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                                  UNITED STATES
                       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 March 31, 2003

[_]  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)



         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, 32,114,978 shares issued and outstanding as of May 1, 2003.

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


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<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                      INDEX

                                                                            PAGE
                                                                            ----

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

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

          Condensed Consolidated Balance Sheet as of March 31, 2003............3

          Condensed Consolidated Statements of Operations for the
          three months ended March 31, 2003 and March 31, 2002.................4

          Condensed Consolidated Statements of Cash Flows for the
          three months ended March 31, 2003 and March 31, 2002.................5

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

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...........................................12

Item 4.   Evaluation of Disclosures, Controls and Procedures..................29

PART II   OTHER INFORMATION...................................................30

Item 2.   Changes in Securities and Use of Proceeds...........................30

Item 6.   Exhibits............................................................30

          Signatures and Certifications.......................................31


                                       2


<PAGE>


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

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


                                                                       MARCH 31,
                                                                         2003
                                                                       --------
ASSETS                                                               (unaudited)
Current assets:
    Cash and cash equivalents ................................         $     58
    Restricted cash ..........................................               75
    Marketable securities ....................................              147
    Accounts receivable, net .................................              604
    Other assets, net ........................................            1,245
                                                                       --------
Total current assets .........................................            2,129
Property, plant and equipment, net ...........................               43
Other assets, net ............................................              331
                                                                       --------
Total assets .................................................         $  2,503
                                                                       ========


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable .........................................         $  1,201
    Accrued expenses .........................................              463
    Deferred revenue .........................................            1,123
    Capital financing, net of discount .......................            3,507
                                                                       --------
Total current liabilities ....................................            6,294
Deferred revenue .............................................            1,457
Long-term debt ...............................................            1,201
Other long term liabilities ..................................               50
                                                                       --------
Total liabilities ............................................            9,002
Commitments and contingencies
Stockholders' deficit:
    Common stock .............................................               32
    Additional paid-in capital ...............................           55,296
    Accumulated deficit ......................................          (61,823)
    Cumulative other comprehensive loss ......................               (4)
                                                                       --------
Total stockholders' deficit ..................................           (6,499)
                                                                       --------
Total liabilities and stockholders' deficit ..................         $  2,503
                                                                       ========

                 See Notes to Consolidated Financial Statements.


                                       3


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

                                                              THREE MONTHS
                                                             ENDED MARCH 31,
                                                        -----------------------
                                                          2002           2003
                                                        --------       --------
                                                      (unaudited)    (unaudited)

Revenues .........................................      $    293       $    586

Costs and expenses:
     Costs of revenues ...........................            52             34
     Sales and marketing .........................            22             89
     General and administrative ..................           557            686
     Research and development ....................            90            209
     Depreciation and amortization ...............            17             19
                                                        --------       --------
                                                             738          1,037
                                                        --------       --------
Loss from operations .............................          (445)          (451)
Other income (expense):
     Interest expense ............................          (866)          (446)
                                                        --------       --------
     Total other expense .........................          (866)          (446)
                                                        --------       --------
Net loss .........................................        (1,311)          (897)

Unrealized gain on marketable securities .........          --               32
Foreign currency translation adjustment
     (net of tax effects) ........................            (4)           (23)
                                                        --------       --------
Comprehensive loss ...............................      $ (1,315)      $   (888)

Basic and diluted net loss per share .............      $  (0.07)      $  (0.03)
                                                        ========       ========
Weighted average number of shares used in
     computing basic and diluted net loss
     per share ...................................        17,850         32,115
                                                        ========       ========

                 See Notes to Consolidated Financial Statements.


                                       4


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

                                                               THREE MONTHS
                                                              ENDED MARCH 31,
                                                          ---------------------
                                                            2002         2003
                                                          -------       -------
                                                         (unaudited) (unaudited)
OPERATING ACTIVITIES
Net loss ...........................................      $(1,311)      $  (897)
Adjustments to reconcile net loss to the net cash
   used in operating activities:
      Depreciation and amortization of debt
      discount on convertible financing agreements .          936            19
      Effect of accrued interest expense on
      convertible debt .............................         --             446
      Effect of warrant issued for patent rights ...         --              45
      Effect of warrants granted for services ......           21            20
      Changes in operating assets and liabilities:
         Accounts receivable .......................            1          (115)
         Other assets ..............................            2           (51)
         Accounts payable and accruals .............           46           429
         Deferred revenue ..........................         (229)           24
         Other long-term liabilities ...............          (65)         --
                                                          -------       -------
 Net cash used in operating activities .............         (599)          (80)


FINANCING ACTIVITIES
Proceeds from issuance of shares, net of costs .....          800          --
Proceeds from the issuance of capital financing ....          400          --
Repayments of notes payable ........................          (11)         --
Restricted cash ....................................         --             (75)
                                                          -------       -------
Net cash provided by (used in) financing
   activities ......................................        1,189           (75)
                                                          -------       -------
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS .....................................          590          (155)

Effect of exchange rate changes on cash ............           (4)          (23)
Cash and cash equivalents at beginning of period ...          185           236
                                                          -------       -------
Cash and cash equivalents at end of period .........      $   771       $    58
                                                          =======       =======

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

                 See Notes to Consolidated Financial Statements.


                                       5


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SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:



The  following  table  summarizes  the  Company's   non-cash  related  financing
activity:



                                                        3/31/02       3/31/03
                                                       --------      --------
    Beneficial conversion feature--debt discount       $  3,057       $  --


                                       6


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                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2003


1.       BASIS OF PRESENTATION

         The accompanying  unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted  accounting  principles
in the United States 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  in  the  United  States  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.  and  consolidated  subsidiaries  (the  "Company")
included in the  Company's  Form 10-KSB for the fiscal year ended  December  31,
2002.

         The accompanying  consolidated  financial statements have been prepared
assuming that the Company 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.  However,  the Company has suffered  recurring  operating  losses and at
March 31,  2003,  had negative  working  capital of  approximately  $4,165 and a
stockholders'  deficit of approximately  $6,499. These factors raise substantial
doubt about the Company's ability to continue as a going concern.

