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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, 2005

[_]      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 001-14480

                      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.)

                         14011 VENTURA BLVD., SUITE 501
                         SHERMAN OAKS, CALIFORNIA 91423
                    (Address of Principal Executive Offices)

                                 (818) 386-2180
                (Issuer's Telephone Number, Including Area Code)

         Check whether the issuer (i) 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 the 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, 42,857,153 shares issued and outstanding as of May 6, 2005.

         Transitional Small Business Disclosure Format (check one):

                              Yes [_]      No [X]

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<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                              INDEX TO FORM 10-QSB

                                                                            PAGE
                                                                            ----

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

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

          Condensed Consolidated Balance Sheet as of
          March 31, 2005 (unaudited)...........................................3

          Condensed Consolidated Statements of Operations for the three
          months ended March 31, 2005 and March 31, 2004 (unaudited)...........4

          Condensed Consolidated Statements of Cash Flows for the three
          months ended March 31, 2005 and March 31, 2004 (unaudited)...........5

          Notes to Consolidated Financial Statements (unaudited)...............6

Item 2.   Management's Discussion and Analysis or Plan of Operation ..........15

Item 3.   Controls and Procedures.............................................32

PART II   OTHER INFORMATION...................................................33

Item 6.   Exhibits............................................................33

Signatures....................................................................34


                                       2
<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

Item 1.  Financial Statements

                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                 (In thousands)
                                                                       MARCH 31,
                                                                         2005
                                                                       --------
ASSETS                                                               (unaudited)
Current assets:
    Cash and cash equivalents ..................................       $    490
    Restricted cash ............................................             75
    Accounts receivable, net ...................................          1,873
    Prepaid interest ...........................................          1,684
    Other assets, net ..........................................            110
                                                                       --------
Total current assets ...........................................          4,232
Property, plant and equipment, net .............................            103
License Rights .................................................            873
                                                                       --------
Total assets ...................................................       $  5,208
                                                                       ========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
    Accounts payable ...........................................       $    880
    Accrued expenses, related parties ..........................          1,775
    Accrued expenses ...........................................            681
    Guaranteed minimum payments, related party .................            360
    Deferred revenue ...........................................              8
    Secured convertible promissory notes,
      including accrued interest ...............................          3,923
                                                                       --------
Total current liabilities ......................................          7,627
Other long term liabilities ....................................            142
Long-term Guaranteed Minimum Payments, related party ...........             90
                                                                       --------
Total liabilities ..............................................          7,859

Stockholders' deficit:
    Common stock ...............................................             47
    Additional paid-in capital .................................         73,125
    Accumulated deficit ........................................        (75,832)
    Unrealized gain on marketable securities and
    foreign exchange transactions ..............................              9
                                                                       --------
Total stockholders' deficit ....................................         (2,651)
                                                                       --------
Total liabilities and stockholders' deficit ....................       $  5,208
                                                                       ========

                 See Notes to Consolidated Financial Statements.


                                       3
<PAGE>


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

                                                              THREE MONTHS
                                                             ENDED MARCH 31
                                                        -----------------------
                                                          2004           2005
                                                        --------       --------
                                                       (unaudited)   (unaudited)

Revenues:
      Marketing services .........................      $  1,840       $  1,304
      Licensing and other services ...............           543            401
      Digital content ............................           124             92
                                                        --------       --------
           Total revenues ........................         2,507          1,797

Costs and expenses:
     Costs of revenues ...........................           324            144
     Sales and marketing .........................           378            230
     General and administrative ..................         1,599            885
     Research and development ....................           118             82
     Depreciation and amortization ...............            13              3
                                                        --------       --------
                                                           2,432          1,344
                                                        --------       --------
Income (loss) from operations ....................            75            453
Other income (expense):
     Interest expense ............................          (432)        (1,057)
     Interest income .............................             3           --
                                                        --------       --------
     Total other income (expense) ................          (429)        (1,057)
                                                        --------       --------
Net income (loss) ................................          (354)          (604)
Foreign currency translation adjustment
   (net of tax effects) ..........................             1           --
                                                        --------       --------
Comprehensive income (loss) ......................      $   (353)      $   (604)
                                                        ========       ========

Basic and fully-diluted net income (loss)
   per share .....................................      $  (0.01)      $  (0.01)
                                                        ========       ========
Weighted average number of shares used
   in computing basic and fully-diluted
   net income (loss) per share ...................        42,345         42,857
                                                        ========       ========

                 See Notes to Consolidated Financial Statements.


                                       4
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                                               THREE MONTHS
                                                              ENDED MARCH 31,
                                                           --------------------
                                                             2004        2005
                                                           --------    --------
                                                         (unaudited) (unaudited)
OPERATING ACTIVITIES
Net loss .........................................         $   (354)   $   (605)
Adjustments to reconcile net loss to the net cash
   provided by (used in) operating activities:
      Depreciation and amortization ..............               12           3

      Effect of accrued interest expense on
         convertible debt & capital funding ......               75         780

      Effect of warrant amortization related to
         purchase of license rights ..............              174         175
      Changes in operating assets and liabilities:
         Accounts receivable .....................             (358)         47
         Accrued expenses related party ..........             --          (323)
         Other assets ............................              153          12
         Accounts payable and accruals ...........               60         206
         Deferred revenue ........................              (29)        (24)
         Notes receivable ........................               52        --
         Guaranteed minimum payments due to related
            parties ..............................              (90)       (120)
         Other long-term liabilities .............                0        --
                                                           --------    --------
Net cash (used in) provided by operating activities            (305)        152

INVESTING ACTIVITIES
Purchase of equipment ............................              (16)          2
                                                           --------    --------
Net cash used in investing activities ............              (16)          2

FINANCING ACTIVITIES
Repayments of notes payable ......................             --           (35)
                                                           --------    --------
Net cash used in financing activities ............             --           (35)
                                                           ========    ========

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS           (321)        115

Effect of exchange rate changes on cash ..........               13          62

Cash and cash equivalents at beginning of period .              880         313
                                                           --------    --------
Cash and cash equivalents at end of period .......         $    572    $    490
                                                           ========    ========

Supplemental  disclosure of cash flow  information:
Cash paid during the period for:
   Interest ......................................         $   --         $ 148
                                                           ========    ========

                 See Notes to Consolidated Financial Statements.


                                       5
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2005

1.       BASIS OF PRESENTATION, RISKS AND GOING CONCERN UNCERTAINTY

         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,
2004

         The  discussion and analysis of the Company's  financial  condition and
results of  operations  are based upon its  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 the Company 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, the Company evaluates
its  estimates,  including  those  related to  reserves  for bad debts and those
related to the possible  impairment of long-lived  assets. The Company bases its
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.  The Company's use of
estimates,  however, is quite limited, as they have adequate time to process and
record actual results from operations.

         The  Company is subject to a number of risks  similar to those of other
companies  in a  comparable  stage  of  development  including  reliance  on key
personnel,   successful  marketing  of  its  services  in  an  emerging  market,
competition from other companies with greater technical,  financial,  management
and marketing  resources,  successful  development  of new services,  successful
integration of acquired  businesses and technology,  the enhancement of existing
services,  and the  ability  to secure  adequate  financing  to  support  future
operations.

         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


                                       6
<PAGE>


31, 2005, had negative  working capital of approximately  $5,079,000  (excluding
non-cash prepaid expense of $1,684,000  related to the issuance of warrants) and
a  stockholders'  deficit  of  approximately  $2,651,000.  These  factors  raise
substantial doubt about the Company's ability to continue as a going concern. In
its report on the Company's financial statements for the year ended December 31,
2004, the Company's  Independent  Registered  Public Accounting Firm included an
explanatory  paragraph expressing  substantial doubt about the Company's ability
to continue as a going concern.

         The Company is seeking additional  funding.  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.       SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The  consolidated  financial  statements  include  the  accounts of the
Company and majority  owned and  controlled  domestic and foreign  subsidiaries.
Intercompany transactions have been eliminated.

RESTRICTED CASH

         At March  31,  2005,  $75,000  of cash was  pledged  as  collateral  on
outstanding  secured   convertible   promissory  notes  and  was  classified  as
restricted cash on the balance sheet.

