SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-QSB


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

                 For the quarterly period ended March 31, 1997

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

            For the transition period from __________ to _________.


                        Commission file number 0-21637


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

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

                   6355 Topanga Canyon Boulevard, Suite 513
                       Woodland Hills, California 91367
                   (Address of Principal Executive Offices)


                                (818) 346-3653
               (Issuer's Telephone Number, Including Area Code)


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

                              Yes X     No 
                                 ----      ---

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:  Common Stock, par value
$0.001, 7,200,001 shares issued and outstanding as of April 30, 1997.

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

Exhibit index is located on page 21.


<PAGE>

<TABLE>
                     BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                     INDEX

<CAPTION>
                                                                     PAGE NO.
<S>                                                                  <C>
PART I    Financial Information                                            3

Item 1.   Financial Statements                                             3

          Condensed Consolidated Balance Sheet - March 31, 1997            3

          Condensed Consolidated Statements of Operation - Three months
          ended March 31, 1997 and 1996                                    4

          Condensed Consolidated Statements of Cash Flows - Three months 
          ended March 31, 1997 and 1996                                    5

          Notes to Consolidated Financial Statements                       6

Item 2.   Management's Discussion and Analysis of Financial Condition 
          and Results of Operations                                        7


PART II   Other Information                                                19

Item 6.   Exhibits and Reports on Form 8-K                                 19

</TABLE>


PAGE 2
<PAGE>

                                    PART I

                             FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEET
                                (IN THOUSANDS)

<CAPTION>
                                                                 MARCH 31,
                                                                   1997   
                                                                 ---------
                                                                (UNAUDITED)
<S>                                                             <C>
ASSETS
Current assets:

     Cash and cash equivalents                                    $ 6,841
     Accounts receivable, net                                          80
     Accounts receivable from related parties                          28
     Other current assets, net                                        174
                                                                  -------
Total current assets                                                7,123
Property, plant and equipment, net                                    401
Other assets                                                          282
                                                                  -------
Total assets                                                      $ 7,806
                                                                  =======


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued expenses                        $ 1,134
     Deferred revenue                                                 233
     Amounts payable to related parties                                82
                                                                  -------
Total current liabilities                                           1,449
Commitments and contingencies 
Stockholders' equity:
 Common stock                                                           7
     Additional paid-in capital                                    11,320
     Accumulated deficit                                           (4,951)
     Cumulative translation adjustment                                (19)
                                                                  -------
Total stockholders' equity                                          6,357
                                                                  -------
Total liabilities and stockholders' equity                        $ 7,806
                                                                  =======

</TABLE>

                            See accompanying notes.


PAGE 3
<PAGE>

<TABLE>
                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
                                                THREE MONTHS ENDED MARCH 31,
                                                ---------------------------
                                                    1996            1997
                                                -----------      ----------
                                                (UNAUDITED)      (UNAUDITED)
<S>                                             <C>              <C>
Revenues                                          $    584       $       74

Costs and expenses:
Costs of revenues                                      136                8
Sales and marketing                                     37               63
General and administrative                             105              540
Research and development                                99              489
Depreciation                                            26               51
                                                  ---------        ---------
                                                       403            1,151
                                                  ---------        ---------
Income (loss) from operations                          181           (1,077)
Other income (expense):
Gain (loss) on foreign exchange 
  transactions                                           3              (10)
Interest income (expense), net                         (11)              92
                                                  ---------        ---------
Total other income (expense)                            (8)              82
                                                  ---------        ---------
Income (loss) before income taxes                      173             (995)
Provision for income taxes                              --               (1)
                                                  ---------        ---------
Net income (loss)                                 $    173         $   (996)
                                                  =========        =========
Net income (loss) per share                       $   0.04         $  (0.14)
                                                  =========        =========
Weighted average number of shares used in
  computing net income (loss) per share              4,557            7,200
                                                  =========        =========

</TABLE>
                            See accompanying notes.


PAGE 4
<PAGE>

<TABLE>
                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)

<CAPTION>
                                                THREE MONTHS ENDED MARCH 31,
                                                ---------------------------
                                                    1996            1997
                                                -----------      ----------
                                                (UNAUDITED)      (UNAUDITED)
<S>                                             <C>              <C>
OPERATING ACTIVITIES
Net income (loss)                                  $   173          $  (996)
Adjustments to reconcile net income (loss) to
  the net cash provided by (used in) operating 
  activities:
    Depreciation and amortization                       26              121
    Changes in operating assets and liabilities:
      Accounts receivable                              279               --
      Accounts payable and accruals                     39              247
      Other assets                                      --              (87)
      Deferred revenue                                  --               70
                                                   --------         --------
Net cash provided by (used in) 
  operating activities                                 517             (645)
                    
INVESTING ACTIVITIES
Purchases of equipment                                  (1)            (111)
                                                   --------         --------
Net cash used in investing activities                   (1)            (111)

FINANCING ACTIVITIES
Increases in notes payable                             554               --
Repayments of notes payable                         (1,126)              --
                                                   --------         --------
Net cash provided by financing 
  activities                                          (572)              --
                                                   --------         --------

NET INCREASE (DECREASE) IN CASH AND 
  CASH EQUIVALENTS                                     (56)            (756)
Translation adjustments                                  3                6
Cash and cash equivalents at beginning 
  of period                                             86            7,591
                                                   --------         --------
Cash and cash equivalents at end of 
  period                                           $    33          $ 6,841
                                                   ========         ========
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
    Interest                                            --               --
                                                   ========         ========
    Income taxes                                   $    --          $     3
                                                   ========         ========

</TABLE>
                            See accompanying notes.


PAGE 5
<PAGE>


                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
                                MARCH 31, 1997
                                  (UNAUDITED)

1.   BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B.  Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.  The accompanying unaudited condensed
consolidated financial statements reflect all adjustments which, in the opinion
of management, are considered necessary for a fair presentation of the
financial position, results of operations, and cashflows 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. (the "Company") included in the Company's Form 10-KSB for
the transition period from July 1, 1996 to December 31, 1996.  The results for
the three months ended March 31, 1996 include the operations of BII Australia
only, while the results for the three months ended March 31, 1997 include the
operations of the parent company (Brilliant Digital Entertainment, Inc.), BII
Australia and SAND (see the Overview section of Management's Discussions and
Analysis of Financial Condition and Results of Operations). As a result of the
restructuring of the group and the change in the focus of the business, the
results for the three months ended March 31, 1996 are not comparable to those
for the three months ended March 31, 1997.


