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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 June 30, 2003

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

  For the transition period from __________________ to ______________________.

                         Commission file number 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.)

                       6355 TOPANGA CANYON BOULEVARD, SUITE 120
                        WOODLAND HILLS, CALIFORNIA 91367
                    (Address of Principal Executive Offices)

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



         State the number of shares  outstanding of each of the issuer's classes
of common equity,  as of the latest  practicable  date:  Common Stock, par value
$0.001, 40,276,571 shares issued and outstanding as of August 1, 2003.

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


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<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                      INDEX

                                                                            PAGE

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

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

            Condensed Consolidated Balance Sheet as of June 30, 2003...........3

            Condensed Consolidated Statements of Operations for the
            three and six months ended June 30, 2003 and June 30, 2002.........4

            Condensed Consolidated Statements of Cash Flows for the
            six months ended June 30, 2003 and June 30, 2002...................5

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

Item 2.     Management's Discussion and Analysis or Plan of Operation ........16

Item 3.     Controls and Procedures...........................................35

PART II     OTHER INFORMATION.................................................37

Item 2.     Changes in Securities and Use of Proceeds.........................37

Item 4.     Submission of Matters to a Vote of Security Holders...............38

Item 6.     Exhibits and Reports on Form 8-K..................................38

            Signatures........................................................40


                                       2


<PAGE>


                                     PART I
                              FINANCIAL INFORMATION

Item 1.  Financial Statements

                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                 (In thousands)
                                                                       JUNE 30,
                                                                         2003
                                                                       --------
ASSETS                                                               (unaudited)
Current assets:
    Cash and cash equivalents .................................        $    594
    Restricted cash (Note 2) ..................................              75
    Marketable securities (Note 2) ............................             147
    Accounts receivable, net ..................................           1,188
    Note Receivable (Note 4) ..................................             200
    Other assets, net .........................................             908
                                                                       --------
Total current assets ..........................................           3,112
Property, plant and equipment, net ............................              55
Purchased Technology Related Party (Note 2) ...................           1,652
License Rights (Note 8) .......................................           3,949
Other assets, net .............................................             137
                                                                       --------
Total assets ..................................................        $  8,905
                                                                       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable ..........................................        $    638
    Accrued expenses ..........................................           1,869
    Note payable-net of discount (Note 3) .....................             132
    Guaranteed minimum payments (Note 8) ......................             360
    Deferred revenue ..........................................             730
    Capital financing, net of discount ........................           3,582
                                                                       --------
Total current liabilities .....................................           7,311
Long-term debt ................................................             142
Long-term Guaranteed Minimum Payments (Note 8) ................             720
                                                                       --------
Total liabilities .............................................           8,173

Stockholders' equity:
    Common stock ..............................................              46
    Additional paid-in capital ................................          61,631
    Accumulated deficit .......................................         (60,940)
    Cumulative other comprehensive loss .......................              (5)
                                                                       --------
Total stockholders' equity ....................................             732
                                                                       --------
Total liabilities and stockholders' equity ....................        $  8,905
                                                                       ========

                 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              SIX MONTHS
                                      ENDED JUNE 30,          ENDED JUNE 30,
                                   --------------------    ---------------------
                                     2002        2003        2002        2003
                                   --------    --------    --------    --------
                                 (unaudited) (unaudited) (unaudited) (unaudited)

Revenues .......................   $    375    $  1,694    $    668    $  2,280

Costs and expenses:
     Costs of revenues .........        136         229         188         289
     Sales and marketing .......        103         308         125         397
     General and administrative       1,251       1,458       1,808       2,183
     Research and development ..         46         123         136         307
     Depreciation and
        amortization ...........         14          35          31          53
                                   --------    --------    --------    --------
                                      1,550       2,153       2,288       3,229
                                   --------    --------    --------    --------
Income (loss) from operations ..     (1,175)       (459)     (1,620)       (949)
Other income (expense):
     Other Income ..............       --         2,097        --         2,097
     Loss on write off of
        deferred fees ..........       --          (206)       --          (206)
     Interest expense ..........       (909)       (549)     (1,775)       (995)
                                   --------    --------    --------    --------
     Total other income
        (expense) ..............       (909)      1,342      (1,775)        896
                                   --------    --------    --------    --------
Net income (loss) ..............     (2,084)        883      (3,395)        (53)
Unrealized gain on marketable
   securities ..................       --          --          --            31
Foreign currency translation
   adjustment (net of tax
   effects) ....................         12        --             8        --
                                   --------    --------    --------    --------
Comprehensive income (loss) ....   $ (2,072)   $    883    $ (3,387)   $    (22)
                                   ========    ========    ========    ========

Basic and fully-diluted net
   income (loss) per share .....   $  (0.09)   $   0.01    $  (0.16)   $   --
                                   ========    ========    ========    ========

 Weighted average number of
   shares used in computing
   basic and fully-diluted net
   income (loss) per share .....     24,317      97,425      21,197      35,596
                                   ========    ========    ========    ========

                 See Notes to Consolidated Financial Statements.


                                       4


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                                                SIX MONTHS
                                                              ENDED JUNE 30,
                                                         ----------------------
                                                           2002           2003
                                                         -------        -------
                                                      (unaudited)    (unaudited)
OPERATING ACTIVITIES
Net income (loss) ................................       $(3,395)       $   (53)
Adjustments to reconcile net loss to the net cash
   provided by (used in) operating activities:
      Depreciation and amortization ..............           174             53
      Effect of accrued interest expense on
         convertible debt ........................         1,723            150
      Effect of warrants granted related to
         promissory notes ........................           229            414
      Effect of shares issued for investment in
         subsidiary ..............................          --            1,680
      Effect of warrants granted related to Joint
         Enterprise and other agreements .........          --            3,168
      Changes in operating assets and liabilities:
         Accounts receivable .....................          (140)          (583)
         Other assets ............................          --           (2,014)
         Accounts payable and accruals ...........           480          1,303
         Deferred revenue ........................          (457)        (1,824)
         Notes receivable ........................          --             (200)
         Other long-term liabilities .............           (84)            34
                                                         -------        -------
Net cash provided by (used in) operating
   activities ....................................        (1,470)         2,128

INVESTING ACTIVITIES
Purchase of equipment ............................          --              (23)
Purchased Intangibles ............................          --           (1,680)
                                                         -------        -------
Net cash used in investing activities ............          --           (1,703)

FINANCING ACTIVITIES
Proceeds from issuance of shares,
   net of costs ..................................         1,229             14
Proceeds from issuance of promissory notes net of
   discount ......................................          --              133
Proceeds from the issuance of capital financing ..           400           --
Repayments of notes payable ......................           (22)          --
Restricted cash ..................................          --             (222)
                                                         -------        -------
Net cash provided by financing activities ........         1,607            (75)
                                                         -------        -------

NET INCREASE IN CASH AND CASH EQUIVALENTS ........           137            350

Effect of exchange rate changes on cash ..........             8              8
Cash and cash equivalents at beginning of period .           185            236
                                                         -------        -------
Cash and cash equivalents at end of period .......       $   330        $   594
                                                         =======        =======

Supplemental  disclosure of cash flow information:
Cash paid during the period for:
   Interest ......................................       $     9        $  --
                                                         =======        =======

                 See Notes to Consolidated Financial Statements.


                                       5


<PAGE>


Supplemental Disclosure of Non-cash Financing Activity:

THE  FOLLOWING  TABLE  SUMMARIZES  THE  COMPANY'S   NON-CASH  RELATED  FINANCING
ACTIVITY:

                                                               JUNE 30,
                                                           ----------------
                                                            2002      2003
                                                           ------    ------
                                                             (unaudited)

     Beneficial conversion feature--debt discount .....    $3,320    $ --
     Debt discount and interest amortization ..........    $1,745    $  741
     Warrants issued in lieu of compensation ..........    $  229    $ --
     Shares issued for investment in subsidiary .......    $ --      $1,680
     Warrants issued for Joint Enterprise
        and other agreements ..........................    $ --      $3,168
     Warrants issued related to promissory notes ......    $ --      $  414


                                       6


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                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2003


1.       BASIS OF PRESENTATION

         The accompanying  unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted  accounting  principles
in the United States for interim financial information and with the instructions
to Form 10-QSB and Item 310 of Regulation S-B. Accordingly,  they do not include
all of the information and footnotes required by generally  accepted  accounting
principles  in  the  United  States  for  complete  financial  statements.   The
accompanying  unaudited condensed  consolidated financial statements reflect all
adjustments that, in the opinion of management,  are considered  necessary for a
fair  presentation of the financial  position,  results of operations,  and cash
flows for the periods presented.  The results of operations for such periods are
not necessarily  indicative of the results  expected for the full fiscal year or
for any future period. The accompanying  financial  statements should be read in
conjunction  with the audited  consolidated  financial  statements  of Brilliant
Digital  Entertainment,  Inc.  and  consolidated  subsidiaries  (the  "Company")
included in the  Company's  Form 10-KSB for the fiscal year ended  December  31,
2002.

         The accompanying  consolidated  financial statements have been prepared
assuming that the Company will continue as a going concern,  which  contemplates
the  realization  of assets and the  satisfaction  of  liabilities in the normal
course of business.  The carrying amounts of assets and liabilities presented in
the financial  statements  do not purport to represent  realizable or settlement
values. However, the Company has suffered recurring operating losses and at June
30, 2003,  had  negative  working  capital of  approximately  $4,199,000.  These
factors raise  substantial  doubt about the  Company's  ability to continue as a
going concern.

         The Company is seeking additional funding and believes this will result
in  improved  working  capital.  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

CHANGE IN ESTIMATE

         In February  2000,  the Company  entered into a certain  agreement with
e-New Media relating to distribution,  production and licensing of the Company's
B3D  software  suite and  Multipath  Movie  Webisodes.  At the  inception of the
agreement,   the  Company  received  advances  of  $2,500,000   related  to  the
distribution  and  licensing  portions  of  the  agreement,  which  were  to  be
recognized by the Company over six years,  the term of the agreement.  Under SEC
Staff Accounting Bulletin No. 101 (SAB 101) and AICPA Statement of Position 97-2
(SOP 97-2), 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. During the
second quarter ended June 30, 2003, the Company  determined  that it had met all
of its obligations  under the agreement with respect to delivery of master discs
for the


                                       7


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2003


B3D software suite and Multipath  Movie  Webisodes,  and in accordance  with SEC
Staff Accounting Bulletin No. 101 (SAB 101) and AICPA Statement of Position 97-2
(SOP  97-2),  recognized  as other  income  the  remaining  deferred  balance of
$2,097,000.