REVENUE RECOGNITION

         Under SEC Staff  Accounting  Bulletin  No. 104,  generally  the Company
recognizes  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 the Company's
products  and service  lines,  the Company  establishes  a contract or insertion
order  with its  customers  with  specific  requirements  for a fixed  price,  a
delivery schedule,  and terms for payment.  The Company regularly  evaluates the
collectibility  of its  receivables  based on a combination  of factors.  When a
customer's  account becomes past due, it initiates dialogue with the customer to
determine the cause. If the Company  determines that the customer will be unable
to meet its financial obligations,  due to a bankruptcy filing, deterioration in
the customer's  operating results or financial position or other material events
impacting its business,  the Company records a specific  reserve for bad debt to
reduce the  related  receivable  to the  amount it expects to recover  given all
information presently available.  If circumstances related to specific customers
change,  the  Company's  estimate of the  recoverability  of  receivables  could
materially  change.  At March 31, 2005, the Company had a reserve of $127,000 to
cover several customers from whom collectibility is uncertain.

         The Company's revenues are derived principally from marketing services,
licensing and other services, and digital content revenue.


                                       7
<PAGE>


         Marketing   services   revenues   are  derived  from  paid  search  and
advertising  agreements.  Under the terms of the Company's  agreement with Focus
Interactive,  Inc. (formerly known as The Excite Network, Inc.), a subsidiary of
Ask  Jeeves,  Inc.,  the  Company  is  paid  a  non-refundable  bounty  for  the
installation of a My Search toolbar on an English speaking user's computer,  and
the  Company  is paid a  percentage  of the gross  profit  earned as a result of
clicks on paid  search  results  by any end users of the  toolbar.  The  Company
recognizes revenue as installations are recorded,  and as the gross profit share
of paid searches is reported. The Company derives advertising revenue by selling
advertising  inventory on behalf of Sharman  Networks  Limited in exchange for a
percentage of revenue therefrom. Sharman's clients pay a fee based on a cost per
thousand impressions (CPM) or specified conversions delivered (CPA). The Company
recognizes revenue when the conversions are made or impressions are delivered.

         Licensing   and  other   services   revenues   are  derived   from  the
sub-licensing of the TruNames patent, business development services, and payment
processing  services.  Under  the  terms  of  the  Company's  patent  sublicense
agreement  with Sharman  Networks  Limited,  the Company  recognizes  sublicense
payments as revenue on a monthly basis as earned.  The Company  negotiates  with
third  parties  that desire to enter into a business  transaction  with  Sharman
relating  to the  KMD  application.  The  commission  paid to the  Company  is a
percentage of the gross revenue received by Sharman for each transaction entered
into  based  solely  on  the  Company's  efforts.  Revenue  is  recognized  from
individual  transactions based on the specific terms of the applicable contract,
which may involve (i) a revenue share deal,  (ii) a one-time fee paid at signing
or at some  other  date,  or  (iii) a  combination  of these  two  arrangements.
Non-refundable  advance fees are  amortized  over the life of the contract or as
earned. Revenue share fees are recognized as earned. The Company charges fees to
Sharman  Networks as a percentage of gross sales for the use of Altnet's payment
processing  gateway on the sale of certain  software  applications.  The Company
recognizes this as revenue when the end user pays for the software application.

         Digital  content  revenues  are  derived  from the Altnet  peer-to-peer
business by processing digital media content (music, PC games, software, movies)
for placement on Altnet's peer-to-peer network, and by promoting,  distributing,
and  selling  the  content to end users of the  network.  The Company may charge
clients a processing fee to prepare content for distribution on the network. The
amount of this fee varies  based on the number of files,  the size of the files,
digital encoding costs, and the preparation of collateral  marketing  materials,
such as artwork.  These fees are recognized as the services are  performed.  The
Company charges clients for content promotions on a cost per specified number of
downloaded  files.  A  customer  typically  pre-purchases  an  agreed  number of
downloaded files. The amounts charged vary based on volume and the complexity of
the  campaign.  These fees are  recognized as the download  delivery  levels are
achieved.  The Company  charges clients for content sales based on (a) a revenue
sharing basis where the Company  receives an agreed upon percentage of the sales
price for each transaction, or (b) a combination of revenue share and a cost per
specified  number  of  downloaded  files  The  revenue  from  content  sales  is
recognized when the end user pays for the content and, where relevant,  the file
is downloaded by the end user.


                                       8
<PAGE>


LICENSE RIGHTS

         In October 2002, the Company  entered into a patent  license  agreement
with  Kinetech,  Inc.,  pursuant to which the Company  acquired a license to the
TruNames patent,  and in consideration  for such license,  the Company issued to
Kinetech a warrant to  purchase  up to  5,000,000  shares of common  stock at an
exercise price of $0.001 per share. In July 2003, the Company modified the terms
of the  warrants  with  Kinetech,  to  accelerate  vesting.  As a result  of the
accelerated  vesting and the fact that the Company now  recognizes  revenue on a
monthly basis from  sub-licensing  the TruNames patent,  the Company  determined
that the warrants granted to Kinetech as consideration for the patent rights had
a determinable value. The fair value of the warrants was re-examined at the date
of  modification  and was  based on a  Black-Scholes  model  with the  following
weighted average  assumptions for 2003:  interest rates of 4.5%;  dividend yield
rates of 0; volatility  factors of expected market price of the Company's common
stock of 50%; and the expected  life of the warrants,  or 6 years.  The value of
these  warrants was  determined to be $2,096,000  and will be amortized over the
remaining useful life of the patent license  agreement,  or 3 years.  During the
first three months of 2005,  the Company has recorded  $175,000 of  amortization
expense  related to the patent,  leaving an  unamortized  balance of $873,000 at
March 31, 2005, which is reflected on the balance sheet as License Rights.

         The Company assesses the  recoverability  of long-lived assets whenever
events or changes in business  circumstances indicate that the carrying value of
an asset may not be recoverable.  Annual estimated  amortization expense for the
remaining long-lived asset for each of the five succeeding years is as follows:

                                             Amortization
                           Year                 Expense
                       ------------          ------------

                       2005                       523,000
                       2006                       350,000
                                             ------------
                       Total                 $    873,000
                                             ============

CONCENTRATION OF REVENUE RISK

         For the three  months  ended  March 31,  2005,  the  Company  generated
approximately  100% of its total  revenue  either  directly from Sharman or from
other parties based on activities  dependent upon the  availability of the Kazaa
Media Desktop to computer users.

         For the three months ended March 31, 2005,  Sharman  contributed 27% of
the Company's  revenue,  from content sales,  patent licensing,  advertising and
payment  processing.  Focus Interactive,  Inc.  contributed 73% of the Company's
revenue,  from the  amortization  of a  non-recoupable  signing bonus,  bounties
earned on activated  installations of the My Search toolbar,  and profit sharing
on paid searches via the My Search toolbar.

         Financial   instruments  which  potentially   subject  the  Company  to
concentrations  of credit risk  consist  primarily of accounts  receivable.  The
Company  had  $1,861,197  of  accounts   receivable   from  Focus   Interactive,
representing 99% of the Company's accounts receivable


                                       9
<PAGE>


balance at March 31, 2005. The Company performs credit evaluations and generally
does not require collateral.

         The Company  maintains the majority of its cash and cash equivalents in
one bank in the United States and with one bank in  Australia.  The bank account
maintained in the United States is guaranteed by the Federal  Deposit  Insurance
Corporation  ("FDIC") up to $100,000.  The banking  system in Australia does not
provide the same  guarantees.  At March 31,  2005 the Company had  approximately
$473,000 at the United  States bank,  which was in excess of the FDIC  insurance
limit  and  approximately   $17,000  in  the  Australian  bank,  which  was  not
guaranteed.

