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 September 30, 2001

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

  For the transition period from __________________ to ______________________.

                         Commission file number 0-21637

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

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

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

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

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

                         Yes |X|   No |_|

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common Stock, par value
$0.001, 16,453,660 shares issued and outstanding as of November 9, 2001.

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


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                                                           PAGE

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

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

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

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

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

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

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

PART II    OTHER INFORMATION.................................................26

Item 2.    Changes in Securities and Use of Proceeds.........................26

Item 4.    Submission of Matters to a Vote of Security Holders...............26

Item 6.    Exhibits and Reports on Form 8-K..................................26


                                     Page 2
<PAGE>


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                 (In thousands)

                                                                 SEPTEMBER 30,
                                                                     2001
                                                                 -------------
<S>                                                              <C>
ASSETS                                                            (unaudited)
Current assets:
    Cash and cash equivalents..................................  $        562
    Accounts receivable, net...................................           540
    Other assets, net..........................................           181
                                                                 -------------
Total current assets...........................................         1,283
Property, plant and equipment, net.............................           242
Other assets, net..............................................           734
                                                                 -------------
Total assets...................................................  $      2,259
                                                                 =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable...........................................  $        310
    Accrued expenses...........................................         1,079
    Deferred revenue...........................................           917
    Debt discount                                                        (703)
    Current portion of notes payable...........................            53
                                                                 -------------
Total current liabilities......................................         1,656
Deferred revenue                                                        2,784
Notes payable, less current portion............................            45
Debt discount, less current portion............................          (165)
Capital financing .............................................         2,325
Other long term liabilities....................................            50
                                                                 -------------
Total liabilities..............................................         6,695
Commitments and contingencies
Stockholders' deficit:
    Common stock                                                           16
    Additional paid-in capital.................................        48,863
    Accumulated deficit........................................       (53,060)
    Cumulative other comprehensive loss........................          (255)
                                                                 -------------
Total stockholders' deficit....................................        (4,436)
                                                                 -------------
Total liabilities and stockholders' deficit....................  $      2,259
                                                                 =============
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                     Page 3
<PAGE>


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

                                                           3 MONTHS      3 MONTHS       9 MONTHS      9 MONTHS
                                                             ENDED         ENDED          ENDED         ENDED
                                                            9/30/01       9/30/00        9/30/01       9/30/00
                                                          -----------   -----------    ----------    ----------
                                                          (UNAUDITED)   (UNAUDITED)    (UNAUDITED)   (UNAUDITED)
<S>                                                       <C>           <C>            <C>           <C>
REVENUE:
     Revenues........................................     $      397    $      326     $   1,439     $     762
                                                          -----------   -----------    ----------    ----------
COST OF REVENUES AND EXPENSES:
Cost of revenues.....................................            125             3           542           208
Sales & marketing....................................             44           705           564         1,130
Website development..................................            (57)          (74)           30            51
General and administrative...........................          1,082         1,278         3,505         3,426
Research and development.............................            453         1,091         1,362         2,767
Depreciation.........................................             57            85           235           232
                                                          -----------   -----------    ----------    ----------
Total cost of revenues and expenses..................          1,704         3,088         6,238         7,814
                                                          -----------   -----------    ----------    ----------
Loss from operations.................................         (1,307)       (2,762)       (4,799)       (7,052)

OTHER INCOME (EXPENSE):
Export market development grant......................             25            (3)           56           119
Gain (loss) on foreign exchange......................             --             3            44             4
Gain (loss) on sale of assets........................            (15)           --            10            --
Debenture expense....................................           (232)           --          (246)          (30)
Interest income (expense), net.......................            (10)           46            19           173
                                                          -----------   -----------    ----------    ----------
     Total other income (expense)....................           (232)           46          (117)          266
                                                          -----------   -----------    ----------    ----------
Loss from continuing operations......................         (1,539)       (2,716)       (4,916)        6,786)
Gain (loss) on disposal of discontinued operations...            290        (1,755)          313         6,354)
                                                          -----------   -----------    ----------    ----------
Net loss before income tax...........................         (1,249)       (4,471)       (4,603)      (13,140)
Provision for income tax.............................             --            --            --            --
                                                          -----------   -----------    ----------    ----------
Net loss.............................................         (1,249)       (4,471)       (4,603)      (13,140)
Foreign currency translation adjustment..............             (9)           26           (89)           47
                                                          -----------   -----------    ----------    ----------
Comprehensive loss...................................     $   (1,258)   $   (4,445)    $  (4,692)    $ (13,093)
                                                          ===========   ===========    ==========    ==========
Basic and diluted net loss per share from
   continuing operations.............................     $    (0.10)   $    (0.17)    $   (0.30)    $   (0.46)
                                                          ===========   ===========    ==========    ==========
Basic and diluted net loss per share from
   discontinued operations...........................     $     0.02    $    (0.12)    $    0.02     $   (0.44)
                                                          ===========   ===========    ==========    ==========
Basic and diluted net loss per share.................     $    (0.08)   $    (0.29)    $   (0.28)    $   (0.90)
                                                          ===========   ===========    ==========    ==========
Weighted average number of shares used in
   computing basic and diluted net loss per share....         16,372        15,149        16,160        14,557
                                                          ===========   ===========    ==========    ==========
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                     Page 4
<PAGE>