2.   NET INCOME (LOSS) PER SHARE

     Net income (loss) per share is computed using the weighted average number
of shares of common stock outstanding.  Common equivalent shares from stock
options and warrants (using the treasury stock method) have been included in
the computation when dilutive.  Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins and Staff policy, all common and common
equivalent shares issued by the Company at an exercise price below the public
offering price during the twelve-month period prior to the Company's initial
public offering (in November 1996) have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method at an initial public offering price of $5.00 per share for stock options
and warrants).

     In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128").  SFAS No. 128, effective for periods ending after December
15, 1997, revises the computation and disclosure of earnings per share. 
Principal among computation revisions is the replacement of primary earnings
per share with basic earnings per share, which does not consider common stock
equivalents.  In addition, SFAS No. 128 modifies certain dilutive computations
and replaces fully diluted earnings per share with diluted earnings per share.
Disclosure requirements include, among others, dual presentation of basic and
diluted earnings per share, along with a reconciliation of the elements used in
computing basic and diluted earnings per share.  At this time, the Company does
not expect that the adoption of SFAS No 128 will have a material impact on the
Company's reported results. 


PAGE 6
<PAGE>


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

OVERVIEW

     The Company's historical operations discussed in this section reflect only
the operations of BII Australia.  Since its founding in September 1993, BII
Australia has developed and sold interactive education and entertainment CD-ROM
titles primarily for children.  With the completion of the acquisition of SAND,
the nature of the Company's business changed significantly.  SAND is
responsible for developing the Multipath Movie Trademark suite of proprietary
software tools, production process and first Multipath Movie Trademark product.
While the Company will continue to produce traditional interactive CD-ROM
titles at reduced levels, the Company is focusing its efforts on the
development of the Multipath Movie Trademark tools and production process, as
well as the commercialization of the Multipath Movie Trademark (including the
StoryTeller) genre.  As a result of this change in the Company's business, the
following discussion of historical results is not representative of its
expected future operations.  The Company changed its fiscal year end from June
30 to December 31, effective December 31, 1996.

     The Company intends to generate a substantial majority of its future
revenue from the development and production of Multipath Movies Trademark and
other three-dimensional digitally created entertainment.  The first of its
Multipath Movies Trademark, CYBERSWINE, is expected to be released in the fall
of 1997.  The first product in the StoryTeller Series is not expected to be
released until late 1997.  The Company's annual and quarterly revenue will
depend upon the successful development, timing and market acceptance of its
interactive products and upon the costs to distribute and promote these
products.  Specifically, the revenues derived from the production and
distribution of the Company's Multipath Movies Trademark will depend primarily
on the acceptance by the market of the Multipath Movie Trademark concept and
the underlying content of the Multipath Movie Trademark, neither of which can
be predicted nor necessarily bear a direct correlation to the production or
distribution costs incurred.  The commercial success of a film also depends
upon promotion and marketing, production costs, impact of competition and other
factors.  Accordingly, the Company's annual and quarterly revenues are, and
will be, extremely difficult to forecast.

     The Company incurred significant operating expenses and development costs
as it continued development of its proprietary software tools and its Multipath
Movies Trademark and expanded in anticipation of growth.  As a result, the
Company incurred a loss in the three months ended March 31, 1997.  The Company
expects that these expenses and development costs will result in losses in the
quarter ended June 30, 1997, and that the Company could incur quarterly losses
thereafter.


RESULTS OF OPERATIONS

     REVENUES.  The Company historically has derived its revenues from
royalties, development fees and software sales.  Brilliant licenses its CD-ROM
software products to publishers and distributors in exchange for non-refundable
advances, and royalties based on product sales.  Royalties based on product
sales are due only to the extent revenues exceed any associated non-refundable
royalty advance.  Royalties related to non-refundable advances are recognized
when the CD-ROM master is delivered to the licensees.  Royalty revenues in
excess of non-refundable advances are recognized upon notification by the
distributor that a royalty has been earned by the Company. Development fees are
paid by customers in exchange for the Company's development of software
packages in accordance with customer specifications.  The software development
agreements generally specify certain "milestones" which must be achieved
throughout the development process.  As these milestones are achieved, the
Company recognizes the portion of the development fee allocated to each
milestone.  Software sales result from the Company selling to customers
completed software products developed by the Company.  Software sales revenues
are recognized upon shipment of product.  Revenues decreased from $584,000 for
the three months ended March 31, 1996 to $74,000 for the three months ended
March 31, 1997.  This represents a decrease of $510,000 or 87%.  The decrease
is mainly attributable to a change in the Company's focus to the development of
Multipath Movies Trademark.

PAGE 7
<PAGE>



     COST OF REVENUES.  Cost of revenues related to royalties consists
primarily of royalty obligations to third parties.  Cost of revenues related to
development fees consists primarily of salaries, benefits and overhead
associated with the development of specific software products to customer
specifications, as well as costs of outside contractors engaged from time to
time in creating aspects of software products such as animation, voice
recording and music.  Cost of revenues related to software sales consists
primarily of royalties to third parties and the direct costs and manufacturing
overhead required to reproduce and package software products.  Cost of revenues
decreased from $136,000 for the three months ended March 31, 1996 to $8,000 for
the three months ended March 31, 1997.  This represents a decrease of $128,000,
or 94%.  Cost of revenues in the 1996 period included costs associated with
development of the Company's own titles.  The reduction in cost of revenues in
the 1997 period is a result of the Company's change in focus to the development
of Multipath Movies Trademark and to the development of the associated software
tools.

     SALES AND MARKETING.  Sales and marketing expenses include primarily costs
for advertising, promotions, brochures, travel and trade shows.  Sales and
marketing expenses increased from $37,000 for the three months ended March 31,
1996 to $63,000 for the three months ended March 31, 1997.  This increase is
attributable to increased costs associated with the Company's participation in
trade shows.

     GENERAL AND ADMINISTRATIVE.  General and administrative expenses include
primarily salaries and benefits of management and administrative personnel,
rent, insurance costs and professional fees.  General and administrative
expenses increased from $105,000 for the three months ended March 31, 1996 to
$540,000 for the three months ended March 31, 1997.  This increase is
attributable to increased costs associated with the development of internal
management and infrastructure to support the Company's increased development
activity, and other services (such as accounting, legal and consulting
services) which are consistent with the Company's new status as a public
company.

