SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

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

                For the quarterly period ended September 30, 2000

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

  For the transition period from __________________ to ______________________.

                         Commission file number 0-21637

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

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

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

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

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

                                  Yes  X   No
                                      ---     ---

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common Stock, par value
$0.001, 16,044,660 shares issued and outstanding as of November 10, 2000.

         Transitional Small Business Disclosure Format (check one):

                                   Yes      No X
                                      ---     ---


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
<TABLE>
<CAPTION>

                                                                                                               PAGE


<S>               <C>                                                                                          <C>
PART I            FINANCIAL INFORMATION.........................................................................3

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

                  Condensed Consolidated Balance Sheet (unaudited) as of September 30, 2000.....................3

                  Condensed Consolidated Statements of Operations for the three and nine months
                  ended September 30, 2000 (unaudited) and September 30, 1999 (unaudited).......................4

                  Condensed Consolidated Statements of Cash Flows for the nine months
                  ended September 30, 2000 (unaudited) and September 30, 1999 (unaudited).......................5

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

Item 2.           Management's Discussion and Analysis of Financial Condition and
                  Results of Operations........................................................................11

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

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

Item 6.           Exhibits and Reports on Form 8-K.............................................................26
</TABLE>


                                     Page 2
<PAGE>



                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

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


<TABLE>
<CAPTION>
                                                                                             SEPTEMBER 30,
                                                                                                  2000
                                                                                           -------------------
ASSETS                                                                                        (unaudited)
Current assets:
<S>                                                                                        <C>
    Cash and cash equivalents..................................................            $            6,355
    Accounts receivable, net...................................................                           523
    Other assets, net..........................................................                         1,102
                                                                                           -------------------
Total current assets...........................................................                         7,980
Property, plant and equipment, net.............................................                           923
Goodwill and other intangibles, net............................................                         4,509
Other assets...................................................................                         1,090
                                                                                           -------------------
Total assets...................................................................            $           14,502
                                                                                           ===================

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
    Accounts payable...........................................................            $              787
    Accrued expenses...........................................................                         1,367
    Deferred revenue...........................................................                         4,627
    Note payable, related party................................................                             6
    Current portion of notes payable and other debt............................                            28
                                                                                           -------------------
Total current liabilities......................................................                         6,815
Notes payable, less current portion............................................                            49
Other long term liabilities....................................................                            50
                                                                                           -------------------
Total liabilities..............................................................                         6,914
Commitments and contingencies
Stockholders' equity:
    Common stock...............................................................                            16
    Additional paid-in capital.................................................                        47,149
    Accumulated deficit........................................................                       (39,474)
    Cumulative other comprehensive income (loss)...............................                          (103)
                                                                                           -------------------
Total stockholders' equity.....................................................                         7,588
                                                                                           -------------------
Total liabilities and stockholders' equity.....................................            $           14,502
                                                                                           ===================
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                     Page 3
<PAGE>



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

<TABLE>
<CAPTION>
                                                         3 MONTHS      3 MONTHS ENDED     9 MONTHS          9 MONTHS
                                                           ENDED          9/30/99           ENDED             ENDED
                                                          9/30/00                         9/30/00            9/30/99
                                                       --------------  ---------------  --------------    --------------
                                                        (UNAUDITED)     (UNAUDITED )     (UNAUDITED)       (UNAUDITED)
<S>                                                    <C>             <C>              <C>               <C>
   REVENUE:
       Revenues ....................................   $        407    $         299    $         967     $         633
                                                       --------------  ---------------  --------------    --------------

  COST OF REVENUES AND EXPENSES:
  Cost of revenues..................................            120              268              650               617
  Sales & marketing.................................            766              250            1,273               729
  Website development...............................            213               --            1,304                --
  General and administrative........................          2,292            1,116            7,085             2,653
  Research and development..........................          1,091            1,029            2,767             2,912
  Amortization of software technology and
        goodwill....................................            320              409              959               409
  Depreciation......................................            125              145              324               415
                                                       --------------  ---------------  --------------    --------------
  Total cost of revenues and expenses...............          4,927            3,217           14,362             7,735
                                                       --------------  ---------------  --------------    --------------


  Loss from operations..............................         (4,520)          (2,918)         (13,395)           (7,102)

  OTHER INCOME (EXPENSE):
  Export market development grant...................             --               55              119               182
  Gain (loss) on foreign exchange...................              2               --                3                (5)
  Debenture expense.................................             --               --               --               (55)
  Interest income (expense), net....................             47               29              133                33
                                                       --------------  ---------------  --------------    --------------
       Total other income (expense).................             49               84              255               155
                                                       --------------  ---------------  --------------    --------------
  Net loss .........................................         (4,471)          (2,834)         (13,140)           (6,947)
  Foreign currency translation adjustment
        (net of tax effects)........................             26              (53)              47               (27)
                                                       --------------  ---------------  --------------    --------------
  Comprehensive loss................................      $  (4,445)       $  (2,887)     $   (13,093)       $   (6,974)
                                                       ==============  ===============  ==============    ==============
  Basic and diluted net loss per share .............      $   (0.29)       $   (0.23)     $     (0.90)       $    (0.64)
                                                       ==============  ===============  ==============    ==============
  Weighted average number of shares used in
       computing basic and diluted net loss per
       share........................................         15,149           12,373           14,557            10,878
                                                       ==============  ===============  ==============    ==============
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                     Page 4
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                                   NINE MONTHS
                                                                                               ENDED SEPTEMBER 30,
                                                                                          ------------------------------
                                                                                              2000            1999
                                                                                          --------------  --------------
                                                                                           (unaudited)     (unaudited)
OPERATING ACTIVITIES
<S>                                                                                           <C>              <C>
Net loss................................................................................      $ (13,140)       $ (6,947)
Adjustments to reconcile net loss to the net cash
   used in operating activities:
      Depreciation and other amortization...............................................          1,438             575
      Amortization of movie software costs..............................................            158             392
      Amortization of software technology...............................................             60             171
      Amortization of goodwill..........................................................            875             238
      Amortization of customer database.................................................             24              --
      Effect of warrants granted........................................................            389              --
      Debenture expense.................................................................             --             117
      Changes in operating assets and liabilities:
         Accounts receivable............................................................           (188)           (277)
         Other assets...................................................................         (1,392)           (126)
         Accounts payable and accruals..................................................           (410)           (259)
         Deferred revenue...............................................................          4,595              --
         Other long-term liabilities....................................................             --             (96)
                                                                                          --------------  --------------
Net cash used in operating activities...................................................         (7,591)         (6,212)