<TABLE>
<CAPTION>
                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                                                                   NINE MONTHS
                                                                               ENDED SEPTEMBER 30,
                                                                          ---------------------------
                                                                              2001            2000
                                                                          -----------      -----------
                                                                          (unaudited)      (unaudited)
<S>                                                                       <C>              <C>
OPERATING ACTIVITIES
Net loss................................................................  $  (4,885)       $ (13,140)
Adjustments to reconcile net loss to the net cash
   used in operating activities:
      Depreciation and other amortization...............................        964            1,347
      Loss from discontinued operations.................................        371            6,354
      Amortization of movie software costs..............................         --              158
      Loss (gain) on foreign exchange...................................         49               --
      Effect of warrants granted........................................      1,590              389
      Changes in operating assets and liabilities:
         Accounts receivable............................................       (131)            (209)
         Other assets...................................................       (334)          (1,492)
         Accounts payable and accruals..................................       (507)              (4)
         Deferred revenue...............................................       (578)           4,595
         Other long-term liabilities....................................     (1,037)               6
                                                                          ----------       ----------
Total adjustments                                                               387           11,144
                                                                          ----------       ----------
Net cash used in continuing activities..................................     (4,498)          (1,996)
Net cash used in discontinued operations................................       (301)          (5,595)
                                                                          ----------       ----------
Net cash used in operating activities...................................     (4,799)          (7,591)

INVESTING ACTIVITIES
Purchases of equipment..................................................         (1)            (426)
                                                                          ----------       ----------
Net cash used in continuing operations for investing....................         (1)            (426)
Net cash used in discontinued activities for investing..................         --             (302)
                                                                          ----------       ----------
Net cash used in investing activities...................................         (1)            (728)

FINANCING ACTIVITIES
Proceeds from issuance of shares, net of costs..........................         --           12,192
Capital financing.......................................................      2,324               --
Repayments of notes.....................................................        (40)            (112)
                                                                          ----------       ----------
Net cash provided by financing activities...............................      2,284           12,080
                                                                          ----------       ----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................     (2,516)           3,761
Translation adjustments.................................................        (89)              88
Cash and cash equivalents at beginning of period........................      3,187            2,506
                                                                          ----------       ----------
Cash and cash equivalents at end of period..............................  $     582        $   6,355
                                                                          ==========       ==========
Supplemental disclosure of cash flow information:
      Cash paid during the period for interest..........................  $      10        $      12
                                                                          ==========       ==========
</TABLE>

                 See Notes to Consolidated Financial Statements.



                                     Page 5
<PAGE>


SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

     We issued 200,000 shares of our common stock to each of Russell Simmons and
Stan Lathan for an increased ownership in Digital Hip Hop, raising our ownership
percentage in Digital Hip Hop from 50% to 75%.

     We issued 9,000 shares of our common stock during the quarter in connection
with a consulting agreement and incurred $6,000 in consulting expense.

     In May, 2001, we issued warrants to purchase 2,850,393 shares of our common
stock in connection with Secured Convertible Promissory Notes and incurred a
beneficial conversion feature expense of $ 10,690 for the second quarter. In the
third quarter we expensed $176,000 in connection with the financing agreement.
This will continue in future quarters through November 10, 2002.


                                     Page 6
<PAGE>


                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2001


1.   BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Item
310 of Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited condensed consolidated
financial statements reflect all adjustments that, in the opinion of management,
are considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements of Brilliant Digital Entertainment, Inc. included in our
Form 10-KSB for the fiscal year ended December 31, 2000. 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 September
30, 2001 we had an accumulated deficit of $53.1 million. Given the following
factors there is substantial doubt about the Company's ability to continue as a
going concern.

2.   STOCKHOLDERS' EQUITY

     Options and warrants representing common shares of 3,324,000 and 6,210,000
were excluded from the average number of common and common equivalent shares
outstanding in the diluted EPS calculation for the nine months ended September
30, 2000 and 2001, respectively, because they were anti-dilutive.

3.   COMMITMENTS AND CONTINGENCIES

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

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

                           YEAR                  AMOUNT
                         --------              ----------
                           2001                 $13,000
                           2002                  54,000
                           2003                  31,000
                                               ----------
                                                $98,000
                                               ==========

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

                           YEAR                  AMOUNT
                         --------              ----------
                           2001                 $ 44,000
                           2002                  175,000
                           2003                   38,000
                                               ----------
                                                $257,000
                                               ==========


                                     Page 7
<PAGE>


     Rent expense was $532,000 and $354,000 for the nine months ended September
30, 2000 and the nine months ended September 30, 2001, respectively.