         The Company is seeking  additional  funding and believes that this will
result in improved operating results.  There can be no assurance,  however, that
the Company will be able to secure additional  funding,  or that if such funding
is  available,  whether  the  terms or  conditions  would be  acceptable  to the
Company.



2.       STOCKHOLDERS' EQUITY

         Options and  warrants  representing  common  shares of  58,514,828  and
92,144,631 were excluded from the average number of common and common equivalent
shares  outstanding  in the diluted EPS  calculation  for the three months ended
March 31, 2002 and 2003,  respectively,  because  they were  anti-dilutive.  The
increase in the warrants is primarily due to warrants  issued in connection with
capital debt financing agreements and equity investments  transacted from May 1,
2001 through September 30, 2002.


                                       7


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                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2003


3.       COMMITMENTS AND CONTINGENCIES

         The Company leases its facilities  under  operating  lease  agreements,
which  expired  during the 1st  quarter  of 2003.  The  Company  signed two new,
two-year,  facility  lease  agreements in February  2003. As of March 2003,  the
commitments under these leases were as follows:



         YEAR            UNITED STATES           AUSTRALIA
      -----------        -------------         -------------

         2003              $ 25,000              $ 55,900
         2004                31,000                70,000
         2005                   300                 8,200
                           --------              --------
                           $ 56,300              $134,100
                           ========              ========

         Rent  expense was $21,000 and $23,000 for the three  months ended March
31, 2002 and March 31, 2003, respectively.



4.         MAJOR CUSTOMERS

         For the three months ended March 31, 2003, e-New Media  represented 39%
of the revenues with  distribution  and licensing  rights of $229,000.  Internet
Fuel contributed 27% ($159,000) of the revenue, with media buys and impressions.
Additionally,  the Company earned 9% ($50,000) from Winstar for  advertising and
media buys and 7% ($43,000)  from  Trymedia  for PC games.  For the three months
ended  March  31,  2002,  e-New  Media  represented  80%  of the  revenues  with
distribution and licensing rights ($229,000).



5.       SUBSEQUENT EVENTS

         On April 14, 2003,  the Company signed a two-year  Strategic  Alliance,
Marketing and Distribution  Agreement (the "Strategic Agreement") with the owner
and operator of a proprietary search toolbar software  application which enables
users to access  content,  products  and  services.  Pursuant  to the  Strategic
Agreement,  the  Company  and the third  party  agreed to  develop,  market  and
distribute  a  customized  version  of the  search  toolbar  and to  operate  an
integrated  sweepstakes  and loyalty  program for users of the Company's  Altnet
peer-to-peer  software  application.  The search  toolbar  will be  bundled  and
distributed  with the "Altnet  Loyalty  Points  Manager," the  Company's  points
management  software  program.  The Company received a refundable (under limited
circumstances), non-recoupable signing bonus in the aggregate amount of $250,000
in April 2003, and will receive an


                                       8


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2003


additional  refundable (under limited  circumstances)  and recoupable advance of
$375,000 upon the satisfaction of certain conditions,  which the Company expects
to satisfy prior to July 1, 2003.  The advance will be applied  against  amounts
that may become  payable  to the  Company  under the  Strategic  Agreement.  The
Strategic  Agreement also provides for ongoing  payments between the Company and
the third party,  based on the success in distributing  the browser plug-ins and
their performance.


6.       STOCK BASED COMPENSATION

1996 STOCK OPTION PLAN

         The Company adopted a Stock Option Plan (the "1996 Plan"), which became
effective on September 13, 1996. Each director,  officer, employee or consultant
of the Company or any of its  subsidiaries  is eligible to be considered for the
grant of awards  under the 1996  Plan.  The  maximum  number of shares of Common
Stock  that may be  issued  pursuant  to awards  granted  under the 1996 Plan is
20,000,000,  subject to certain  adjustments to prevent dilution.  Any shares of
Common Stock  subject to an award,  which for any reason  expires or  terminates
unexercised are again available for issuance under the 1996 Plan.

         The fair value of options  granted  under the 1996 Plan is  examined at
the date of grant and is based on a Black-Scholes  option pricing model with the
following weighted-average  assumptions for both of 2003 and 2002: interest rate
of 5.5%; dividend yield of 0%; volatility factor of the expected market price of
the  Company's  common  stock of 50.0%;  and  expected  life of the options of 3
years.

         In accordance  with Accounting  Principles  Board Opinion (APB) No. 25,
"Accounting  for  Stock  Issued  to  Employees,"  no  compensation  cost for the
Company's  stock option plan has been recognized in the  accompanying  condensed
financial    statements.    SFAS   No.   148,    "Accounting   for   Stock-Based
Compensation--Transition  and  Disclosure"  which  amends SFAS No. 123  provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee  compensation.  In addition,  SFAS
148 amends the disclosure requirements of SFAS 123 to require more prominent and
more frequent  disclosures in financial statements of the effects of stock-based
compensation.  The  Company  has  elected  not to change to the fair value based
method of accounting for stock-based  compensation and had the compensation cost
for the stock option plan been  determined  under the fair value,  it would have
been as follows:


                                       9


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2003


                                                     THREE MONTHS ENDED
                                                          MARCH 31,
                                                -------------------------------
                                                   2003                2002
                                                -----------         -----------

Net loss, as reported ..................        $  (897,000)        $(1,311,000)
Employee compensation expense ..........        $   (39,000)        $   (31,000)
                                                -----------         -----------
Net loss, pro forma ....................        $  (936,000)        $(1,342,000)
                                                ===========         ===========
Basic and diluted loss per share,
   as reported .........................        $     (0.03)        $     (0.07)
Basic and diluted loss per share,
   pro forma ...........................        $     (0.03)        $     (0.08)


7.       GUARANTEES

         In November  2002, the FASB issued FIN No. 45  "Guarantor's  Accounting
and Disclosure  Requirements for Guarantees,  including  Indirect  Guarantees of
Indebtedness of Others - an  interpretation of FASB Statements No. 5, 57 and 107
and  rescission  of FIN  34."  The  following  is a  summary  of  the  Company's
agreements, that the Company has determined are within the scope of FIN 45.