INVESTING ACTIVITIES
Cost of Acquisition.....................................................................             --            (198)
Purchase of equipment...................................................................           (728)           (168)
                                                                                          --------------  --------------
Net cash used in investing activities...................................................           (728)           (366)

FINANCING ACTIVITIES
Proceeds from issuance of shares, net of costs..........................................         12,192           4,574
Convertible debenture, net of costs.....................................................             --             965
Repayment of debenture..................................................................             --            (100)
Repayments of notes.....................................................................           (112)           (108)
                                                                                          --------------  --------------
Net cash provided by financing activities...............................................         12,080           5,331
                                                                                          --------------  --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................          3,761          (1,247)

Translation adjustments.................................................................             88              (4)
Cash and cash equivalents at beginning of period........................................          2,506           3,187
                                                                                          --------------  --------------
Cash and cash equivalents at end of period..............................................        $ 6,355         $ 1,936
                                                                                          ==============  ==============

Supplemental disclosure of cash flow information:
Cash paid during the period for:
   Interest.............................................................................        $    21          $   --
                                                                                          ==============  ==============
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                     Page 5
<PAGE>


SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

     On January 10, 2000, Roseworth Group, Ltd. converted a $1,500,000 debenture
into 612,825 shares of our common stock. A commission of 3,798 shares was paid
in conjunction with this conversion as well as a write-off of the debenture
warrant valuation expense. On March 17, 2000, 50,000 shares were issued to
Continental Capital and Equity Corporation and $36,000 was expensed in the first
quarter in connection with the shares earned. In June we dissolved our agreement
with Continental Capital and reacquired 30,000 of the unearned share of stock
pursuant to the terms of the agreement. We issued warrants to purchase 307,692
shares of our common stock to Enewmedia Digital Entertainment Limited on
February 28, 2000 in connection with an investment and licensing agreement. The
warrants carry a value of $492,000, which will be expensed over the 6-year term
of the contract. On May 23, 2000 we entered into an agreement with Yahoo!. The
warrants issued in connection with this agreement carry a value of $1,022,222
and will be expensed over 12 months. The unamortized portion of the Yahoo!
warrants is included in other current assets.


                                     Page 6
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2000
                                   (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 that, in the opinion of management,
are considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements of Brilliant Digital Entertainment, Inc. included in our
Form 10-KSB for the fiscal year ended December 31, 1999.

2.   STOCKHOLDERS' EQUITY

     Options and warrants representing common shares of 2,195,000 and 3,324,000
were excluded from the average number of common and common equivalent shares
outstanding in the diluted EPS calculation for the nine months ended September
30, 1999 and 2000, respectively, because they were anti-dilutive.

3.   COMMITMENTS AND CONTINGENCIES

     We have an obligation under our joint venture agreement with KISS Digital,
LLC to fund 75% of the development of a Multipath Movie, up to $900,000. We
anticipate that we will fund more than the $900,000 under the agreement. As of
September 30, 2000 we have spent approximately $800,000.

4.   SIGNIFICANT AGREEMENT

     On February 17, 2000, we entered into an agreement with Enewmedia Digital
Entertainment Limited ("Enewmedia"), a wholly-owned subsidiary of e-New Media
Company. The agreement with Enewmedia provides for a Distribution Agreement, a
Production Joint Venture Agreement, a Technology License Agreement and an
Investment Agreement.

     The Distribution Agreement stipulates that Enewmedia will have Internet
distribution rights to English and Asian language versions of our Multipath
Movie webisodes in selected Asian territories, with exclusive rights to the
Asian language versions. Enewmedia has paid us a fee of $2,500,000 for these
rights. The revenue will be recognized over a 6 year period, commencing in the
2nd quarter of 2000. Enewmedia is entitled to a distribution fee of 20% of gross
revenues generated under the Distribution Agreement.

         The Production Joint Venture Agreement provides for the formation of a
joint venture to create new content using our B3D technology for distribution in
the Asian territories for which


                                     Page 7
<PAGE>


Enewmedia has distribution rights. Enewmedia will fund the projects developed by
the joint venture. The joint venture is owned in equal parts by Enewmedia and
us.

     The Technology Licensing Agreement provides for our grant to the joint
venture owned equally by Enewmedia and us of a 5-year exclusive alpha license to
our B3D technology for exploitation by the joint venture in those Asian
territories where Enewmedia has distribution rights. Enewmedia has paid us a fee
of $2,500,000 for this license. The revenue will be recognized over a 5 year
period, commencing in the 2nd quarter of 2000. We are also entitled to a 10%
royalty on all joint venture revenues.

     Pursuant to the Investment Agreement, Enewmedia acquired 666,667 shares of
our common stock at $6.00 per share, for aggregate proceeds to us of $4,000,000.
Additionally, Enewmedia received warrants to purchase up to 307,692 shares of
our common stock at a price of $6.50 per share. The warrants have a term of 9
months and may be called by us if our common stock share price exceeds $7.80 for
20 consecutive trading days.