4.   GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

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

<TABLE>
<CAPTION>
                                                        UNITED
                                                        STATES      AUSTRALIA
                                                      -----------   ----------
<S>                                                   <C>           <C>
NINE MONTHS  ENDED SEPTEMBER 30, 2000 :
   Revenues from unaffiliated customers............     $266,000     $114,000
   Revenues from affiliated customers..............      382,000           --
                                                      -----------   ----------
   Total revenues                                       $648,000     $114,000
                                                      ===========   ==========
NINE MONTHS ENDED SEPTEMBER 30, 2001:
   Revenues from unaffiliated customers............     $741,000      $10,000
   Revenues from affiliated customers..............      688,000           --
                                                      -----------   ----------
   Total revenues                                     $1,429,000      $10,000
                                                      ===========   ==========
LONG-LIVED ASSETS AS OF:
   September 30, 2001..............................     $901,000      $75,000
                                                      ===========   ==========
</TABLE>

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

     For the nine months ended September 30, 2001, e-New Media represented 48%
of the revenues with distribution and licensing rights ($688,000). Island Def
Jam contributed 18% of the revenue ($250,000). Warner Bros. Online contributed
revenue of 17% ($240,000), while Infogrames contributed 7% ($100,000) of the
revenue and Rock the Vote contributed 6% ($88,000). For the nine months ended
September 30, 2000, e-New Media and SlingShot, Inc accounted for 50% ($382,000)
and 14% ($107,000) of our revenues, while Motion Capture provided 10% ($74,000)
of the revenues.

5.   SEGMENT INFORMATION

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


                                     Page 8
<PAGE>


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

6.   SIGNIFICANT AGREEMENTS

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

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


                                     Page 9
<PAGE>


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

     The following discussion and analysis should be read together with our
consolidated financial statements and the notes to the consolidated financial
statements included elsewhere in this Form 10-QSB.

     THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT DIGITAL ENTERTAINMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
AND SEPTEMBER 30, 2001. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED
IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE
BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE
FACTORS DESCRIBED BELOW UNDER THE CAPTION "CAUTIONARY STATEMENTS AND RISK
FACTORS."

OVERVIEW

     Brilliant Digital Entertainment, Inc. (AMEX: BDE) is a leading developer of
rich media ad serving technologies, software authoring tools and content for 3D
animation on the World Wide Web. We recently began marketing and distributing
our digital media projector (required for the playback of our rich media content
and advertisements) through two large peer to peer (P2P) networks, StreamCast
Networks which operates the Morpheus network, and Consumer Empowerment which
operates the KaZaa network. Previously, our primary method of distribution was
through the syndication of our content to third party web sites. By year-end
2001, our projector is expected to reach tens of millions of additional P2P
connected computers and other users. We are commercializing our technology in
various ways, including licensing our rich media ad server technologies to P2P
networks and other high traffic websites to enable the serving and sale of our
proprietary rich media ad format - 3D, interactive animation with audio which
plays in all banner sizes - for the World Wide Web. We also license our
authoring tools - "b3d Studio" and "b3d Studio Pro" - to production studios.

     We are a Delaware corporation that was incorporated in July 1996. We were
formed through the combination of two businesses: Brilliant Interactive Ideas,
Pty. Ltd., an Australian entertainment software developer and producer, and Sega
Australia New Developments, a research and development operation for leading
edge software tools. Our executive offices are located at 6355 Topanga Canyon
Boulevard, Suite 120, Woodland Hills, California 91367, and our telephone number
is (818) 615-1500. Information on our web sites, www.brilliantdigital.com and
www.b3d.com, does not constitute part of this Form 10-QSB.

RICH MEDIA AD TECHNOLOGIES

     We are licensing our rich media ad server technologies to high traffic
websites including P2P networks, StreamCast Networks and Consumer Empowerment.
This enables the serving of our rich media ad format to advertisers and web
sites as an alternative to the current GIF banners that are prevalent on web
sites today. Early tests have shown that advertising campaigns created and
served in our ad format have provided click through rates significantly higher
than the industry norm for static, 2D GIF banner ads. With the decline of
industry wide banner advertising revenues and click through rates, we believe
that our animated 3D banner advertisements will reinvigorate online


                                    Page 10
<PAGE>


advertising campaigns. We are also introducing our ad format to third party ad
serving companies, making our technologies available for them to commence
selling and serving this new rich media ad format.

SOFTWARE AUTHORING TOOLS

     In July 2000, we made our b3d software tools available to parties
interested in participating in the beta test phase of the product. Our b3d
Studio tool was made available to these participants in a downloadable version
on the Internet. b3d Studio is designed to work as a plug-in with Discreet's 3D
Studio Max, and a beta version supporting Alias|Wavefront Maya animation
software was released in July, 2001. Final release versions of b3d Studio and
b3d Studio Pro were made available at the end of the first quarter of 2001.
These tools provide production studios and the creative departments of ad
agencies with the capability to create rich media ads and other content for
commercial distribution on the Internet, and should ultimately provide a wide
and varied base of content to enrich the consumer web experience. Animation
content developed using our software authoring tools allows for the production
of a wide variety of content including production of artistic renderings,
education, architecture, engineering, e-commerce and other solutions that
require animation. In addition, we released a limited version of our digital
media projector for the Apple Macintosh in July 2001. We believe that this will
further broaden the market for our b3d software tools.