     RESEARCH AND DEVELOPMENT.  Research and development expenses include
primarily salaries and benefits of personnel conducting research and
development for licensed software products.  Research and development costs
also include costs associated with creating the Company's traditional CD-ROM
software tools and the software tools used to develop Multipath Movies
Trademark.  Research and development expenses increased from $99,000 for the
three months ended March 31, 1996 to $489,000 for the three months ended March
31, 1997. This increase is attributable to the in-process research and
development costs incurred in connection with the development of Multipath
Movies Trademark and the Multipath Movie Trademark software tools.  As of March
31, 1997, technological feasibility of the Multipath Movie Trademark technology
had not been established.  In addition, the Company has identified no future
alternative uses for the acquired technology.  Therefore, in accordance with
Statement of Financial Accounting Standards No. 86 ("SFAS No. 86"), the results
of operations for the three months ended March 31, 1997 include in research and
development expenses of the Multipath Movie Trademark software development
costs.

     The Company estimates that it will reach technological feasibility of its
software development tools during the second quarter of 1997.  This is a
forward-looking statement however and is subject to uncertainties.  The
Company's policy is that technological feasibility is reached on completion of
its first Multipath Movie.  Numerous factors could cause a delay in the
reaching of technological feasibility, including software errors and conflicts
with other computer programs, in which case additional development may be
required to resolve such issues and until such development is completed,
technological feasibility will not be established.  The above and other factors
could result in the Company's software development tools not reaching
technological feasibility until a later date.

     DEPRECIATION.  Depreciation expense relates to depreciation of fixed
assets such as computer equipment and cabling, furniture and fixtures.  These
fixed assets are depreciated over their estimated useful lives (up to three
years) using the straight-line method.  Depreciation expense increased from
$26,000 for the three months ended March 31, 1996 to $51,000 for the three
months ended March 31, 1997.  This increase is primarily attributable to
additional computer equipment put in place during 1996.

     OTHER INCOME AND EXPENSE.  Other income includes interest income and
expenses, and losses on foreign exchange transactions.  Interest increased from
a net expense of $11,000 for the three months ended March 31, 1996 to net
income of $92,000 for the three months ended March 31, 1997 due to the higher
cash balances as a result of the initial public offering in November 1996 and
the extinction of all interest bearing debt.


PAGE 8
<PAGE>


FLUCTUATING OPERATING RESULTS

     The Company's expense levels are, to a large extent, fixed.  The Company
may be unable to adjust spending in a timely manner to compensate for any
revenue shortfall.  As a result, any significant shortfall in revenue from the
Company's Multipath Movies Trademark would have an immediate material adverse
effect on the Company's business, operating results and financial condition. 
The Company has increased, and expects to continue to increase its operating
expenses to fund greater levels of Multipath Movie Trademark development,
research and development, increased marketing operations and expansion of its
distribution channels.  To the extent that such expenses precede or are not
subsequently followed by increased revenues, the Company's business, operating
results and financial condition will be materially adversely affected.

     Historically, the Company has experienced significant fluctuations in its
operating results from quarter to quarter and it expects these fluctuations to
continue in the future.  Factors that may influence the Company's quarterly
operating results include customer demand for the Company's products,
introduction or enhancement of products by the Company and its competitors, the
timing of releases of new products or product enhancements by the Company and
its competitors, introduction or availability of new hardware, market
acceptance of the Multipath Movies Trademark and other new products,
development and promotional expenses relating to the introduction of new
products or enhancements of existing products, reviews in the industry press
concerning the products of the Company or its competitors, changes or
anticipated changes in pricing by the Company or its competitors, mix of
distribution channels through which products are sold, mix of products sold,
product returns, the timing of orders from major customers, order
cancellations, delays in shipment and other developments and decisions
including the timing and extent of development expenditures, management's
evaluation and judgment regarding a title's acceptance, and other unanticipated
operating expenses and general economic conditions.  Additionally, a majority
of the unit sales for a product typically occurs in the quarter in which the
product is introduced.  As a result, the Company's revenues may increase
significantly in a quarter in which a major product introduction occurs and may
decline in following quarters.  The Company's revenues both domestically and
internationally have varied significantly between monthly and quarterly
periods.  Therefore, in the future, the operating results for any quarter
should not be taken as indicative of the results for any quarter in subsequent
periods.

     The entertainment software business is highly seasonal.  Typically, net
revenues are highest during the fourth calendar quarter (which includes the
holiday buying season), decline in the first calendar quarter and are lowest in
the second and third calendar quarters.  This seasonal pattern is due primarily
to the increased demand for entertainment software products during the year-end
holiday buying season.  As a result, a disproportionate share of the Company's
net revenues historically have been generated in the fourth calendar quarter. 
The Company expects its revenues and operating results will continue to reflect
these seasonal factors.

     The entertainment industry historically has been subject to substantial
cyclical variation, with consumer spending for entertainment products tending
to decline during recessionary periods.  There can be no assurance that the
Company will be able to adjust its anticipated product development expenditures
and other expenses in the event of an economic downturn during such
development.  Accordingly, if a recessionary period occurs, tending to result
in decreased sales of the Company's products, product development expenses
likely will remain constant and the Company's business, operating results and
financial condition could be adversely affected


LIQUIDITY AND CAPITAL RESOURCES

     Prior to the Company's initial public offering in November 1996, a
substantial portion of its operations were financed through loans from PIE, a
significant shareholder.  PIE provided loans to the Company of approximately
$1,021,000, $746,000 and $8,000 during the fiscal years ended June 30, 1995 and
1996, and the six months ended December 31, 1996, respectively.  In the fiscal
years ended June 30, 1995 and 1996 and the six months ended December 31, 1996,
the Company repaid $541,000, $680,000 and $733,000, respectively.  As at
December 31, 1996, the loan had been fully repaid.

     During the six months ended December 31, 1996, the Company executed three
promissory notes in favor of Reefknot in the principal amounts of $150,000,
$50,000 and $145,000 to fund certain costs in connection with the initial
public offering.  These notes bore interest at the rate of 10% per annum and
were fully repaid by December 31, 1996.  In


PAGE 9
<PAGE>


November 1996, the Company's initial public offering of 2,000,000 shares of
Common Stock at $5 per share provided approximately $8.5 million in cash after
underwriters' discounts and commissions and offering expenses.