3.       RELATED PARTY TRANSACTIONS

         In May 2003,  Altnet  entered  into a license  to use  rights to Joltid
Ltd.'s Content Distribution Environment peer-to-peer computer program,  commonly
referred to as  PeerEnabler.  In exchange for the license,  Altnet agreed to pay
Joltid a guaranteed  monthly fee of $30,000  based on a  percentage  of revenues
earned  from the  exploitation  of the  licensed  rights,  subject  to a maximum
aggregate  amount.  The  Company  has  reflected  the  current  portion  of  the
guaranteed payment of $360,000 as a current liability.  The company assesses the
recoverability  of  long-lived  assets  whenever  events or changes in  business
circumstances  indicate  that  the  carrying  value  of  an  asset  may  not  be
recoverable.  During the fourth quarter of 2003, in connection with this review,
the Company  obtained an independent  valuation to assist them in evaluating the
Company's  intangible  assets for  impairment  in  accordance  with FAS 144.  An
impairment loss is recognized when the sum of the expected  undiscounted  future
net cash flows over the remaining  useful life, is less than the carrying amount
of the asset.  Prior to the impairment  evaluation the Company  capitalized  and
reflected on its balance sheet an asset;  Purchased  Technology  associated with
our purchase of additional  shares of our Altnet  subsidiary  from Joltid.  As a
result of the independent  evaluation of these assets,  the Company  recorded an
impairment  charge of $1,484,000  during the fourth quarter of 2003. The Company
paid Joltid  $90,000 for services  provided  during the three months ended March
31, 2005, and had an outstanding trade payable to them of $19,176.

         The Company  entered into a Patent  Sublicense  Agreement with Sharman,
the distributor of the Kazaa Media Desktop file sharing software application (or
KMD). Pursuant to the Patent Sublicense Agreement, the Company granted Sharman a
limited,  non-exclusive  sublicense  to the  Company's  rights  to the  TruNames
patent, which the Company licenses from Kinetech Inc. The TruNames 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.  As  consideration  for the sublicense,  the Company
will receive from Sharman a monthly license fee. Additionally, in June 2003, the
Company and Altnet entered into a Joint  Enterprise  Agreement with Sharman,  to
act  as  its  exclusive  representative  for  the  sale,  license  and/or  other
commercial  exploitation  of index  search  results  displayed  on or  otherwise
accessed  using the KMD in response to end user search  requests.  The agreement
also granted the Company a  non-exclusive  right to enter into  agreements  with
third parties to provide for the  establishment  of one or more browse  channels
within the KMD that enable  users to find and  download  rights-managed  content
from the relevant  browse channel in a single click process,  and to provide for
all the terms and conditions governing the management, maintenance, operation,


                                       10
<PAGE>


and other elements of each browse  channel.  The Company shall share in revenues
derived  from the browse  channels.  As of March 31,  2005,  the  Company has an
outstanding accounts payable balance to Sharman of $908,000, which is classified
on the Balance sheet as Accrued Expenses Related Parties.

         As of March  31,  2005,  the  Company  has an  outstanding  balance  to
Europlay Capital Advisors,  LLC of $867,000,  which is classified on the balance
sheet as Accrued Expenses Related Parties.

4.       SIGNIFICANT AGREEMENTS

SECURED CONVERTIBLE PROMISSORY NOTES

         At March 31, 2005, the Company was indebted to its secured debt holders
in the amount of $3,923,000,  which indebtedness is due and payable on September
26, 2005. The principal and accrued  interest is convertible by the holders into
the  Company's  common  stock  at a price  of $0.07  per  share,  for a total of
56,042,857  shares of common stock at March 31, 2005.  In  connection  with this
financing,  the note holders received warrants to purchase up to an aggregate of
73,787,613  shares of  common  stock at a  current  exercise  price of $0.07 per
share.

         In  connection  with the  extension of the maturity  date of our senior
secured  notes,  the Company  agreed to make the following  payments to the note
holders in repayment of the  indebtedness:  (i) $50,000 per month, plus (ii) 50%
of any quarterly  EBITDA in excess of $600,000,  plus (iii) 50% of any increased
revenue  received  from  existing  sources  of  revenue  or from new  sources of
revenue.

5.       STOCKHOLDERS' DEFICIT

         Options and warrants  representing  common  shares of  144,950,848  and
139,367,564  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,  2005  and  2004,  respectively,   because  they  were
anti-dilutive.

6.       COMMITMENTS AND CONTINGENCIES

         The Company  continues its obligation under two facility leases.  As of
March 31, 2005, the commitments under these leases were as follows:

                                      UNITED
                  YEAR                STATES            AUSTRALIA
                  ----              ----------          ---------
                  2005              $  14,000           $   4,500
                                    ----------          ---------
                                    $  14,000           $   4,500
                                    ==========          =========

         Rent  expense was $37,000 and $20,000 for the three  months ended March
31, 2004 and 2005, respectively.

         In March  2004,  in the  Federal  Court of  Australia,  New South Wales
District  Registry,  Brilliant  Digital  Entertainment,  Inc., its  subsidiaries
Altnet  Inc.  and  Brilliant  Digital  Entertainment  Pty.  Limited,  and  Kevin
Bermeister and Anthony Rose, the Chief Executive


                                       11
<PAGE>


Officer and Chief Technology Officer, respectively, were joined as defendants in
the suit by Universal  Music Australia Pty. Ltd. and other record labels against
Sharman  Networks  Limited and other  defendants,  alleging  infringement of the
copyright in sound  recordings  controlled  by the  plaintiffs.  The  plaintiffs
allege  that  due to the  Company's  business  dealings  with  Sharman  Networks
Limited,  the Company is integrally involved in the operation of the Kazaa Media
Desktop and therefore liable for the alleged copyright  infringement  occasioned
by its  development and  distribution.  The plaintiffs are seeking damages under
the  Australian  Copyright Act of 1968,  recovery of costs and  interest,  and a
permanent   injunction   restraining   the  Company   from  making   copies  of,
communicating to the public,  or distributing  the Plaintiff's  sound recordings
without a license. The Company believes these allegations are without merit, and
intends to vigorously defend against these claims.

         In September 2004,  through its subsidiary  Altnet, the Company filed a
civil lawsuit in the United States District Court Central District of California
against  a number  of  companies  and  organizations,  including  the  Recording
Industry  Association of America,  alleging the breach of the "TruNames"  patent
which the  Company  licenses  from  Kinetech,  Inc.  In that  filing the Company
alleges  that  some  of  the  defendants  infringe  on  the  patent  to  "spoof"
peer-to-peer  users with bogus or  corrupted  media  files,  which  inhibits the
growth of  peer-to-peer  for legitimate file sharing and thereby has injured the
Company's business.

7.       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
35,000,000,  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 maximum
number of shares of Common Stock with respect to which  options or rights may be
granted under the 1996 Plan to any executive or other employee during any fiscal
year is one-half of the number of shares reserved for issuance under the amended
1996 Plan  Although any award that was duly granted may  thereafter be exercised
or settled in accordance with its terms, no shares of Common Stock may be issued
pursuant to any award made after September 13, 2006.  Options granted  generally
have a term of 10 years  and  usually  vest  over 4 years at the rate of 25% per
year beginning on the first day in the year subsequent to the year of the grant.

         The Company  accounts  for  employee  stock  options or similar  equity
instruments  in  accordance  with  Statement of Financial  Accounting  Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS
No. 123 defines a  fair-value-based  method of  accounting  for  employee  stock
options or similar equity instruments. This statement gives entities a choice to
recognize related  compensation  expense by adopting the fair-value method or to
measure   compensation   using  the  intrinsic  value  method  under  Accounting
Principles  Board  (APB)  Opinion  No. 25, the  former  standard.  If the former
standard  for  measurement  is  elected,  SFAS  No.  123  requires  supplemental
disclosure to show the effect of


                                       12
<PAGE>


using the new measurement criteria.  The Company uses the intrinsic value method
prescribed by APB Opinion No. 25.

         These pro forma amounts may not be representative of future disclosures
since the  estimated  fair value of the options is amortized to expense over the
options' vesting periods.  The pro forma effect on net loss for the three months
ended March 31, 2005 and 2004 is not  representative  of the pro forma effect on
net loss in future periods  because it reflects  expense for only  three-months'
vesting.   Pro  forma   information  in  future  years  will  also  reflect  the
amortization of any stock options granted in succeeding years. The Company's pro
forma information is as follows:

                                                          THREE MONTHS ENDED
                                                               MARCH 31,
                                                      -------------------------
                                                        2004             2005
                                                      ---------       ---------
Net loss, as reported ..........................      $(354,000)      $(604,000)
Employee compensation expense ..................      $ (41,000)      $ (19,000)
Net loss, pro forma ............................      $(395,000)       (623,000)
Basic and diluted loss per share, as reported ..      $   (0.01)      $   (0.01)
Basic and diluted loss per share, pro forma ....      $   (0.01)      $   (0.01)

         The fair value of the options as examined at the date of grant is based
on a  Black-Scholes  model with the following  weighted-average  assumptions for
2005 and 2004, respectively: interest rates of 4.5% and 5.5%; dividend yields of
0% for both  years;  volatility  factors  of the  expected  market  price of the
Company's common stock of 50.0% and 50.0%; and expected life of the options of 3
years for both years.  These  assumptions  resulted in a weighted  average  fair
value of $0.06 per share for stock options granted in 2004.