CONTENT DISTRIBUTION

     We have licensed some of the world's best known characters for the
production and web distribution of episodic animations, MultipathTM Movies,
including SUPERMAN, XENA: WARRIOR PRINCESS, KISS, and ACE VENTURA, and have
produced animated music videos of top selling artists including JA RULE,
LUDACRIS, SUM 41, DMX, LIL' ROMEO and REDMAN/LADY LUCK. These full-screen
productions, developed using our proprietary suite of software authoring tools,
have small files for faster download. Our content is distributed broadly through
Internet syndication partners including Warner Bros. Online, Roadrunner and
VH1.com. Revenue is split with the distribution partner according to various
deal structures, many of which are traffic dependent.

     At this time, we have five MultipathTM Movie animated series in syndicated
distribution on the Internet: SUPERMAN, XENA: WARRIOR PRINCESS, KISS: IMMORTALS,
CHOOSE YOUR OWN NIGHTMARE, ACE VENTURA and the online film festival property,
SHORT ATTENTION SPAN THEATRE. Each of the series differs in the scale of
distribution, with some enjoying wider distribution than others depending on a
number of factors including demographics and content type. In addition, we have
six animated music videos in distribution on the Internet: Ja Rule's (an Island
Def Jam artist) 6 FEET UNDERGROUND, Ludacris' (an Island Def Jam artist) HO
song, Sum 41's (an Island Def Jam artist) FAT LIP, DMX's (an Island Def Jam
artist) WHO WE BE, the Long Beach Dub All Stars' (a DreamWorks artist) SAWRED
and Lil' Romeo's (a No Limit Records artist) GAME.

     We announced in July, 2001 that Warner Bros. Online ordered an additional
30 webisodes of The Multipath Adventures of Superman. The new series, which is
expected to debut in January, 2002, brings the total number of SUPERMAN
webisodes ordered by Warner Bros Online to 75. In addition, Warner Bros. Online
offers selected animated music videos produced by Brilliant Digital's majority
owned subsidiary Digital Hip Hop, Inc. on their site.


                                    Page 11
<PAGE>


DIGITAL HIP HOP

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

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

DVD MARKET

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

THE AUCTION CHANNEL

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

     In late 2000, we decided to sell The Auction Channel. The Auction Channel
has been accounted for as a discontinued operation in fiscal 2001 pursuant to
Management's formal adoption on December 31, 2000 of a plan to dissolve the
business unit. On April 30, 2001, we sold substantially all of the assets of The
Auction Channel to Metro Channels, LLC and closed The Auction Channel's New York
and London offices.

RESULTS OF OPERATIONS

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


                                    Page 12
<PAGE>


     Revenues, which are earned from the sale or licensing of our software
tools, are recognized when the sales or licensing agreements are entered into.
If the agreement covers a period in excess of one year, the revenue associated
with this agreement is recognized on a straight-line basis over the life of the
agreement.

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

     Revenues increased from $762,000 for the nine months ended September 30,
2000 to $1,439,000 for the nine months ended September 30, 2001. During the nine
months ended September 30, 2001, e-New Media represented 48% of the revenues
with distribution and licensing rights ($688,000). Island Def Jam contributed
18% ($250,000) of the revenues, while Warner Bros. Online contributed revenues
of 17% ($240,000), Infogrames contributed 7% ($100,000) and Rock the Vote
contributed 6% ($88,000) of the revenues. For the nine months ended September
30, 2000, e-New Media, and SlingShot, Inc. accounted for 50% ($382,000) and 14%
($107,000), while Motion Capture accounted for 10% ($74,000) of the revenue. The
increase in revenues is partially due to a full nine months of e-New Media
revenues, the addition of Digital Hip Hop revenues, and the advertising
revenues.

     COST OF REVENUES. Cost of revenues consists primarily of direct costs
attributable to the production of animated music videos and royalties to third
parties for licensing rights. Cost of revenues increased from $208,000 for the
nine months ended September 30, 2000 to $542,000 for the nine months ended
September 30, 2001. This represents an increase of $334,000. The primary reason
for the increase is that during the second quarter of 2001, we increased our
ownership of Digital Hip Hop from 50% to 75% and, as a consequence, began to
consolidate Digital Hip Hop into our financial statements. The costs
attributable to Digital Hip Hop pertain primarily to the production costs of
animated music videos. Additionally, there was a reduction in the cost of
software sales and development fees.