         Under its bylaws,  the Company has agreed to  indemnify  its  officers,
directors and employees for certain events or occurrences arising as a result of
the  officer,  director,  or  employee  serving in such  capacity.  The  maximum
potential  amount of future payments the Company could be required to make under
these  indemnification  agreements  is  unlimited.  However,  the  Company has a
directors and officer liability insurance policy that mitigates its exposure and
enables  it to  recover a portion of any  future  amounts  paid,  subject to the
applicable  terms of the policy.  As a result of its insurance  policy coverage,
the  Company  believes  the  estimated  fair  value  of  these   indemnification
agreements is minimal and has no liabilities recorded for these agreements as of
March 31, 2003.

         The Company occasionally enters into  indemnification  provisions under
(i) its  agreements  with other  companies in its  ordinary  course of business,
typically with business partners,  contractors,  customers,  and landlords,  and
(ii) its agreements with investors. Under these provisions the Company generally
indemnifies  and holds  harmless the  indemnified  party for losses  suffered or
incurred by the indemnified party as a result of the Company's activities or, in
some  cases,  as a  result  of the  indemnified  party's  activities  under  the
agreement.  These  indemnification  provisions  often  include  indemnifications
relating  to  representations  made by the Company  with regard to  intellectual
property rights. These indemnification  provisions generally survive termination
of the underlying agreement.  In addition, in some cases, the Company has agreed
to reimburse  employees for certain expenses and to provide salary  continuation
during  short-term  disability.  The maximum potential amount of future payments
the Company could be required to make under these indemnification  provisions is
unlimited.  The Company has not incurred  material  costs to defend  lawsuits or
settle claims  related to these  indemnification  agreements.  As a result,  the
Company  believes  the  estimated  fair value of these  agreements is


                                       10


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2003


minimal.  Accordingly,  the  Company  has  no  liabilities  recorded  for  these
agreements as of March 31, 2003.



8.        NEW ACCOUNTING PRONOUNCEMENTS

         In  January  2003,  the  FASB  issued  FASB   Interpretation   No.  46,
"Consolidation  of Variable Interest  Entities" ("FIN 46"). This  Interpretation
requires that variable  interest  entities  created after January 31, 2003,  and
variable  interest entities in which an interest is obtained after that date, be
evaluated  for  consolidation  into  an  entity's  financial  statements.   This
interpretation  also  applies,  beginning  July 1, 2003 for us, to all  variable
interest  entities in which an  enterprise  holds an  interest  that it acquired
before  February  1,  2003.  We are  in the  process  of  evaluating  all of our
investments  and other  interests in entities under the provisions of FIN 46 and
have not yet determined the effect of its adoption on our financial position and
results of operations.


                                       11


<PAGE>

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

         The information contained in this Form 10-QSB is intended to update the
information  contained  in our Annual  Report on Form  10-KSB for the year ended
December 31, 2002 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-KSB.  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, 2003 AND
MARCH 31, 2002. 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 company which operates two
distinct lines of business: (1) through our Altnet, Inc. subsidiary,  we operate
a peer-to-peer-based  content distribution network,  utilizing existing,  proven
technology  which allows Altnet to securely and efficiently  distribute  digital
files to end users, and (2) through our b3d, Inc. subsidiary, we are a developer
and server of rich media  advertising  campaigns  ("rich media" being defined as
use of audio and animation), and a developer of software authoring tools used in
the creation of "three  dimensional",  or "3D", animated content, for use on the
World Wide Web.

         Through our Altnet, Inc.  subsidiary,  we 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. We commercialize 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.

         Additionally,  through our b3d, Inc. subsidiary, we are a developer and
server of "rich media" (which  includes  audio and  animation)  Internet  banner
advertisements, and a developer of software authoring tools used to create three
dimensional (or 3D) animated content for use on the World Wide Web.


                                       12


<PAGE>


         During   fiscal  2002,  we  shifted  our  emphasis  from  our  Internet
advertising and b3d toolset business to our Altnet peer-to-peer  business.  This
shift in emphasis  occurred  gradually  over the course of fiscal 2002,  and has
come about  primarily due to our limited  financial  resources,  which have been
unable to support both businesses. Until we have sufficient resources to support
both  businesses,  we  have  indefinitely  suspended  substantially  all  of our
Internet   advertising   and  b3d  toolset   operations   and  intend  to  focus
substantially  all of our limited  financial  resources  and efforts to grow the
Altnet business. We intend to resume efforts once cash flow improves.

         We generate, or intend to generate, revenue in five principal ways:

         o        We contract with content  owners to distribute  and sell their
                  digital files to computer  users over our Altnet  peer-to-peer
                  network.   We  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.

         o        We perform business  development services in the United States
                  for Sharman  Networks  Limited,  the  distributor of the Kazaa
                  Media Desktop file sharing software  application,  pursuant to
                  an  arrangement  which  gives  us a  portion  of  the  revenue
                  received by Sharman as a result of our efforts;

         o        We intend to  sublicense  to third  parties  our rights to the
                  TrueNames patent (U.S.  patent  #5,978,791),  which we license
                  from  Kinetech  Inc. The  TrueNames  patent covers a method of
                  identifying digital files based on the actual data contents of
                  the file, rather than by its name, origin, location,  address,
                  or other information that can easily be changed.

         o        We license our ad serving technology, which is used to display
                  our Brilliant  Banners,  to third party operators of web sites
                  and other Internet applications; and

         o        We license  our b3d  software  tools to  creators  of animated
                  content.

         During the second half of 2002,  we generated  our first  revenues from
the  distribution  and sale of digital files over the Altnet network to users of
the Kazaa  Media  Desktop  file  sharing  software  application  (or  KMD).  Our
agreement with Sharman  Networks  Limited,  distributor of the KMD, allows us to
distribute  and sell digital files from the Altnet  network to KMD users.  A KMD
user can download an Altnet file from the Altnet  network in  substantially  the
same  manner as the user would  download a digital  file from other users of KMD
applications.  Pursuant to our agreement with Sharman, if a search query matches
the  description  of one or more Altnet  files,  the  matching  Altnet files are
currently  displayed in the top four positions and every seventh file within the
search  results  page of the KMD GUI.  We pay  Sharman a  percentage  of revenue
generated from the distribution and sale of Altnet files to users of the KMD.