     Net cash provided by operating activities during the three months ended
March 31, 1996 was primarily attributable to revenues of $584,000 and a
reduction in accounts payable of $279,000.  Net cash used in operating
activities during the three months ended March 31, 1996 was primarily
attributable to a net loss of $1,016,000.  Net cash used in investing
activities in the three months ended March 31, 1997 was due primarily to the
purchase of computer equipment. Cash flows used in financing activities in the
three months ended March 31, 1996 was primarily attributable to the repayment
of advances to PIE and Reefknot.

     As of March 31, 1997, the Company had no material commitments other than
an advance from a customer for software development of $162,000 which will be
repaid from proceeds from the sales of the completed software, an obligation
under its agreement with Crawford Productions to contribute up to one half of
the costs incurred to develop and produce each project selected by the parties,
if any, for development into Multipath Movies Trademark, which total cost per
title is anticipated to be approximately $790,000 (as at March 31, 1997 one
project had been selected), an obligation under its agreement with Morgan Creek
to fund entirely the development of two Multipath Movies Trademark and a
commitment under its rental agreements for $553,000.

     As of March 31, 1997, the Company's principal source of liquidity was
approximately $6.8 million in cash.  The Company believes that these funds will
be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next 12 months.  Thereafter, if cash
generated by operations is insufficient to satisfy the Company's liquidity
requirements, the Company may sell additional equity or debt securities or
obtain credit facilities.  The sale of additional equity or convertible debt
securities will result in additional dilution to the Company's shareholders. 
There can be no assurance that financing will be available to the Company in an
amount and on terms acceptable to it.


RISK FACTORS

     This Report contains certain forward looking statements.  Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth below.


ACCEPTANCE OF MULTIPATH MOVIE CONCEPT; SUCCESSFUL DEVELOPMENT OF MULTIPATH
MOVIES WITH APPEALING CREATIVE CONTENT

     The success of the Company's Multipath Movie products will depend to a
significant extent on acceptance by the market of the Multipath Movie concept. 
The market for entertainment software is emerging and is dependent upon a
number of variables, including consumer preferences, the installed base of
personal computers and a sufficient number of entertainment software titles to
stimulate market development.  Any competitive, technological or other factor
materially adversely affecting the introduction or sale of personal computers
or entertainment software would have a material adverse effect on the Company. 
Because the market for entertainment software is relatively small in comparison
with the overall market for consumer software products, it is impossible to
predict with any degree of certainty the future rate of growth, if any, and the
size of the market for the Company's products. 

     Each Multipath Movie will be an individual artistic work, and its
commercial success primarily will be determined by user reaction, which is
unpredictable.  The Company has not yet introduced its first Multipath Movie. 
The commercial success of the Company's Multipath Movies will depend on its
ability to predict the type of content that will appeal to a broad audience and
to develop stories and characters that capture the attention and imagination of
the market.  In addition, the success of the Company's Multipath Movies will
depend upon the Company's ability to develop popular characters and to license
recognized characters and properties from third parties for its software
titles.  There can be no assurance that the Company will be able to develop or
license popular stories or characters.  The success of a Multipath Movie also
depends upon the effectiveness of the Company's marketing and successful
introduction of the first Multipath Movie through the Company's bundling
relationship with Packard Bell NEC, as well as the quality and acceptance of
other competing programs released into the market at or near the same time,
critical reviews, the availability of alternative forms of entertainment and
leisure time activities, general economic conditions and other


PAGE 10
<PAGE>

tangible and intangible factors, all of which can change and cannot be 
predicted with certainty.  There can be no assurance that the Company will be
able to successfully introduce the Multipath Movie through its bundling
relationship with Packard Bell NEC or otherwise.  Accordingly, there exists
substantial risk that some or all of the Company's Multipath Movies will not be
commercially successful, resulting in certain costs not being recouped or
anticipated profits not being realized.  Further, the success of the Multipath
Movie genre will substantially depend on the market's reception of the first
Multipath Movie.  The failure of the Company's initial Multipath Movie to
achieve commercial success would damage the ability of the Company to introduce
additional titles.  Accordingly, the failure of any of the Company's Multipath
Movies, and especially its first Multipath Movie, to achieve commercial
success, could have a material adverse affect on the business, operating
results and financial condition of the Company.


FLUCTUATING OPERATING RESULTS

     The Company intends to generate a substantial majority of its future
revenue from the development and production of Multipath Movies and other
three-dimensional digitally created entertainment.  The first of its Multipath
Movies, Cyberswine, is expected to be released in the fall of 1997.  The first
product in the StoryTeller Series is not expected to be released until late
1997.  The Company's annual and quarterly revenue will depend upon the
successful development, timing and market acceptance of its interactive
products and upon the costs to distribute and promote these products. 
Specifically, the revenues derived from the production and distribution of the
Company's Multipath Movies will depend primarily on the acceptance by the
market of the Multipath Movie concept and the underlying content of the
Multipath Movie, neither of which can be predicted nor necessarily bear a
direct correlation to the production or distribution costs incurred.  The
commercial success of a film also depends upon promotion and marketing,
production costs, impact of competition and other factors. Accordingly, the
Company's annual and quarterly revenues are and will continue to be extremely
difficult to forecast. 

     The Company's expense levels are, to a large extent, fixed.  The Company
may be unable to adjust spending in a timely manner to compensate for any
revenue shortfall.  As a result, any significant shortfall in revenue from the
Company's Multipath Movies would have an immediate material adverse effect on
the Company's business, operating results and financial condition.  The Company
plans to increase its operating expenses to fund greater levels of Multipath
Movie and traditional CD-ROM development, research and development, increased
marketing operations and expansion of its distribution channels.  To the extent
that such expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition
will be materially adversely affected. 

     Historically, the Company has experienced significant fluctuations in its
operating results from quarter to quarter and it expects these fluctuations to
continue in the future.  Factors that may influence the Company's quarterly
operating results include customer demand for the Company's products,
introduction or enhancement of products by the Company and its competitors, the
timing of releases of new products or product enhancements by the Company and
its competitors, introduction or availability of new hardware, market
acceptance of the Multipath Movies and other new products, development and
promotional expenses relating to the introduction of new products or
enhancements of existing products, reviews in the industry press concerning the
products of the Company or its competitors, changes or anticipated changes in
pricing by the Company or its competitors, mix of distribution channels through
which products are sold, mix of products sold, product returns, the timing of
orders from major customers, order cancellations, delays in shipment and other
developments and decisions including the timing and extent of development
expenditures, management's evaluation and judgment regarding a title's
acceptance, other unanticipated operating expenses and general economic
conditions.  Additionally, a majority of the unit sales for a product typically
occurs in the quarter in which the product is introduced.  As a result, the
Company's revenues may increase significantly in a quarter in which a major
product introduction occurs and may decline in following quarters.  The
Company's revenues both domestically and internationally have varied
significantly between monthly and quarterly periods.  Therefore, in the future,
the operating results for any quarter should not be taken as indicative of the
results for any quarter in subsequent periods. 

