations consist of the operations of Brilliant
Interactive Ideas Pty. Ltd. in Australia and Brilliant Digital Entertainment in
the United States. The following schedule sets forth the revenues and long-lived
assets by geographic area:

<TABLE>
<CAPTION>
                                                 UNITED
                                                 STATES       AUSTRALIA
                                               ------------  ------------
<S>                                            <C>           <C>
SIX MONTHS  ENDED JUNE 30, 2000 :
   Revenues from unaffiliated customers...        $389,000       $47,000
   Revenues from affiliated customers.....              --            --
                                               ------------  ------------
   Total revenues.........................        $389,000       $47,000
                                               ============  ============
SIX MONTHS ENDED JUNE 30, 2001:
   Revenues from unaffiliated customers...        $574,000       $10,000
   Revenues from affiliated customers.....         458,000            --
                                               ------------  ------------
   Total revenues.........................      $1,032,000       $10,000
                                               ============  ============
LONG-LIVED ASSETS AS OF:
   June 30, 2001..........................        $744,000      $124,000
                                               ============  ============
</TABLE>

        For each of the periods shown above, 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 animation design, 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 six months ended June 30, 2001, e-New Media represented 44% of
the revenues with distribution and licensing rights ($458,000). Island Def Jam
contributed 22% of the revenue ($226,000). Warner Bros. Online contributed
revenue of 13% ($136,000), while Infogrames contributed 10% ($100,000) of the
revenue. For the six months ended June 30, 2000, e-New Media and SlingShot, Inc
accounted for 35% ($153,000) and 25% ($107,000) of our revenues, while
Entertaindom, a Time Warner website, and GT Interactive accounted for 10%
($45,000) and 7% ($32,000) of the revenues, respectively.

5.      SEGMENT INFORMATION

        The Company's primary line of business is as a developer and producer of
3D rich media digital animation and technology. Brilliant Digital Entertainment,
in the United States, together with its subsidiary Brilliant Interactive Ideas
Pty. Ltd. in Australia, is a production and development studio that uses its
proprietary software tool set to create digital entertainment for distribution
primarily over the Internet. Brilliant Digital Entertainment also offers for
sale its proprietary authoring tools, b3d Studio and b3d Studio Pro. Each
operating entity is incorporated and


                                     Page 8
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2001



maintains separate sets of books, which are combined on consolidation.
Previously, the Company operated in a separate business segment - live auctions
- through its subsidiary, The Auction Channel. The Auction Channel has now been
accounted for as discontinued operations, and as such, the Company believes that
it currently operates in only one business segment.

6.      SIGNIFICANT AGREEMENTS

        The Company has issued and sold $2,264,150 in principal amount of
Secured Convertible Promissory Notes for an aggregate purchase price of
$2,264,150 per agreements between the Company and three purchasers of such
notes. The notes have a term of eighteen (18) months from the date of issuance
and an interest rate of 10% per annum payable at maturity on November 10, 2002.
The principal amount of the notes and, at the option of the holder, all accrued
interest may be converted by the holder into shares of Common Stock of the
Company at a conversion price of $.706 per share, which price is the 10 day
average closing sales price of the Company's Common Stock on the American Stock
Exchange over the 10 trading days prior to execution of the first note purchase
agreement. The notes are secured by all of the assets of the Company and its two
subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and guaranteed by B3D, Inc.
and Brilliant Studios, Inc. The investors also received warrants to purchase
2,850,393 shares of Common Stock at exercise prices of $0.793 per share (with
respect to 2,792,118 shares) and $0.858 per share (with respect to 58,275
shares). The number of shares underlying each warrant issued to a purchaser is
equal to 100% of the principal amount of the note acquired by the purchaser
divided by 112.5% of the average closing sales price of the Company's Common
Stock on the American Stock Exchange over the 10 trading days prior to execution
by the purchaser of the note purchase agreement. The warrants may be exercised
at any time during their three (3) year term.