     On September 9, 2000 Enewmedia purchased 1,130,000 shares of our common
stock at $4.28 per share for proceeds to us of $4,837,500.

5.   PRO FORMA STATEMENT

     The following summary of unaudited pro forma combined statement of
operations data for the nine months ended September 30, 1999 reflects our
acquisition, on July 1, 1999, of The Auction Channel, as if the acquisition had
occurred at the beginning of 1999.

<TABLE>
<CAPTION>
                                                     NINE MONTHS ENDED
                                                    SEPTEMBER 30, 1999
                                              --------------------------------
                                                        (unaudited)
      <S>                                            <C>
      Revenues.......................                $          995,000
      Net loss.......................                $      (7,730,000)
      Net loss per share.............                $           (0.62)
</TABLE>


                                     Page 8
<PAGE>


6.       GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

     Our operations consist of our subsidiary, Brilliant Interactive Ideas Pty.
Ltd., in Australia, Brilliant Digital Entertainment, Inc. in the United States
of America and the United Kingdom operations of The Auction Channel. The
following schedule sets forth our revenues and long-lived assets by geographic
area:

<TABLE>
<CAPTION>
                                                               UNITED                         UNITED
                                                               STATES        AUSTRALIA        KINGDOM
                                                           --------------  --------------  --------------
                                                            (unaudited)     (unaudited)     (unaudited)
<S>                                                        <C>             <C>             <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Revenues from unaffiliated customers....................   $     410,000   $     131,000   $      92,000
Revenues from affiliated customers......................              --              --              --
                                                           --------------  --------------  --------------
Total revenues..........................................   $     410,000   $     131,000   $      92,000
                                                           ==============  ==============  ==============
NINE MONTHS ENDED SEPTEMBER 30, 2000:
Revenues from unaffiliated customers....................   $     648,000   $     114,000   $     205,000
Revenues from affiliated customers......................              --              --              --
                                                           --------------  --------------  --------------
Total revenues..........................................   $     648,000   $     114,000   $     205,000
                                                           ==============  ==============  ==============
LONG-LIVED ASSETS AS OF:
September 30, 2000......................................   $   1,238,000   $     314,000   $   4,970,000
                                                           ==============  ==============  ==============
</TABLE>

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

     For the nine months ended September 30, 1999, a Multipath Movie technology
agreement accounted for 22.9%, GT Interactive accounted for 14.8% and The
Learning Company accounted for 12.3% of our reported revenues. For the nine
months ended September 30, 2000, Enewmedia, and SlingShot, Inc. accounted for
40.2% and 11.2% of our revenues, respectively.

7.   SEGMENT INFORMATION

     We currently have two major lines of businesses: digital animation and live
auction facilitation. Brilliant Digital Entertainment, Inc., in the United
States, together with its subsidiary Brilliant Interactive Ideas Pty. Ltd., in
Australia, is a production and development studio that uses its proprietary
software tool set to create digital entertainment for distribution over the
Internet, on CD-ROM and DVD, as television programming and for home video.
Brilliant Digital Entertainment also offers for sale its proprietary b3d
software tools. Our subsidiary, The Auction Channel, has it's primary operations
in London, England, although we are continuing to transition a portion of its
operations from London to New York, New York. The Auction Channel integrates
live satellite, cable television and web broadcasts of auction events conducted
by auction houses,


                                     Page 9
<PAGE>


allowing participants to watch events on television and over the Internet and to
use the Internet or their telephone to bid simultaneously with people actually
present at the auction house. Each segment is incorporated and maintains
separate sets of books which are combined on consolidation.

<TABLE>
<CAPTION>
                                                       NINE MONTHS ENDED
                                                       SEPTEMBER 30, 2000
                                                              (1)
                                                  ----------------------------
                                                          (unaudited)
TOTAL ASSETS:
<S>                                               <C>
    Digital animation..........................   $             9,026,000
    Auction facilitation.......................                 5,476,000
                                                  ----------------------------
       Total assets(2).........................   $            14,502,000
                                                  ============================

REVENUES--EXTERNAL CUSTOMERS:
    Digital animation..........................   $               762,000
    Auction facilitation.......................                   205,000
                                                  ----------------------------
       Total revenues..........................   $               967,000
                                                  ============================

INCOME (LOSS) FROM OPERATIONS:
    Digital animation (3)......................   $           (6,773,000)
    Auction facilitation (4)...................               (6,622,000)
    Other (5)..................................                   255,000
                                                  ----------------------------
       Total income (loss).....................   $          (13,140,000)
                                                  ============================

<FN>
---------------------------

(1)  The Auction Facilitation segment arose on acquisition on July 1, 1999. We
     did not have separately identifiable segments prior to July 1, 1999.
(2)  Transactions between the two segments are primarily cash transfers to fund
     The Auction Channel operations.
(3)  Includes depreciation of $324,000.
(4)  Includes $91,000 of depreciation and amortization of $959,000 of goodwill
     and other intangibles.
(5)  Consists primarily of interest income and export marketing development
     grant income, net of debenture and interest expense.

</FN>
</TABLE>


                                    Page 10
<PAGE>


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

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

     THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT DIGITAL ENTERTAINMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 2000. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED
IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE
BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE
FACTORS DESCRIBED BELOW UNDER THE CAPTION "CAUTIONARY STATEMENTS AND RISK
FACTORS."