PURCHASED TECHNOLOGY

         The Company records  intangible  assets in accordance with Statement of
Financial Accounting  Standards (or FAS) 141 "Business  Combination" and FAS 142
"Goodwill  and other  Intangible  Assets".  FAS 141  requires  that the purchase
method of accounting be used for all business combinations  initiated after June
30, 2001,  and also  specifies  the criteria for the  recognition  of intangible
assets  separately from goodwill.  FAS 142 requires that intangible  assets with
definitive lives be amortized over their estimated useful lives and reviewed for
impairment  when events or changes in  circumstances  indicate that the carrying
amount of such  assets may not be  realized.  Purchased  technology  consists of
licensing and other agreements which are stated at cost.

         On May 28, 2003,  the Company  entered into a Share Exchange and Option
Agreement with Joltid, Ltd., the entity which prior to the transaction owned 49%
of Altnet,  Inc. Under the terms of the Agreement,  the Company issued 7,000,000
unregistered  shares of its common stock to acquire  1,102,500  shares of Altnet
common stock (24.5%),  and 1,000,000  unregistered shares of its common stock to
obtain the option to purchase the  remaining  1,102,500  shares of Altnet common
stock  (24.5%)  at an  exercise  price of  0.1575  newly  issued  shares  of the
Company's common stock,  for an aggregate  purchase price of 7,000,000 shares of
the Company's  common stock for all such option  shares.  The option to purchase
the remaining  shares  expires in May 2005. The Company now owns 75.5% of Altnet
and  continues  to manage  all of the  day-to-day  operations  of  Altnet.  This
transaction  resulted in the recognition of $1,680,000 of purchased  technology,
relating to the rights contained in various Altnet  agreements,  including those
under the Joltid  Software  License  Agreement and the Sharman Joint  Enterprise
Agreement. The purchased technology rights are being amortized over their useful
life of 5 years. The Company recognized  $28,000 in amortization  expense in the
current  quarter,  leaving an  unamortized  balance of $1,652,000 on the balance
sheet as of June 30, 2003.

RESTRICTED CASH

         At June  30,  2003,  $75,000  of cash  was  pledged  as  collateral  on
outstanding  convertible  promissory notes and was classified as restricted cash
on the balance sheet.

MARKETABLE SECURITIES

         The Company  determines the  appropriate  classification  of marketable
securities  at the time of purchase and  reevaluates  such  designation  at each
balance  sheet date.  Marketable  securities  are  carried at fair  value,  with
unrealized  holding  gains  and  losses  reported  as a  separate  component  of
stockholder's equity. At June 30, 2003, the Company had marketable securities of
$147,000.


                                       8


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2003


EARNINGS PER SHARE

         Basic and fully  diluted  net income  (loss) per share is  computed  by
dividing net income by the weighted average number of common shares  outstanding
during the period plus the incremental  shares that would have been  outstanding
upon the assumed exercise of dilutive stock options and warrants.

3.       STOCKHOLDERS' EQUITY

         Options and  warrants  representing  common  shares of  65,675,034  and
144,978,807  were  excluded  from  the  average  number  of  common  and  common
equivalent shares  outstanding in the diluted EPS calculation for the six months
ended June 30, 2002 and 2003, respectively, because they were anti-dilutive. The
increase in the options and  warrants  is  primarily  due to warrants  issued in
connection  with  capital  debt  financing  and  the  Sharman  Joint  Enterprise
Agreement,  and options  issued in  connection  with the  conversion of deferred
compensation,  the  Joltid  Share  Exchange  and  Option  Agreement,  and annual
employee option grants.

COMMON STOCK

         In May 2003, the Company  purchased from Joltid Ltd.,  1,102,500 shares
of common stock of Altnet.  As a result of the purchase,  the Company  increased
its ownership from 51% to 75.5% of the outstanding  voting securities of Altnet.
The purchase price consisted of 7,000,000  unregistered  shares of the Company's
common  stock.  The  Company  also  acquired  from  Joltid a two year  option to
purchase  Joltid's  remaining  1,102,500  shares of Altnet  common  stock for an
exercise  price per share of 0.1575 newly issued shares of the Company's  common
stock,  for an aggregate  purchase  price of 7,000,000  shares of the  Company's
common stock for all of Joltid's  remaining Altnet shares.  For this option, the
Company  issued Joltid  1,000,000  unregistered  shares of the Company's  common
stock. The company recognized $82,000 of warrant expense in conjunction with the
transaction. This option to purchase the remaining shares expires in May 2005.

WARRANTS AND OPTIONS

         Under the terms of the Company's  Deferred  Compensation  Plan ("Plan")
dated  January 1, 1997,  a director  (and prior  employee of the  Company) and a
current  executive,  elected to exchange  Plan benefits for stock options on May
30, 2003. In  conjunction  with this  election,  the Company  issued  10,395,000
options to purchase common stock of the Company to the two  individuals  with an
exercise  price  of  $0.12  per  share,  when the  average  market  price of the
Company's  stock for the five days  preceding  the grant date was equal to $0.23
per share. The options expire in May 2013. The intrinsic value of the options of
$1,143,450 were equal to the total amount of deferred compensation, plus accrued
interest owed to the two individuals, as of the date of the grant, May 30, 2003,
and therefore the Company has not  recognized  any expense  associated  with the
conversion.


                                       9


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2003


         In June 2003,  the  Company  and its  subsidiary  entered  into a Joint
Enterprise   Agreement  with  Sharman  Networks,   to  act  as  their  exclusive
representative for the sale, license and/or other commercial exploitation of its
search technology. Under the terms of this agreement, the Company issued Sharman
Networks  warrants to purchase up to 14,000,000  shares of the Company's  common
stock,  par value  $0.001 per share,  at an  exercise  price of $0.61 per share,
expiring in June 2008. These warrants were initially vested and exercisable with
respect  to  7,000,000  shares on the  issuance  date and will  vest and  become
exercisable  with respect to the remaining  7,000,000 shares two years following
the  issuance  date  provide that the Joint  Enterprise  Agreement  has not been
terminated  prior to such date.  The fair value of  warrants  as examined at the
date of  grant  is  based  on a  Black-Scholes  option  pricing  model  with the
following  weighted-average  assumptions  for  2003:  interest  rates  of  4.5%;
dividend yield rates of 0;  volatility  factors of the expected  market price of
the Company's  common stock of 50.0%;  and expected  life of the  warrants.  The
value  of these  warrants  was  determined  to be  $2,951,000.  The  Company  is
reflecting the total value of these warrants,  net of amortized warrant expense,
as License Rights on the balance sheet. The Company amortizes the license rights
over three  years,  the life of the  agreement,  and has  recognized  $82,000 of
warrant  expense in the current  quarter  reflecting  the remaining  unamortized
amount of $2,869,000 as License Rights on the balance sheet as of June 30, 2003.

         In June 2003, the Company received $200,000 of additional  financing in
the form of promissory notes,  bearing an interest rate of 10% per annum and due
August 10,  2003.  In  conjunction  with this  transaction,  the Company  issued
warrants to purchase up to 1,066,666  shares of the Company's common stock at an
exercise  price equal to  $0.28125  per share,  expiring in June 2006.  The fair
value of warrants  as examined at the date of grant is based on a  Black-Scholes
option pricing model with the following  weighted-average  assumptions for 2003:
interest  rates of 4.5%;  dividend yield rates of 0;  volatility  factors of the
expected market price of the Company's  common stock of 50.0%; and expected life
of the warrants.  The value of these warrants was determined to be $414,100. The
Company  attributed  33% of the fair value of the  warrants  of $134,900 to debt
discount to be amortized  over the two-month  life of the note, of which $67,430
was  amortized  in June 2003.  The  remaining  value of $279,200 is reflected as
deferred  warrant  expense and will be amortized  over the two-month life of the
note, of which $139,600 was amortized in June 2003. At June 30, 2003 the Company
reflected a Note  Payable of  $132,000,  and  included  the $137,000 of deferred
warrant expense in Other Assets on the balance sheet.

4.       SIGNIFICANT AGREEMENTS

STREAMWAVES.COM, INC.

         On June 11, 2003,  the Company  entered into an  Interactive  Marketing
Agreement with  Streamwaves.com,  Inc. to market and promote the streaming music
service of Streamwaves, and to sell Streamwaves' streamed music, video and, when
available,   downloadable   digital  audio  and  video  files  over  the  Altnet
peer-to-peer  network. As consideration for the Company's services,  Streamwaves
will pay the Company a percentage of revenue Streamwaves  receives from sales of


                                       10


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2003


its content to Altnet users.  The Company will also provide  Streamwaves and its
customers with online  payment  processing  services for a transaction  fee. The
Company loaned Streamwaves $200,000 in connection with this transaction pursuant
to a secured promissory note, which note is secured by all of Streamwaves assets
and shares of Streamwaves stock owned by its founder.  The Company also received
a warrant to purchase 29,173,074 shares of Streamwaves common stock. The Company
has  determined  that the  warrant  to  purchase  Streamwaves  common  stock has
immaterial  value  at this  time,  and  therefore  has  not  recorded  an  asset
associated with the warrant.

5.       COMMITMENTS AND CONTINGENCIES

         The Company  signed two new,  two-year,  facility  lease  agreements in
February 2003. As of June 30, 2003, the  commitments  under these leases were as
follows:
                                      UNITED
                    YEAR              STATES           AUSTRALIA
                  --------           --------           --------

                      2003           $ 35,000           $ 18,900
                      2004             69,000             41,500
                      2005              5,000              7,000
                                     --------           --------
                                     $109,000           $ 67,400
                                     ========           ========

         Rent  expense was $79,000 and $42,000 for the six months ended June 30,
2002 and June 30, 2003, respectively.

6.       MAJOR CUSTOMERS

         For the six months ended June 30, 2003,  Sharman  Networks  contributed
$890,000 (39%) of revenue related to our Patent  Sublicense  Agreement and e-New
Media  represented 20% of the revenues with distribution and licensing rights of
$459,000. Excite contributed $111,000 (5%) of the revenue, from the amortization
of a non-recoupable signing bonus and bounties earned on activated installations
of the KMD.

7.       SUBSEQUENT EVENTS

         The Company is  negotiating  the extension of the June 2003  promissory
notes, which were due on August 10, 2003, in the amount of $200,000.


                                       11


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2003


8.       RELATED PARTY TRANSACTIONS

         On May  28,  2003,  Altnet  entered  into a  non-exclusive,  perpetual,
irrevocable,  transferable,  worldwide  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,  and the balance of the
commitment  of $720,000 as a long-term  liability.  The Company has recorded the
$1,080,000  related to the license  rights  under this  agreement on the balance
sheet as License Rights, and is amortizing the license rights on a straight-line
basis over three years  commencing  July 1, 2003.  In addition  the Company paid
Joltid  $65,000 for services  provided  during the period and has an outstanding
payable to Joltid of $ 44,251 as of June 30, 2003.