     SALES AND MARKETING. Sales and marketing expenses decreased $566,000 from
$1,130,000 for the nine months ended September 30, 2000 to $564,000 for the nine
months ended September 30, 2001. Consulting and advertising costs were reduced
in 2001 by $248,000 from $351,000 to $103,000, while we also reduced tradeshow
costs by $328,000. The decrease in the United States marketing costs was
partially offset by an increase in Australian marketing costs of $88,000. We
incurred $426,000 in distribution expense for warrants issued in connection with
our agreement with Yahoo!, while incurring $341,000 warrant expense for the nine
months ended September 30, 2000.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses include
primarily salaries and benefits of management and administrative personnel,
consultants, rent, insurance costs and professional fees. General and
administrative expenses increased from $3,426,000 for the nine months ended
September 30, 2000 to $3,505,000 for the nine months ended September 30, 2001.
The principal reason for the increase is the addition of Digital Hip Hop to the
consolidated financial statements with $433,000 in general and administrative
costs. The Australian office decreased administrative costs by $105,000
primarily due to a reduction in personnel. United States costs were also
decreased by $248,000 principally by a decrease in salaries, investor costs and
professional fees partially offset by an increase in insurance costs and warrant
expense.


                                    Page 13
<PAGE>


     RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and benefits of personnel conducting research and development of
software products. Research and development costs also include costs associated
with creating our software tools used to develop MultipathTM Movies and other 3D
animated content. The costs decreased from $2,767,000 for the nine months ended
September 30, 2000 to $1,362,000 for the nine months ended September 30, 2001
primarily due to personnel layoffs and a decrease in production in our
Australian company. Web development costs decreased by $21,000 from $51,000 for
the nine months ended September 30, 2000 to $30,000 for the nine months ended
September 30, 2001 due to the reduction of work for the Company's web site.

     DEPRECIATION AND AMORTIZATION. Depreciation expense relates to depreciation
of fixed assets such as computer equipment and cabling, furniture and fixtures
and leasehold improvements. These fixed assets are depreciated over their
estimated useful lives (up to five years) using the straight-line method.
Depreciation expense changed by $3,000 from $232,000 for the nine months ended
September 30, 2000 to $235,000 for the nine months ended September 30, 2001.

     OTHER INCOME AND EXPENSE. Other income and expense includes interest income
and interest expense, gains and losses on foreign exchange transactions and
export development grants paid to our subsidiary, Brilliant Interactive Ideas
Pty. Ltd., by the Australian Trade Commission for its participation in certain
export activities. Other income and expense decreased from income of $266,000 in
the nine months of 2000 to a loss of $117,000 in the nine months of 2001. The
decrease is primarily due to a reduction of $63,000 for the export grant and a
reduction in interest income due to lower cash balances plus the addition of
discounted debt expense attached to the financing package.

     NET LOSS ON DISCONTINUED OPERATIONS. The Auction Channel has been accounted
for as a discontinued operation in fiscal 2001 pursuant to Management's formal
adoption on December 31, 2000 of a plan to dissolve the business unit.
Substantially all of the net assets were sold and the business unit has been
dissolved.

     Operating results of this discontinued operation, a gain of $313,000 for
the nine months ended September 30, 2001, are shown separately in the
accompanying income statement. Losses in the first quarter of 2001 were offset
in the second quarter by the gain on the sale of substantially all of the assets
of The Auction Channel to Metro Channels, LLC. The income statement for the nine
months ended September 30, 2000 has been restated to conform to the current
year's presentation. Included in the loss of the discontinued operation is an
amortization expense for the nine months ended September 30, 2000 comprised of
amortization of goodwill of $876,000, software technology of $60,000 and
customer database of $24,000, all attributable to the purchase of Trojan
Television Limited in July 1999. Due to an impairment of goodwill, the amount
was written down by $4,189,000 at December 31, 2000, reducing the balance to
zero. We sold substantially all of the assets of The Auction Channel on April
30, 2001 and the New York and London offices ceased to operate.

LIQUIDITY AND CAPITAL RESOURCES

     As of September 30, 2001, our principal source of liquidity was
approximately $562,000 in cash, which we primarily raised through the sale of
Secured Convertible Promissory Notes and related Common Stock Purchase Warrants.
See Note 6 to the Financial Statements.


                                    Page 14
<PAGE>


     Net cash used in operating activities during the nine months ended
September 30, 2001 was primarily attributable to a net loss from continuing
operations of $4,916,000, with a net gain due to discontinued operations of
$313,000 pertaining principally to the sale of the net assets of The Auction
Channel. Cash used in financing activities for the year was for the repayment of
notes for the financing of office furniture and computer equipment.

     We are required as of September 30, 2001 to make minimum payments of
$37,000 under various licensing agreements. At September 30, 2001, we had rental
commitments for our offices and production facilities of $257,000 and two
promissory notes for the financing of fixed assets in the amount of $98,000
payable over the next 3 years.