OVERVIEW

     Brilliant Digital Entertainment (AMEX: BDE) is a leading entertainment
content producer, technology developer and tools provider with an established
library of episodic serial content created for the Internet. Our 3D digitally
animated interactive series feature popular television, comic book, and motion
picture characters that include Superman, Xena, KISS, Popeye and Ace Ventura.
Developed using our proprietary suite of b3d software tools, these full-screen
productions have smaller files for faster downloads. Our content currently is
distributed broadly through our Internet syndication partners including Yahoo,
Warner Brothers On-line, Roadrunner, @Home and VH1.com. Through our subsidiary,
B3D, Inc., we license our b3d studio suite of authoring tools that enables the
creation and presentation of interactive streaming 3-D web content. These tools
were developed to meet the production needs of studios, production houses, web
content suppliers, advertising agencies, e-commerce companies and educational
institutions to produce 3-D animation for both Internet and television
distribution. Through our subsidiary, The Auction Channel, Inc., we provide
services to auction houses that enable participants to watch auction events in
real time on television, and over the Internet, and to bid using their telephone
or the Internet. We are headquartered in the United States and were incorporated
in July 1996.

     Our annual and quarterly revenue will depend upon the successful
development, distribution, timing and market acceptance of our interactive
products and on the successful distribution and market acceptance of our
proprietary software tools. Our annual and quarterly revenue will also depend
upon the use by auction houses of our auction-related products and services. The
revenues derived from the production and distribution of our 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. See "Cautionary Statements and Risk Factors--We
will not be able to sell our Multipath Movies if they do not achieve market
acceptance." The commercial success of a Multipath Movie is also expected to
depend upon promotion and marketing, production costs, the impact of competition
and other factors. Accordingly, our annual and quarterly revenues are, and will
continue to be, extremely difficult to forecast.


                                    Page 11
<PAGE>


     Future revenues will also depend upon the acceptance of other content
produced using our b3d tool suite. The introduction of these tools through the
beta test program that we launched in July 2000 makes these tools available to
content developers and studios interested in producing 3D animation for
distribution over the Internet. Our license of these tools, which should begin
with the planned introduction of an updated version during the first quarter of
2001, should provide us with incremental revenue and fuel the growth of our
distribution and syndication network efforts.

     We will launch a sales program offering advertisers animated 3D banner
advertisements utilizing the b3d tool suite. With the decline of industry wide
banner advertising revenues and click through rates, the company believes that
its 3d banner advertisements will reinvigorate online advertising campaigns.

OUR ACQUISITION OF THE AUCTION CHANNEL

     On July 1, 1999, we acquired Trojan Television Limited. Trojan Television
Limited is a London-based company doing business as The Auction Channel. Founded
in 1996, The Auction Channel integrates live satellite, cable TV and Web
broadcasts of auction events conducted by auction houses, allowing participants
to watch events on television and the Internet, and use the Internet or their
telephone to bid simultaneously with people actually present at the auction
house. During the first quarter of 2000, we transferred our ownership interest
in Trojan Television Limited to our newly formed, wholly-owned subsidiary, The
Auctionchannel, Inc.

     The Auction Channel enables live real time bidding through its proprietary
NetBidlive technology, allowing bidders to compete for items at live auctions
from their homes or offices. TAC was one of the first companies to integrate
broadcast television with the power of the internet to enable the broadcasting
of live auctions to a bidder's television or computer in a real time broadcast
quality environment. Since its inception in 1996, TAC has hosted more than 100
internet auctions with some of the major international auction houses, as well
as producing and hosting twenty of those auctions on television in conjunction
with BSkyB Sports in the United Kingdom.

     During the quarter ended September 30, 2000, The Auction Channel was
selected by the CBS Early Morning Show to assist in producing a bi-monthly
co-branded auction and appraisal segment. TAC also entered into an agreement
with Auction Watch to create a co-branded appraisal component on TAC's website
to allow consumers to send in digital photos of items they would like to have
appraised. Additionally, TAC entered into an agreement with the British based
Two Way Television, an enhanced TV pioneer, to create auction related games for
their "enhanced TV platform."

DVD MARKET

     We have begun a limited release of selected Multipath Movie titles to the
DVD market. We entered into an agreement with SlingShot, a special purpose DVD
publisher and distributor, in March 1999. We granted to SlingShot exclusive
worldwide rights to distribute up to 20 of our Multipath Movies in DVD format.
Under the agreement, SlingShot has made an up-front, non-refundable cash advance
and provided a minimum guarantee in exchange for its exclusive retail DVD
distribution rights. The titles have been delivered to SlingShot for conversion
to the DVD format and a release plan has been developed.


                                    Page 12
<PAGE>


INTERNET AND ONLINE SERVICES

     Given the importance of Internet and online delivery in the overall success
of the Multipath Movie and other b3d format movies, we believe that it is
critical to make Multipath Movies available to as many Internet and online
service users as possible. Consequently, we follow a syndication strategy to
distribute content as broadly as possible across the Internet. We continue to
focus more of our efforts toward Internet distribution through third party
websites and have increased our hiring of personnel in this area. Much progress
has been made in this area during 2000 and our content is now available on third
party websites that include Yahoo!, VH1.com, Studiosusa.com, Time-Warner's
Entertaindom.com, Road Runner, Qwest and Music.com. Additionally, agreements to
host our content have been reached with third-party sites such as Lycos, Vidnet,
and StreamSearch, thus enabling even more consumer reach in the near term.

     At this time, we have three Multipath Movie animated series in syndicated
distribution on the Internet; Superman, Xena: Warrior Princess and KISS:
Immortals, and the online film festival property, Short Attention Span Theatre.
We released Xena: Warrior Princess late in the second quarter 2000. Two
additional series, Ace Ventura and Choose Your Own Nightmare, are in production
and will be available over the coming months.