         The Company  entered into a Patent  Sublicense  Agreement  with Sharman
Networks Limited,  the distributor of the KMD. Pursuant to the Patent Sublicense
Agreement,  the  Company  granted  Sharman  Networks  a  limited,  non-exclusive
sublicense to the  Company's  rights to the TruNames  patent,  which the Company
licenses from Kinetech Inc. The TrueNames  patent covers a method of identifying
digital files based on the actual data contents of the file,  rather than by its
name,  origin,  location,  address,  or other  information  that can  easily  be
changed.  As  consideration  for the  sublicense,  the Company will receive from
Sharman Networks a monthly license fee. Additionally,  in June 2003, the Company
and Altnet entered into a Joint Enterprise  Agreement with Sharman Networks,  to
act as  their  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,
and other elements of each browse  channel.  The Company shall share in revenues
derived from the browse channels. Under the terms of this agreement, the Company
issued  Sharman  Networks  warrants to purchase up to  14,000,000  shares of the
Company's  common  stock,  par value $0.001 per share,  at an exercise  price of
$0.61 per share,  expiring in June 2008.  The fair value of warrants as examined
at the date of grant is based on a  Black-Scholes  option pricing model with the
following  weighted-average  assumptions  for  2003:  interest  rates  of  4.5%;
dividend yield rates of 0;  volatility  factors of the expected  market price of
the Company's  common stock of 50.0%;  and expected  life of the  warrants.  The
value  of these  warrants  was  determined  to be  $2,951,000.  The  Company  is
reflecting the total value of these warrants,  net of amortized warrant expense,
as License Rights on the balance sheet. The Company amortizes the license rights
over three  years,  the life of the  agreement,  and has  recognized  $82,000 of
warrant  expense in the current  quarter  reflecting  the remaining  unamortized
amount of $2,869,000 as License Rights on the balance sheet as of June 30, 2003.


                                       12


<PAGE>


                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2003


         As of June 30, 2003 the Company has an outstanding  accounts receivable
balance from Sharman Networks of $967,714, and an outstanding payable balance of
$1,489,443.

         In June 2003, the Company received from Europlay Capital  Advisors,  an
entity in which the Company's  Chairman is an executive,  $100,000 of additional
financing in the form of a promissory note,  bearing an interest rate of 10% per
annum and due August 10, 2003. In conjunction with this transaction, the Company
issued  warrants to purchase up to 533,333 shares of the Company's  common stock
at an exercise  price equal to $0.28125  per share,  expiring in June 2006.  The
promissory  note has  been  recorded,  net of the  applicable  unamortized  debt
discount of $33,700, at $66,300 as of June 30, 2003.

         In 2003, the Company issued warrants to purchase shares of common stock
in consideration for consulting services to Scheinrock Advisory Group, an entity
owned by Jeff  Scheinrock,  a member of the Board of Directors.  In addition the
Company paid Scheinrock Advisory Group $43,000 for consulting services.

         In 2003, the Company paid Abe Sher, a member of the Board of Directors,
$75,000 for consulting services.

9.       STOCK BASED COMPENSATION

1996 STOCK OPTION PLAN

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

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

         In accordance  with Accounting  Principles  Board Opinion (APB) No. 25,
"Accounting  for  Stock  Issued  to  Employees,"  no  compensation  cost for the
Company's  stock option plan has been recognized in the  accompanying  condensed
financial    statements.    SFAS   No.   148,    "Accounting   for   Stock-Based
Compensation--Transition  and  Disclosure"  which  amends SFAS No. 123  provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee  compensation.  In addition,  SFAS
148 amends the disclosure requirements of SFAS 123 to require more prominent and
more frequent


                                       13


<PAGE>


                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2003


disclosures in financial statements of the effects of stock-based  compensation.
The  Company  has  elected  not to  change  to the fair  value  based  method of
accounting for stock-based  compensation and had the  compensation  cost for the
stock option plan been  determined  under the fair value,  it would have been as
follows:

                                                            SIX MONTHS ENDED
                                                                JUNE 30,
                                                          2003            2002
                                                        -------         -------

Comprehensive income (loss),
   as reported .................................        $   (22)        $(3,387)
Employee compensation expense ..................            (79)            (60)
                                                        -------         -------
Net income (loss), pro forma ...................        $  (101)        $(3,447)
                                                        =======         =======
Basic and diluted income (loss)
   per share, as reported ......................        $  --           $ (0.16)
                                                        =======         =======
Basic and diluted income  (loss)
   per share, pro forma ........................        $  --           $ (0.16)
                                                        =======         =======

10.      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.  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
June 30, 2003.

         The Company occasionally enters into  indemnification  provisions under
(i) its  agreements  with other  companies in its  ordinary  course of business,
typically with business partners,  contractors,  customers,  and landlords,  and
(ii) its agreements with investors. Under these provisions the Company generally
indemnifies  and holds  harmless the  indemnified  party for losses  suffered or
incurred by the indemnified party as a result of the Company's activities or, in
some  cases,  as a  result  of the  indemnified  party's  activities  under  the
agreement.  These  indemnification  provisions  often  include  indemnifications
relating  to  representations  made by the Company  with regard to  intellectual
property rights. These indemnification  provisions generally survive termination
of the underlying agreement.  In addition, in some cases, the Company has agreed
to reimburse  employees for certain expenses and to provide salary  continuation
during  short-term  disability.  The maximum potential amount of future payments
the Company could be


                                       14


<PAGE>


                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2003


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 June 30, 2003.

11.      NEW ACCOUNTING PRONOUNCEMENTS

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

         In May 2003,  the FASB  issued  SFAS No.  150  ACCOUNTING  FOR  CERTAIN
FINANCIAL  INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS
No. 150 establishes  standards for how an issuer classifies and measures certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some  circumstances).  Many of these  instruments
were previously  classified as temporary equity.  SFAS No. 150 will be effective
for  financial  instruments  entered into or modified  after May 31,  2003,  and
otherwise  shall be  effective  at the  beginning  of the first  interim  period
beginning  after June 15, 2003.  For financial  instruments  created  before the
issuance date of SFAS No. 150 and still existing at the beginning of the interim
period of adoption,  transition  shall be achieved by reporting  the  cumulative
effect of a change in accounting  principle by initially measuring the financial
instruments at fair value or other  measurement  attribute  required by SFAS No.
150.  Instruments  with  characteristics  of both  liabilities  and  equity  not
addressed  in SFAS No. 150 will be  addressed  in the next phase of the project.
Adoption  of SFAS No.  150 is not  expected  to have a  material  impact  on the
Company's consolidated financial position, results of operations or cash flows.


                                       15


<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, 2002 and presumes  that readers have access to, and will have read,
the "Management's  Discussion and Analysis of Financial Condition and Results of
Operations" and other information  contained in such Form 10-KSB.  The following
discussion  and  analysis  also should be read  together  with our  consolidated
financial  statements  and the notes to the  consolidated  financial  statements
included elsewhere in this Form 10-QSB.

         THIS  DISCUSSION  SUMMARIZES  THE  SIGNIFICANT  FACTORS  AFFECTING  THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT  DIGITAL  ENTERTAINMENT  FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND
JUNE 30, 2002. 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 operates two
distinct lines of business: (1) through our Altnet, Inc. subsidiary,  we operate
a peer-to-peer-based  content distribution network,  utilizing existing,  proven
technology  which allows Altnet to securely and efficiently  distribute  digital
files to end users, and (2) through our b3d, Inc. subsidiary, we are a developer
and server of rich media  advertising  campaigns  ("rich media" being defined as
use of audio and animation), and a developer of software authoring tools used in
the creation of "three  dimensional",  or "3D", animated content, for use on the
World Wide Web.

         Through our Altnet, Inc.  subsidiary,  we operate a  peer-to-peer-based
content  distribution  network that allows  Altnet to securely  and  efficiently
distribute a content owner's music,  video,  software and other digital files to
computer users. We commercialize Altnet by partnering with third party operators
of web sites and other Internet  applications to enable users of those web sites
and  applications  to search  for and  download  digital  files  from the Altnet
network.  In June 2003,  we  purchased  an  additional  24.5%  equity  ownership
interest in Altnet from Joltid, Ltd. (formally known as Blastoise, Ltd.) and now
own 75.5% of the outstanding  capital stock of Altnet and continue to manage all
of its  day-to-day  operations.  Joltid,  the  company  from  whom we  license a
substantial portion of Altnet's  peer-to-peer  technology,  continues to own the
remaining  24.5% of Altnet's  common  stock.  We have an option to purchase  the
additional 24.5% from Joltid, under a Share Exchange and Option Agreement, which
expires in May 2013.

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


                                       16


<PAGE>


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

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

         o        We contract with content  owners to distribute  and sell their
                  digital files to computer  users over our Altnet  peer-to-peer
                  network.   We  charge  the  content   owner  a  placement   or
                  distribution fee based on one or more of the following:  (i) a
                  negotiated fee for each file downloaded, (ii) a negotiated fee
                  for each  license  issued  once the end user tries to play the
                  file the first time after it has been downloaded,  and (iii) a
                  negotiated  percentage of the sales price a computer user pays
                  to purchase a digital file. We also charge  content owners and
                  licensed  distributors a transaction fee for processing online
                  payments for digital files.

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

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

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

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

         During the second half of 2002,  we generated  our first  revenues from
the  distribution  and sale of digital files over the Altnet network to users of
the KMD. Our agreement with Sharman  Networks  Limited,  distributor of the KMD,
allows us to distribute  and sell digital  files from the Altnet  network to KMD
users.  A KMD user can  download  an Altnet  file  from the  Altnet  network  in
substantially  the same  manner as the user would  download a digital  file from
other users of KMD  applications.  Pursuant to our agreement with Sharman,  if a
search query matches the  description of one or more Altnet files,  the matching
Altnet files are currently displayed in the top four positions and every seventh
file  within the  search  results  page of the KMD.  We pay  Sharman  Networks a
percentage of revenue  generated from the  distribution and sale of Altnet files
to users of the KMD. We memorialized  our agreement with Sharman  Networks,  and
expanded  upon it, in June  2003,  when we  entered  into our  Joint  Enterprise
Agreement.   Under  this  agreement,   we  act  as  Sharman  Networks  exclusive
representative  for the sale,  license and/or


                                       17


<PAGE>


other commercial  exploitation of index search results displayed on or otherwise
accessed  using the KMD in response to end user  search  requests.  We were also
granted 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, and other elements
of each  browse  channel.  We will  share in  revenues  derived  from the browse
channels with Sharman Networks.  For this agreement,  we issued Sharman Networks
warrants to  purchase up to  14,000,000  shares of our common  stock,  par value
$0.001 per share,  at an  exercise  price of $0.61 per share,  expiring  in June
2008.