         During  the  second  half  of  2002,  we  began   performing   business
development  services  in the United  States  under an  agreement  with  Sharman
Networks  Limited.  We negotiate  with third


                                       13


<PAGE>


parties that desire to enter into a business  transaction  with Sharman relating
to the KMD  application.  These  transactions  include  the  placement  by third
parties  of  banner  advertisements  on the KMD,  software  bundle  transactions
whereby a third party's  software  product is bundled with downloads of the KMD,
and other partnering transactions. We are paid a percentage of the gross revenue
received  by Sharman for each  transaction  entered  into based on our  efforts.
Pursuant to this  arrangement,  in February  2003, we assisted with an agreement
between  Sharman  and  MatchNet  plc for the  placement  on the KMD of a "dating
service"  application that allows users of the KMD to search  MatchNet's  online
database of dating  profiles and subscribe to MatchNet's  online dating  service
from the KMD.

         In  October  2002,  we  licensed  from  Kinetech,  Inc.  rights  to its
TrueNames patent (U.S. patent #5,978,791) and all related intellectual property.
We have a  non-exclusive,  sublicensable  right to the Patent for the purpose of
developing, marketing, renting and selling products and services, which, without
the license,  would infringe or contribute to the infringement of the Patent. In
addition  to using the  patented  technology  to  operate  our own  peer-to-peer
business,  we intend to identify  other  parties  that might be  infringing  the
patent and, where we deem appropriate, seek to sublicense the patent for a fee.

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  value 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.

         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 (SAB  101) and  AICPA
Statement of Position 97-2 (SOP 97-2),  generally we recognize  revenue when all
of the following  criteria are met: (1)  persuasive  evidence of an  arrangement
exists,  (2)  delivery  has  occurred or services  have been  rendered,  (3) the
seller's price to the buyer is fixed or determinable,  and (4) collectibility is
reasonably  assured.  In the case of each of our product  and  service  lines we
establish a contract or insertion  order with our customers  with  specifics for
requirements,  a fixed price, a delivery schedule, and terms for payment. Unless
cash is paid in advance,  our receivables are recorded as revenue is earned.  We
regularly  evaluate the collectibility of our receivables based on a combination
of factors.  When a customer's  account  becomes past due, we initiate  dialogue
with


                                       14


<PAGE>


the customer to determine the cause.  If we determine  that the customer will be
unable to meet its  financial  obligations  to us, due to a  bankruptcy  filing,
deterioration in the customer's operating results or financial position or other
material events  impacting their business,  we record a specific reserve for bad
debt to reduce the related  receivable  to the amount we expect to recover given
all  information  presently  available.  If  circumstances  related to  specific
customers  change,  our estimates of the  recoverability  of  receivables  could
materially  change.  We do not have material  exposure to any single customer or
group of customers at this time.  At March 31, 2003, we had a reserve of $32,000
to cover three customers from whom collectibility is uncertain.

RESULTS OF OPERATIONS

         Under SAB 101 and SOP 97-2, revenue generally is realized or realizable
and earned 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.

         REVENUES.  Revenues  increased  100% from $293,000 for the three months
ended March 31,  2002 to $586,000  for the three  months  ended March 31,  2003.
Distribution  and  technology  revenue from a related  party,  which consists of
revenue  earned from the e-New media  contract,  was $229,000 for 2003 and 2002.
Development fees and other revenues  increased from $ 64,000 in 2002 to $357,000
in 2003  due to an  increase  in  demand  for our  advertising  and  development
services,  resulting  in an increase in revenues of $293,000 in 2003. A majority
of the increase  relates to $207,000 of revenue  derived from Altnet sales,  and
the addition of $20,000 of revenues from our business  development  services for
Sharman Networks.

         The following table shows revenues by product or service grouping:

                                           MARCH 31,      MARCH 31,       NET
            REVENUES                         2002           2003         CHANGE
--------------------------------------------------------------------------------

E-New Media Technology .............       $229,000       $229,000        --
Sharman Business Development .......           --         $ 20,000         6.8%
Altnet Sales .......................           --         $207,000        70.7%
Advertising and Development ........       $ 55,000       $130,000        25.6%
Software and DVD Sales .............       $  9,000           --          (3.1%)
                                           --------       --------       -----

Total Revenue ......................       $293,000       $586,000       100.0%
                                           ========       ========       =====


         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 decreased from $52,000 for the three months
ended March 31, 2002 to $34,000 for the three months ended March 31, 2003.  This
represents  a  decrease  of  $18,000,  or 35%,  which  is  primarily  due to the


                                       15


<PAGE>


reduction in banner ad production created for Internet  advertisers at a cost of
$26,000 for the three months ended March 31, 2002.

         SALES AND MARKETING.  Sales and marketing  expenses increased by 304.5%
from  $22,000 for the three months ended March 31, 2002 to $89,000 for the three
months ended March 31, 2003.  Of the $89,000  incurred in the three months ended
March 31, 2003,  $77,000 pertains to fees to sales consultants for Altnet,  Inc.
and for 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 increased $129,000 or 23.2% from $557,000 for the three
months  ended March 31, 2002 to $686,000  for the three  months  ended March 31,
2003. This increase is primarily  attributable to an increase in insurance costs
of $18,000,  an increase in investor  relations  of $18,000  plus an increase of
$20,000 in warrant  expense,  attributable  to two  consultant  agreements.  For
Kinetech,  a warrant to purchase up to 5 million shares of our common stock at a
nominal price of par value  ($0.001 per share) was issued in the fourth  quarter
of 2002, for which we recorded  $45,000 of warrant  expense in the first quarter
of 2003.

         RESEARCH AND  DEVELOPMENT.  Research and development  expenses  include
salaries and benefits of personnel  conducting  research and  development of the
Internet  web site,  the  banner  ads and the  development  of  Altnet's  Points
Manager.  These costs  increased  132.2% from $90,000 for the three months ended
March 31, 2002 to $209,000 for the three  months ended March 31, 2003  primarily
due to an increase in web site  development  costs,  principally in relations to
the development of Altnet's Points Manager.