B3D

     We are pursuing a strategy designed to encourage active use of our tools
and technology by a broad market of animators who are currently using 3D Studio
Max, an animation and 3D design software package developed and marketed by
Kinetix, a division of Autodesk. We are currently developing an exporter plug-in
tool for users of Maya and Lightwave animation packages that is expected to be
available in the first quarter of 2001. This will enable users of these software
packages to export their software in b3d format. In addition, we intend to have
a compatible version of the b3d Digital Projector completed for the Apple
Macintosh in the first quarter of 2001, followed by a Playsation2 version. This
will further broaden the market for the b3d toolset.

     Beta versions of our proprietary toolsets, which are developed by our
subsidiary, b3d, Inc., have been released to the public. The first software
products to be launched consist of b3d Studio, b3d Studio Pro, and other
supporting products that are targeted for sale in the first quarter of 2001. The
b3d Studio products are similar to those used by our own production team in the
creation of our syndicated Multipath Movie series such as Superman, KISS and
Xena that are now available on popular entertainment Web portals. These tools
will provide individual artists, animators and studios with the capability to
create their own multipath movies and b3d content for commercial distribution on
the Internet, and should ultimately provide a wide and varied base of b3d
content to enrich the consumer web experience. Animation content generated using
the b3d tools can be of any type. The tool is not limited to the production of
entertainment content. It can be applied to the production of artistic
renderings, education, architecture, engineering, e-commerce and other solutions
that require animation.

     b3d, Inc. officially launched the toolset program in July 2000 at the
Siggraph computer graphics show in New Orleans, during which b3d, Inc. announced
and initiated the Web-based beta program. The beta program allows users to
download a full featured but "watermarked" (i.e., our name will appear on the
content) version of the b3d Studio software for evaluation and feedback to our
b3d software development and marketing team. b3d, Inc. is also in discussions
with other


                                    Page 13
<PAGE>


leading 3D tools makers to provide a broad array of potential companion products
for the b3d software tools. However, we do not guarantee that such discussions
will lead to any ultimate agreements or partnerships, or that the terms of such
agreements, if concluded, will be favorable to us.

     We also sponsored, as well as participated in, the Web3DRoundUp event
during Siggraph, where we held the exclusive world premiere presentation of an
online music video created in b3d. We intend to focus our resources on securing
rights to songs in a number of music categories including Hip Hop and will
develop original 3D animated music videos for distribution on the Internet.

DIGITAL HIP HOP

     We have entered into an agreement with Russell Simmons and Stan Lathan that
provides for the formation of Los Angeles-based Digital Hip Hop, Inc., a joint
venture production studio headed by Stan Lathan that will produce and distribute
full screen animated music videos and other content primarily for Internet and
broadband distribution. The joint venture is owned and was initially funded 50%
by us and 50% by Messrs. Lathan and Simmons.

     Digital Hip Hop also received from our wholly-owned subsidiary, b3d, Inc.,
     a 5-year exclusive Alpha level license to our b3d production tool suite for
     the production of hip hop content for non-Asian markets. Digital Hip Hop
     has agreed to pay b3d, Inc. a fee of $1,500,000 for this license payable in
     installments over the first three years of the license, $500,000 of which
     is contingent on the raising of capital by the joint venture. Digital Hip
     Hop has also agreed to pay b3d, Inc. a royalty of 10% of Digital Hip Hop's
     gross revenues.

RESULTS OF OPERATIONS

     REVENUES. Revenues from the sale of Multipath Movies through retail outlets
are recognized when the product is shipped. Product returns or price protection
concessions that exceed our reserves could materially adversely affect our
business and operating results and could increase the magnitude of quarterly
fluctuations in our operating and financial results. See "Cautionary Statements
and Risk Factors -- Product returns that exceed our anticipated reserves could
result in worse than expected operating results."

     We enter into distribution contracts under which we are entitled to fixed
minimum guaranteed payments. The minimum guaranteed payments are recognized as
revenue when the CD-ROM master is delivered to the distributor, we have complied
with the requirements of the contract, and the terms of the sale are considered
fixed. Historically, we have derived our revenues from royalties, development
fees and software sales. We licensed our traditional CD-ROM 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 they exceed any associated non-refundable royalty advance.
Non-refundable advances are recognized as revenue when the CD-ROM master is
delivered to the licensee and the terms of the sale are considered fixed.
Royalty revenues in excess of non-refundable advances are recognized upon
notification by the distributor that a royalty has been earned by us.
Development fees are paid by customers in exchange for our development of
software packages in accordance with customer specifications. The software
development agreements generally specify certain "milestones" which must be
achieved throughout


                                    Page 14
<PAGE>


the development process. As these milestones are achieved, we recognize the
portion of the development fee allocated to each milestone. Software sales
revenues are recognized upon shipment of product.

     Revenues earned from the broadcast of auctions are recognized when the
broadcast airs. Revenues, which are computed as a percentage of the hammer price
of an item up for auction, are recognized when the item is knocked down.

     Revenues earned from the sale or licensing of our software tools will be
recognized based on the terms of the sales or licensing agreement.

     Revenues from the placing of our content on third party web sites are
recognized when the third party accounts to us. These revenues will be accrued
during the period to which they relate.

     Revenues increased from $633,000 for the nine months ended September 30,
1999 to $967,000 for the nine months ended September 30, 2000. Revenues
increased by $108,000 from $299,000 for the three months ended September 30,
2000 to $407,000 for the three months ended September 30, 2000. Revenues for the
nine months ended September 30, 2000 include internet advertising revenue,
licensing of b3d tools, licensing of b3d content, Multipath Movie retail sales,
DVD revenue, and auction service revenues earned by The Auction Channel,
primarily from the televised broadcast of auctions. Motion Capture Services is
the use of software for the capture of motion for animated digital characters,
which generated revenues in the 2000 period. Revenues for the nine months ended
September 30, 1999 were primarily the result of CD ROM sales, revenues earned
under a Multipath Movie technology and content development agreement and for
motion capture services.