     The entertainment software business is highly seasonal.  Typically, net
revenues are highest during the fourth calendar quarter (which includes the
holiday buying season), decline in the first calendar quarter and are lowest in
the second and third calendar quarters.  This seasonal pattern is due primarily
to the increased demand for entertainment software products during the year-end
holiday buying season.  As a result, a disproportionate share of the Company's
net revenues historically have been generated in the last calendar quarter of
the Company's fiscal year.  The Company expects its revenues and operating
results will continue to reflect these seasonal factors. 


PAGE 11
<PAGE>


     The entertainment industry historically has been subject to substantial
cyclical variation, with consumer spending for entertainment products tending
to decline during recessionary periods.  There can be no assurance that the
Company will be able to adjust its anticipated product development expenditures
and other expenses in the event of an economic downturn during such
development.  Accordingly, if a recessionary period occurs, tending to result
in decrease sales of the Company's products, product development expenses
likely will remain constant and the Company's business, operating results and
financial condition could be adversely affected. 

     Due to all of the foregoing factors, it is also likely that in some future
periods the Company's operating results will be below the expectations of
public market analysts and investors.  In such event, the price of the
Company's Common Stock would likely be materially adversely affected.


SOFTWARE TOOLS AND PRODUCT DEVELOPMENT

     The suite of software tools that will enable the Company to create its
Multipath Movie has been developed over the past two years and additional
refinement of these tools may be necessary in order to create the Multipath
Movie.  The Company believes that its future success depends in large part upon
the continuous enhancement of the software tools necessary to create the
Multipath Movie.  If problems in the development of the Company's software
tools arise, no assurance can be given that the Company will be able
successfully to remedy these problems.  Even if the Company can remedy these
potential problems, the creation, and consequently the distribution, of the
Multipath Movie may be significantly delayed or could become significantly more
expensive.  Any such delay or increase in cost would have a material adverse
affect on the business, operating results and financial condition of the
Company. 

     For the foreseeable future, the Company expects to be significantly
dependent upon the success of the Multipath Movie.  The Multipath Movie is
still in the development stage.  The Company expects to release its first
product in the Multipath Movie product line in the fall of 1997.  There can be
no assurance that these products will be successfully developed at all, or if
successfully developed, will be released during these periods.  If the Company
is unable to timely produce and develop these products and subsequent digital
entertainment products that meet with broad market acceptance, the Company's
business, operating results and financial condition will be materially
adversely affected. 

     Also, entertainment products as complex as those offered by the Company
may contain undetected errors or defects when first introduced or as new
versions are released.  The Company has in the past discovered software errors
in certain of its new products and enhancements after their introduction. 
Although the Company has not experienced material adverse effects resulting
from any such errors to date, there can be no assurance that errors or defects
will not be found in new products or releases after commencement of commercial
shipments, resulting in adverse product reviews and a loss of or delay in
market acceptance, which would have a material adverse effect upon the
Company's business, operating results and financial condition. 


DEPENDENCE ON DEVELOPMENT OF ADDITIONAL MULTIPATH MOVIES

     The Company's success will depend largely upon its ability in the future
to continuously develop new, commercially-successful Multipath Movie titles and
to replace revenues from Multipath Movie titles in the later stages of their
life cycles.  If revenues from new products or other activities fail to replace
declining revenues from existing products, the Company's business, operations
and financial condition could be materially adversely affected.  In addition,
the Company's success will depend upon its ability to develop popular
characters and to license recognized characters and properties from third
parties for its digital entertainment products.  If the Company is unable to
develop popular characters or if the cost of licensing characters and
properties from third parties becomes prohibitive, the Company's business,
operating results and financial condition could be adversely affected.  Also,
pursuant to certain of its licensing arrangements, the Company historically
has, and may continue to, prepay royalties to third parties.  There can be no
assurance that the sales of products associated with these royalties will equal
or exceed the amount of the prepayment


PAGE 12
<PAGE>


LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY 

     The Company was founded in September 1993, and shipped its initial CD-ROM
product in November 1994.  The Company has not introduced its first Multipath
Movie and has only recently acquired the software tools necessary to produce a
Multipath Movie.  Accordingly, the Company has only a limited operating history
in the case of CD-ROM development and no operating history in the case of
Multipath Movies upon which an evaluation of the Company and its prospects can
be based.  There can be no assurance that the revenues of the Company will
continue at their current level or will increase, or that the Company will be
able to achieve profitability.

     The Company incurred a loss in the three months ended March 31, 1997.  The
Company expects to incur significant operating expenses and development costs
as it completes development, and commences marketing, of its Multipath Movies
and expands in anticipation of growth.  The Company expects that these expenses
and development costs will result in a loss in the quarter ended June 30, 1997,
and that, depending on the level of revenues, the Company could incur quarterly
losses thereafter. 


SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES

     The Company depends substantially upon third parties for several critical
elements of its business including the development and licensing of content and
the distribution of its products. 

DEPENDENCE UPON STRATEGIC RELATIONSHIPS

     The Company has entered into strategic relationships with Packard Bell
NEC, Crawford and Morgan Creek, as well as licensing arrangements with numerous
additional companies that own the stories underlying and/or characters in many
of the Company's products.  The Company's business strategy is based largely on
its strategic relationships with these and other companies.  In each of these
relationships, mutual agreement of the parties is required for significant
matters, or approval of the strategic partner or both parties is required to
release products or to commence distribution of products.  For example, the
Company will rely on Packard Bell NEC to distribute CD-ROMs to purchasers of
certain Packard Bell NEC computers as a significant element of the Company's
launch of the Multipath Movie genre.  Packard Bell NEC's obligation to
distribute such CD-ROMs will depend upon Packard Bell NEC's acceptance of
master CD-ROMs complying with the Company's specifications.  Consequently,
Packard Bell NEC may, in the exercise of its approval rights, delay the
introduction of the Company's first Multipath Movie.  Also, Morgan Creek and
Crawford have various creative controls and approval rights pursuant to their
joint venture agreements with the Company.  These creative controls and
approval rights allow Morgan Creek or Crawford to reject or delay the Multipath
Movie productions of the respective joint ventures.  There can be no assurance
that the Company will not be subject to delays resulting from disagreements
with or an inability to obtain approvals from its strategic partners or that
the Company will achieve its objectives in respect of any or all of its
strategic relationships or continue to maintain and develop these or other
strategic relationships, or that licenses between the Company and any such
third party will be renewed or extended at their expiration dates.  Any such
delays or the Company's failure to renew or extend a key license or maintain
any of its strategic relationships could materially and adversely affect the
Company's business, operating results and financial condition.  In addition,
under certain key license agreements, the Company must obtain approval on a
timely basis from the licensor in order to ship products it develops under the
license.  There can be no assurance that the Company will obtain such approval
and failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition.