         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 has remained a consistent expense of $17,000 for the three
months  ended  March 31, 2002 to $19,000  for the three  months  ended March 31,
2003, as the depreciable assets have not materially changed.

         OTHER INCOME AND EXPENSE.  Other income and expense  includes  interest
income and interest expense and debt discount on capital financing. Other income
and expense  decreased  from an expense of $866,000  for the three  months ended
March 31, 2002 to  $446,000  for the three  months  ended  March 31,  2003.  The
expense is due to a non-cash  debt  discount  expense of  $793,000  and  accrued
interest  expense of $73,000 for the three months ended March 31, 2002  incurred
in connection  with our sale of $3,014,150  in principal  amount of  Convertible
Promissory Notes in 2001. During the first quarter of 2003, we expensed $370,000
of non-cash  interest  expense  incurred due to the extension of the Convertible
Promissory  Notes. In addition,  we incurred accrued interest expense of $76,000
in  connection  with the Notes during the three months ended March 31, 2003.


                                       16


<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

         As  of  March  31,  2003,  our  cash  and  cash   equivalents   totaled
approximately  $58,000.  This is a decrease  of $178,000 as compared to December
31, 2002.

         Cash flows from operating,  financing and investing  activities for the
three  months  ended March 31,  2003 and 2002 are  summarized  in the  following
table:


               ACTIVITY:                         2002              2003
     ----------------------------------      -----------       -----------
     Continuing Operations ............      $  (599,000)      $   (80,000)

     Financing ........................      $ 1,189,000       $   (75,000)
     ----------------------------------      -----------       -----------

         Net cash of  $80,000  used in  operating  activities  during  the three
months  ended  March  31,  2003 was  primarily  attributable  to a net loss from
operations  of  $897,000  offset by an increase  in  Accounts  Payable.  This is
compared  to a net use of cash during the three  months  ended March 31, 2002 of
$599,000 attributable to a net loss of $1,311,000.

         We lease our facilities under operating lease agreements, which expired
during the 1st  quarter of 2003.  We signed two new,  two-year,  facility  lease
agreements  in February  2003.  As of March 2003,  the  commitments  under these
leases were as follows:


         YEAR            UNITED STATES           AUSTRALIA
      -----------        -------------         -------------

         2003              $ 25,000              $ 55,900
         2004                31,000                70,000
         2005                   300                 8,200
                           --------              --------
                           $ 56,300              $134,100
                           ========              ========


         Our  operations  generated  negative  cash flow during the three months
ended March 31, 2002 and 2003,  and we expect a  significant  use of cash during
the  upcoming  2003  fiscal  year  as  we  continue  to  initiate  the  business
opportunity  for Altnet,  Inc. On April  14,2003 we signed a two-year  Strategic
Alliance,  Marketing and Distribution Agreement with the owner and operator of a
proprietary search toolbar software application. We received a refundable (under
certain circumstances),  non-recoupable signing bonus in the aggregate amount of
$250,000 in April 2003, and will receive an additional refundable (under certain
circumstances)  and  recoupable  advance of $375,000  upon the  satisfaction  of
certain  conditions,  which we  expect  to  satisfy  prior to July 1,  2003.  We
anticipate our current cash reserves,  plus our expected generation of cash from
existing  operations,  will be sufficient to fund our  anticipated  expenditures
into the third quarter of 2003. Consequently,  we will require additional equity
or debt  financing  during  2003,  the amount and timing of which will depend in
large part on our spending  program,  and whether the signing bonus and expected
advance will need to be refunded.  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.


                                       17


<PAGE>


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,  2002  financial  statements  included  an  explanatory  paragraph
expressing substantial doubt about our ability to continue as a going concern.

NEW ACCOUNTING PRONOUNCEMENTS

         In  January  2003,  the  FASB  issued  FASB   Interpretation   No.  46,
"Consolidation  of Variable Interest  Entities" ("FIN 46"). This  Interpretation
requires that variable  interest  entities  created after January 31, 2003,  and
variable  interest entities in which an interest is obtained after that date, be
evaluated  for  consolidation  into  an  entity's  financial  statements.   This
interpretation  also  applies,  beginning  July 1, 2003 for us, to all  variable
interest  entities in which an  enterprise  holds an  interest  that it acquired
before  February  1,  2003.  We are  in the  process  of  evaluating  all of our
investments  and other  interests in entities under the provisions of FIN 46 and
have not yet determined the effect of its adoption on our financial position and
results of operations.

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.

         THERE IS DOUBT ABOUT OUR ABILITY TO  CONTINUE  AS A GOING  CONCERN.  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, 2003, our cash balance was approximately
$58,000  and our  outstanding  accounts  payable and  accrued  expenses  totaled
$1,664,000 not including the capital  financing notes,  which have a convertible
feature.  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


                                       18


<PAGE>


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,  2003 we had an  accumulated  deficit  of $61.8
million. We incurred  comprehensive  losses of $1.3 million and $0.9 million for
the quarter ended March 31, 2002 and 2003, respectively. Additionally, as of the
date of this 10-Q 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 brand promotion, sales and marketing,  administration, and research and
development,  all principally  related to deployment of our Altnet  peer-to-peer
network and operating  infrastructure.  In fiscal 2002, we significantly reduced
the development and marketing of our proprietary  software  authoring tools, and
our services for serving "rich media"  Internet  banner  advertisements  (banner
advertisements that use audio and animation).  Additionally,  we have ceased all
internal  production  of  three-dimensional  animated  content.  While  our past
activities  in these areas will continue to generate  some future  revenue,  our
business  model assumes that our growth and a significant  portion of our future
revenues  will be derived  from our  Altnet  peer-to-peer  business,  which only
became operational in the fourth quarter of 2002. This business model is not yet
proven  and we cannot  make  assurances  that we will ever  achieve  or  sustain
profitability or that our operating losses will not increase in the future or be
inconsistent  with the expectations of the public market.  Primarily as a result
of our continued losses, our independent public accountants modified the opinion
on our 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
now mature on December 31, 2003, and accrued  interest,  may be converted by the
holders at any time into  shares of our common  stock at a price of $0.1203  per
share. The warrants  attached to the promissory notes have an expiration date of
May 23,  2004  and  entitle  the  holders  to  purchase  up to an  aggregate  of
69,768,745  shares of our Common Stock at an exercise  price of  $0.1353375  per
share on 44,542,718  shares,  and at an exercise  price of $0.2091 on 25,226,028
shares.  The  exercise  of the  warrants  would  increase  the  number of shares
outstanding and result in further dilution to our other stockholders.