     COST OF REVENUES. Cost of revenues consists primarily of the amortization
and write-down of capitalized movie software costs, if any, for previously
released titles, royalties to third parties and the direct costs and
manufacturing overhead required to reproduce and package software products. The
Auction Channel cost of revenues consists of costs associated with the broadcast
of live auctions. Cost of revenues increased from $617,000 for the nine months
ended September 30, 1999 to $650,000 for the nine months ended September 30,
2000. The costs of revenues decreased from $268,000 for the three months ended
September 30, 1999 to $120,000 for the three months ended September 30, 2000.
This is due to a reduction of the movie software costs which were fully
amortized in the second quarter of 2000.


                                    Page 15
<PAGE>


     SALES AND MARKETING. Sales and marketing expenses include primarily costs
for salaries, advertising, promotions, travel and trade shows. Sales and
marketing expenses increased from $729,000 for the nine months ended September
30, 1999 to $1,273,000 for the nine months ended September 30, 2000. For the
three months ended September 30, 2000 the costs increased by $516,000 over the
same period in 1999. The increase is primarily attributable to an increase in
trade show related expenses and to amortized costs associated with a
distribution agreement.

     GENERAL AND ADMINISTRATIVE AND WEBSITE DEVELOPMENT. General and
administrative expenses include primarily salaries and benefits of management
and administrative personnel, rent, insurance costs and professional fees.
General and administrative expenses and website costs increased from $2,653,000
for the nine months ended September 30, 1999 to $8,389,000 for the nine months
ended September 30, 2000. The increase of $5,736,000 is primarily attributable
to the addition of $3,659,000 of general and administrative costs related to The
Auction Channel's operations in the United Kingdom and in New York, and
$1,304,000 in web development costs and increased payroll costs of $1,020,000
due to the development of internal management, the addition of other personnel
and the other associated costs. These increases were offset by small reductions
in other areas. For the three months ended September 30, 2000 the costs
increased $1,389,000 over last year due to website development and increased
personnel and related costs

     RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and benefits of personnel conducting research and development, relating
to software products. Research and development costs also include costs
associated with creating our software tools used to develop Multipath Movies.
Research and development expenses were $2,912,000 and $2,767,000 for the nine
months ended September 30, 1999 and September 30, 2000, respectively. In the
2000 period, our research and development costs were offset by a $350,000
reimbursement fee received under a distribution agreement. For the three months
ended September 30, 2000, research and development expenses increased from
$1,029 to $1,091 compared with the three months ended September 30, 1999.

     DEPRECIATION AND AMORTIZATION. Depreciation expense relates to depreciation
of fixed assets such as computer equipment and cabling, furniture and fixtures
and leasehold improvements. These fixed assets are depreciated over their
estimated useful lives (up to five years) using the straight-line method.
Depreciation expense decreased from $415,000 for the nine months ended September
30, 1999 to $324,000 for the nine months ended September 30, 2000 as a number of
assets were fully depreciated. Amortization expense for the nine months ended
September 30, 2000 includes amortization of goodwill, software technology, and
customer database of $959,000 all attributable to the purchase of The Auction
Channel in July 1999. For the three months ended September 30, 2000,
depreciation and amortization decreased by $109,000 due to certain assets being
fully depreciated.

     OTHER INCOME AND EXPENSE. Other income and expense includes interest income
and interest expense, gains and losses on foreign exchange transactions and
export development grants paid to Brilliant Interactive Ideas Pty. Ltd. by the
Australian Trade Commission for its participation in certain export activities.
Other income and expense increased from income of $155,000 in the 1999 nine
month period to income of $255,000 in the comparable 2000 period. This increase
is primarily due to interest income of $111,000. For the three months ended
September 30, 2000 other income and expense decreased by $35,000 primarily due
to the inclusion of an export grant of $55,000 in the three months ended
September 30, 1999.


                                    Page 16
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

     As of September 30, 2000, our principal source of liquidity was
approximately $6,355,000 in cash, which we raised primarily through the issue of
new equity and a software distribution and tools licensing agreement.

     On February 17, 2000 we entered into an agreement with Enewmedia, as
described in Note 4 to the Financial Statements, which provides for the payment
to us of $9,000,000 in cash. Enewmedia made an additional investment on
September 9, 2000 of $4,837,000 for 1,130,000 shares of our common stock.

     Net cash used in operating activities during the nine months ended
September 30, 2000 was primarily attributable to a net loss of $13,140,000. Net
cash of $728,000 used in investing activities in the nine months ended September
30, 2000 was due primarily to the purchase of computer equipment. Cash used in
financing activities for the year was primarily for repayment of notes for the
financing of office furniture and computer equipment and for costs associated
with raising capital.

     We have an obligation under our agreement with Morgan Creek to fund
entirely the development of two Multipath Movies, the first of which, ACE
VENTURA CD-ROM, was developed and shipped in the fourth quarter of 1998 with
continued sales in 1999. The second project has not been identified yet. We have
an obligation under our joint venture agreement with KISS Digital, LLC to fund
75% of the development of a Multipath Movie up to $900,000. We anticipate that
we will fund more than the $900,000 under the agreement. We may spend up to
$1,753,000 for the development of a web site for The Auction Channel. Thus far,
we have paid $940,000 on the first three development phases for this web site.