         During  the  second  half  of  2002,  we  began   performing   business
development  services  in the United  States  under an  agreement  with  Sharman
Networks.  We negotiate  with third parties that desire to enter into a business
transaction  with  Sharman  Networks  relating  to the  KMD  application.  These
transactions include the placement by third parties of banner  advertisements on
the KMD, software bundle  transactions  whereby a third party's software product
is bundled with downloads of the KMD, and other partnering transactions.  We are
paid a percentage of the gross revenue  received by Sharman for each transaction
entered into based on our  efforts.  Pursuant to this  arrangement,  in February
2003, we assisted with an agreement  between  Sharman  Networks and MatchNet plc
for the placement on the KMD of a "dating service" application that allows users
of the KMD to search MatchNet's online database of dating profiles and subscribe
to MatchNet's online dating service from the KMD.

         We entered into a Patent  Sublicense  Agreement with Sharman  Networks,
pursuant  to  which  we  granted  Sharman  Networks  a  limited,   non-exclusive
sublicense  to our rights to the TruNames  patent (U.S.  patent No.  5,978,791),
which we license from  Kinetech  Inc. The  TrueNames  patent  covers a method of
identifying  digital files based on the actual data contents of the file, rather
than by its name,  origin,  location,  address,  or other  information  that can
easily be changed.  We have a non-exclusive,  sublicensable  right to the patent
for the purpose of  developing,  marketing,  renting and  selling  products  and
services,  which,  without the  license,  would  infringe or  contribute  to the
infringement of the Patent.  Sharman  Networks will pay us a monthly license fee
for its sublicense of the patent.

         In April 2003, we signed a two-year Strategic  Alliance,  Marketing and
Distribution  Agreement  with The Excite  Network,  Inc.  with respect to its My
Search toolbar,  which enables users to access  content,  products and services.
Pursuant to our agreement,  the parties agreed to develop, market and distribute
a  customized  version of the My Search  toolbar  and to  operate an  integrated
sweepstakes  and loyalty program for users of our Altnet  peer-to-peer  software
application. The search toolbar will be bundled and distributed with the "Altnet
Loyalty Points Manager," our point's management  software program. We received a
refundable (under limited  circumstances),  non-recoupable  signing bonus in the
aggregate amount of $200,000 in April 2003. We will be recognizing this bonus as
revenue over the life of the  agreement;  as a result we  recognized  $25,000 as
revenue  during the three months ended June 30, 2003. In May 2003 we received an
additional  refundable (under limited  circumstances)  and recoupable advance of
$300,000 to be earned when we satisfied certain  conditions under the agreement.
We have satisfied all of these conditions, and accordingly recognized $86,000 as
revenue  during the


                                       18


<PAGE>


quarter ended June 30, 2003.  The agreement  also provides for ongoing  payments
between the parties,  based on the success in distributing  the browser plug-ins
and their performance.

         On  May  28,  2003  we  entered   into  a   non-exclusive,   perpetual,
irrevocable,  transferable,  worldwide license to use rights to Joltid's Content
Distribution Environment peer-to-peer computer program,  commonly referred to as
PeerEnabler.  In exchange for the license, we agreed to pay Joltid a monthly fee
based on a percentage of revenues  earned from the  exploitation of the licensed
rights, subject to a maximum aggregate amount.

         On June 11, 2003, we entered into an  Interactive  Marketing  Agreement
with Streamwaves.com,  Inc. to market and promote the streaming music service of
Streamwaves, and to sell Streamwaves' streamed music, video and, when available,
downloadable digital audio and video files over the Altnet peer-to-peer network.
As  consideration  for our  services,  we will be paid a  percentage  of revenue
Streamwaves  receives  from sales of its content to Altnet  users.  We will also
provide  Streamwaves and its customers with online payment  processing  services
for a transaction  fee. We loaned  Streamwaves  $200,000 in connection with this
transaction  pursuant to a secured promissory note, which note is secured by all
of Streamwaves  assets and shares of Streamwaves stock owned by its founder.  We
also  received a warrant to purchase  29,173,074  shares of  Streamwaves  common
stock. We have determined that the warrant to purchase  Streamwaves common stock
has  immaterial  value at this time,  and  therefore  have not recorded an asset
associated with the warrant.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

         We  believe  our most  critical  accounting  policies  include  revenue
recognition, the corresponding accounts receivable,  capitalization of purchased
technology  (intangibles),   and  our  use  of  the  consolidation  method  when
accounting for our subsidiaries.  We believe the following  critical  accounting
policies affect our more significant judgments and estimates used in preparation
of our consolidated financial statements.

         Under  SEC  Staff  Accounting  Bulletin  No.  101 (SAB  101) and  AICPA
Statement of Position 97-2 (SOP 97-2),  generally we recognize  revenue when all
of the following  criteria are met: (1)  persuasive  evidence of an  arrangement
exists,  (2)  delivery  has  occurred or services  have been  rendered,  (3) the
seller's price to the buyer is fixed or determinable,  and (4) collectibility is


                                       19


<PAGE>


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.  We do not have material  exposure to any single customer or
group of customers at this time.  At June 30, 2003,  we had a reserve of $32,000
to cover three customers from whom collectibility is uncertain.

         We record  intangible  assets in accordance with Statement of Financial
Accounting  Standards (or FAS) 141 "Business  Combination" and FAS 142 "Goodwill
and other  Intangible  Assets".  FAS 141 requires  that the  purchase  method of
accounting be used for all business combinations  initiated after June 30, 2001,
and also  specifies  the  criteria  for the  recognition  of  intangible  assets
separately  from  goodwill.   FAS  142  requires  that  intangible  assets  with
definitive lives be amortized over their estimated useful lives and reviewed for
impairment  when events or changes in  circumstances  indicate that the carrying
amount of such assets may not be realized.

RESULTS OF OPERATIONS

         REVENUES.  During the six months ended June 30,  2003,  we continued to
earn advertising and development  revenues.  For the first time we earned Patent
Sublicense Revenue through our newly signed agreement with Sharman Networks.  We
recognize the Sharman Networks revenue on a monthly basis as earned. In addition
we are now earning installation bounty and search revenue,  which relates to our
new  agreement  with  The  Excite  Network.  Subject  to  specific  terms of the
agreement,  we are paid non-refundable  bounties for each active installation of
the Excite  Activated  Installation  Toolbar bundled for  distribution  with our
Altnet Loyalty Points Manager software application. In addition we will share in
the gross profit generated from the Activated  Installation  Toolbar in the form
of paid  searches.  We  recognize  The  Excite  Network  revenues  as  Activated
Installations  are  recorded,  and as our gross profit share of paid searches is
reported.  We have also begun to recognize revenues as we continue to expand our
business  of  providing  digital  content  through  the use of our  peer-to-peer
technology, primarily through our Altnet, Inc. subsidiary.

         Revenues increased 241% from $668,000 for the six months ended June 30,
2002 to  $2,280,000  for the six months  ended June 30, 2003.  Distribution  and
technology  revenue from a related party,  which consists of revenue earned from
the e-New Media  contract,  was $459,000 for 2003 and $250,000 for 2002.  During
the six months ended June 30, 2003, we recognized  $890,000 of Patent Sublicense
revenues  under  our  new  agreement  with  Sharman  Networks,  relating  to its
sublicense from us of the TrueNames patent. During the six months ended June 30,
2003, we recognized $369,000 in revenue relating to the sale of digital content,
primarily through our Altnet subsidiary, and $148,000 of search revenue.


                                       20


<PAGE>


         The following table shows revenues by product or service grouping:

                                       JUNE 30,       JUNE 30,
             REVENUES                    2002           2003        NET CHANGE
--------------------------------      ---------      ----------     -----------

e-New Media Technology..........      $ 250,000      $  459,000     $  209,000
Patent Sublicense...............             --         890,000        890,000
Digital content.................             --         369,000        369,000
Search .........................             --         148,000        148,000
Advertising and Development.....        418,000         414,000         (4,000)
                                      ---------      ----------     ----------

Total Revenue...................      $ 668,000      $2,280,000     $1,612,000
                                      =========      ==========     ==========


         COST OF REVENUES.  Cost of revenues  consists  primarily of the cost of
providing internet bandwidth for Altnet and amortization of licensing  royalties
to third  parties.  Cost of revenues  increased from $188,000 for the six months
ended June 30, 2002 to $289,000  for the six months  ended June 30,  2003.  This
represents an increase of $101,000,  or 54%, which is primarily due to increased
bandwidth costs resulting from increased  distribution of digital files over the
Altnet network.

         SALES AND  MARKETING.  Sales and marketing  expenses  increased by 218%
from  $125,000  for the six months  ended June 30, 2002 to $397,000  for the six
months  ended June 30, 2003.  Of the  $397,000  incurred in the six months ended
June 30, 2003,  $185,000 pertains to fees to sales consultants for Altnet,  Inc.
and for our initial marketing  efforts for Altnet,  Inc. There was also $100,000
attributable to commissions paid for securing new business.

         GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses
primarily  include  salaries  and  benefits  of  management  and  administrative
personnel,   rent,   insurance  costs  and   professional   fees.   General  and
administrative  expenses  increased  $375,000 or 21% from $1,808,000 for the six
months ended June 30, 2002 to $2,183,000 for the six months ended June 30, 2003.
This increase is primarily  attributable  to an increase of $221,600 in non-cash
warrant  expense,  attributable  to the  14,000,000  warrants  issued to Sharman
Networks under our Joint Enterprise  Agreement and the 1,066,666 warrants issued
in conjunction  with the June 2003 promissory  notes, in addition to an increase
in  payroll  and  related  costs  associated  with  the  growth  of  our  Altnet
peer-to-peer business.

         RESEARCH AND  DEVELOPMENT.  Research and development  expenses  include
salaries and benefits of personnel  conducting research and development relating
to our Internet web site, Internet banner  advertisements and the development of
Altnet's Points Manager  software  application.  These costs increased 126% from
$136,000  for the six months  ended June 30, 2002 to $307,000 for the six months
ended June 30, 2003 primarily due to the development of Altnet's Points Manager.

         DEPRECIATION  AND   AMORTIZATION.   Depreciation   expense  relates  to
depreciation of fixed assets such as computer  equipment and cabling,  furniture
and fixtures and leasehold improvements. These fixed assets are depreciated over
their estimated useful lives (up to five


                                       21


<PAGE>


years) using the straight-line  method.  Amortization  expense is related to the
amortization  of  Purchased  Technology,  associated  with  the  acquisition  of
additional  ownership  interest in Altnet,  from  Joltid,  Ltd.  This  Purchased
Technology is being  amortized over the life of the agreement,  three years.  We
recognized $28,000 of amortization  expense during the six months ended June 30,
2003.  Depreciation expense has remained a consistent expense of $31,000 for the
six months  ended June 30,  2002 to  $25,000  for the six months  ended June 30,
2003, as the depreciable assets have not materially changed.