         The conversion  price of the promissory notes and the exercise price of
warrants  to  purchase up to  44,542,718  shares of Common  Stock are subject to
reduction if we issue additional securities at a price below the then applicable
conversion  price or  exercise  price,  with  exceptions  for  certain  types of
securities  issuances.  If we issue  securities at a price below the  conversion
price or exercise  price,  then the  conversion  price or exercise price will be
adjusted downward to equal the price at which we sold the additional securities.
As a  consequence,  if we trigger the  adjustment  provision for the  promissory
notes,  the holders of the promissory notes could convert them at a lower price,
which would  increase the number of shares of Common  Stock they would  receive.
Similarly,  if we trigger the adjustment provision for the warrants, the


                                       19


<PAGE>


holders of the warrants could exercise the warrants to purchase a greater number
of shares for the same aggregate purchase price.

         The table  below sets  forth the  number of shares of our Common  Stock
that could be acquired by the holders upon  conversion of the  promissory  notes
and exercise of the warrants,  and the  percentages  of our  outstanding  Common
Stock that the shares issued upon conversion and exercise would  represent.  The
amounts assume conversion on the maturity date of the promissory notes (December
31, 2003),  and include all interest  that would accrue on the entire  principal
amount  of the  promissory  notes  through  such  date.  The share  amounts  and
percentages are based on our closing share price of $0.16 on May 1, 2003, and on
assumed closing share prices of $0.12, $0.08 and $0.04, which prices represent a
25%, 50% and 75% decline,  respectively, in our May 1, 2003 closing share price.
The table assumes that we would issue additional securities at these prices, and
thus trigger the price  adjustment  provisions  of the notes and  warrants.  The
table also assumes that the warrants  would be exercised for cash,  and that the
holders would pay us the aggregate  exercise price  $6,028,300.  The percentages
are also based on 32,114,978  shares of our common stock  outstanding  on May 1,
2003.

Percentage Decline in                                           Percentage of
     May 1, 2003              Assumed          Shares of         Outstanding
    Closing Price          Closing Price      Common Stock       Common Stock
---------------------      -------------      ------------      -------------
         --                    $ 0.16*          75,683,821          70.2%
         25%                   $ 0.12           81,454,790          71.7%
         50%                   $ 0.08          122,182,184          79.2%
         75%                   $ 0.04          244,364,369          88.4%
------------------
         Based on the terms of the notes and warrants,  if we sold securities at
this share closing price the conversion price of the notes and exercise price of
the warrants would be $0.1203 and $0.1353375 per share, respectively.

         Additionally,  during  the 2002,  we raised  an  additional  $2,685,000
through the sale of  15,451,318  shares of common stock at an average  price per
share of $0.15, and in connection therewith issued warrants to purchase up to an
additional  27,568,627  shares of common stock at exercise  prices  ranging from
$0.148725 to $0.28125 per share. We anticipate that during 2003, 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 1, 2003,
and identifies  the number of shares issued and  outstanding as of such date, as
well as the number of shares that may be issued in the future upon conversion of
outstanding convertible promissory notes and exercise of outstanding options and
warrants:


                                       20


<PAGE>

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

Outstanding Common Stock ...................      32,114,978           37.2%
Convertible Promissory Notes,
   with accrued interest ...................      29,442,142           34.1%
Outstanding Warrants(1) ....................      12,601,571           14.6%
Outstanding Options ........................      12,160,500           14.1%
                                                  ----------          -----
  Fully Diluted Shares of
     Common Stock(2) .......................      86,319,191          100.0%
------------------
  1      For purposes of this table,  we have only  included  warrants  that are
         "in-the-money"  (the exercise  price of the warrants is below the price
         of our  common  stock),  and the  number  of  shares  of  common  stock
         underlying the outstanding warrants has been calculated on a "cashless"
         exercise  basis,  whereby  the  holder of each  warrant  receives  upon
         exercise a number of shares of common  stock with a value  equal to (i)
         the total value of the shares  underlying  the  warrants  less (ii) the
         aggregate  exercise price of the warrants,  and is calculated  based on
         the  closing  sales  price of our common  stock on the  American  Stock
         Exchange on May 1, 2003, which was $0.16.
  2      This number  excludes (i) 7,483,875  shares that have been reserved for
         issuance  under our 1996 Stock Option Plan that were not the subject of
         an  outstanding  stock  option or other award at May 1, 2003,  and (ii)
         91,160,087 shares underlying warrants that have exercise prices ranging
         from $.1656 to $0.75 per share, and thus not "in-the-money."

         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 maturity in December  2003,  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.

         WE DO NOT MEET THE CONTINUED LISTING REQUIREMENTS OF THE AMERICAN STOCK
EXCHANGE,  AND OUR  STOCK  COULD BE  DELISTED  AT ANY  TIME.  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 $6 million.  We currently  are not in  compliance  with both the bid
price  and  net  tangible  assets  requirements.  Specifically,  we  are  not in
compliance  with the  following  listing  requirements  as set forth in the AMEX
Company Guide:

         o        Section  1003  (a)(i) with  shareholders'  equity of less than
                  $2,000,000 and losses from  continuing  operations  and/or net
                  losses in two of our three most recent fiscal years;
         o        Section 1003 (a)(ii)  with  shareholders'  equity of less than
                  $4,000,000 and losses from  continuing  operations  and/or net
                  losses in three of our four most recent fiscal years;


                                       21


<PAGE>


         o        Section 1003 (a)(iii) with  shareholders'  equity of less than
                  $6,000,000 and losses from  continuing  operations  and/or net
                  losses in our five most recent fiscal years; and
         o        Section  1003 (a)(iv) in that we have  sustained  losses which
                  are so  substantial  in relation to our overall  operations or
                  our existing financial  resources,  or our financial condition
                  has become so impaired  that it appears  questionable,  in the
                  opinion  of the  exchange,  as to  whether  we will be able to
                  continue  operations  and/or  meet  our  obligations  as  they
                  mature.