     We believe that our existing funds, cash generated from operations and
proceeds from the sale of common stock under our securities purchase agreement
with St. Annes will be sufficient to fund our ongoing working capital
requirements for at least the next twelve months. However, see "Cautionary
Statements and Risk Factors - If we are unable to raise additional funds, we may
be required to defer completion of Multipath Movie titles and reduce overhead
significantly."


                                    Page 17
<PAGE>


ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES

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

CAUTIONARY STATEMENTS AND RISK FACTORS

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

         WE WILL NOT BE ABLE TO GENERATE REVENUES IF OUR MULTIPATH MOVIES AND
B3D TOOLSET DO NOT ACHIEVE MARKET ACCEPTANCE. Each Multipath Movie is an
individual artistic work, and its ability to generate revenues primarily will be
determined by consumer reaction, which is unpredictable. To generate revenues,
we must develop stories and characters that capture the attention and
imagination of consumers and license recognized characters and properties from
third parties for use in our Multipath Movies. We cannot be certain that we will
be able to do so. The 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 Multipath
Movies and the b3d toolset include:

     o    consumer reluctance to initiate time consuming downloads of data
          necessary to view our products;
     o    our marketing strategies;
     o    the quality of our products and competing products;
     o    our ability to enter into revenue share agreements with third party
          web sites;
     o    critical reviews;
     o    the availability of alternative forms of entertainment and leisure
          time activities;
     o    our ability to sell advertising and sponsorships for the content;


                                    Page 18
<PAGE>


     o    our b3d toolset may contain features, functionality or workflow
          conventions that may not be widely accepted by our target audience;
     o    our ability to continue to develop and enhance the toolset and deliver
          without delay; and
     o    the marketplace's reluctance to adopt a new toolset.

     WE HAVE EXPERIENCED, AND MAY CONTINUE TO EXPERIENCE, REDUCED REVENUES DUE
TO DELAYS IN THE INTRODUCTION AND DISTRIBUTION OF OUR PRODUCTS. We cannot be
certain that we will be able to meet our planned release dates for our new
Multipath Movies. If we cannot release an important new product or webisodes
during the scheduled quarter, our revenues would likely be reduced in that
quarter. In the past, we have experienced significant delays in our introduction
of some new products. It is likely in the future that delays will continue to
occur and that some new products will not be released in accordance with our
internal development schedule or the expectations of public market analysts and
investors.

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

     IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DEFER
COMPLETION OF MULTIPATH MOVIE TITLES AND REDUCE OVERHEAD SIGNIFICANTLY. We
believe that our existing funds, cash generated from operations and proceeds
from our future sales of common stock to St. Annes Investments, Ltd. under the
securities purchase agreement we entered into with St. Annes in March 1999 will
be sufficient to fund our working capital requirements for at least the next
twelve months. After that period, we may need to raise additional funds through
debt or equity financing or by other means. We cannot be certain that additional
financing will be available at the time we need additional funds or that, if
available, it can be obtained on terms that we deem favorable. If necessary
funds are not available, we may be required to defer completion of Multipath
Movie titles and reduce overhead significantly, which could have a material
adverse effect on our business. Additionally, our stockholders may be diluted if
we raise additional funds through the sale of our stock.

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


                                     Page 19
<PAGE>


     o    A software distributor or a licensor of a story or character may, in
          the exercise of its product approval rights, arbitrarily require
          expensive and time consuming changes to our products, which may cause
          a delay in the release of the products; and
     o    A third party web site could delay the inclusion of our content on the
          site, and thereby cause a delay in distribution.

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

     IF THE VENDOR WE USE TO DELIVER MULTIPATH MOVIES THROUGH OUR INTERNET SITE
EXPERIENCES AN INTERRUPTION IN SERVICE, WE WILL NOT BE ABLE TO DELIVER MOVIES
THROUGH OUR INTERNET SITE UNTIL SERVICE RESUMES. We presently use a single
vendor to deliver Multipath Movies through our Internet site. Any significant
interruption in service provided by this vendor could interrupt sales and
delivery of Multipath Movies and adversely affect our ability to conduct this
portion of our business and maintain customer satisfaction.

     IF WE CANNOT OBTAIN CD-ROM AND DVD MANUFACTURING AND PACKAGING SERVICES ON
A TIMELY BASIS, WE MAY NOT BE ABLE TO TIMELY DELIVER OUR CD-ROM AND DVD PRODUCTS
TO DISTRIBUTORS AND RETAILERS AND OUR SALES WILL BE ADVERSELY AFFECTED. We use
third party vendors to press CD-ROM and DVD disks, assemble purchased product
components, print product packaging and user manuals and package finished
products in connection with the retail distribution of our Multipath Movies. We
do not have contractual agreements with any of our third party vendors, which
may result in our inability to secure adequate services in a timely manner. If
we cannot obtain adequate manufacturing services, we will not be able to timely
produce and deliver our CD-ROM and DVD products to distributors and retail
stores for ultimate sale to consumers, which will adversely affect our sales and
operating results.

     IF WE ARE UNABLE TO DEVELOP A RETAIL SALES CHANNEL, EFFECTIVELY COMPETE FOR
RETAIL SHELF SPACE AND NEGOTIATE FAVORABLE TERMS WITH RETAILERS, OUR RETAIL
SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED. We anticipate that a
certain amount of Multipath Movies sales will be made by traditional retailers.
We may not be able to achieve retail sales at prices favorable to us. The
competition for shelf space in retail stores is intense. We expect that our
products will constitute a small percentage of a retailer's sales volume, and we
cannot be certain that retailers will provide our products with adequate levels
of shelf space and promotional support. Due to the increased competition for
limited retail shelf space and promotional resources, retailers and distributors
increasingly are in a better position to negotiate favorable terms of sale,
including terms relating to price discounts, product return rights and
cooperative market development funds. Increased competition could result in loss
of shelf space for our products at retail stores, as well as significant price
competition, any of which could adversely affect our sales volume and the price
we receive for our products.