     Our operations generated a negative cash flow during the years ended
December 31, 1999 and 2000 and the nine months ended September 30, 2001. We
expect a significant use of cash during the coming months of 2001 to fund our
operations, and as we continue to develop our software tools and continue our
marketing efforts for our tools and 3D animated content. We will require
additional equity or debt financing during 2001, the amount and timing of which
depend in large part on our spending program. If additional funds are raised
through the issuance of equity securities, our stockholders may experience
significant dilution. Furthermore, there can be no assurance that additional
financing will be available when needed or that if available, such financing
will include terms favorable to our stockholders or us. If such financing is not
available when required or is not available on acceptable terms, or if we do not
receive sufficient financing, we may (i) liquidate assets, (ii) seek or be
forced into bankruptcy, and/or (iii) continue operations, but incur material
harm to our business, operations or financial condition. Please see "Cautionary
Statements and Risk Factors - If we are unable to raise additional funds, we may
be required to delay implementation of our business plan and reduce overhead
significantly."

ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES

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


                                    Page 15
<PAGE>


ACCOUNTING GUIDANCE FOR REVENUE RECOGNITION FOR SOFTWARE TRANSACTIONS

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

NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

     In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, BUSINESS COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001.


                                    Page 16
<PAGE>


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

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

     The Company had no previous transactions that resulted in the recognition
of goodwill. The adoption of SFAS 141 and SFAS 142 had no material affect on the
Company's financial results.

     SFAS 143, Accounting for Asset Retirement Obligations, was issued in June
2001 and is effective for fiscal years beginning after June 15, 2002. SFAS 143
requires that any legal obligation related to the retirement of long-lived
assets be quantified and recorded as a liability with the associated asset
retirement cost capitalized on the balance sheet in the period it is incurred
when a reasonable estimate of the fair value of the liability can be made.

     SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
was issued in August 2001 and is effective for fiscal years beginning after
December 15, 2001. SFAS 144 provides a single, comprehensive accounting model
for impairment and disposal of long-lived assets and discontinued operations.

     SFAS 143 and SFAS 144 will be adopted on their effective dates, and
adoption is not expected to result in any material effects on theCorporation's
Company's financial statements.

CAUTIONARY STATEMENTS AND RISK FACTORS

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

     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 September 30, 2001 we had an accumulated deficit of $53.1
million. Additionally, as of the date of this report, our current liabilities
exceed our current assets. We have not achieved profitability and expect to
continue to incur operating losses for the


                                    Page 17
<PAGE>


foreseeable future as we fund operating and capital expenditures in the areas of
tools development, brand promotion, content development sales and marketing, and
operating infrastructure. Our business model assumes that consumers and
advertisers will be attracted to our MultipathTM Movies, animated music videos
and rich media advertising formats (Brilliant Banners), and that animators and
those who produce banner ads will use our b3d tools and technology in the
development of other b3d-produced content. This business model is not yet proven
and we cannot assure you that we will ever achieve or sustain profitability or
that our operating losses will not increase in the future or be inconsistent
with the expectations of the public market.

     IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DELAY
IMPLEMENTATION OF OUR BUSINESS PLAN, REDUCE OVERHEAD SIGNIFICANTLY OR SUSPEND
OPERATIONS. 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 cannot raise additional capital on
terms favorable to us, we will have to reduce our costs by delaying, canceling,
suspending or scaling back product development and marketing programs,
downsizing our work force and selling or consolidating our operations. These
measures could materially limit our ability to market our tools technology to
developers, websites and advertisers and may not decrease our costs enough to
permit us to operate profitability, or at all. Additionally, if we are not able
to raise additional financing or if such financing is not available on
acceptable terms, we may (i) liquidate assets, (ii) seek or be forced into
bankruptcy and/or (iii) continue operations, but incur material harm to our
business, operations or financial condition.

     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.

     We will be in default under our Secured Convertible Promissory Notes with
Harris Toibb, Europlay 1, LLC and Preston Ford, Inc., entered into in May 2001,
if we generally do not pay or become unable to pay our debts as such debts
become due. If this default occurs, all outstanding amounts owed to the lenders
would immediately become due and payable. If this debt becomes due before its
stated maturity in November 2002, we may not have sufficient funds to repay the
outstanding amounts, which will enable the lenders to exercise all of their
rights and remedies, including foreclosure on our assets which we pledged as
collateral to secure repayment of the debt.