        On April 30, 2001 the Company sold substantially all of the assets of
The Auction Channel to Metro Channels, LLC, a division of Rainbow Media
Holdings, Inc. The Auction Channel has ceased operations. Some of the former
employees of The Auction Channel have relocated to Metro Channels' offices. The
Company's London based subsidiary, Trojan Television, Ltd., has also ceased
operations.


                                     Page 9
<PAGE>


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

        The following discussion and analysis 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 SIX MONTHS ENDED JUNE 30, 2000 AND
JUNE 30, 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. (AMEX: BDE) is a leading
entertainment content producer, technology developer and provider of rich media
b3d software tools for 3D animation on the World Wide Web. We have established a
library of episodic serial content created in our proprietary format. Our rich
media technologies include proprietary authoring tools used to create, author
and serve content for the World Wide Web. We market the technology used to view
content created using our tools by syndicating and otherwise distributing our
b3d-produced content to third party web sites. The content is seamlessly
associated with our Digital Projector, the technology required to playback
b3d-produced content. We are commercializing the technology in various ways,
including through our syndication relationships where we enable web sites to
serve Brilliant Banners, a proprietary Rich Media ad format for the World Wide
Web. We also license our b3d authoring tools to production studios and our
Brilliant Banner advertising server technologies to the web based advertising
industry. Through our subsidiary, The Auctionchannel, Inc., we also have
provided services to auction houses that enabled participants to watch auction
events in real time on television, and over the Internet, and to bid using their
telephone or the Internet. We discontinued operations at The Auction Channel in
December 2000 and sold substantially all of its assets on April 30, 2001.

        We are a Delaware corporation that was incorporated in July 1996. We
were formed through the combination of two businesses: Brilliant Interactive
Ideas, Pty. Ltd., an entertainment software developer and producer, and Sega
Australia New Developments, a research and development operation for leading
edge software tools. 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.

b3d SOFTWARE TOOLS

        In July 2000, we made our b3d software tools available to parties
interested in participating in the beta test phase of the product. Our b3d
Studio tool was made available to these participants in a downloadable version
on the Internet. b3d Studio is designed to work as a plug-in with Discreet's 3D
Studio Max, and a beta version supporting Alias|Wavefront Maya animation
software


                                    Page 10
<PAGE>


was released in July, 2001. Final release versions of b3d Studio and b3d Studio
Pro were made available at the end of the first quarter of 2001. These tools
provide individual artists, animators and studios with the capability to create
their own multipath movies and b3d content for commercial distribution on the
Internet, and should ultimately provide a wide and varied base of b3d content to
enrich the consumer web experience. Animation content generated using our b3d
software tools can be of any type. The tools are not limited to the production
of entertainment content. The tools can be applied to the production of artistic
renderings, education, architecture, engineering, e-commerce and other solutions
that require animation. In addition, we released a limited version of the b3d
Digital Projector for the Apple Macintosh in July 2001. We believe that this
will further broaden the market for our b3d software tools.

        We have launched our rich media 3D advertising banners - Brilliant
Banners - into the market to offer advertisers and web sites an alternative to
the current GIF banners that are prevalent on web sites today. With the decline
of industry wide banner advertising revenues and click through rates, we believe
that our animated 3D banner advertisements will reinvigorate online advertising
campaigns. We are introducing the Brilliant Banner to our syndication partners,
making the technologies available for them to commence selling and serving this
new rich media ad format.

CONTENT DISTRIBUTION

        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, Sum 41 and Redman/Lady Luck. These full-screen productions,
developed using our proprietary suite of b3d software tools, have small files
for faster download. Our content is distributed broadly through Internet
syndication partners including Yahoo, Warner Bros. Online, Roadrunner and
VH1.com. Additionally, agreements to host our content have been reached with
third-party sites such as Lycos, Vidnet, and StreamSearch, thus enabling even
more consumer reach in the near term. Revenue is split with the distribution
partner according to various deal structures, many of which are traffic
dependent.