         OTHER  INCOME AND  EXPENSE.  Other  income and expense  includes  other
income,  interest  expense  and the  amortization  of debt  discount  on capital
financing.  Other income and expense increased from an expense of $1,775,000 for
the six months  ended  June 30,  2002 to income of  $896,000  for the six months
ended June 30, 2003. This $2,671,000 increase was primarily  attributable to the
recognition  of $2,097,000 of deferred  revenues  under the agreement with e-New
Media,  entered into in February  2000. As part of this  agreement,  we received
advances of $2,500,000 that we were  recognizing over six years, the term of the
agreement.  During the second  quarter ended June 30, 2003, we determined we had
met all of our  obligations  under the agreement  with e-New Media.  In light of
these  factors,  we  recognized  the remaining  balance of the deferred  revenue
relating to the agreement.  We also had a $780,000 reduction in interest expense
during 2003.  For the six months  ended June 30, 2002,  the expense was due to a
non-cash debt discount  expense of $1,573,000  and accrued  interest  expense of
$179,000  incurred in connection  with the $3,014,150 in Convertible  Promissory
Notes.  During the six months  ended June 30,  2003,  we  amortized  as non-cash
interest  expense,  $741,000  of debt  discount  related  to  these  Convertible
Promissory Notes. In addition,  we incurred accrued interest expense of $185,000
in connection  with the notes during the six months ended June 30, 2003.  During
the  quarter  ended June 30,  2003 we wrote off  $206,000  of  unamortized  fees
relating to several agreements that were terminated in 2003.

LIQUIDITY AND CAPITAL RESOURCES

         As  of  June  30,  2003,   our  cash  and  cash   equivalents   totaled
approximately  $594,000. This is an increase of $358,000 as compared to December
31, 2002.

         Cash flows from operating,  financing and investing  activities for the
six months ended June 30, 2003 and 2002 are summarized in the following table:

         ACTIVITY:                           2002              2003
         -------------------------       -----------       -----------

         Continuing Operations ....      $(1,470,000)      $ 2,128,000
         Investing ................      $      --         $(1,703,000)
         Financing ................      $ 1,607,000       $   (75,000)

         During the six months  ended June 30,  2003,  we had a net  increase in
cash of $358,000, which was primarily attributable to lump sum payments received
under several  agreements,  including  those with The Excite  Network,  Inc. and
Sharman  Networks.  The net cash provided in operating  activities of $2,128,000
during  the six  months  ended  June 30,  2003 was  primarily  the net result of
non-cash related transactions  recognized in conjunction with the acquisition of
additional ownership in Altnet of $1,680,000, the issuance of warrants connected
with the Sharman Joint Enterprise  Agreement of $2,869,000,  and the increase in
accounts  payable of


                                       22


<PAGE>


$1,272,000.  These  amounts  were  offset  by a  decrease  in  deferred  revenue
associated  with a change in  accounting  estimate  related  to the e-New  Media
agreement  of  $2,097,000,  and the  decrease  in  Other  Assets  of  $2,014,000
associated with the amortization deferred warrant expense.

         Net cash used in  investing  activities  of  $1,703,000  was  primarily
attributed to non-cash related transactions,  including the $1,680,000 effect of
recognizing  the  purchased  technology   associated  with  the  acquisition  of
additional ownership in Altnet from Joltid, Ltd.

         Net cash used by financing  activities  was  primarily  attributed to a
$222,000  increase  in  restricted  cash and  marketable  securities,  offset by
$133,000 in proceeds  from the sale of  promissory  notes,  $67,000 of which was
received  from an  affiliate of our  Chairman.  This is compared to a slight net
increase in cash during the six months ended June 30, 2002 of  $137,000.  During
2002, the net loss of $3,395,000 was offset by the proceeds from the issuance of
common  stock of  $1,229,000,  as well as proceeds  from the issuance of capital
financing,  and increases in accrued  interest  related to the then  outstanding
convertible debt of $400,000 and $1,723,000 respectively.

         We signed two new,  two-year,  facility  lease  agreements  in February
2003. As of June 2003, the commitments under these leases were as follows:

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

                      2003           $ 35,000           $ 18,900
                      2004             69,000             41,500
                      2005              5,700              7,000
                                     --------           --------
                                     $109,700           $ 67,400
                                     ========           ========


         Our operations generated negative cash flow during the six months ended
June 30, 2002 and we are  reporting a net loss for the six months ended June 30,
2003.  We expect a  significant  use of cash  during the  remainder  of the 2003
fiscal year as we continue to initiate the business opportunity for Altnet, Inc.
We anticipate  that our current cash reserves,  plus our expected  generation of
cash from existing  operations,  may not be  sufficient to fund our  anticipated
expenditures  into the fourth  quarter  of 2003.  Consequently,  we may  require
additional  equity or debt financing during 2003, the amount and timing of which
will depend in large part on our spending  program.  Our recent  financings have
been  significantly  dilutive to our  stockholders  and if additional  funds are
raised  through  the  issuance  of  equity  securities,   our  stockholders  may
experience  significant  additional  dilution.  Furthermore,  there  can  be  no
assurance  that  additional  financing  will be available when needed or that if
available,  such financing will include terms  favorable to our  stockholders or
us. If such  financing is not  available  when  required or is not  available on
acceptable  terms,  we may be unable to  develop  or enhance  our  products  and
services,  take  advantage of business  opportunities  or respond to competitive
pressures,  any of which could have a material  adverse  effect on our business,
financial  condition and results of operations,  and would most likely result in
our having to file for bankruptcy protection under the Bankruptcy Code.


                                       23


<PAGE>


         The accompanying  consolidated  financial statements have been prepared
assuming  that we will  continue  as a going  concern,  which  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business.  The carrying  amounts of assets and  liabilities  presented in the
financial  statements  do not  purport to  represent  realizable  or  settlement
values.  The report of our  Independent  Certified  Public  Accountants  for the
December  31,  2002  financial  statements  included  an  explanatory  paragraph
expressing substantial doubt about our ability to continue as a going concern.

NEW ACCOUNTING PRONOUNCEMENTS

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

         In May 2003,  the FASB  issued  SFAS No.  150  ACCOUNTING  FOR  CERTAIN
FINANCIAL  INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS
No. 150 establishes  standards for how an issuer classifies and measures certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some  circumstances).  Many of these  instruments
were previously  classified as temporary equity.  SFAS No. 150 will be effective
for  financial  instruments  entered into or modified  after May 31,  2003,  and
otherwise  shall be  effective  at the  beginning  of the first  interim  period
beginning  after June 15, 2003.  For financial  instruments  created  before the
issuance date of SFAS No. 150 and still existing at the beginning of the interim
period of adoption,  transition  shall be achieved by reporting  the  cumulative
effect of a change in accounting  principle by initially measuring the financial
instruments at fair value or other  measurement  attribute  required by SFAS No.
150.  Instruments  with  characteristics  of both  liabilities  and  equity  not
addressed  in SFAS No. 150 will be  addressed  in the next phase of the project.
Adoption  of SFAS No.  150 is not  expected  to have a  material  impact  on the
Company's consolidated financial position, results of operations or cash flows.

CAUTIONARY STATEMENTS AND RISK FACTORS

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

         THERE IS DOUBT ABOUT OUR ABILITY TO  CONTINUE  AS A GOING  CONCERN.  We
currently  have a number  of  obligations  that we are  unable  to meet  without
generating  additional  revenues  or raising  additional  capital.  If we cannot
generate  additional revenues or raise additional capital in


                                       24


<PAGE>


the near future, we may become insolvent.  As of June 30, 2003, our cash balance
was  approximately  $594,000 and our  outstanding  accounts  payable and accrued
expenses totaled  $2,507,000 not including the capital  financing  notes,  which
have  a  convertible   feature.   Historically,   we  have  funded  our  capital
requirements  with debt and equity  financing.  Our ability to obtain additional
equity or debt financing  depends on a number of factors including our financial
performance  and the overall  conditions in our industry.  If we are not able to
raise  additional  financing or if such financing is not available on acceptable
terms,  we may  liquidate  assets,  seek or be forced  into  bankruptcy,  and/or
continue  operations  but suffer  material harm to our  operations and financial
condition. These measures could have a material adverse affect on our ability to
continue as a going concern.

         WE HAVE A HISTORY OF LOSSES,  A NEGATIVE NET WORTH AND MAY NEVER ATTAIN
PROFITABILITY.  We have a limited  operating  history and realized a net loss of
$22,000  for the six  months  ended  June 30,  2003.  Since  inception,  we have
incurred  significant  losses and negative cash flow, and as of June 30, 2003 we
had an accumulated deficit of $60.9 million. We incurred comprehensive losses of
$3.4   million  for  the  six  months  ended  June  30,  2002  and  despite  the
comprehensive  income  reported  during the most recent quarter and year to date
period, 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 exceed our current assets.

         In fiscal 2002, we significantly  reduced the development and marketing
of our proprietary  software authoring tools, and our services for serving "rich
media" Internet banner advertisements  (banner advertisements that use audio and
animation).   Additionally,   we  have  ceased  all   internal   production   of
three-dimensional  animated  content.  While our past  activities in these areas
will continue to generate some future  revenue,  our business model assumes that
our growth and a significant portion of our future revenues will be derived from
our Altnet  peer-to-peer  business,  which only became operational in the fourth
quarter  of 2002.  This  business  model is not yet  proven  and we cannot  make
assurances  that we will  ever  achieve  or  sustain  profitability  or that our
operating  losses will not  increase in the future or be  inconsistent  with the
expectations  of the  public  market.  Primarily  as a result  of our  continued
losses, our independent public accountants included an explanatory  paragraph in
their opinion on our financial  statements  wherein they  expressed  substantial
doubt about our ability to continue as a going concern.

         OUR  RECENT  CAPITAL  RAISING  EFFORTS  HAVE  RESULTED  IN  SUBSTANTIAL
DILUTION TO OUR  STOCKHOLDERS  AND OUR FUTURE  CAPITAL NEEDS WOULD INCREASE THIS
DILUTION.  During 2001, we raised $3.0 million  through the sale of  convertible
promissory notes and common stock purchase warrants. The holders may convert the
promissory  notes,  which now mature on December 31, 2003, and accrued interest,
at any time into shares of our common stock at a price of $0.1203 per share. The
warrants  attached to the  promissory  notes have an expiration  date of May 23,
2004 and entitle the holders to purchase up to an aggregate of 69,768,745 shares
of our Common Stock at an exercise  price of $0.1353375  per share on 44,542,718
shares,  and at an exercise price of $0.2091 on 25,226,028  shares. The exercise
of the warrants  would increase the number of shares  outstanding  and result in
further dilution to our other stockholders.