     OUR BUSINESS MODEL CONTEMPLATES RECEIVING A SIGNIFICANT PORTION OF OUR
FUTURE REVENUES FROM RICH MEDIA INTERNET ADVERTISEMENTS DEVELOPED AND SERVED
USING OUR SOFTWARE TOOLS AND FROM INTERNET ADVERTISING SERVICES. INTERNET
ADVERTISING IS DEPENDENT ON THE ECONOMIC PROSPECTS OF ADVERTISERS AND THE
ECONOMY IN GENERAL AND RECENTLY HAS EXPERIENCED A SIGNIFICANT DECLINE. A
CONTINUED DECREASE IN EXPENDITURES BY ADVERTISERS OR A PROLONGED DOWNTURN IN THE
ECONOMY COULD CAUSE US TO FAIL TO ACHIEVE OUR REVENUE PROJECTIONS. We are
increasing our emphasis on generating revenues from the sale of our b3d tools
for the creation of rich media Internet advertisements and from the sale of
technologies and services to Web publishers, third party advertising
representation firms, advertisers and agencies. In recent quarters, the market
for Internet advertising has experienced lower demand, lower prices for
advertisements and the reduction of marketing and advertising budgets. As a
consequence, expenditures for Internet advertisements have decreased. We cannot
be certain that future decreases will not occur and that spending on Internet
advertisement will return to historical levels. A continued decline in the
economic prospects of advertisers or the economy in general could cause us to
fail to achieve our advertising-related revenue projections.


                                    Page 18
<PAGE>


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

     o    Acceptance of the Brilliant Banner advertising format by websites;

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

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

     OUR FAILURE TO MAINTAIN STRATEGIC RELATIONSHIPS WITH DISTRIBUTION PARTNERS
COULD REDUCE THE NUMBER OF DIGITAL PROJECTORS WE ARE ABLE TO DISSEMINATE TO
CONSUMERS, WHICH WOULD REDUCE THE NUMBER OF USERS THAT ARE ABLE TO VIEW OUR
MEDIA CONTENT AND DECREASE THE VALUE OF OUR BRILLIANT BANNERS TO ADVERTISERS. We
recently began distributing our Digital Projector through two large peer-to-peer
networks, StreamCast Networks, Inc and Consumer Empowerment. We rely on these
networks to increase the installed base of our Digital Projector, which is
necessary to view b3d-produced content, including our Brilliant Banners. Our
business, results of operations and financial condition could be materially
adversely affected if we do not maintain these relationships on acceptable terms
or if these relationships do not achieve the projected distribution of our
Digital Projector.

     Additionally, since we depend on these networks for our success, we are
subject to the risks that our partners may go out of business, sell parts or all
of their assets, demand that we renegotiate our arrangements with them to
include new terms less favorable to us, or terminate their relationship with us.

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

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


                                    Page 19
<PAGE>


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

     WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH MICROSOFT, REAL NETWORKS AND
OTHER COMPANIES IN THE MEDIA DELIVERY MARKET. The market for software and
services for the delivery of media over the Internet is constantly changing and
highly competitive. Companies such as Microsoft Corporation and Real Networks,
Inc. have substantial penetration in the media delivery market, and
significantly greater resources than us to continue to grow their business in
this area. More companies are entering the market for, and expending increasing
resources to develop, media delivery software and services. We expect that
competition will continue to intensify. The other components of our business,
such as our music videos, Brilliant Banners and MultipathTM Movies, as well as
the demand by animators for our b3d tools in their production of 3D animated
content, depends in large part on a substantial user base of our Digital
Projector, which is the media player that must be used to view b3d enabled
content. If we do not achieve a widespread distribution of our media player,
there will not be substantial demand for b3d-produced content.

     IF WE DO NOT IMPROVE OUR SOFTWARE TOOLS TO PRODUCE NEW, MORE ENHANCED 3D
ANIMATED CONTENT, OUR REVENUES WILL BE ADVERSELY AFFECTED. The software tools
that enable us to create MultipathTM Movies, animated music videos, Brilliant
Banners and other 3D animated content have been developed over the past five
years. Additional refinement of these tools is necessary to continue to enhance
the b3d format. If we cannot develop improvements to these software tools, our
MultipathTM Movies, animated music videos, Brilliant Banners and all other
b3d-produced content may not obtain or maintain market acceptance and our
revenues will be adversely affected.

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

     TO DEVELOP PRODUCTS THAT CONSUMERS DESIRE, WE MUST MAKE SUBSTANTIAL
INVESTMENTS IN RESEARCH AND DEVELOPMENT TO KEEP UP WITH THE RAPID TECHNOLOGICAL
DEVELOPMENTS THAT ARE TYPICAL IN OUR INDUSTRY. The entertainment software market
and the PC industry are subject to rapid technological developments. To develop
products that consumers desire, we must continually improve and enhance our
existing products and technologies and develop new products and technologies
that incorporate these technological developments. We cannot be certain that we
will have the financial and technical resources available to make these
improvements. For instance, for the nine months ended September 30, 2001, we
reduced our expenditures on research and development by $1.4 million as compared
to the same period in 2000, due primarily to our capital constraints. We must
make improvements to our technology while remaining competitive in terms of
performance and price.


                                    Page 20
<PAGE>


This will require us to make substantial investments in research and
development, often times well in advance of the widespread release of the
products in the market and any revenues these products may generate.

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

     Additionally, since we depend on our strategic partners for our success, we
are subject to the risks that our partners may go out of business, or demand
that we renegotiate our arrangements with them to include new terms less
favorable to us.