        At this time, we have five MultipathTM Movie animated series in
syndicated distribution on the Internet: SUPERMAN, XENA: WARRIOR PRINCESS, KISS:
IMMORTALS, CHOOSE YOUR OWN NIGHTMARE, ACE VENTURA and the online film festival
property, SHORT ATTENTION SPAN THEATRE. Each of the series differs in the scale
of distribution, with some enjoying wider distribution than others depending on
a number of factors including demographics and content type. In addition, we
have four animated music videos in distribution on the Internet: Ja Rule's (an
Island Def Jam artist) 6 FEET UNDERGROUND, Ludacris' (an Island Def Jam artist)
HO song, Sum 41 (an Island Def Jam artist) FAT LIP and the Long Beach Dub All
Stars (a DreamWorks artist) SAWRED.

        We announced in July, 2001 that Warner Bros. Online ordered an
additional 30 webisodes of The Multipath Adventures of Superman. The new series,
which is expected to debut in the fourth quarter of 2001, brings the total
number of SUPERMAN webisodes ordered by Warner Bros Online to 75. In addition,
Warner Bros. Online will offer selected animated music videos on their site
starting in the third quarter of 2001.


                                    Page 11
<PAGE>


DIGITAL HIP HOP

        We entered into an agreement with Russell Simmons and Stan Lathan that
provided for the formation of Los Angeles-based Digital Hip Hop, Inc., a joint
venture production studio headed by Stan Lathan. Digital Hip Hop produces and
distributes full screen animated music videos and other content primarily for
Internet and broadband distribution. To date, four music videos have been
commercially released on the Internet. The joint venture was initially funded
50% by us and 50% by Messrs. Lathan and Simmons. On May 15, 2001 we assumed
operating control of Digital Hip Hop, agreed to fund all future operations of
the company and acquired an additional 25% of the business. Messrs. Lathan and
Simmons have each retained 12.5% of Digital Hip Hop.

        Digital Hip Hop received from our wholly-owned subsidiary, B3D, Inc., a
5-year exclusive Alpha level license to our b3d production tool suite for the
production of hip-hop content for non-Asian markets. Digital Hip Hop has agreed
to pay B3D, Inc. a fee of $1,500,000 for this license payable in installments
over the first three years of the license, $1,450,000 of which is contingent on
the raising of capital by Digital Hip Hop.

DVD MARKET

        We began a limited release of selected MultipathTM Movie titles to the
DVD market in the fourth quarter of 2000 pursuant to a March 1999 agreement with
SlingShot, Inc., a special purpose DVD publisher and distributor. Additional
titles are expected to be released into the market in the fourth quarter of
2001, pursuant to our agreement with SlingShot, Inc.

THE AUCTION CHANNEL

        In July 1999, we acquired Trojan Television Limited. Trojan Television
Limited was a London-based company doing business as The Auction Channel.
Founded in 1996, The Auction Channel integrated live satellite, cable TV and Web
broadcasts of auction events conducted by auction houses, allowing participants
to watch events on television and the Internet, and use the Internet or their
telephone to bid simultaneously with people actually present at the auction
house. During the first quarter of 2000, we transferred our ownership interest
in Trojan Television Limited to our subsidiary, The Auctionchannel, Inc.

        In late 2000, we decided to sell The Auction Channel. The Auction
Channel has been accounted for as a discontinued operation in fiscal 2001
pursuant to Management's formal adoption on December 31, 2000 of a plan to
dissolve the business unit. Net liabilities to be disposed of, at their expected
realizable values, have been separately classified in the accompanying balance
sheet at June 30, 2001. On April 30, 2001, we sold substantially all of the
assets of The Auction Channel to Metro Channels, LLC and closed The Auction
Channel's New York and London offices.

RESULTS OF OPERATIONS

        REVENUES. Development fees are paid by customers in exchange for our
development of animated content and/or software packages in accordance with
customer specifications. The development agreements generally specify certain
"milestones" which must be achieved throughout the development process. As these
milestones are achieved, we recognize the portion of the development fee
allocated to each milestone.


                                    Page 12
<PAGE>


        Revenues, which are earned from the sale or licensing of our software
tools, are recognized when the sales or licensing agreements are entered into.
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.

        Advertising revenues, which are earned revenues from the placing of our
content on third party web sites, are recognized when the third party accounts
to us.