USE OF INDEPENDENT SOFTWARE DEVELOPERS AND CONTENT PROVIDERS

     In addition to internally developing software and creating content, the
Company uses entertainment software created by independent software developers
as well as content developed by third parties.  The Company has less control
over the scheduling and the quality of the software generated by independent
contractors than over that developed by its own employees.  Additionally, the
Company may not be able to secure the services of talented content developers. 
The Company's business and future operating results will depend in part on the
Company's continued ability to maintain relationships with skilled independent
software developers and content providers, and to enter into and renew product
development agreements with such developers.  There can be no assurance that
the Company will be able to maintain such relationships or enter into and renew
such agreements. 


PAGE 13
<PAGE>


RISKS ASSOCIATED WITH INTERNET DELIVERY

     The Company intends to distribute its Multipath Movies via an Internet
site to be established by the Company.  The Company also intends to distribute
certain of its Multipath Movies through a link connecting Packard Bell NEC's
"Planet Oasis" Web site to the Company's Internet site.  Accordingly, any
system failure that causes interruption or an increase in response time on the
Company's Internet site or the Planet Oasis Web site could result in less
traffic to and distribution of Multipath Movies via the Company's Internet site
and, if sustained or repeated, could reduce the attractiveness of the Company's
products.  The Company is also dependent upon Web browsers and Internet and
online service providers to ensure user access to its products.  User
acceptance with respect to payment methods over the Internet may also create
barriers to distribution of the Company's products through the Internet.  Any
disruption in the Internet access provided to the Company's Internet site
provided by Planet Oasis, Internet and online service providers or Web browsers
or any failure by the Company's Internet site to handle higher volumes of
transactions could have a material adverse effect on the Company's business,
operating results and financial condition. 

     The seamless appearance of Multipath Movies delivered via the Internet
requires that while a scene is being viewed, succeeding scenes must be
downloaded.  This requires the use of 28.8 kilobits per second or faster
modems, computers equipped with high-speed Pentium (or equivalent)
microprocessors, 24 megabytes of random access memory and appropriately
configured operating systems.  These requirements generally are not satisfied
by the majority of the base of currently installed PCs.  There can be no
assurance that adequately equipped and configured computers will become
widespread prior to release of the Company's Multipath Movies.  Users of
computers with less sophisticated PCs may experience noticeable latencies or
"lag times" between scene changes.  Additionally, the performance
characteristics of Multipath Movies delivered via the Internet may not equal
those of Multipath Movies delivered solely on CD-ROMs, particularly with
respect to perceived seamlessness and sound quality.  Moreover, communications
between the user and an Internet site delivering Multipath Movies may require
routing of Multipath Movie instructions through several servers and may result
in brief but noticeable lag times.  Noticeable lag times or negative
comparisons to Multipath Movies distributed on CD-ROM may reduce the
attractiveness of online versions of the Multipath Movies. 


COMPETITION

     The markets for the Company's digital entertainment products are intensely
competitive, subject to rapid change and characterized by constant demand for
new product features at reduced prices and pressure to accelerate the release
of new products and product enhancements.  The Company expects to compete with
computer graphics special effects firms, including Pixar, ILM, Digital Domain,
Sony ImageWorks, Pacific Data Images, Rhythm & Hues and Boss Film Studios, Inc.

The CD-ROM industry is intensely competitive and consumer demand for particular
software products may be adversely affected by the proliferation of competitive
products.  The Company believes that the primary competitive factors in the
market for CD-ROM products include creative content, product quality,
technological capabilities, pricing, breadth of features, marketing and
distribution resources and customer service and support.  The Company will
compete primarily against companies offering entertainment software and related
products such as Broderbund, 7th Level, GT Interactive, Electronic Arts,
Softkey, and Sierra On-Line, and companies offering traditional feature films
and television programming produced by major movie studios, including Disney,
Warner Bros., Twentieth Century Fox, Paramount, Sony, Lucasfilm, MCA Universal,
and MGM/UA.  In addition, the Company will compete with movie studios for the
acquisition of literary properties, production financing, the services of
performing artists, and the services of other creative and technical personnel,
particularly in the fields of animation and technical direction.  Most of the
companies with which the Company will compete have significantly greater name
recognition and significantly greater financial, technical, creative,
marketing, and other resources than does the Company.  Due to their
substantially greater resources, these competitors likely will be able to enter
into more favorable distribution arrangements and to promote their products
more successfully than the Company.  Further, the Company believes that
continuing enhancements in computer hardware and software technology will lower
barriers to entry for studios or special effects companies which intend to
produce computer animated feature films or other products. 

     In response to all of these competitive forces, the Company will be
required to make a high level of investment in content and tool development,
marketing and customer service and support.  There can be no assurance that the
Company will have sufficient resources to make such investments or, even if
they are made, that the Company's 


PAGE 14
<PAGE>


products will be competitive.  Additionally, present or future competitors may
be able to develop products comparable or superior to those offered by the
Company or adapt more quickly than the Company to new technologies or evolving
customer requirements.  The Company's competitors also may increase their
efforts to gain and retain market share through competitive pricing or product
giveaways.  These competitive pressures may necessitate price reductions by the
Company, thus reducing the Company's profit margins.  In addition, as the
number of competitors increases and competition for scarce consumer time
available to be devoted to the products such as those of the Company and
equally scarce retail shelf space becomes more intense, the Company may need to
increase marketing expenditures to maintain sales and product differentiation.
Also, as competition for popular titles and themes that may be used in
entertainment software increases, the cost of acquiring such titles and
properties is likely to increase, resulting in reduced margins.  There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the
Company will not materially and adversely affect its business, operating
results and financial condition.