         The  Black-Scholes  model was developed for use in estimating  the fair
value of traded  options.  The  Company's  employee  stock options have not been
traded. In addition,  the assumptions used in option valuation models are highly
subjective,  particularly  the expected stock price volatility of the underlying
stock.  Because  changes in these  subjective  input  assumptions can materially
affect the fair value estimate,  in management's opinion, the existing models do
not provide a reliable  single  measure of the fair value of its employee  stock
options.

8.       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 are a summary of 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.


                                       13
<PAGE>


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, 2005.

         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  minimal.
Accordingly,  the Company has no liabilities recorded for these agreements as of
March 31, 2005.

9.       SUBSEQUENT EVENTS

         On April 28,  2005,  the Company  amended its  Strategic  Alliance  and
Distribution  Agreement  with Focus  Interactive,  Inc.  (formerly  known as The
Excite Network, Inc.), a subsidiary of Ask Jeeves, Inc., to, among other things,
modify the royalty and other economic  terms of the  agreement,  provide for the
payment by Focus of an additional  advance  against  future  royalties and other
payments,  and extend the term of the  agreement  for an  additional  year.  The
agreement now expires on July 26, 2006, unless terminated  earlier in accordance
with its terms.

         In May 2005, the Company's  Board of Directors  resolved to exercise an
option to purchase  from Joltid  Ltd.,  1,102,500  shares of common stock of its
subsidiary,  Altnet Inc.  Upon  acquisition  of these  shares from  Joltid,  the
Company will own 100% of the  outstanding  capital stock of Altnet.  In exchange
for the Altnet shares, the Company will issue to Joltid, 7,000,000 shares of the
Company's common stock.


                                       14
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         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, 2004 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, 2005 AND
MARCH 31, 2004. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS
MANAGEMENT'S  DISCUSSION  AND ANALYSIS OR PLAN OF OPERATION 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, through our
Altnet, Inc.  subsidiary,  operates a  peer-to-peer-based  content  distribution
network that allows us to securely and efficiently  distribute a content owner's
music,  video,  software  and  other  digital  files to  computer  users via the
Internet.  Using internally developed and licensed  technology,  we have created
technologies for a private, or "closed" peer-to-peer network, which allows us to
centrally  control the distribution of a digital file, with  authorization  from
the copyright  owner,  directly from one computer user (peer) to another (peer).
Our ability to control files  distributed over our private  network,  as well as
our use of widely available digital rights management (or DRM) technologies from
Microsoft Corporation, TryMedia Systems, Softwrap Limited and others prevent the
distribution of unauthorized  files over our network and help to protect against
the  unauthorized  use of a  digital  file  once  it  resides  on an end  user's
computer.  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 over the Altnet network.
We also operate a payment  processing  "gateway" that enables  computer users to
purchase content distributed over our network.

         We own 75.5% of the outstanding  capital stock of Altnet and manage all
of its day-to-day operations,  and the remaining 24.5% is owned by Joltid, Ltd.,
the company from whom we license a substantial portion of Altnet's  peer-to-peer
technology.  We increased  our ownership of Altnet from 51% to the present 75.5%
in May 2003,  when we acquired  1,102,500  shares of Altnet's  common stock from
Joltid in exchange for 7,000,000  shares of  Brilliant's  common stock.  We also
issued to Joltid 1,000,000  shares of Brilliant's  common stock as consideration
for an option to purchase Joltid's remaining shares of Altnet. The option, which
expires in May 2005, entitles us to purchase Joltid's remaining 1,102,500 shares
of Altnet common stock in exchange for 7,000,000  shares of  Brilliant's  common
stock.  In May 2005, our Board of Directors  resolved to exercise the option and
acquire Joltid's remaining interest in Altnet. Prior


                                       15
<PAGE>


to these  transactions,  we received 51% of the  outstanding  capital  stock and
Joltid,  Ltd.  received 49% of the capital stock.  Neither party was required to
make a capital  contribution in connection with the formation of Altnet.  At the
time of the  transaction,  the only  significant  asset  owned by Altnet was its
technology.

         Our revenues are derived principally from marketing services, licensing
and other services, and digital content revenue.

         Marketing   services   revenues   are  derived  from  paid  search  and
advertising  services.  Under the terms of our agreement with Focus Interactive,
Inc. (formerly know as The Excite Network, Inc.), now owned by Ask Jeeves, Inc.,
we are paid a  non-refundable  bounty  for the  installation  of each My  Search
toolbar  bundled for  distribution  with our Altnet Loyalty Points Manager on an
English  speaking  user's  computer,  and we are paid a percentage  of the gross
profit  earned as a result of clicks on paid search  results by any end users of
these toolbars. We recently announced an online advertising revenue-sharing fund
that  will  be  split  with  top  independent  labels  including  V-2,  Artemis,
Epitaph/Anti,  Side One Dummy  and Palm,  Simmons/Latham,  and Koch  Media,  all
Altnet  music  licensors.  These  labels will share the revenue  generated  from
advertising  that  appears  in the  user  interface  of  popular  Peer  to  Peer
applications.  The fund will be split  proportionately based on content licenses
issued  whether  the music  content is offered for sale,  trial or for free.  In
exchange for services performed by us we will receive a fee from the fund.

         Licensing and other  services  revenues are derived from our sublicense
of rights to the TruNames patent,  business  development  services,  and payment
processing  services.  Under the terms of our patent  sublicense  agreement with
Sharman Networks,  we recognize sublicense revenue on a monthly basis as earned.
We negotiate with third parties that desire to enter into a business transaction
with  Sharman  Networks  relating to the Kazaa Media  Desktop (or KMD)  software
application.  We receive a percentage of the gross  revenue  received by Sharman
Networks for each transaction  entered into based solely on our efforts. We also
generate fees from processing payments for the purchase of digital content using
the Altnet  payment  processing  gateway.  In early  February  2005,  we stopped
processing  payments  for  Kazaa  Plus for  which we were  receiving  a  payment
processing fee.

         Digital  content  revenues are derived from  processing  digital  media
content  (music,  PC  games,  software,  movies)  for  placement  on our  Altnet
peer-to-peer network, and by promoting, distributing, and selling the content to
end users which we access via our Internet  affiliates.  We may charge clients a
processing fee to prepare content for distribution on the network. The amount of
this fee  varies  based on the number of files,  the size of the files,  digital
encoding costs, and the preparation of collateral marketing  materials,  such as
artwork. We charge clients for content promotions on a cost per specified number
of downloaded files. The amounts charged vary based on volume and the complexity
of the campaign.  We charge clients for content sales based on a revenue sharing
basis  where we receive an agreed  upon  percentage  of the sales price for each
transaction or a combination of revenue share and a cost per specified number of
downloaded files.


                                       16
<PAGE>


SIGNIFICANT CHALLENGES AND RISKS

         Our future success will depend on our ability to overcome the following
operational challenges:

         o        Our ability to acquire  in-demand content from independent and
                  major musical recording and filmed entertainment companies;

         o        Our  ability  to  diversify   our  reliance   upon  one  large
                  distribution partner, Sharman Networks Limited;

         o        Our ability to increase  revenue from our core  business - the
                  distribution of content over the Altnet network;

         o        Our  ability to raise the  funding  necessary  to support  the
                  sales,  marketing,  and research and development  necessary to
                  grow the Altnet business;

         o        Our ability to either pay or restructure  our secured debt and
                  unsecured trade payables; and

         o        Our ability to fund litigation in which Altnet is involved.

         We intend to continue to aggressively  pursue content  acquisition with
both  the  major  and  smaller   independent   musical   recording   and  filmed
entertainment  companies  in order to address our content  needs and to increase
revenue from the  distribution  of content.  To date, our efforts in this regard
have been  hampered  by the  litigation  surrounding  our  largest  distribution
partner, Sharman Networks, over the legality of the KMD. Despite our efforts, we
have been  unable to obtain  download  licenses  for music  files from the major
musical recording  companies,  even though these companies have granted licenses
to our competitors. Several of these musical recording companies have sued us in
the Federal Court of Australia for activities  relating to our business dealings
with Sharman  Networks.  There can be no assurance  that we will be granted such
licenses at any time in the future.