        Revenues increased from $436,000 for the six months ended June 30, 2000
to $1,042,000 for the six months ended June 30, 2001. For the six months ended
June 30, 2001, e-New Media represented 44% of the revenues with distribution and
licensing rights ($458,000). Island Def Jam contributed 22% ($226,000) of the
revenues, while Warner Bros. Online contributed revenues of 13% ($136,000) and
Infogrames contributed 10% ($100,000) of the revenues. For the six months ended
June 30, 2000, e-New Media, and SlingShot, Inc. accounted for 35% ($153,000) and
25% ($107,000), while Entertaindom, a Time Warner website, and GT Interactive
accounted for 10% ($45,000) and 7% ($32,000) of our revenues, respectively. The
increase in revenues is partially due to a full six months of e-New Media
revenues, the addition of Digital Hip Hop revenues, and the advertising
revenues.

        COST OF REVENUES. Cost of revenues consists primarily of direct costs
attributable to the production of animated music videos and royalties to third
parties for licensing rights. Cost of revenues increased from $205,000 for the
six months ended June 30, 2000 to $417,000 for the six months ended June 30,
2001. This represents an increase of $212,000. The primary reason for the
increase is that during the second quarter of 2001, we increased our ownership
of Digital Hip Hop from 50% to 75% and, as a consequence, began to consolidate
Digital Hip Hop into our financial statements. The costs attributable to Digital
Hip Hop pertain primarily to the production costs of animated music videos.

        SALES AND MARKETING. Sales and marketing expenses increased $95,000 from
$425,000 for the six months ended June 30, 2000 to $520,000 for the six months
ended June 30, 2001. Although consulting, advertising and tradeshow costs were
reduced in 2001 by $180,000, we incurred $426,000 in distribution expense for
warrants issued in connection with our agreement with Yahoo!, while only
incurring $54,000 warrant expense for the six months ended June 30, 2000. The
increase in warrant expense was partially offset by a decrease in Australian
marketing costs of $72,000 and overseas travel costs of $25,000.

        GENERAL AND ADMINISTRATIVE. General and administrative expenses include
primarily salaries and benefits of management and administrative personnel,
consultants, rent, insurance costs and professional fees. General and
administrative expenses increased from $2,148,000 for the six months ended June
30, 2000 to $2,423,000 for the six months ended June 30, 2001. The principal
reason for the increase is the addition of Digital Hip Hop to the consolidated
financial statements with $234,000 in general and administrative costs. The
Australian and United States offices of Brilliant Digital Entertainment
contributed a net increase of $41,000, which is primarily attributable to an
increase in salaries of $282,000, insurance costs of $125,000 and warrant
expense of $60,000, offset by a decrease in investor costs of $153,000,
amortization expense of $61,000, professional fees of $56,000, trademarks of
$36,000, computer supplies of $26,000, Australian expenses of $40,000 plus other
offsets of $54,000.


                                    Page 13
<PAGE>


        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 and other 3D
animated content. The costs decreased from $1,676,000 for the six months ended
June 30, 2000 to $909,000 for the six months ended June 30, 2001 primarily due
to personnel layoffs and a decrease in production in our Australian company of
$767,000. Web development costs decreased by $38,000 from $125,000 for the six
months ended June 30, 2000 to $87,000 for the six months ended June 30, 2001 due
to the reduction of work for the Company's web site.

        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 increased from $147,000 for the six months ended June 30,
2000 to $178,000 for the six months ended June 30, 2001. The increase is
attributable to an increase in depreciable assets, primarily computer equipment
purchased in the second and third quarters of 2000.

        OTHER INCOME AND EXPENSE. Other income and expense includes interest
income and interest expense, 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
$220,000 in the first six months of 2000 to income of $115,000 in the first six
months of 2001. The decrease is primarily due to a reduction of $89,000 for the
export grant and a reduction in interest income due to lower cash balances,
offset by a gain on the sale of assets.