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

     o    variations in quarterly operating results;

     o    the gain or loss of significant contracts;

     o    changes in management;

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

     o    recommendations by securities industry analysts;

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

     o    short sales and hedging of our common stock.

     Additionally, the stock market has experienced extreme price and trading
volume fluctuations that have affected the market price of securities of many
technology companies. These fluctuations have, at times, been unrelated to the
operating performances of the specific companies whose stock is affected. The
market price and trading volume of our stock may be subject to these
fluctuations.

     IF OUR STOCK DOES NOT SUSTAIN A SIGNIFICANT TRADING VOLUME, STOCKHOLDERS
MAY BE UNABLE TO SELL LARGE POSITIONS IN OUR COMMON STOCK. In the past, our
common stock has not experienced significant trading volume on a consistent
basis and has not been actively followed by stock market analysts. The average
trading


                                    Page 21
<PAGE>


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;

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

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

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

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

     WE WILL NOT BE ABLE TO GENERATE REVENUES IF OUR MULTIPATHTM MOVIES AND B3D
TOOLSET DO NOT ACHIEVE MARKET ACCEPTANCE. Each MultipathTM Movie is an
individual artistic work, and its ability to generate revenues primarily will be
determined by consumer reaction, which is unpredictable. To generate revenues,
we must develop stories and characters that capture the attention and
imagination of consumers and license recognized characters and properties from
third parties for use in our MultipathTM Movies. We cannot be certain that we
will be able to do so profitably. Additionally, our b3d toolset may have
programming errors, may be incompatible with other software or hardware products
in the market, may face slow adoption in the marketplace and may face
competition from other toolmakers. Other factors that influence our ability to
generate revenues from our MultipathTM Movies and the b3d toolset include:


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

     o    our marketing strategies;

     o    the quality of our products and competing products;

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

     o    critical reviews;

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

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

     o    our 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.

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

     THIRD PARTY WEB SITES AND THE LICENSORS FROM WHOM WE OBTAIN RIGHTS TO OUR
STORIES AND CHARACTERS MAY CAUSE THE DELAY OF THE RELEASE OF OUR PRODUCTS, WHICH
MAY RESULT IN LOWER REVENUES THAN ANTICIPATED. Our distribution relationships
with third party web sites and our licensing arrangements with companies that
own the stories or characters used in many of our MultipathTM Movies and music
videos, contain potentially burdensome provisions. These provisions may affect
our ability to release our products, which would adversely affect our revenues,
for a number of reasons, such as:

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

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


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<PAGE>


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

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

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

     WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE
PRICE OF OUR COMMON STOCK. Our adoption of a stockholders' rights plan, our
ability to issue up to 700,000 shares of preferred stock and some provisions of
our certificate of incorporation and bylaws and of Delaware law could make it
more difficult for a third party to make an unsolicited takeover attempt of us.
These anti-takeover measures may depress the price of our common stock by making
third parties less able to acquire us by offering to purchase shares of our
stock at a premium to its market price. Our board of directors can issue up to
700,000 shares of preferred stock and determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by our stockholders. Our board of directors could
issue the preferred stock with voting, liquidation, dividend and other rights
superior to the rights of our common stock. The rights of holders of our


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common stock will be subject to, and may be adversely affected by, the rights of
holders of the share purchase rights and of any preferred stock that may be
issued in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could make it more difficult for a third party to acquire a majority
of our outstanding voting stock.


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<PAGE>


                                     PART II

                                OTHER INFORMATION

ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS

     In July 2001, we issued to each of Russell Simmons and Stan Latham 200,000
shares of our common stock in exchange for a 25% ownership interest in Digital
Hip Hop, LLC, which transaction was valued at $264,000. 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 July 2001, we issued to Adam Townsend 9,000 shares of our common stock
for sales consulting services provided by Mr. Townsend, which services were
valued at $5,940. 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 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At our 2001 Annual Meeting of Stockholders held on August 10, 2001, our
stockholders elected Ray Musci, Jeff Scheinrock and Mark Miller to serve as our
Class II directors for three years and until their successors have been elected.

     Ray Musci and Mark Miller were elected by a vote of 9,881,653 shares in
favor of, and 39,358 shares withheld from voting for, the election of these
directors. Jeff Scheinrock was elected by a vote of 9,881,138 shares in favor
of, and 39,873 shares withheld from voting for, the election of this director.

     Subsequent to the 2001 Annual Meeting of Stockholders, on August 20, 2001,
the Board of Directors appointed Russell Simmons as one of our Class II
directors, to fill the vacancy in Class II directors that existed at the time of
his appointment.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

            Exhibits.

                     None

            (b)      Reports on Form 8 K

                     None


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                                   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: November 13, 2001                /S/ ROBERT CHMIEL
                                       ----------------------------------------
                                       By:    Robert Chmiel
                                       Its:   Chief Operating Officer and Chief
                                              Financial Officer (Principal
                                              Financial and Accounting Officer)


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