                                       25


<PAGE>


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

         The table  below sets  forth the  number of shares of our Common  Stock
that could be acquired by the holders upon  conversion of the  promissory  notes
and exercise of the warrants,  and the  percentages  of our  outstanding  Common
Stock that the shares issued upon conversion and exercise would  represent.  The
amounts assume conversion on the maturity date of the promissory notes (December
31, 2003),  and include all interest  that would accrue on the entire  principal
amount  of the  promissory  notes  through  such  date.  The share  amounts  and
percentages are based on our closing share price of $0.36 on August 1, 2003, and
on  assumed  closing  share  prices of  $0.27,  $0.18 and  $0.09,  which  prices
represent  a 25%,  50% and 75%  decline,  respectively,  in our  August  1, 2003
closing share price. The table assumes that we would issue additional securities
at these prices,  and thus trigger the price adjustment  provisions of the notes
and  warrants.  The table also assumes that the warrants  would be exercised for
cash and that the holders would pay us the aggregate  exercise price $6,028,300.
The  percentages  are also  based  on  40,276,571  shares  of our  common  stock
outstanding on August 1, 2003

Percentage Decline in                                              Percentage of
   August 1, 2003              Assumed           Shares of          Outstanding
    Closing Price           Closing Price       Common Stock       Common Stock
---------------------       -------------       ------------       -------------
         --                     $0.36*            75,683,821            70.2%
         25%                    $0.27*            75,683,821            70.2%
         50%                    $0.18*            75,683,821            70.2%
         75%                    $0.09            101,164,040            71.5%
----------
* Based on the terms of the notes and  warrants,  if we sold  securities at this
share closing price the conversion  price of the notes and exercise price of the
warrants would be $0.1203 and $0.1353375 per share, respectively.

         Additionally,  during 2002, we raised an additional  $2,685,000 through
the sale of  15,451,318  shares of common stock at an average price per share of
$0.15,  and  in  connection  therewith  issued  warrants  to  purchase  up to an
additional  27,568,627  shares of common stock at exercise  prices  ranging from
$0.148725 to $0.28125  per share.  We  anticipate  that during the later part of
2003, 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.


                                       26


<PAGE>


         The following  table  illustrates  our  capitalization  as of August 1,
2003,  and  identifies  the number of shares issued and  outstanding  as of such
date,  as well as the  number of shares  that may be issued in the  future  upon
conversion  of  outstanding   convertible   promissory  notes  and  exercise  of
outstanding options and warrants:


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

Outstanding Common Stock                   40,276,571               25.9%
Convertible Promissory Notes,
  with accrued interest                    30,083,213               19.3%
Outstanding Warrants(1)                    58,764,912               37.8%
Outstanding Options                        26,395,018               17.0%
                                         ------------              ------
  Fully Diluted Shares of
     Common Stock(2)                      155,519,714              100.0%
----------
(1)      For purposes of this table,  we have only  included  warrants  that are
         "in-the-money"  (the exercise  price of the warrants is below the price
         of our  common  stock),  and the  number  of  shares  of  common  stock
         underlying the outstanding warrants has been calculated on a "cashless"
         exercise  basis,  whereby  the  holder of each  warrant  receives  upon
         exercise a number of shares of common  stock with a value  equal to (i)
         the total value of the shares  underlying  the  warrants  less (ii) the
         aggregate  exercise price of the warrants,  and is calculated  based on
         the  closing  sales  price of our common  stock on the  American  Stock
         Exchange on August 1, 2003, which was $0.36.
(2)      This number  excludes (i) 3,733,875  shares that have been reserved for
         issuance  under our 1996 Stock Option Plan that were not the subject of
         an outstanding  stock option or other award at August 1, 2003, and (ii)
         14,014,823 shares underlying warrants that have exercise prices ranging
         from $0.4385 to $0.6096 per share, and thus not "in-the-money."

         The following  table  illustrates  our  capitalization  as of August 1,
2003,  and  identifies  the number of shares issued and  outstanding  as of such
date,  as well as the  number of shares  that may be issued in the  future  upon
conversion  of  outstanding   convertible   promissory  notes  and  exercise  of
outstanding  options  and  warrants.  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:


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

Outstanding Common Stock                   40,276,571               18.7%
Convertible Promissory Notes, with
  accrued interest                         30,083,213               13.9%
Outstanding Warrants                      118,583,790               55.1%
Outstanding Options                        26,395,018               12.3%
                                         ------------              ------
  Fully Diluted Shares of
     Common Stock                         215,338,592              100.0%


                                       27


<PAGE>


         IF WE  BECOME  INSOLVENT,  WE  WILL BE IN  DEFAULT  UNDER  OUR  SECURED
CONVERTIBLE  PROMISSORY  NOTES,  WHICH  COULD  RESULT IN OUR  OBLIGATION  TO PAY
IMMEDIATELY ALL AMOUNTS THEN OUTSTANDING UNDER THE NOTES. If we generally do not
pay,  or become  unable to pay,  our debts as such  debts  become  due,  we will
default under our  outstanding  Secured  Convertible  Promissory  Notes,  in the
aggregate  principal  amount of $3.0 million.  If a default occurs,  all amounts
owed to the holders of the notes would  immediately  become due and payable.  If
the debt  becomes due before its maturity in December  2003,  we likely will not
have sufficient funds to repay the indebtedness,  which will entitle the holders
of the notes to exercise all of their rights and remedies, including foreclosure
on all of our assets which we pledged as collateral  to secure  repayment of the
debt.

         WE DO NOT MEET THE CONTINUED LISTING REQUIREMENTS OF THE AMERICAN STOCK
EXCHANGE,  AND OUR  STOCK  COULD BE  DELISTED  AT ANY  TIME.  Our  common  stock
currently is quoted on the American Stock Exchange.  For continued  inclusion on
the American Stock Exchange, we must meet certain tests, including maintaining a
sales price for our common stock above $1.00 per share,  and net tangible assets
of at least $6 million.  We currently  are not in  compliance  with both the bid
price  and  net  tangible  assets  requirements.  Specifically,  we  are  not in
compliance  with the  following  listing  requirements  as set forth in the AMEX
Company Guide:

         o        Section  1003  (a)(i) with  shareholders'  equity of less than
                  $2,000,000 and losses from  continuing  operations  and/or net
                  losses in two of our three most recent fiscal years;
         o        Section 1003 (a)(ii)  with  shareholders'  equity of less than
                  $4,000,000 and losses from  continuing  operations  and/or net
                  losses in three of our four most recent fiscal years;
         o        Section 1003 (a)(iii) with  shareholders'  equity of less than
                  $6,000,000 and losses from  continuing  operations  and/or net
                  losses in our five most recent fiscal years; and
         o        Section 1003 (a) (iv) in that we have  sustained  losses which
                  are so  substantial  in relation to our overall  operations or
                  our existing financial  resources,  or our financial condition
                  has become so impaired  that it appears  questionable,  in the
                  opinion  of the  exchange,  as to  whether  we will be able to
                  continue  operations  and/or  meet  our  obligations  as  they
                  mature.

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

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


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<PAGE>


could also become a "penny  stock."  The  trading  price per share of our common
stock likely would be reduced as a result.

         TO DEVELOP  PRODUCTS THAT 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.

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

         o        variations in quarterly operating results;
         o        the gain or loss of significant contracts;
         o        changes in management;
         o        announcements of technological  innovations or new products by
                  us or our competitors;
         o        recommendations by securities industry analysts;
         o        dilution to existing stockholders  resulting from the issuance
                  of additional shares of common stock; and
         o        short sales and hedging of our common stock.

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

         IF  OUR  STOCK  DOES  NOT  SUSTAIN  A   SIGNIFICANT   TRADING   VOLUME,
STOCKHOLDERS  MAY BE UNABLE TO SELL LARGE  POSITIONS IN OUR COMMON STOCK. In the
past,  our common  stock has not  experienced  significant  trading  volume on a
consistent  basis and has not been actively  followed by stock market  analysts.
The average  trading  volume in our common stock may not increase or sustain its
current  levels.  As a result,  we cannot be certain  that an  adequate  trading
market will exist to permit  stockholders  to sell large positions in our common
stock.


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<PAGE>


         FLUCTUATIONS IN OPERATING  RESULTS MAY RESULT IN UNEXPECTED  REDUCTIONS
IN REVENUE AND STOCK PRICE VOLATILITY. We operate in an industry that is subject
to significant  fluctuations in operating results from quarter to quarter, which
may lead to  unexpected  reductions  in  revenues  and stock  price  volatility.
Factors that may influence our quarterly operating results include:

         o        the  introduction  or  enhancement  of software  products  and
                  technology by us and our competitors;
         o        the use by animators  of our  toolsets to create  b3d-produced
                  content;
         o        the market's acceptance of our 3D Brilliant Banner advertising
                  format; and
         o        our  ability  to operate  and  expand our Altnet  peer-to-peer
                  business.

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

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

         WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE
PRICE  OF OUR  COMMON  STOCK.  Our  ability  to issue up to  700,000  shares  of
preferred  stock and some  provisions of our  certificate of  incorporation  and
bylaws and of  Delaware  law could make it more  difficult  for a third party to
make an unsolicited  takeover  attempt of us. These  anti-takeover  measures may
depress  the price of our  common  stock by making  third  parties  less able to
acquire  us by  offering  to  purchase  shares of our stock at a premium  to its
market price. Our Board of Directors can issue up to 700,000 shares of preferred
stock and determine the price, rights, preferences, privileges and restrictions,
including  voting rights,  of those shares without any further vote or action by
our  stockholders.  Our Board of Directors  could issue the preferred stock with
voting,  liquidation,  dividend and other  rights  superior to the rights of our
common stock.  The rights of holders of our common stock will be subject to, and
may be adversely affected by, the rights of holders of the share purchase rights
and of any  preferred  stock that may be issued in the future.  The  issuance of
preferred  stock,  while  providing  desirable  flexibility  in connection  with
possible  acquisitions and other corporate purposes could make it more difficult
for a third party to acquire a majority of our outstanding voting stock.