        NET LOSS ON DISCONTINUED OPERATIONS. The Auction Channel has been
accounted for as a discontinued operation in fiscal 2001 pursuant to
Management's formal adoption on December 31, 2000 of a plan to dissolve the
business unit. Net liabilities to be disposed of are recorded at their expected
realizable values, and have been separately classified in the accompanying
balance sheet at June 30, 2001.

        Operating results of this discontinued operation, a gain of $23,000 for
the six months ended June 30, 2001, are shown separately in the accompanying
income statement. Losses in the first quarter of 2001 were offset in the second
quarter by the gain on the sale of substantially all of the assets of The
Auction Channel to Metro Channels, LLC. The income statement for the six months
ended June 30, 2000 has been restated to conform to the current year's
presentation. Included in the loss of the discontinued operation is an
amortization expense for the six months ended June 30, 2000 comprised of
amortization of goodwill of $584,000, software technology of $40,000 and
customer database of $16,000, all attributable to the purchase of Trojan
Television Limited in July 1999. Due to an impairment of goodwill, the amount
was written down by $4,189,000 at December 31, 2000, reducing the balance to
zero. We sold substantially all of the assets of The Auction Channel on April
30, 2001 and the New York and London offices ceased to operate.

LIQUIDITY AND CAPITAL RESOURCES

        As of June 30, 2001, our principal source of liquidity was approximately
$2,140,000 in cash, which we primarily raised through the sale of Secured
Convertible Promissory Notes and related Common Stock Purchase Warrants. See
Note 6 to the Financial Statements.


                                    Page 14
<PAGE>


        Net cash used in operating activities during the six months ended June
30, 2001 was primarily attributable to a net loss from continuing operations of
$3,366,000, with a net gain due to discontinued operations of $23,000 pertaining
principally to the sale of the net assets of The Auction Channel. Net cash of
$21,000 used in investing activities during the six months ended June 30, 2001
was due primarily to the purchase of computer equipment. Cash used in financing
activities for the year was for the repayment of notes for the financing of
office furniture and computer equipment.

        We are required as of June 30, 2001 to make minimum payments of $37,000
under various licensing agreements. At June 30, 2001, we had rental commitments
for our offices and production facilities of $469,000 and two promissory notes
for the financing of fixed assets in the amount of $112,000 payable over the
next 3 years.

        Our operations generated a negative cash flow during the years ended
December 31, 1999 and 2000 and the six months ended June 30, 2001. We expect a
significant use of cash during the coming months of 2001 as we continue to
develop our software tools and continue our marketing efforts for our tools and
3D animated content. We will require additional equity or debt financing during
2001, the amount and timing of which depend in large part on our spending
program. If additional funds are raised through the issuance of equity
securities, our stockholders may experience significant 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. Please see "Cautionary
Statements and Risk Factors - If we are unable to raise additional funds, we may
be required to delay implementation of our business plan and reduce overhead
significantly."

ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES

        The Company's accounting policy follows Statement of Financial
Accounting Standards No. 86 ("SFAS No. 86"), which provides for the
capitalization of software development costs once technological feasibility is
established. The capitalized costs are then amortized beginning on the date the
product is made available for sale either on a straight-line basis over the
estimated product life or on a ratio of current revenues to total projected
product revenues, whichever results in the greater amortization amount. Prior to
reaching technological feasibility, the Company expenses all costs related to
the development of both its software tools and MultipathTM Movie titles. The
Company achieved technological feasibility of its original Digital Projector
during the third quarter of 1997. Since the date of achieving technological
feasibility, the costs of developing MultipathTM Movies intended to be viewed on
the original projector have been capitalized in accordance with SFAS No. 86. The
Company continues to develop new Digital Projectors with enhanced functionality
such as improved compression technology. Costs incurred in the development of
new Digital Projectors are expensed until technological feasibility is reached.
MultipathTM Movies that are developed for new Digital Projectors that have not
yet reached technological feasibility are capitalized in accordance with SFAS
No. 86 to the extent that they are compatible with an existing Digital
Projector. Amounts incurred for MultipathTM Movies that are developed for new
Digital Projectors that are not compatible with an existing projector and would
require substantial revision in order to achieve compatibility are expensed as
incurred.