         In order to reduce our reliance on a single large distribution partner,
we will continue to pursue other distribution outlets for our products including
peer-to-peer  application providers seeking to commercialize their applications,
web  sites  with  traffic  seeking  an easy way to manage  content  provisioning
solutions and content  oriented web sites with targeted  traffic seeking to sell
content.

         We intend to  continue  our pursuit of  additional  capital to fund our
expansion  efforts and to pay both our secured debt holders and unsecured  trade
creditors.  At March 31, 2005,  we were  indebted to our secured note holders in
the amount of $3,923,000,  and our trade payables,  including  related  parties,
were  $3,336,000.  We are also  working  with both our secured  debt holders and
certain of our unsecured trade  creditors to restructure  amounts owed them into
long-term arrangements.  There can be no assurance that we will be successful in
raising additional capital to pay these obligations,  or in restructuring  these
obligations to avoid a payment default.

         The accompanying  financial statements have been prepared assuming that
we will continue as a going  concern,  which  contemplates  the  realization  of
assets and the satisfaction of


                                       17
<PAGE>


liabilities in the normal course of business.  The carrying amount of assets and
liabilities  presented in the  financial  statements do not purport to represent
realizable or settlement values. We have suffered recurring operating losses and
at March 31, 2005,  had negative  working  capital of  approximately  $5,079,000
(excluding  non-cash  prepaid  expense of $1,684,000  related to the issuance of
warrants) and a stockholders' deficit of approximately $2,651,000. These factors
raise  substantial  doubt about our ability to continue as a going  concern.  We
anticipate that our current cash reserves,  plus our expected generation of cash
from existing  operations in 2005, may not be sufficient to fund our anticipated
expenditures.  Consequently,  we may require additional equity or debt financing
during  2005,  the amount  and timing of which will  depend in large part on our
spending program. The report of our Independent Certified Public Accountants for
the December 31, 2004 financial  statements  included an  explanatory  paragraph
expressing substantial doubt about our ability to continue as a going concern.

SETTLEMENT AGREEMENT AND MUTUAL RELEASE

         In June 2004, we entered into a Settlement Agreement and Mutual Release
with Big Seven  Entertainment,  LLC, a distributor  of digital  content over the
Altnet network, and Detershan Pty. Ltd. Big Seven is owned by Michael Toibb, the
son of Harris Toibb,  our largest secured  creditor and  stockholder.  Under the
terms of the agreement,  we agreed to acquire from Michael  Toibb,  on or before
the first  anniversary  of the agreement,  all of his ownership  interest in Big
Seven in  exchange  for the  issuance to him of  6,666,667  shares of our common
stock or, in lieu of such issuance, the payment to him of $0.15 in cash for each
such share (for aggregate  proceeds of $1,000,000).  Prior to our acquisition of
Mr. Toibb's  ownership  interest in Big Seven,  we agreed to operate Big Seven's
business and are responsible for all of Big Seven's liabilities and are entitled
to retain  all of its  revenues.  We also  agreed  to  reimburse  Michael  Toibb
$150,000 in legal and professional  fees and pay him a management fee of $15,000
per month until we consummate our  acquisition  of Big Seven.  We also agreed to
indemnify Mr. Toibb for all losses, damages and expenses that may arise from our
operation of Big Seven.

         If we sell Big Seven or any of its assets at any time after the date of
the settlement  agreement and prior to the first  anniversary of consummation of
our  acquisition  of Big Seven,  the proceeds of the sale would be allocated and
paid as follows:  (i) the first  $1,000,000 of such proceeds  would be allocated
and paid to us; (ii) the next $180,000 of such  proceeds  would be allocated and
paid to Michael Toibb;  and (iii) all remaining  proceeds would be allocated and
paid to us.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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


                                       18
<PAGE>


from other  sources.  Actual  results  may differ  from  these  estimates  under
different  assumptions or conditions.  Our use of estimates,  however,  is quite
limited,  as we have  adequate  time to process and record  actual  results from
operations.

         Our  critical  accounting  policies  are  described  in  Note  2 to the
consolidated  financial  statements  included in Item 2 of this Form 10-QSB.  We
believe our most critical accounting policies include revenue  recognition,  the
corresponding  accounts  receivable and long-lived asset impairment.  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.  104 (SAB  104) and  AICPA
Statement  of Position  97-2 (SOP 97-2),  we  recognize  revenue when all of the
following  criteria are met: (1) persuasive  evidence of an arrangement  exists,
(2) delivery has occurred or services have been rendered, (3) the seller's price
to the buyer is fixed or  determinable,  and (4)  collectibility  is  reasonably
assured.  In the case of each of our product and  service  lines we  establish a
contract or insertion order with our customers with specifics for  requirements,
a fixed price, a delivery schedule,  and terms for payment.  Unless cash is paid
in advance,  our  receivables  are  recorded as revenue is earned.  We regularly
evaluate  the  collectibility  of our  receivables  based  on a  combination  of
factors.  When a customer's  account becomes past due, we initiate dialogue with
the customer to determine the cause.  If we determine  that the customer will be
unable to meet its  financial  obligations  to us, due to a  bankruptcy  filing,
deterioration in the customer's operating results or financial position or other
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.

         Long-lived  assets and intangible  assets with  determinable  lives are
reviewed for impairment  quarterly or whenever events or circumstances  indicate
that the carrying  amounts of assets may not be recoverable  in accordance  with
SFAS No. 144,  "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS".
We  evaluate  recoverability  of  assets  to be held and used by  comparing  the
carrying  amount  of an  asset  to  future  net  undiscounted  cash  flows to be
generated  by the asset.  If such  assets are  considered  to be  impaired,  the
impairment  to be  recognized  is measured  as the amount by which the  carrying
amount of the assets  exceeds the fair value of the assets.  Such reviews assess
the fair value of the assets  based upon our  estimates of the future cash flows
we expected  the assets to  generate.  In  response  to changes in industry  and
market conditions,  we may be required to strategically realign our resources in
the future, which could result in an impairment of long lived assets.


                                       19
<PAGE>


RESULTS OF OPERATIONS

         REVENUES.  Revenues  decreased 28% from $2,507,000 for the three months
ended March 31, 2004 to  $1,797,000  for the three  months ended March 31, 2005.
Revenues by groups of similar service were as follows:

             REVENUES                       2004           2005       NET CHANGE
---------------------------------     --------------  --------------  ----------
Marketing services...............         $1,840,000     $ 1,304,000       (29%)
Licensing and other services.....            543,000         401,000       (26%)
Digital content..................            124,000          92,000       (26%)

                                      --------------  --------------  ----------
Total Revenue....................         $2,507,000       1,797,000       (28%)
                                      ==============  ==============  ==========

         Marketing services revenue decreased to $1,304,000 for the three months
ended March 31,  2005  primarily  as a result of a decrease in revenue  from our
agreement with Focus  Interactive,  Inc.  Licensing and other services  revenues
decreased to $401,000  for the three  months ended March 31, 2005 from  $543,000
for the three  months  ended  March  31,  2004,  due to a  decrease  in  payment
processing  revenues as a result of our discontinuation of processing Kazaa Plus
transactions  that occurred in early  February  2005.  Digital  content  revenue
decreased  from  $124,000 for the three months ended March 31, 2004,  to $92,000
for the three months ended March 31, 2005 primarily as a result of a decrease in
software sales through the Altnet Network.

         COST OF  REVENUES.  Cost of revenues  decreased  from  $324,000 for the
three months ended March 31, 2004,  to $144,000 for the three months ended March
31, 2005.  This net decrease of $180,000 is primarily  related to a  substantial
decrease in the costs  associated  with the  operation  of our  payment  gateway
services of $154,000 as a result of our  discontinuation of processing for Kazaa
Plus, a decrease of $14,000  relating to a decrease in production  payroll and a
decrease of $9,000 in web hosting costs.