RAPID TECHNOLOGICAL CHANGE; CHANGING PRODUCT PLATFORMS AND FORMATS

     The entertainment software market and the personal computer industry in
general are characterized by rapid and significant technological developments
and frequent changes in computer operating environments.  To compete
successfully in these markets, the Company must continually improve and enhance
its existing products and technologies and develop new products and
technologies that incorporate technological advances while remaining
competitive in terms of performance and price.  The Company's success also will
depend substantially upon its ability to anticipate the emergence of, and to
adapt its products to, popular platforms for consumer software. 

     The Company has designed its Multipath Movies for use with the
IBM-compatible PC and the Sega Saturn game console.  The Company intends to
design future products for use with new platforms which will require
substantial investments in research and development.  Generally, such research
and development efforts must occur one to two years in advance of the
widespread release or use of the platforms in order to introduce products on a
timely basis following the release of such platforms.  The research and
development efforts in connection with games for certain advanced and emerging
platforms may require greater financial and technical resources than currently
possessed by the Company.  In addition, there can be no assurance that the new
platforms for which the Company develops products will achieve market
acceptance and, as a result, there can be no assurance that the Company's
development efforts with respect to such new platforms will lead to marketable
products or products that generate sufficient revenues to offset the research
and development costs incurred in connection with their development.  Failure
to develop products for new platforms that achieve significant market
acceptance would have a material adverse effect on the Company's business,
operating results and financial condition.  There can be no assurance that
technological developments will not render certain of the Company's existing
products obsolete, that the Company will be able to adapt its products or
technologies to emerging hardware platforms, that the Company has chosen to
support platforms that ultimately will be successful or that the Company will
be able successfully to create software titles for such platforms in a timely
manner, or at all.  


DEPENDENCE ON KEY PERSONNEL

     The Company's success has and will continue to depend to a significant
extent upon certain key management, product development and technical
personnel, many of whom would be difficult to replace, particularly Mark Dyne,
its Chairman and Chief Executive Officer and Kevin Bermeister, its President. 
Although the Company has entered into employment agreements with certain
officers, such agreements are terminable upon 30 days notice by either party. 
Accordingly, there can be no assurance that such employees will continue to be
available to the Company.  The loss of the services of one or more of these key
employees could have a material adverse effect on the Company and the Company's
future success will depend in large part upon its ability to attract, retain
and motivate personnel with a variety of technical and managerial skills,
including software development and programming expertise.  Significant
competition exists for such personnel and the companies with which the Company
competes are often larger and more established than the Company.  Additionally,
there is currently an industry-wide shortage of technical personnel which makes
it more difficult to attract and retain such personnel.  There can be no
assurance that the Company will be able to retain and motivate its managerial
and technical personnel or attract additional qualified members to management
or technical staff.  The inability to attract and retain necessary technical
and managerial personnel could have a material and adverse effect upon the
Company's business, operating results and financial condition. 


PAGE 15
<PAGE>


SHARED RESPONSIBILITIES AND OTHER EMPLOYMENT COMMITMENTS OF CHIEF EXECUTIVE
OFFICER AND PRESIDENT

     The Company's Chief Executive Officer and Chairman, Mark Dyne and its
President, Kevin Bermeister, also serve as joint managing directors of Sega
Ozisoft, Sega Enterprises (Australia) Pty., Ltd. ("Sega Enterprises") and other
businesses.  Although Messrs. Dyne and Bermeister are active in the management
of the Company, they are not required to spend a certain amount of time at the
Company nor are they able to devote their full time and resources to the
Company.  Further, the Company does not have employment agreements with either
of Messrs. Dyne or Bermeister.  There can be no assurance that the inability of
Messrs. Dyne and Bermeister to devote their full time and resources to the
Company will not adversely affect the Company's business, operating results or
financial condition.


CONFLICTS OF INTEREST

     Certain of the Company's directors and officers are directors or officers
of potential competitors and/or strategic partners of the Company.  These
relationships may give rise to conflicts of interest between the Company, on
the one hand, and one or more of the directors, or officers and/or their
affiliates, on the other hand.  The Company's Certificate of Incorporation
provides that Mark Dyne and Kevin Bermeister are required to present to the
Company any corporate opportunities for the development of any type of digital
entertainment with the exception of opportunities for (i) minority
participation in the development of digital entertainment and (ii)
participation in the development by others of digital entertainment where
publishing and distribution rights for the product to be developed are offered
to Messrs. Dyne and/or Bermeister solely for Australia, New Zealand and/or
Southern Africa.  The Company's Certificate of Incorporation provides that
Messrs. Dyne and Bermeister are not required to present to the Company any
other opportunities which potentially may be of benefit to the Company.


NEW PRODUCTION STUDIO

     The Company recently completed the buildout of its new production studio
in Australia and currently occupies the new space.  Members of management may
be required to devote substantial time in order to facilitate an uninterrupted
and efficient transition of current operations to the new facility which could
result in delays in production.  There can be no assurance that the Company
will be successful in timely hiring and training new content developers and
software programmers necessary to conduct the additional operations in which
event the development, and consequently the release, of the Company's products
may be delayed.  Any such delay would have a material adverse effect upon the
Company's business, operating results and financial condition.


MANAGEMENT OF BUSINESS CHANGES; POTENTIAL GROWTH; POTENTIAL ACQUISITIONS

     Implementation of the Company's business plan, including introduction of
the Company's Multipath Movies, management of the Company's joint ventures with
Morgan Creek and Crawford, management of the Company's strategic relationship
with Packard Bell NEC, the establishment of a new production studio in
Australia, and the general strains of the Company's new role of a public
company will require that the Company significantly expand its operations in
all areas.  This growth in the Company's operations and activities will place a
significant strain on the Company's management, operational, financial and
accounting resources.  Successful management of the Company's operations will
require the Company to continue to implement and improve its financial and
management information systems.  In addition, the restructuring of the Company
and resulting management and reporting of Australian operations and financial
results from the United States, as well as other aspects of the process of
preparing the Company for the Offering have placed and will continue to place
an additional strain on the Company's accounting and information systems
resources.  The Company's ability to manage its future growth, if any, will
also require it to hire and train new employees, 


PAGE 16
<PAGE>


including management and technical personnel, and motivate and manage its new
employees and integrate them into its overall operations and culture.  The
Company recently has made additions to its management team and is in the
process of expanding its accounting staff and modifying its internal procedures
to adapt to its new role as a public company, a process which is expected to
continue following the Offering.  The Company's failure to manage
implementation of its business plan and the changes made to structure and
prepare for the Offering would have a material adverse effect on the Company's
business, operating results and financial condition. 