                                    Page 15
<PAGE>


ACCOUNTING GUIDANCE FOR REVENUE RECOGNITION FOR SOFTWARE TRANSACTIONS

        Software sales entered into prior to December 15, 1997 were accounted
for in accordance with AICPA Statement of Position ("SOP") 91-1, "Software
Revenue Recognition." For transactions entered into after December 15, 1997 the
Company recognizes revenue from the sale of software in accordance with SOP
97-2, "Software Revenue Recognition". SOP 97-2 provides guidance on when revenue
should be recognized and in what amounts for licensing, selling, leasing, or
otherwise marketing computer software.

NEW ACCOUNTING PRONOUNCEMENTS

        In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC.
Subsequently, the SEC released SAB 101B, which delayed the implementation date
of SAB 101 for registrants with fiscal years that begin between December 16,
1999 and March 15, 2000. We were required to be in conformity with the
provisions of SAB 101, as amended by SAB 101B, no later than October 1, 2000.
The adoption of SAB 101, as amended by SAB 101B, has not had a material adverse
effect on our financial position, results of operations or cash flows.

        In October 2000, we adopted the Financial Accounting Standards Board
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments embedded
in other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The adoption of SFAS No. 133 has not had a material
effect on our financial statements.

        In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, and Interpretation of APB
Opinion No. 25" (FIN. 44). The Interpretation is intended to clarify certain
problems that have arisen in practice since the issuance of APB No. 25,
"Accounting for Stock Issued to Employees." The effective date of the
interpretation was July 1, 2000. The provisions of the interpretation apply
prospectively, but they will also cover certain events occurring after December
15, 1998 and after January 12, 2000. The adoption of FIN. 44 has not had a
material adverse effect on our current or historical consolidated financial
statements, but may affect future accounting regarding stock option
transactions.

        In March 2000, EITF 00-2 "Accounting for Web Site Development Costs" was
released. EITF 00-2 provides guidance on how an entity should account for costs
involved in such areas as planning, developing software to operate the web site,
graphics, content, and operating expenses. EITF 00-2 is effective for web site
development costs incurred for fiscal quarters beginning after June 30, 2000.
The Company adopted EITF 00-2 during the year ending December 31, 2000, and all
amounts associated with our web sites were expensed in accordance with EITF
00-2.

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


                                    Page 16
<PAGE>


cause actual results to differ 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 and risk
factors.

        IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DELAY
IMPLEMENTATION OF OUR BUSINESS PLAN AND REDUCE OVERHEAD SIGNIFICANTLY. 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 June 30,
2001 we had an accumulated deficit of $51.8 million. 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
tool development, brand promotion, content development, sales and marketing, and
operating infrastructure. Our business model assumes that consumers will be
attracted to our MultipathTM Movies, animated music videos and Brilliant
Banners, and that animators will use our b3d tools and technology in the
development of other b3d-produced content. 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.

         WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES THAT
OFFER TOOLS PRODUCTS AND SERVICES SIMILAR TO OURS. The markets for our tools
products 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
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
have substantial penetration in the media delivery market, and significantly
greater resources than us to continue to grow their business in this area. 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. The other components of our business, such as our music
videos, Brilliant Banners and MultipathTM Movies, as well as the demand by
animators for our b3d tools in their production of 3D animated content, depends
in large part on a substantial user base of our Digital Projector, which is the
media player that must be used to view b3d enabled content. If we do not achieve
a widespread distribution of our media player, there will not be substantial
demand for b3d-produced content.

        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 MultipathTM Movies, animated music videos and other 3D
animated content 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 MultipathTM Movies,
animated music videos and Brilliant Banners and all other b3d-produced content
may not obtain or maintain market acceptance and our revenues will be adversely
affected.