         SALES AND MARKETING. Sales and marketing expenses decreased by 39% from
$378,000  for the three  months  ended March 31, 2004 to $230,000  for the three
months  ended  March 31,  2005.  The net  decrease  of  $148,000  in 2005 is due
primarily to a reduction in marketing and promotion  costs of $119,000  spent to
support  our  marketing  efforts  for the Altnet  network,  and a  reduction  in
commissions of $28,000.

         GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses
primarily  include  salaries  and  benefits  of  management  and  administrative
personnel,  rent,  insurance  costs,  professional  fees  and  non-cash  warrant
expense.  General and administrative  expenses decreased $714,000,  or 45%, from
$1,599,000  for the three  months ended March 31, 2004 to $885,000 for the three
months ended March 31, 2005. This decrease is primarily  attributable to payroll
related cost savings of $338,000,  decrease in legal costs of $178,000, decrease
of  $41,000  in bad debts and  $50,000  in Public  Relations  costs,  $23,000 in
insurance and $16,000 in rent.

         RESEARCH AND  DEVELOPMENT.  Research and development  expenses  include
salaries and benefits of personnel  conducting research and development relating
to our Internet web site, payment gateway and related information database,  and
the development of the Altnet Peer Points Manager  software  application.  These
costs decreased from $118,000 for the three months


                                       20
<PAGE>


ended March 31, 2004 to $82,000 for the three months  ended March 31,  2005,  as
most of the  development  costs incurred for the  development of our Peer Points
program and our payment gateway have been incurred.

         DEPRECIATION.  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  was $13,000  for the three  months  ended March 31, 2004 as compared to
$3,000 for the three  months ended March 31,  2005,  as many of the  depreciable
assets have been fully depreciated.

         OTHER INCOME AND EXPENSE.  Other income and expense primarily  includes
interest  expense.  Other  income  and  expense  increased  from net  expense of
$429,000  for  the  three  months  ended  March  31,  2004 to a net  expense  of
$1,057,000  for the three months  ended March 31, 2005.  During the three months
ended March 31, 2005,  interest expense included interest accrued on outstanding
convertible  promissory  notes and an  additional  $976,000  of  amortized  debt
issuance costs associated with the agreement to further extend the maturity date
of the indebtedness.

LIQUIDITY AND CAPITAL RESOURCES

         As  of  March  31,  2005,  our  cash  and  cash   equivalents   totaled
approximately  $490,000. This is an increase of $115,000 as compared to December
31, 2004. As of March 31, 2005, we had a working  capital  deficit of $5,079,000
(excluding  non-cash  prepaid  expense of $1,684,000  related to the issuance of
warrants).  Included  in this  working  capital  deficit are  accounts  payable,
accrued expenses and accrued expenses to related parties of $1,775,000 which are
over 90 days past due, and $3,923,000 of secured indebtedness.

         Subsequent to March 31, 2005, we received an advance payment from Focus
Interactive,  Inc. in connection  with an extension of our agreement with Focus.
These net proceeds we received comprise our portion of an advance against future
royalties and other payments. The agreement now expires on July 26, 2006, unless
terminated earlier in accordance with its terms.

         We currently satisfy our working capital requirements primarily through
cash flows  generated  from  operations and sales of equity  securities.  We are
seeking additional  funding.  There can be no assurance that with any additional
financing, higher cash flows will be generated by operations.

CASH FLOWS

         Cash flows from operating,  investing and financing  activities for the
three  months  ended March 31,  2005 and 2004 are  summarized  in the  following
table:

ACTIVITY:                                          2004                  2005
------------------------------------            ---------             ---------

Continuing Operations ..............            $(305,000)            $ 152,000
Investing ..........................              (16,000)                2,000
Financing ..........................                 --                 (35,000)


                                       21
<PAGE>


         During the three  months  ended March 31, 2005 we had a net increase in
cash of $115,000.  The net increase in cash from operating activities during the
three  months ended March 31, 2005 was  primarily  the result of the net loss of
$604,000, a decrease of $120,000 in guaranteed minimum payments,  and a $323,000
decrease in accrued expenses. These amounts were offset primarily by $780,000 in
non-cash  interest  expense,  $175,000 in non-cash  warrant  amortization and an
increase of $206,000 in accounts payable and accrued expenses.

         At March 31, 2005, 99% of the accounts  receivable was outstanding from
a single  customer.  Cash necessary to fund operations and for other purposes is
heavily  dependent on the receipts  from this  customer.  If this  customer were
unable to honor its accounts  receivable,  the cash required to fund  operations
and for other purposes would not be available and our financial  condition would
be materially adversely affected.

         We are  not  generating  sufficient  cash  flow  to  meet  our  monthly
obligations and pay our existing  current  liabilities and secured debt which is
due in September 2005. While we have been successful in working with our secured
debt holders to achieve short term extensions, we will continue working with our
secured debt holders and unsecured  creditors to  restructure  our  obligations,
however  there can be no guarantee  that we will be  successful  in our efforts.
Consequently,  we may require  additional  equity or debt financing during 2005,
the amount and timing of which will depend in large part on our spending program
and our success in restructuring our secured debt and current  liabilities.  Our
previous financings have been significantly  dilutive to our stockholders and if
additional  funds are raised  through  the  issuance of equity  securities,  our
stockholders may experience significant additional dilution.  Furthermore, there
can be no assurance that  additional  financing will be available when needed or
that  if  available,   such  financing  will  include  terms  favorable  to  our
stockholders  or us. If such  financing is not available when required or is not
available on acceptable  terms, we may be unable to pay our secured debt holders
as their debt matures or trade creditors under our contractual  terms with them,
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.

         In March  2004,  in the  Federal  Court of  Australia,  New South Wales
District  Registry,  Brilliant  Digital  Entertainment,  Inc., our  subsidiaries
Altnet,  Inc.  and  Brilliant  Digital  Entertainment  Pty.  Limited,  and Kevin
Bermeister and Anthony Rose, our Chief  Executive  Officer and Chief  Technology
Officer, respectively,  were joined as defendants in the suit by Universal Music
Australia  Pty.  Ltd.  and  other  record  labels  against   Sharman  and  other
defendants,   alleging   infringement  of  the  copyright  in  sound  recordings
controlled by the  plaintiffs.  The  plaintiffs  allege that due to our business
dealings with Sharman,  we are integrally involved in the operation of the Kazaa
Media  Desktop  and  therefore  liable for the  alleged  copyright  infringement
occasioned by its  development and  distribution.  While we believe these claims
are without merit, if we are unable to have these charges  dismissed,  defending
against these claims,  and defending  against any other actions brought by these
or  similarly  situated  plaintiffs  in  Australia,  the United  States or other
jurisdictions,  could require a significant  use of cash during 2005 and beyond.
If the legal  expenses  and other  costs of defense  are not  covered for by our
insurance  policies or reimbursed by third parties  pursuant to  indemnification


                                       22
<PAGE>


agreements,  the cash required to pay for these costs and expenses  would not be
available  for other  purposes  and our  results  of  operations  and  financial
condition would be materially  adversely affected.  A decision in this matter is
expected during the second quarter of 2005.

CONTRACTUAL OBLIGATIONS

         At March 31, 2005,  we were indebted to its secured debt holders in the
amount of  $3,923,000,  which  indebtedness  is due and payable on September 26,
2005. The principal and accrued  interest is convertible by the holders into our
common stock at a price of $0.07 per share, for a total of 56,042,857  shares of
common stock at March 31, 2005.  In  connection  with this  financing,  the note
holders received warrants to purchase up to an aggregate of 73,787,613 shares of
common stock at a current exercise price of $0.07 per share.

         In  connection  with the  extension of the maturity  date of our senior
secured notes,  we agreed to make the following  payments to the note holders in
repayment  of the  indebtedness:  (i)  $50,000  per month,  plus (ii) 50% of any
quarterly EBITDA in excess of $600,000,  plus (iii) 50% of any increased revenue
received from existing sources of revenue or from new sources of revenue.

OFF-BALANCE SHEET ARRANGEMENTS

         At March 31,  2005 and  2004,  we did not have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.