         We were afforded the  opportunity to submit a plan of compliance to the
exchange,  which we did on  April  30,  2002.  On June 19,  2002,  the  exchange
notified us that it accepted our plan of  compliance  and granted us an informal
extension,  the length of which is at the discretion of the exchange,  to regain
compliance  with the  continued  listing  standards.  We are subject to periodic
reviews by the exchange staff during the extension period.

         We could be delisted from the American Stock Exchange at any time, with
little or no advance notice. If this occurs,  trading of our common stock may be
conducted on (i) the NASDAQ SmallCap  Market,  if we qualify for listing at that
time,  which we currently  do not,  (ii) in the  over-the-counter  market on the
"pink sheets", or (iii) if available, the NASD's "Electronic Bulletin Board." In
any of those cases, investors could find it more difficult to buy or sell, or to
obtain  accurate  quotations  as to the  value of our  common  stock.  If we are
delisted,  our stock  could also become a "penny  stock." The trading  price per
share of our common stock likely would be reduced as a result.

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

         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;


                                       22


<PAGE>


         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:

         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 operate  and  expand 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


                                       23


<PAGE>


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 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.

RISKS RELATED TO OUR BUSINESS

         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  financially  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,  acceptance  of content  offered  through  TopSearch,  broad
acceptance and use of our micro-payment  processing  system,  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 fund  Altnet  and  expand  the  operations  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.

         ALTNET'S MICRO-PAYMENT PROCESSING SYSTEM IS RELIANT UPON THE TECHNOLOGY
AND SYSTEMS OF THIRD PARTY VENDORS THAT PROVIDE THEIR SERVICES TO ALTNET. We use
the  technology  and  services  of third  parties  to  process  payment  for the
individual  sale  of  digital  content  over  our  Altnet  peer-to-peer  system.
NewGenPay Inc. currently provides payment processing  technology and services to
us. The ability to process  payment for  individual  sales at price  points well
below  $1.00  (better  known as micro  payments)  is  integral to our ability to
commercialize  the secure  distribution  to and sale of our  customers'  digital
content to  millions  of users.  Our ability to  commercialize  Altnet  could be
materially  adversely  affected if we do not maintain our relationships with the
vendors that provide these services on our behalf. Additionally, a


                                       24


<PAGE>


disruption in these vendors'  services,  problems with their technology,  or any
other  matters  that  interfere  with their  provision  of  services to us could
disrupt our ability to collect fees for the digital content we distribute, which
would have a materially  adverse affect on our  operations and our  relationship
with our customers.

         OUR FAILURE TO MAINTAIN A STRATEGIC  RELATIONSHIP WITH SHARMAN NETWORKS
COULD  ADVERSELY  AFFECT  OPERATING  RESULTS.  We  receive  compensation  as the
exclusive representative of Sharman Networks for the sale, license, and/or other
commercial  exploitation  of index  search  results  displayed  on or  otherwise
accessed using the Kazaa Media Desktop in response to end user search  requests.
Additionally,   through  our  business  development   arrangement  with  Sharman
Networks,  we receive  compensation  for the sale of  advertising  campaigns and
other revenue  received by Sharman  Networks,  which is generated as a result of
our  efforts.  If we do not  maintain our  strategic  relationship  with Sharman
Networks,  these  sources of revenue may be  eliminated  which  would  adversely
affect our financial condition and results of operations.

         OUR  FAILURE TO  MAINTAIN  STRATEGIC  RELATIONSHIPS  WITH  DISTRIBUTION
PARTNERS COULD REDUCE THE NUMBER OF ALTNET PEER-TO-PEER APPLICATIONS WE ARE ABLE
TO  DISSEMINATE  TO  CONSUMERS,  WHICH WOULD  REDUCE THE NUMBER OF USERS FOR OUR
ALTNET PEER-TO-PEER BUSINESS. We distribute 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 Altnet  software,  which is
necessary to connect users to our private  peer-to-peer  network.  Additionally,
through our agreement with Sharman Networks, Altnet distributes and sell digital
files to users of the Kazaa Media Desktop.  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
Altnet software or sales of authorized digital files.

         CURRENT LITIGATION AGAINST SHARMAN NETWORKS LIMITED MAY PREVENT FURTHER
DISTRIBUTION  OF OUR ALTNET  PEER-TO-PEER  SOFTWARE,  AND  ADVERSELY  AFFECT OUR
ABILITY TO SERVE BRILLIANT  BANNERS ON, AND DISTRIBUTE AND SELL DIGITAL FILES TO
USERS OF, THE KAZAA MEDIA DESKTOP. A disruption in the distribution of the Kazaa
Media Desktop or its use by consumers would necessarily adversely impact (1) the
future distribution of our Altnet software,  (2) revenues we derive from serving
Brilliant  Banners  on the  Kazaa  Media  Desktop,  and  (3)  Altnet's  sale  of
authorized  digital  files to users of the Kazaa  Media  Desktop.  For the three
months  ended  March  31,  2003,  we  generated  approximately  61% of our total
revenues from  activities  dependent  upon the  availability  of the Kazaa Media
Desktop to computer users.  If there is a disruption in the  distribution of the
Kazaa Media Desktop or its use by consumers,  we may not be able to replace this
source of revenue in the short  term,  or at all.  Sharman  Networks,  the Kazaa
Media  Desktop,  and other  peer-to-peer  software  products,  are 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,  our  business  and  financial
condition could be materially and adversely  affected.


                                       25


<PAGE>


While we understand that Sharman  Networks is vigorously  defending  against the
claims  raised  in this  litigation,  we are  unable to  determine  at this time
whether Sharman Networks will prevail.