                                       30


<PAGE>


RISKS RELATED TO OUR BUSINESS

         ALTNET IS AN UNPROVEN  BUSINESS  VENTURE  AND MAY  REQUIRE  SIGNIFICANT
CAPITAL TO BE  SUCCESSFULLY  IMPLEMENTED.  Our Altnet  peer-to-peer  business is
unproven and we cannot  guaranty  that it will be  financially  successful.  The
success of the business  will depend,  in part, on our ability to enter into end
user agreements with a sufficient  number of qualified  personal computer owners
to  allow  the  network  to work  efficiently  and  effectively,  acceptance  by
corporate customers of our services, the technical viability of the commercially
available digital rights  management,  or DRM, software we employ to protect the
proprietary  content  that will pass  through  the Altnet  network and reside on
network  computers,  acceptance  of content  offered  through  TopSearch,  broad
acceptance and use of our micro-payment  processing  system,  and our underlying
peer-to-peer  technology.  Additionally,  we do not have  sufficient  capital to
internally fund Altnet's development and operations.  Consequently,  the capital
necessary  to fund  Altnet  and  expand  the  operations  will need to come from
outside  sources.  We cannot make  assurances  that  sufficient  capital will be
available at all or on terms  acceptable to us to fund Altnet's  development and
operations.

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

         OUR FAILURE TO MAINTAIN A STRATEGIC  RELATIONSHIP WITH SHARMAN NETWORKS
COULD  ADVERSELY  AFFECT  OPERATING  RESULTS.  We  receive  compensation  as the
exclusive representative of Sharman Networks for the sale, license, and/or other
commercial  exploitation  of index  search  results  displayed  on or  otherwise
accessed using the Kazaa Media Desktop in response to end user search  requests.
Additionally,   through  our  business  development   arrangement  with  Sharman
Networks,  we receive  compensation  for the sale of  advertising  campaigns and
other revenue  received by Sharman  Networks,  which is generated as a result of
our  efforts.  We also receive a monthly  license fee from  Sharman  networks in
connection with its license from us of rights to the TrueNames  patent. 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


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<PAGE>


by bundling it with Sharman  Networks' Kazaa Media Desktop.  We rely on computer
users' demand for the Kazaa Media Desktop to increase the installed  base of our
Altnet software, which is necessary to connect users to our private peer-to-peer
network.  Additionally,  through our  agreement  with Sharman  Networks,  Altnet
distributes  and sell  digital  files to users of the Kazaa Media  Desktop.  Our
business,  results of  operations  and financial  condition  could be materially
adversely  affected if we do not maintain  our  distribution  relationship  with
Sharman  Networks on acceptable terms or if this  relationship  does not achieve
the projected distribution of our Altnet software or sales of authorized digital
files.

         CURRENT LITIGATION AGAINST SHARMAN NETWORKS LIMITED MAY PREVENT FURTHER
DISTRIBUTION  OF OUR ALTNET  PEER-TO-PEER  SOFTWARE,  AND  ADVERSELY  AFFECT OUR
ABILITY TO SERVE BRILLIANT  BANNERS ON, AND DISTRIBUTE AND SELL DIGITAL FILES TO
USERS OF, THE KAZAA MEDIA DESKTOP. A disruption in the distribution of the Kazaa
Media Desktop or its use by consumers would necessarily adversely impact (1) the
future distribution of our Altnet software,  (2) revenues we derive from serving
Brilliant  Banners  on the  Kazaa  Media  Desktop,  and  (3)  Altnet's  sale  of
authorized digital files to users of the Kazaa Media Desktop. For the six months
ended June 30, 2003, we generated  approximately  80% of our total revenues from
activities  dependent  upon the  availability  of the  Kazaa  Media  Desktop  to
computer users. If there is a disruption in the  distribution of the Kazaa Media
Desktop or its use by  consumers,  we may not be able to replace  this source of
revenue in the short term, or at all. Sharman Networks, the Kazaa Media Desktop,
and other  peer-to-peer  software  products,  are  currently  the  subject  of a
lawsuit,  METRO-GOLDWYN-MAYER  STUDIOS,  INC. ET. AL. V.  GROKSTER LTD. ET. AL.,
filed in the United States District Court for the Central District of California
(Western Division) by twenty-eight  entertainment companies claiming that, among
other things, the Kazaa Media Desktop facilitates, contributes to and encourages
copyright infringement.  On November 18, 2001, there was an additional complaint
filed,  LIEBER ET. AL. V. CONSUMER  EMPOWERMENT  B.V. ET. AL. To the extent that
Sharman  Networks is precluded  from  distributing  the Kazaa Media Desktop as a
result  of this  litigation,  our  business  and  financial  condition  could be
materially and adversely affected.  While we understand that Sharman Networks is
vigorously defending against the claims raised in this litigation, we are unable
to determine at this time whether Sharman Networks will prevail.

         OUR  BUSINESS  MODEL  CONTEMPLATES  RECEIVING  A PORTION  OF OUR FUTURE
REVENUES FROM RICH MEDIA INTERNET ADVERTISEMENTS  DEVELOPED AND SERVED USING OUR
SOFTWARE TOOLS, AND FROM INTERNET ADVERTISING SERVICES.  INTERNET ADVERTISING IS
DEPENDENT ON THE ECONOMIC  PROSPECTS OF  ADVERTISERS  AND THE ECONOMY IN GENERAL
AND RECENTLY HAS  EXPERIENCED A  SIGNIFICANT  DECLINE.  A CONTINUED  DECREASE IN
EXPENDITURES  BY ADVERTISERS OR A PROLONGED  DOWNTURN IN THE ECONOMY COULD CAUSE
US TO FAIL TO ACHIEVE OUR REVENUE  PROJECTIONS.  While we significantly  reduced
the  development  and marketing of our Internet  advertising  business in fiscal
2002 in favor of our  Altnet  peer-to-peer  business,  we intend to pursue  some
revenue from this business  during fiscal 2003. We are focusing a portion of our
resources on generating revenues from the sale of our b3d tools for the creation
of rich media  Internet  advertisements  and from the sale of  technologies  and
services  to web  publishers,  third  party  advertising  representation  firms,
advertisers  and  agencies.   In  recent  quarters,   the  market  for  Internet
advertising has experienced lower demand,  lower prices for  advertisements  and
the  reduction  of  marketing  and  advertising   budgets.   As  a  consequence,
expenditures for Internet  advertisements  have decreased.  We cannot be certain
that future decreases will not occur and that spending on Internet advertisement
will return to historical  levels. A continued decline in the economic


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<PAGE>


prospects  of  advertisers  or the economy in general  could cause us to fail to
achieve our advertising-related revenue projections.

         WE WILL NOT BE ABLE TO GENERATE REVENUES FROM OUR BRILLIANT BANNERS AND
OTHER B3D CONTENT  WITHOUT A BROAD BASE OF  INSTALLED  DIGITAL  PROJECTORS.  Our
Digital  Projector must be installed on a user's computer in order for that user
to view our  Brilliant  Banners and other b3d content.  If we do not achieve and
maintain  widespread  installation of our Digital  Projector,  there will not be
substantial  demand for  b3d-produced  content or our  software  tools.  We have
discontinued  the  production  of  3D  animated   entertainment,   such  as  our
MultipathTM  Movies  and  animated  music  videos.  The  user's  demand for this
entertainment helped drive installation of our Digital Projector. Presently, the
substantial  majority of b3d content  consists of  Brilliant  Banners.  Computer
users are less likely to  voluntarily  install our Digital  Projector or keep it
installed if its use is almost exclusively for viewing Internet  advertisements.
Other  companies,  such as Lavasoft,  market  software  that removes our Digital
Projector  from a user's  computer.  The  widespread  use of this software could
diminish the number of installed  projectors,  which would reduce demand for our
Brilliant Banners by Internet advertisers and correspondingly  reduce the demand
for our b3d toolset by the creators of Internet advertisements.

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

         o        Acceptance of the Brilliant Banner  advertising  format by web
                  sites;

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

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

         WE MAY NOT BE ABLE TO COMPETE  EFFECTIVELY  WITH OTHER  COMPANIES  THAT
OFFER  SOFTWARE  TOOLS AND  SERVICES  SIMILAR TO OURS.  The  markets for our b3d
software  tools  are  highly   competitive  and  characterized  by  pressure  to
incorporate  new  features  and  accelerate  the  release  of new  and  enhanced
products. A number of companies currently offer content development products and
services that compete directly or indirectly with one or more of our tools sets.
These competitors include, among others,  Macromedia,  Inc., Adobe Systems, Inc.
as well as Pulse Entertainment,  Inc. and Viewpoint  Corporation.  As we compete
with larger  competitors  such as  Macromedia  across a broader range of product
lines and different  platforms,  we may face  increasing  competition  from such
companies.


                                       33


<PAGE>


         WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH MICROSOFT,  REAL NETWORKS
AND OTHER  COMPANIES IN THE MEDIA DELIVERY  MARKET.  The market for software and
services for the delivery of media over the Internet is constantly  changing and
highly competitive.  Companies such as Microsoft  Corporation and Real Networks,
Inc.  have   substantial   penetration  in  the  media  delivery   market,   and
significantly  greater  resources  than we do. More  companies  are entering the
market for,  and  expending  increasing  resources  to develop,  media  delivery
software and services.  We expect that  competition  will continue to intensify.
Because our b3d content, such as our Brilliant Banners, can only be viewed using
our Digital  Projector,  if we do not achieve a widespread  distribution  of our
media player,  there will not be substantial demand for b3d-produced  content or
our software tools. Similarly, we can only deliver digital files over our Altnet
peer-to-peer network to users that have downloaded the Altnet software. If we do
not achieve a widespread distribution of our Altnet software,  there will not be
substantial  demand by content  owners to distribute and sell their content over
the Altnet network.

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

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

         WE  WILL  NOT  BE  ABLE  TO  GENERATE  SIGNIFICANT  REVENUES  FROM  OUR
TECHNOLOGY  BUSINESS IF OUR B3D TOOLSET DOES NOT ACHIEVE MARKET ACCEPTANCE.  Our
b3d toolset may have programming errors, may be incompatible with other software
or hardware  products in the market,  may face slow adoption in the  marketplace
and may face competition from other toolmakers. Other factors that influence our
ability to generate revenues from our b3d toolset include:

         o        our marketing strategies;
         o        the quality of our products and competing products;
         o        critical reviews;
         o        the  availability of alternative  forms of  entertainment  and
                  leisure time activities;
         o        our  ability  to sell  advertising  and  sponsorships  for the
                  content;
         o        our  ability to  increase  the  installed  base of our Digital
                  Projector, which is necessary to view b3d-produced content;
         o        our  b3d  toolset  may  contain  features,   functionality  or
                  workflow  conventions  that may not be widely  accepted by our
                  target audience;


                                       34


<PAGE>


         o        our ability to  continue  to develop,  enhance and deliver the
                  toolset in accordance with established milestones; and
         o        the marketplace's reluctance to adopt a new toolset.