NEW ACCOUNTING PRONOUNCEMENTS

         In an effort to expand upon and strengthen existing accounting guidance
that addresses  when a company  should  include in its financial  statements the
assets,  liabilities and activities of another entity, the FASB issued Financial
Interpretation  No. 46,  "Consolidation of Variable Interest Entities" (FIN 46).
Many   variable   interest   entities   have   commonly   been  referred  to  as
special-purpose  entities or  off-balance  sheet  structures,  but the  guidance
applies to a larger  population  of entities.  In general,  a variable  interest
entity is a corporation,  partnership,  trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity  investors  that do not  provide  sufficient  financial
resources for the entity to support its  activities.  The objective of FIN 46 is
not to restrict the use of variable  interest  entities but to improve financial
reporting by companies involved with variable interest entities.  Until now, one
company  generally has included  another  entity in its  consolidated  financial
statements only if it controlled the entity through voting interests. FIN 46 now
requires  a variable  interest  entity to be  consolidated  by a company if that
company is subject to a majority of the risk of loss from the variable  interest
entity's  activities or entitled to receive a majority of the entity's  residual
returns or both.  To further  assist  financial  statement  users in assessing a
company's  risks,  FIN 46 also  requires  disclosures  about  variable  interest
entities that the company is not required to  consolidate  but in which it has a
significant variable interest. The


                                       23
<PAGE>


consolidation  requirements  of FIN 46 apply  immediately  to variable  interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period  beginning  after June
15,  2003.  Certain  of the  disclosure  requirements  apply  in  all  financial
statements  issued  after  January 31,  2003,  regardless  of when the  variable
interest  entity was  established.  The Company  does not have any  interests in
variable interest entities, and, therefore,  the adoption of FIN 46 did not have
a significant impact on our financial position or results of operations.

         In May 2003,  the FASB  issued SFAS No.  150,  "Accounting  for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
No. 150). This Statement affects the classification,  measurement and disclosure
requirements of the following three types of freestanding financial instruments:
1) manditorily  redeemable shares, which the issuing company is obligated to buy
back with cash or other assets; 2) instruments that do or may require the issuer
to buy back  some of its  shares in  exchange  for cash or other  assets,  which
include put options and forward purchase contracts;  and 3) obligations that can
be settled with shares,  the monetary value of which is fixed, or tied solely or
predominantly to a variable such as a market index, or varies inversely with the
value of the issuers'  shares.  In general,  SFAS No. 150 is  effective  for all
financial instruments entered into or modified after May 31, 2003, and otherwise
was effective at the beginning of the first interim period  beginning after June
15, 2003.  The adoption of SFAS No. 150 did not have an impact on the  Company's
consolidated financial position or disclosures.

         In November  2002,  the FASB issued FASB  Interpretation  (FIN) No. 45,
GUARANTOR'S  ACCOUNTING AND DISCLOSURE  REQUIREMENTS  FOR GUARANTEES,  INCLUDING
INDIRECT  GUARANTEES  OF  INDEBTEDNESS  OF OTHERS.  FIN No. 45 elaborates on the
existing disclosure requirements for most guarantees,  including loan guarantees
such as standby letters of credit.  It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value,  or market value,  of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual  financial  statements.
The  adoption of FIN No. 45 did not have any  material  effect on the  Company's
consolidated financial position, results of operations or liquidity.

         In  December  2002,  the FASB  issued  SFAS  No.  148,  ACCOUNTING  FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE. This Statement amends SFAS
No. 123,  ACCOUNTING FOR STOCK BASED COMPENSATION to provide alternative methods
of  transition  for a  voluntary  change  to the  fair  value  based  method  of
accounting for stock-based employee  compensation.  In addition,  this Statement
amends  the  disclosure  requirements  of  Statement  123 to  require  prominent
disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used on reported results.  The provisions of SFAS No. 148 had no material effect
on the Company's consolidated financial position or results of operation for the
year ended December 31, 2004.

         In December 2004,  the FASB issued SFAS No. 123  (revised),  ACCOUNTING
FOR STOCK BASED COMPENSATION, which supersedes Accounting Principles Board (APB)
Opinion  No. 25,  ACCOUNTING  FOR STOCK  ISSUED TO  EMPLOYEES,  and its  related
implementation  guidance. This Statement requires a public entity to measure the
cost  of  employee  services  received  in  exchange  for  an  award  of  equity
instruments  based on the grant  date  fair  value of the  award  (with  limited


                                       24
<PAGE>


exceptions);  the fair value of that award will be  remeasured  subsequently  at
each reporting date through the settlement  date. This Statement is effective as
of the  beginning of the first  interim or annual  reporting  period that begins
after  December  15, 2005 for small  business  issuers.  The  Company  currently
applies  APB  Opinion  No. 25 in  accounting  for its stock  based  compensation
(options).  The amended provisions of SFAS No. 123 had no material effect on the
Company's  consolidated  financial position or results of operation for the year
ended December 31, 2004.

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.

       RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK

         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, 2005, our cash balance was approximately
$490,000 and we had a working capital deficit of $5,079,000  (excluding non-cash
prepaid   expense  of   $1,684,000   related  to  the  issuance  of   warrants).
Historically,  we have  funded  our  capital  requirements  with debt and equity
financing.  Our ability to obtain additional equity or debt financing depends on
a  number  of  factors  including  our  financial  performance  and the  overall
conditions in our industry.  If we are not able to raise additional financing or
if such financing is not available on acceptable terms, we may liquidate assets,
seek or be  forced  into  bankruptcy,  and/or  continue  operations  but  suffer
material harm to our  operations and financial  condition.  These measures could
have a material adverse affect on our ability to continue as a going concern.

         WE HAVE A HISTORY OF LOSSES,  A NEGATIVE NET WORTH AND MAY NEVER ATTAIN
PROFITABILITY. We realized a comprehensive loss of $604,000 for the three months
ended March 31, 2005. Since inception,  we have incurred  significant losses and
negative cash flow,  and as of March 31, 2005 we had an  accumulated  deficit of
approximately  $76  million.  We  anticipate  that we will  continue to generate
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.
Additionally,   as  of  the  date  of  this  report,  our  current   liabilities
significantly exceed our current assets.

         Our business model assumes that our growth and substantially all 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 included
an explanatory paragraph in


                                       25
<PAGE>


its opinion on our financial statements wherein they expressed substantial doubt
about our ability to continue as a going concern.

         WE HAVE A  SUBSTANTIAL  NUMBER  OF  OUTSTANDING  DERIVATIVE  SECURITIES
WHICH,  IF EXERCISED OR CONVERTED INTO COMMON STOCK,  WILL RESULT IN SUBSTANTIAL
DILUTION TO OUR STOCKHOLDERS.  At March 31, 2005, we had outstanding  $3,923,000
of senior  secured  indebtedness  which is evidenced by  convertible  promissory
notes due September 26, 2005,  which  indebtedness  is  convertible  by the note
holders  into  shares of our  common  stock at a price of $0.07 per  share.  The
conversion  of  the  promissory  notes  would  increase  the  number  of  shares
outstanding and result in dilution to our other stockholders.

         The  conversion  price of the  secured  promissory  notes is subject to
reduction if we issue additional securities at a price below the then applicable
conversion price, with exceptions for certain types of securities issuances.  If
we issue securities at a price below the conversion  price,  then the conversion
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 secured  promissory  notes,  the holders of the  convertible  promissory
notes could  convert them at a lower price,  which would  increase the number of
shares of Common Stock they would receive.

         The table  below sets  forth the  number of shares of our common  stock
that could be acquired by the holders upon  conversion of the  principal  amount
and accrued interest of promissory notes, and the percentages of our outstanding
common stock that the shares issued upon conversion would represent. The amounts
assume  conversion on the maturity date of the promissory notes on September 26,
2005, 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 $0.06 on March 29,  2005,  and on assumed
closing share prices of $0.045,  $0.03 and $0.15,  which prices represent a 25%,
50% and 75% decline,  respectively,  in our March 29, 2005 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. The percentages are
also based on  42,857,153  shares of our common stock  outstanding  on March 29,
2005.

PERCENTAGE DECLINE IN                                              PERCENTAGE OF
   MARCH 29, 2005            ASSUMED           SHARES OF           OUTSTANDING
    CLOSING PRICE         CLOSING PRICE      COMMON STOCK          COMMON STOCK
----------------------    -------------      -------------         ------------
         --                   $0.06             71,298,955             62.5%
         25%                  $0.045            95,065,274             68.9%
         50%                  $0.03            142,597,911             76.9%
         75%                  $0.015           285,195,821             86.9%

         Additionally,  we  anticipate  that during the remainder of 2004 and in
2005, we may need to raise  additional  capital,  as our current  operations are
only  generating a modest  positive cash flow. As such, any  additional  capital
raising efforts would cause further dilution to stockholders.  Additionally, any
further extensions of the maturity date of our convertible promissory notes will
likely  require us to issue a substantial  number of additional  warrants to the
note holders.