                                    Page 17
<PAGE>


        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 entertainment 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 these improvements while remaining competitive in
terms of performance and price. This will require us to make substantial
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 FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH
SYNDICATION AND CONTENT DISTRIBUTION PARTNERS MAY HARM OUR ANIMATED CONTENT
BUSINESS AND THE ESTABLISHMENT OF B3D AS AN INTERNET STANDARD FOR 3D ANIMATION.
We depend on establishing and maintaining strategic relationships for the
co-creation of our b3d-produced content and for the distribution of that content
on third-party web sites. Additionally, we rely on our syndication relationships
to increase the installed base of our Digital Projector, which is necessary to
view b3d-produced content, including our Brilliant Banners. Our business,
results of operations and financial condition could be materially adversely
affected if we do not establish additional, and maintain existing, strategic
relationships on commercially reasonable terms or if any of our strategic
relationships do not result in an increase in the demand for b3d-produced
content and the use of our Digital Projector.

        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


                                    Page 18
<PAGE>


        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:

        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
                advertisements;

        o       our ability to create appealing content which will generate
                advertising revenue; and

        o       our ability to enter into revenue share agreements with third
                party web sites.

        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.


                                    Page 19
<PAGE>


        WE WILL NOT BE ABLE TO GENERATE REVENUES IF OUR MULTIPATHTM MOVIES AND
B3D TOOLSET DO NOT ACHIEVE MARKET ACCEPTANCE. Each MultipathTM Movie is an
individual artistic work, and its ability to generate revenues primarily will be
determined by consumer reaction, which is unpredictable. To generate revenues,
we must develop stories and characters that capture the attention and
imagination of consumers and license recognized characters and properties from
third parties for use in our MultipathTM Movies. We cannot be certain that we
will be able to do so. Additionally, 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 MultipathTM Movies and the b3d toolset include:

        o       consumer reluctance to initiate time consuming downloads of data
                necessary to view our products;

        o       our marketing strategies;

        o       the quality of our products and competing products;

        o       our ability to enter into revenue share agreements with third
                party web sites;

        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 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.

        WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT DEMAND FOR OUR PRODUCTS
VIEWED ON THE INTERNET UNLESS THERE IS A REDUCTION IN THE TIME IT TAKES TO
DOWNLOAD THE LARGE AMOUNTS OF DATA NECESSARY TO VIEW OUR PRODUCTS ON THE
INTERNET. Our revenue growth depends in part on our ability to distribute our
products for viewing on the Internet. We believe that without reductions in the
time to download animated content over the Internet, our MultipathTM Movies and
other b3d-produced content may be unable to gain consumer acceptance. This
reduction in download time depends in part upon advances in compression
technology. We have previously experienced delays in the development of
compression technologies, which, we believe, materially and adversely affected
our online sales and results of operations. We believe that large,
time-consuming downloads have previously deterred potential users of our
products and have reduced the effectiveness of our marketing campaigns at that
time. The development of these technologies continues to be a significant
component of our business strategy and a primary focus of our research and
development efforts.

        THIRD PARTY WEB SITES AND THE LICENSORS FROM WHOM WE OBTAIN RIGHTS TO
OUR STORIES AND CHARACTERS MAY CAUSE THE DELAY OF THE RELEASE OF OUR PRODUCTS,
WHICH MAY RESULT IN LOWER REVENUES THAN ANTICIPATED. Our distribution
relationships with third party web sites and our licensing arrangements with
companies that own the stories or characters used in many of our MultipathTM
Movies, contain potentially burdensome


                                    Page 20
<PAGE>


provisions. These provisions may affect our ability to release our products,
which would adversely affect our revenues, for a number of reasons, such as:

        o       A software distributor or a licensor of a story or character
                may, in the exercise of its product approval rights, arbitrarily
                require expensive and time consuming changes to our products,
                which may cause a delay in the release of the products; and

        o       A third party web site could delay the inclusion of our content
                on the site, and thereby cause a delay in distribution.

        WE MAY NOT BE ABLE TO LICENSE STORIES AND CHARACTERS THAT APPEAL TO
CONSUMERS FOR USE IN OUR MULTIPATHTM MOVIES, WHICH IS NECESSARY FOR OUR
MULTIPATHTM MOVIES TO HAVE APPEAL IN THE MARKET. We use stories and characters
developed by third parties in our MultipathTM Movies. If we cannot license
stories and characters that appeal to consumers at prices or upon terms or
conditions that we consider acceptable, we may not be able to develop
MultipathTM Movies that consumers will watch. To have access to appealing
stories and characters for use in our MultipathTM Movies, we will need to
continue to develop new relationships and maintain existing relationships with
the licensors of these stories and characters. Many licensors are reluctant to
grant broad licenses covering multiple formats, like the Internet and
television, to companies without a proven track record in the particular
industry. When rights are available, there is often significant competition for
licenses.