         OUR  PROPRIETARY  TECHNOLOGY  MAY  NOT  BE  ADEQUATELY  PROTECTED  FROM
UNAUTHORIZED  USE BY OTHERS,  WHICH  COULD  INCREASE  OUR  LITIGATION  COSTS AND
ADVERSELY  AFFECT OUR SALES.  Our  ability to compete  with other  entertainment
software companies depends in part upon our proprietary technology. Unauthorized
use by others of our  proprietary  technology  could  result in an  increase  in
competing  products and a reduction in our sales. We rely on trademark,  patent,
trade  secret and  copyright  laws to protect  our  technology,  and require all
employees and third-party developers to sign nondisclosure  agreements.  We have
been issued two  patents  and have  pending 6  additional  patent  applications,
all-relating to our b3d toolset. We cannot be certain that our reliance on these
laws and  nondisclosure  agreements  will  provide  meaningful  protection  from
unauthorized use by others.  We do not  copy-protect our software,  so it may be
possible  for  unauthorized  third  parties to copy our  products  or to reverse
engineer or otherwise  obtain and use information that we regard as proprietary.
Our  customers  may take  inadequate  precautions  to  protect  our  proprietary
information.  If we  must  pursue  litigation  in  the  future  to  enforce  our
intellectual  property rights,  to protect our trade secrets or to determine the
validity and scope of the proprietary  rights of others,  we may not prevail and
will likely make  substantial  expenditures  and divert valuable  resources.  In
addition,  many foreign  countries' laws may not protect us from improper use of
our proprietary  technologies overseas. We may not have adequate remedies if our
proprietary rights are breached or our trade secrets are disclosed.

         IF OUR PRODUCTS  INFRINGE ANY PROPRIETARY  RIGHTS OF OTHERS,  A LAWSUIT
MAY BE BROUGHT  AGAINST US THAT COULD REQUIRE US TO PAY LARGE LEGAL EXPENSES AND
JUDGMENTS AND REDESIGN OR DISCONTINUE  SELLING OUR PRODUCT.  We believe that our
products,  including our Digital Projector,  b3d toolset and Altnet software, do
not  infringe  any  valid  existing  proprietary  rights of third  parties.  Any
infringement claims, however, whether or not meritorious, could result in costly
litigation  or require us to enter into royalty or licensing  agreements.  If we
are  found to have  infringed  the  proprietary  rights of  others,  we could be
required to pay damages, redesign the products or discontinue their sale. Any of
these outcomes,  individually  or  collectively,  could have a material  adverse
effect on our business and financial condition.

ITEM 4.  CONTROLS AND PROCEDURES.

         As of June 30, 2003, the end of the period covered by this report,  our
Chief Executive Officer and Chief Financial  Officer,  with the participation of
our management, carried out an evaluation of the effectiveness of our disclosure
controls and  procedures  pursuant to Exchange Act Rule 13a-14.  Based upon that
evaluation,  our Chief  Executive  Officer and Chief  Financial  Officer believe
that, as of the date of the evaluation,  our disclosure  controls and procedures
are  effective  in making  known to them  material  information  relating  to us
(including  our  consolidated  subsidiaries)  required  to be  included  in this
report.

         Disclosure  controls and  procedures,  no matter how well  designed and
implemented,  can provide  only  reasonable  assurance  of achieving an entity's
disclosure  objectives.  The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and


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<PAGE>


that breakdowns in internal  control can occur because of human failures such as
simple  errors or  mistakes  or  intentional  circumvention  of the  established
process.

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


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<PAGE>


                                     PART II

                                OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         In June 2003, we issued 8,000,000 shares of our common stock to Joltid,
Ltd.  Of  these  shares,  7,000,000  shares  were  issued  to  Joltid,  Ltd.  as
consideration  for the purchase of  1,102,500  shares of the common stock of our
majority-owned  and  controlled  subsidiary,  Altnet,  Inc.  As a result  of the
purchase,  we now own 75.5% of the outstanding  voting  securities of Altnet. We
simultaneously  acquired from Joltid, Ltd. a two year option to purchase Joltid,
Ltd.'s  remaining  1,102,500 shares of Altnet common stock for an exercise price
per share of 0.1575 newly  issued  shares of our common  stock,  or an aggregate
exercise price of 7,000,000 shares of our common stock for all of Joltid, Ltd.'s
remaining  Altnet  shares.  As  consideration  for the grant of this option,  we
issued to Joltid,  Ltd.  1,000,000  shares of our  common  stock.  Joltid,  Ltd.
represented  to us that it was an  "accredited  investor"  within the meaning of
Rule 501 of Regulation D under the Securities Act of 1933, and it was purchasing
the securities for investment and not in connection with a distribution thereof.
The issuance and sale of these  securities was exempt from the  registration and
prospectus delivery  requirements of the Securities Act pursuant to Section 4(2)
of the Securities Act as a transaction not involving any public offering.

         In June 2003, we issued to each of Michael  Toibb and Europlay  Capital
Advisors,  LLC (an entity in which Mark Dyne,  our  Chairman,  has an  ownership
interest),  warrants  to  purchase  533,333  shares  of our  common  stock at an
exercise  price of $0.28125 per share.  The warrants  have a term of three years
and are  exercisable  in full on September 11, 2003. The warrants were issued as
partial  consideration  for the loan by each  investor of $100,000 to us,  which
loans bear  interest at ten percent per annum and are due and payable in full on
August 10, 2003. Each of the investors in the transaction represented to us that
the  investor  was an  "accredited  investor"  within the meaning of Rule 501 of
Regulation  D under  the  Securities  Act of 1933,  and that such  investor  was
purchasing  the  securities  for  investment  and  not  in  connection   with  a
distribution  thereof. The issuance and sale of these securities was exempt from
the  registration  and prospectus  delivery  requirements  of the Securities Act
pursuant to Section 4(2) of the  Securities  Act as a transaction  not involving
any public offering.

         In June  2003,  we issued  to  Sharman  Networks  Limited  warrants  to
purchase up to  14,000,000  shares of our common  stock at an exercise  price of
$0.6096 per share.  The warrants  have a term of five years.  The warrants  were
issued  to  Sharman   Networks  Limited  in  connection  with,  and  as  partial
consideration  for the rights granted to us in, the Joint  Enterprise  Agreement
entered  into in June 2003  between  Sharman  Networks  Limited  and our  Altnet
subsidiary. These warrants were initially vested and exercisable with respect to
7,000,000 shares on the issuance date and will vest and become  exercisable with
respect to the remaining  7,000,000 shares two years following the issuance date
provide that the Joint  Enterprise  Agreement has not been  terminated  prior to
such date. Sharman Networks Limited represented to us that it was an "accredited
investor"  within the meaning of Rule 501 of  Regulation D under the  Securities
Act of 1933, and that it was purchasing the securities for investment and not in
connection  with  a  distribution  thereof.  The  issuance  and  sale  of  these
securities was exempt from the registration


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<PAGE>


and prospectus  delivery  requirements of the Securities Act pursuant to Section
4(2) of the Securities Act as a transaction not involving any public offering.

         In May 2003, we issued to Mark Dyne (our Chairman) and Kevin Bermeister
(our Chief Executive Officer and a member of our Board of Directors)  options to
purchase 8,208,500 and 2,186,018 shares, respectively, of our common stock at an
exercise price of $0.12 per share. These options were issued to Mr. Dyne and Mr.
Bermeister  in exchange  for the  relinquishment  of all their rights to receive
cash  payments  under a deferred  compensation  plan.  Each of Mr.  Dyne and Mr.
Bermeister  in the  transaction  represented  to us that he was  purchasing  the
securities for investment and not in connection with a distribution thereof. The
issuance  and sale of these  securities  was exempt  from the  registration  and
prospectus delivery  requirements of the Securities Act pursuant to Section 4(2)
of the Securities Act as a transaction not involving any public offering.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         On June 23, 2003, we held our 2003 Annual Meeting of  Stockholders.  At
the  annual  meeting,  there  were  32,114,978  shares  entitled  to  vote,  and
20,494,108  (64%)  were  represented  at the  meeting  in  person  or by  proxy.
Immediately  prior to and  following  the meeting,  the Board of  Directors  was
comprised of Mark Dyne, Kevin  Bermeister,  Mark Miller,  Russell  Simmons,  Ray
Musci, Garth Saloner, Jeff Scheinrock and Abe Sher.

         The following  summarizes  vote results for the proposal to elect Garth
Saloner  and Russell  Simmons to serve as our Class I directors  for three years
and  until  their  successors  have  been  elected,  which  was the sole  matter
submitted to our stockholders for action at the annual meeting:

              Director                    For                  Withheld
              --------                    ---                  --------
           Garth Saloner               20,452,901               41,207
          Russell Simmons              20,452,901               41,207


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      EXHIBITS - THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:

         10.1     Strategic Alliance, Marketing and Distribution Agreement dated
                  April 14, 2003 between Brilliant Digital  Entertainment,  Inc.
                  and The Excite Network, Inc.*

         10.2     Share Exchange and Option Agreement dated May 28, 2003 between
                  Brilliant Digital Entertainment, Inc. and Joltid, Ltd.

         10.3     Joltid Software Licensing Agreement dated May 28, 2003 between
                  Altnet, Inc. and Joltid, Ltd.*

         10.4     Form of Brilliant Digital Entertainment,  Inc. Promissory Note
                  dated June 11, 2003.


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<PAGE>


         10.5     Form of Warrant to Purchase Common Stock of Brilliant  Digital
                  Entertainment, Inc. dated June 11, 2003.

         10.6     Joint Enterprise Agreement dated June 23, 2003 between Altnet,
                  Inc. and Sharman Networks Limited.*

         10.7     Warrant  to  Purchase   Common  Stock  of  Brilliant   Digital
                  Entertainment,  Inc.,  dated June 23, 2003,  issued to Sharman
                  Networks Limited.

         10.8     Brilliant Digital  Entertainment,  Inc. Deferred  Compensation
                  Plan.

         10.9     Form  of  Brilliant  Digital   Entertainment,   Inc.  Deferred
                  Compensation Relinquishment Opportunity Agreement.

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

       * Certain  portions  of  this  agreement  have  been  omitted  and  filed
         separately  with the Securities and Exchange  Commission  pursuant to a
         request for an order granting  confidential  treatment pursuant to Rule
         24b-2 of the General Rules and  Regulations  under the  Securities  and
         Exchange Act of 1934, as amended.

(b)      Reports on Form 8-K.

         Current Report on Form 8-K dated June 6, 2003 reporting Items 5 and 7.


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<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                    BRILLIANT DIGITAL ENTERTAINMENT, INC.


Date: August 19, 2003                 /s/ Tyler Tarr
                                    -------------------------------------
                                    By:    Tyler Tarr
                                    Its:   Chief Financial Officer
                                           (Principal Financial and
                                           Accounting Officer)


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