     In the future, the Company may acquire complementary companies, products
or technologies, although no specific acquisitions currently are pending or
under negotiation.  Acquisitions involve numerous risks, including adverse
short-term effects on the combined business' reported operating results,
impairments of goodwill and other intangible assets, the diversion of
management's attention, the dependence on retention, hiring and training of key
personnel, the amortization of intangible assets and risks associated with
unanticipated problems or legal liabilities. 


LIMITED PROPRIETARY PROTECTION

     The Company's success and ability to compete is dependent in part upon its
proprietary technology.  The Company currently intends to file United States
patent applications relating to certain components of its proprietary
technology.  The Company also relies on trademark, trade secret and copyright
laws to protect its technology, with the source code for the Company's
proprietary software being protected both as a trade secret and as a
copyrighted work.  Also, it is the Company's policy that all employees and
third-party developers sign nondisclosure agreements.  However, there can be no
assurance that such precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or superior
technology independently.  Also, the Company has no license agreements with the
end users of its products and does not copy-protect its software, so it may be
possible for unauthorized third parties to copy the Company's products or to
reverse engineer or otherwise obtain and use information that the Company
regards as proprietary.  Although the Company is not aware of unauthorized
copying of its products, if a significant amount of unauthorized copying of the
Company's products were to occur, the Company's business, operating results and
financial condition could be adversely affected.  Furthermore, policing
unauthorized use of the Company's products is difficult and costly, and
software piracy can be expected to be a persistent problem.  If litigation is
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets or to determine the validity and scope
of the proprietary rights of others, such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, operating results and financial condition. 
Ultimately, the Company may be unable, for financial or other reasons, to
enforce its rights under intellectual property laws and the laws of certain
countries in which the Company's products are or may be distributed may not
protect the Company's products and intellectual rights to the same extent as
the laws of the United States. 

     The Company believes that its products, including its suite of software
tools, do not infringe any valid existing proprietary rights of third parties. 
Since the software tools used to create the Multipath Movies were developed by
SAND, a division of Sega Ozisoft, the Company relies entirely on the
representations of Sega Ozisoft contained in the SAND Acquisition Agreement
between BII Australia and Sega Ozisoft that, to Sega Ozisoft's best knowledge,
the SAND technology and software acquired by the Company does not infringe the
proprietary rights of others.  Additionally, although the Company has received
no communication from third parties alleging the infringement of proprietary
rights of such parties, there can be no assurance that third parties will not
assert infringement claims in the future.  Any such third party claims, whether
or not meritorious, could result in costly litigation or require the Company to
enter into royalty or licensing agreements.  There can be no assurance that the
Company would prevail in any such litigation or that any such licenses would be
available on acceptable terms, if at all.  If the Company were found to have
infringed upon the proprietary rights of third parties, it could be required to
pay damages, cease sales of the infringing products and redesign or discontinue
such products, any of which alternatives, individually or collectively could
have a material adverse effect on the Company's business, operating results and
financial condition.  


RECOVERY OF PREPAID ROYALTIES AND GUARANTEES

     The Company may from time to time, enter into agreements with licensors of
intellectual property that involve advance payments of royalties and guaranteed
minimum royalty payments.  If the sales volumes of products subject to such
arrangements are not sufficient to recover such advances and guarantees, the
Company will be required to write off 


PAGE 17
<PAGE>


unrecovered portions of such payments.  If the Company is required to write 
off a material portion of any advances, or ultimately accrue for the
guarantees, its business, operating results and financial condition could be
adversely affected.


INTERNATIONAL BUSINESS

     Historically, international sales, principally in Australia, have
accounted for a significant portion of the Company's revenues and the Company
expects that international sales will continue to account for a significant
portion of the Company's total revenue.  The Company's international business
is subject to numerous risks, including the need to comply with a wide variety
of foreign and U.S. export and import laws, changes in export or import
controls, tariffs and other regulatory requirements, the imposition of
governmental controls, political and economic instability, trade restrictions,
the greater difficulty of administering business overseas and general economic
conditions.  Although the Company's international sales are denominated
principally in United States dollars, sales to international customers may also
be affected by changes in demand resulting from fluctuations in interest and
currency exchange rates.  In addition, the laws of certain foreign countries
may not protect the Company's intellectual property to the same extent as do
the laws of the United States.  There can be no assurance that these factors
will not have a material adverse effect on the Company's business and results
of operations


FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

     The Company's future capital requirements will depend on many factors,
including but not limited to, the quantity of Multipath Movies developed, the
cost of content development, marketing and distribution, the size and timing of
future acquisitions, if any, and the availability of additional financing.  To
the extent that existing resources and future earnings are insufficient to fund
the Company's activities, the Company may need to raise additional funds
through debt or equity financings.  No assurance can be given that such
additional financing will be available or that, if available, it can be
obtained on terms favorable to the Company and its stockholders.  In addition,
any equity financing could result in dilution to the Company's stockholders. 
The Company's inability to obtain adequate funds would adversely affect the
Company's operations and ability to implement its strategy.


PAGE 18
<PAGE>


                                    PART II

                               OTHER INFORMATION


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits.

     11.1      Computation of Per Share Earnings (Loss)
     27.1      Financial Data Schedule

(b)  Reports on Form 8-K.

     Current Report on Form 8-K filed January 7, 1997 reporting under Item 8
     the change of the Company's fiscal year to December 31.


PAGE 19
<PAGE>


                                  SIGNATURES

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

                           BRILLIANT DIGITAL ENTERTAINMENT, INC.

Date:  May 14, 1997        /s/Michael Ozen
                           -------------------------------------
                           By:  Michael Ozen
                           Its: Chief Financial Officer (Principal Financial
                                and Accounting Officer) and Secretary


PAGE 20
<PAGE>


<TABLE>
                                 EXHIBIT INDEX

<CAPTION>
EXHIBIT
NUMBER    EXHIBIT DESCRIPTION
-------   -------------------
<S>       <C>
11.1      Computation of Earnings (Loss) per Common Share.

27.1      Financial Data Schedule.

</TABLE>


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<PAGE>