        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.


                                    Page 21
<PAGE>


        WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE
PRICE OF OUR COMMON STOCK. Our adoption of a stockholders' rights plan, 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.


                                    Page 22
<PAGE>


                                     PART II

                                OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        During March, April and May 2001, we issued to eBanner Solutions
warrants to purchase up to 50,000 shares of our common stock at an exercise
price of $ 0.75 per share. The warrants have a term of 18 months. The warrants
were issued to eBanner Solutions in consideration of consulting services
provided to us. The issuance and sale of these securities was exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) of the Securities Act as a transaction not involving any public
offering.

        In May, 2001, we sold to Harris Toibb, Europlay 1, LLC and Preston Ford,
Inc. Secured Convertible Promissory Notes in the aggregate principal amount of
$2,264,150 and three-year warrants to purchase up to an aggregate of 2,850,393
shares of our Common Stock at exercise prices of $0.793 per share (with respect
to 2,792,118 shares) and $0.858 per share (with respect to 58,275 shares). We
sold these securities for an aggregate purchase price of $2,264,150. The notes
have a term of eighteen (18) months from the date of issuance and an interest
rate of 10% per annum payable at maturity. The principal amount of the notes
and, at the option of the holder, all accrued interest may be converted by the
holder into shares of Common Stock of the Company at a conversion price of $.706
per share. The notes are secured by all of the assets of the Company and its two
subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and guaranteed by B3D, Inc.
and Brilliant Studios, Inc. The issuance and sale of these securities was exempt
from the registration and prospectus delivery requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act as a transaction not involving
any public offering.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)   Exhibits.

                10.1    Note and Warrant Purchase Agreement, dated as of April
                        19, 2001, between the Registrant and Europlay 1, LLC.

                10.2    Note and Warrant Purchase Agreement, dated as of April
                        19, 2001, between the Registrant and Harris Toibb.

                10.3    Note and Warrant Purchase Agreement, dated as of April
                        26, 2001, between the Registrant and Preston Ford, Inc.

                10.4    Amendment to Note and Warrant Purchase Agreements, dated
                        as of May 23, 2001, between the Registrant and Harris
                        Toibb and acknowledged and consented to by Europlay 1,
                        LLC and Preston Ford, Inc.

                10.5    Form of Secured Convertible Promissory Note of
                        Registrant, dated May 23, 2001.

                10.6    Form of Warrant to Purchase Common Stock of Registrant,
                        dated May 23, 2001.


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<PAGE>


                10.7    Security and Pledge Agreement, dated May 23, 2001, made
                        by Registrant, B3D, Inc. and Brilliant Studios, Inc. in
                        favor of Harris Toibb, as agent.

                10.8    Guaranty, dated May 23, 2001, made by B3D, Inc. and
                        Brilliant Studios, Inc. in favor of Harris Toibb, as
                        agent.

          (b)   Reports on Form 8 K

                Current Report on Form 8-K filed on May 24, 2001, reporting
                under Item 5 the amendment to Registrant's Rights Agreement,
                dated March 30, 1998.

                Current Report on Form 8-K filed on May 15, 2001, reporting
                under Items 2 and 7 the sale by Registrant of substantially all
                of the assets of its two subsidiaries, The Auctionchannel, Inc.
                and Trojan Television Limited, as amended by Current Report on
                Form 8-K/A filed on July 11, 2001.


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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: August 10, 2001               /S/ ROBERT CHMIEL
                                    --------------------------------------------
                                    By:   Robert Chmiel
                                    Its:  Chief Operating Officer and Chief
                                          Financial Officer (Principal Financial
                                          and Accounting Officer)


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