         OUR  BUSINESS  MODEL  CONTEMPLATES  RECEIVING  A 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.  While we significantly  reduced
the  development  and marketing of our Internet  advertising  business in fiscal
2002 in favor of our  Altnet  peer-to-peer  business,  we intend to pursue  some
revenue from this business  during fiscal 2003. We are focusing a portion of our
resources 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 AND
OTHER B3D CONTENT  WITHOUT A BROAD BASE OF  INSTALLED  DIGITAL  PROJECTORS.  Our
Digital  Projector must be installed on a user's computer in order for that user
to view our  Brilliant  Banners and other b3d content.  If we do not achieve and
maintain  widespread  installation of our Digital  Projector,  there will not be
substantial  demand for  b3d-produced  content or our  software  tools.  We have
discontinued  the  production  of  3D  animated   entertainment,   such  as  our
MultipathTM  Movies  and  animated  music  videos.  The  user's  demand for this
entertainment helped drive installation of our Digital Projector. Presently, the
substantial  majority of b3d content  consists of  Brilliant  Banners.  Computer
users are less likely to  voluntarily  install our Digital  Projector or keep it
installed if its use is almost exclusively for viewing Internet  advertisements.
Other  companies,  such as Lavasoft,  market  software  that removes our Digital
Projector  from a user's  computer.  The  widespread  use of this software could
diminish the number of installed  projectors,  which would reduce demand for our
Brilliant Banners by Internet advertisers and correspondingly  reduce the demand
for our b3d toolset by the creators of Internet advertisements.

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


                                       26


<PAGE>


         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.

         WE MAY NOT BE ABLE TO COMPETE  EFFECTIVELY  WITH OTHER  COMPANIES  THAT
OFFER  SOFTWARE  TOOLS AND  SERVICES  SIMILAR TO OURS.  The  markets for our b3d
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. Similarly, we can only deliver digital files over our Altnet
peer-to-peer network to users that have downloaded the Altnet software. If we do
not achieve a widespread distribution of our Altnet software,  there will not be
substantial  demand by content  owners to distribute and sell their content over
the Altnet network.

         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.


                                       27


<PAGE>


         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.

         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 have
been issued two patents and have pending 6 additional patent  applications,  all
relating to our b3d  toolset.  We cannot be certain  that our  reliance on these
laws and  nondisclosure  agreements  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 Digital Projector,  b3d toolset and Altnet software, 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


                                       28


<PAGE>


products or  discontinue  their sale.  Any of these  outcomes,  individually  or
collectively, could have a material adverse effect on our business and financial
condition.


ITEM 4.  CONTROLS AND PROCEDURES.

         Within the 90 days prior to the filing date of this  report,  our Chief
Executive  Officer and Chief Financial  Officer,  with the  participation of our
management,  carried out an evaluation of the  effectiveness  of our  disclosure
controls and  procedures  pursuant to Exchange Act Rule 13a-14.  Based upon that
evaluation,  our Chief  Executive  Officer and Chief  Financial  Officer believe
that, as of the date of the evaluation,  our disclosure  controls and procedures
are  effective  in making  known to them  material  information  relating  to us
(including  our  consolidated  subsidiaries)  required  to be  included  in this
report.

         Disclosure  controls and  procedures,  no matter how well  designed and
implemented,  can provide  only  reasonable  assurance  of achieving an entity's
disclosure  objectives.  The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal  control can occur  because of human  failures such as simple errors or
mistakes or intentional circumvention of the established process.

         There were no significant  changes in our internal controls or in other
factors that could  significantly  affect internal controls,  known to our Chief
Executive  Officer and Chief  Financial  Officer,  subsequent to the date of the
evaluation.


                                       29


<PAGE>


PART II

                                OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         In January  2003,  we issued to Lee Jaffe  warrants  to  purchase up to
165,000 shares of our common stock at an exercise price of $0.18 per share.  The
warrants  have a term of 4 years.  The  warrants  were  issued  to Lee  Jaffe in
consideration of consulting services provided to us. Lee Jaffe represented to us
that  he  was an  "accredited  investor"  within  the  meaning  of  Rule  501 of
Regulation D under the  Securities  Act of 1933,  and that it was purchasing the
securities for investment and not in connection with a distribution thereof. 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 February 2003, we issued to the  Scheinrock  Advisory Group warrants
to purchase  up to 350,000  shares of our common  stock at an exercise  price of
$0.14 per share.  The warrants have a term of 5 years.  The warrants were issued
to Scheinrock  Advisory in consideration of consulting  services provided to us.
Scheinrock  Advisory  represented  to us  that it was an  "accredited  investor"
within the meaning of Rule 501 of Regulation D under the Securities Act of 1933,
and that it was  purchasing  the securities for investment and not in connection
with a  distribution  thereof.  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

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

         10.1     Letter Agreement dated February 19, 2003 between Brilliant
                  Digital Entertainment, Inc. and Scheinrock Advisory Group.

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

(b)      Reports on Form 8-K.

         None.


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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: May 20, 2003          /s/ Tyler Tarr
                          ------------------------------------------------
                          By:    Tyler Tarr
                          Its: 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 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;

         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;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                  a) designed such disclosure  controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this quarterly report is being prepared;

                  b) evaluated the effectiveness of the registrant's  disclosure
controls and  procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

                  c) presented in this quarterly  report our  conclusions  about
the  effectiveness  of the  disclosure  controls  and  procedures  based  on our
evaluation as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

                  a) all significant  deficiencies in the design or operation of
internal  controls  which could  adversely  affect the  registrant's  ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

                  b)  any  fraud,   whether  or  not  material,   that  involves
management or other  employees who have a significant  role in the  registrant's
internal controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this quarterly report whether or not there were significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  May 20, 2003

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


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<PAGE>


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

I, Tyler Tarr, certify that:

         1. I have  reviewed this  quarterly  report on Form 10-QSB 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;

         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;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                  a) designed such disclosure  controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this quarterly report is being prepared;

                  b) evaluated the effectiveness of the registrant's  disclosure
controls and  procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

                  c) presented in this quarterly  report our  conclusions  about
the  effectiveness  of the  disclosure  controls  and  procedures  based  on our
evaluation as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

                  a) all significant  deficiencies in the design or operation of
internal  controls  which could  adversely  affect the  registrant's  ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

                  b)  any  fraud,   whether  or  not  material,   that  involves
management or other  employees who have a significant  role in the  registrant's
internal controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this quarterly report whether or not there were significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  May 20, 2003

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


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