                                       26
<PAGE>


         The following  table  illustrates  as of March 29, 2005,  the number of
shares  issued and  outstanding  as, as well as the number of shares that may be
issued  in  the  future  upon  conversion  of  outstanding  secured  convertible
promissory notes and exercise of outstanding options and warrants:

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

Outstanding Common Stock ......................        42,857,153         33.2%
Secured Convertible Promissory Notes,
  with accrued interest .......................        61,113,390         47.3%
Outstanding Warrants(1) .......................              --            --
Outstanding Options ...........................       25,142,976         19.5%
                                                      -----------        -----
  Fully Diluted Shares of Common Stock(2) .....       129,113,519          100%

----------
(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 Over the Counter
         Bulletin Board on March 29, 2005, which was $0.06.
(2)      This number  excludes (i) 8,305,799  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 March 29, 2005, and (ii)
         112,736,145  shares  underlying  warrants  that  have  exercise  prices
         ranging from $0.07 to $0.6096 per share, and thus not "in-the-money."

         The following  table  illustrates  as of March 29, 2005,  the number of
shares  issued  and  outstanding,  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. For the purposes of this table
we have included all warrants  whether they are  "in-the-money"  or not, and the
number of shares of common stock  underlying the  outstanding  warrants has been
calculated on a "paid-for"  exercise  basis,  whereby the holder of each warrant
receives upon exercise a number of shares of common stock equal to the number of
warrants held:

                                                                      PERCENTAGE
                                                                       OF FULLY
                                                       SHARES OF        DILUTED
SECURITY                                             COMMON STOCK       SHARES
-----------------------------------------------      ------------     ----------
Outstanding Common Stock ......................        42,857,153         17.7%
Secured Convertible Promissory
  Notes, with accrued interest ................        61,113,390         25.3%
Outstanding Warrants ..........................       112,736,145         46.6%
Outstanding Options ...........................        25,142,976         10.4%
                                                      -----------        -----
  Fully Diluted Shares of Common Stock ........       241,849,664        100.0%

         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,  with
aggregate principal and accrued interest and fees of $3,923,000 at March


                                       27
<PAGE>


31,  2005.  If a default  occurs,  all amounts  owed to the holders of the notes
would  immediately  become  due and  payable.  If we are not able to  repay  the
indebtedness when due, the holders of the notes will be entitled 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.

         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 Over the  Counter  Bulletin  Board  (OTCBB),  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;

         o        short sales and hedging of our common stock; and

         o        adverse legal rulings.

         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,


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<PAGE>


         o        our  ability  to operate  and  expand our Altnet  peer-to-peer
                  business; and

         o        our ability to fund our legal fees.

         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 HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE
PRICE OF OUR  COMMON  STOCK.  Our  ability  to issue up to  1,000,000  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  1,000,000  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

         WE DERIVE A SUBSTANTIAL  AMOUNT OF OUR REVENUE FROM OUR AGREEMENT  WITH
FOCUS INTERACTIVE,  INC. We recognized installation bounties and search revenues
from our Strategic  Alliance,  Marketing and  Distribution  Agreement with Focus
Interactive,  Inc.,  totaling  $1,288,000 and $6,076,000 during the three months
ended March 31, 2005 and fiscal 2004, respectively,  representing 72% and 69% of
our total revenues during such periods.  If Focus breaches its obligations to us
under our agreement, or the agreement terminates prior to its expiration date in
July,  2006,  our revenues  and cash flows from  operations  will be  materially
adversely affected.


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<PAGE>


         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 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  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,  we receive compensation for the sale of advertising campaigns and
other revenue received by Sharman Networks,  as a result of our efforts. We also
receive a monthly  license  fee from  Sharman  networks in  connection  with our
sub-licensing  of  the  TruNames  patent  to  them.  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


                                       30
<PAGE>


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  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  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 adversely  impact (1) the future  distribution of our Altnet
software,  and (2) Altnet's  sale of  authorized  digital  files to users of the
Kazaa Media  Desktop.  For the twelve  months ended March 31, 2005, we generated
approximately  100% of our total  revenues from  activities  dependent  upon the
availability  of the  Kazaa  Media  Desktop.  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,
currently are the subject of multiple  lawsuits,  including  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. 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.  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.

         WE HAVE  BEEN  SUED IN  AUSTRALIAN  FEDERAL  COURT AS A  RESULT  OF OUR
BUSINESS DEALINGS WITH SHARMAN NETWORKS  LIMITED.  In March 2004, in the Federal
Court of  Australia,  New  South  Wales  District  Registry,  Brilliant  Digital
Entertainment,   Inc.,  our  subsidiaries  Altnet  Inc.  and  Brilliant  Digital
Entertainment  Pty.  Limited,  and Kevin  Bermeister and Anthony Rose, our Chief
Executive  Officer and Chief Technology  Officer,  respectively,  were joined as
defendants in the suit by Universal  Music  Australia Pty. Ltd. and other record
labels  against  Sharman  Networks  Limited  and  other   defendants,   alleging
infringement of the copyright in sound recordings  controlled by the plaintiffs.
The plaintiffs  allege that due to our business  dealings with Sharman  Networks
Limited,  we are integrally involved in the operation of the Kazaa Media Desktop
and therefore liable for the alleged  copyright  infringement  occasioned by its
development  and  distribution.  The  plaintiffs  are seeking  damages under the
Australian  Copyright  Act of  1968,  recovery  of  costs  and  interest,  and a
permanent injunction  restraining us from making copies of, communicating to the
public,  or  distributing  their sound  recordings  without a license.  While we
believe these claims are without  merit,  if we are unable to have these charges
dismissed,  defending  against  these  claims  would be  costly,  and an adverse
outcome may result in significant  monetary damages or injunctive relief against
us, all of which would have a material adverse impact on our financial  position
and results of  operations.  A decision  in this  matter is expected  during the
second quarter of 2005.

         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


                                       31
<PAGE>


DISCONTINUE SELLING OUR PRODUCT.  We believe that our Altnet software,  does 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.

         TO DEVELOP  PRODUCTS THAT CONSUMER'S  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 consumer's  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.

ITEM 3.       CONTROLS AND PROCEDURES.

         Members of the  company's  management,  including  our Chief  Executive
Officer,  President and acting Chief Financial Officer,  Kevin Bermeister,  have
evaluated  the  effectiveness  of our  disclosure  controls and  procedures,  as
defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of March 31,
2005, the end of the period covered by this report.  Based upon that evaluation,
Mr.  Bermeister  concluded  that our  disclosure  controls  and  procedures  are
effective.

         There were no changes in our internal control over financial  reporting
or in other factors  identified in connection  with the  evaluation  required by
paragraph  (d) of Exchange Act Rules 13a-15 or 15d-15 that  occurred  during the
quarter ended March 31, 2005 that have  materially  affected,  or are reasonably
likely to materially affect, our internal control over financial reporting.


                                       32
<PAGE>


                                     PART II

                                OTHER INFORMATION


ITEM 6.  EXHIBITS

THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:

         31.1     Certificate  of  Chief  Executive  Officer  pursuant  to  Rule
                  13a-14(a)  under the  Securities  and Exchange Act of 1934, as
                  amended

         31.2     Certificate of Acting Chief Financial Officer pursuant to Rule
                  13a-14(a)  under the  Securities  and Exchange Act of 1934, as
                  amended

         32.1     Certificate  of  Chief  Executive  Officer  and  Acting  Chief
                  Financial   Officer  pursuant  to  Rule  13a-14(b)  under  the
                  Securities and Exchange Act of 1934, as amended.


                                       33
<PAGE>


                                   SIGNATURES

         In accordance  with the  requirements  of the Exchange Act of 1934, the
Registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                BRILLIANT DIGITAL ENTERTAINMENT, INC.


Date: May 16, 2005                 /S/ KEVIN BERMEISTER
                                ------------------------------------------------
                                By:    Kevin Bermeister
                                Its:   President, Chief Executive Officer and
                                       Acting Chief Financial Officer (Principal
                                       Financial and Accounting Officer)


                                       34