                                     Page 20
<PAGE>


     WE MAY ENCOUNTER PROBLEMS IN CONNECTION WITH OUR ACQUISITION OF THE AUCTION
CHANNEL, WHICH MAY INCREASE THE COSTS OF THE ACQUISITION AND DISTRACT
MANAGEMENT'S ATTENTION FROM OPERATING THE COMBINED BUSINESS. In July 1999, we
acquired Trojan Television Limited, a London-based company doing business as The
Auction Channel. The Auction Channel integrates live satellite, cable TV and Web
broadcasts of auction events conducted by auction houses, allowing for
participants to watch auction events on television and use the Internet or their
telephone to bid simultaneously with people actually present at the auction
house. We have very little experience in acquiring businesses and will likely
encounter difficulties in integrating The Auction Channel's operations with our
existing operations, which may result in unexpected costs and adversely affect
our operating results. In addition, the integration will require the dedication
of management resources, which may temporarily distract management's attention
from the day-to-day operations of the two companies and adversely affect our
operating results. Some of the difficulties we expect to encounter include,
among others, those related to:

     o    integrating Brilliant's and The Auction Channel's management staffs;
     o    retaining The Auction Channel's key management and technical
          personnel; and
     o    coordinating the operation of geographically separated organizations
          with distinct cultures.

         THE AUCTION CHANNEL MAY NEVER BE PROFITABLE, WHICH WILL ADVERSELY
AFFECT OUR CONSOLIDATED OPERATIONS. The Auction Channel, through it's
subsidiary, Trojan Television, Ltd., commenced operations in July 1996 and,
accordingly, has a limited operating history upon which to evaluate its future
prospects. There can be no assurance that The Auction Channel will achieve
profitability or implement its business strategy. The Auction Channel had net
losses of approximately $310,000 in fiscal 1997, $485,000 in fiscal 1998,
$1,978,000 for the fiscal year ended June 30, 1999, $958,000 for the six months
ended December 31, 1999, and $5,663,000 for the nine months ended September 30,
2000. At September 30, 2000 The Auction Channel had an accumulated deficit of
$9,394,000 relating to net losses from the period from July 1, 1996 through
September 30, 2000. We expect that The Auction Channel will continue to sustain
losses at least for the next twelve months.

     IF THE AUCTION CHANNEL LOSES ITS LICENSE TO THE COMPUTER SOFTWARE AND
HARDWARE TECHNOLOGIES IT USES IN ITS BUSINESS, THE AUCTION CHANNEL MAY NOT BE
ABLE TO CONTINUE TO SELL ITS PRODUCTS AND SERVICES. Many of the underlying
computer software and hardware technologies used by The Auction Channel are
licensed from Articulate UK Limited. The Auction Channel has, with respect to
these technologies, a worldwide license, with rights to exploit and improve the
software, patents, technology, documentation and know how developed or owned or
licensable by Articulate UK. If The Auction Channel loses its rights to the
computer software and hardware technologies it licenses from Articulate UK as a
result of a dispute with Articulate UK or otherwise, The Auction Channel will
not be able to continue to sell its products and services. If this occurs, The
Auction Channel's revenues will be substantially reduced.

     PRODUCT RETURNS THAT EXCEED OUR ANTICIPATED RESERVES COULD RESULT IN WORSE
THAN EXPECTED OPERATING RESULTS. At the time we ship our products to retailers
we will establish reserves, including reserves that estimate the potential for
future product returns. Product returns or price protection concessions that
exceed our reserves could increase the magnitude of quarterly fluctuations in
our operating and financial results. Furthermore, if we incorrectly assess the
creditworthiness of customers who receive our products on credit, we could be
required to significantly increase the reserves previously established. We
cannot be certain that any future write-offs will not occur or that amounts
written off will not


                                     Page 21
<PAGE>


have a material adverse effect on our business and depress the market price of
our common stock. Actual returns to date have been within management's
estimates.

     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    our ability to produce and distribute retail packaged versions of
          Multipath Movies in advance of peak retail selling seasons;
     o    our ability to create appealing content which will generate
          advertising revenue; and
     o    our ability to enter into revenue share agreements with third party
          web sites.

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

     IF WE DO NOT IMPROVE OUR SOFTWARE TOOLS TO PRODUCE NEW, MORE ENHANCED
MULTIPATH MOVIES, OUR REVENUES WILL BE ADVERSELY AFFECTED. The software tools
that enable us to create Multipath Movies have been developed over the past four
years. Additional refinement of these tools is necessary to continue to enhance
the Multipath Movie format. If we cannot develop improvements to these software
tools, our Multipath Movies may not obtain or maintain market acceptance and our
revenues will be adversely affected.

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

     TO DEVELOP PRODUCTS THAT CONSUMERS DESIRE, WE MUST MAKE SUBSTANTIAL
INVESTMENTS IN RESEARCH AND DEVELOPMENT TO KEEP UP WITH THE RAPID TECHNOLOGICAL
DEVELOPMENTS THAT ARE TYPICAL IN OUR INDUSTRY. The entertainment software market
and the PC industry are subject to rapid technological developments. To develop
products that consumers desire, we must continually improve and enhance our
existing products and technologies and develop new products and technologies
that incorporate these technological developments. We cannot be certain that we
will have the financial and technical resources available to make these
improvements. We must make these improvements while remaining competitive in
terms of performance and price. This will require us to make substantial
investments in research and development, often times well in advance of the
widespread release of the products in the market and any revenues these products
may generate.

     OUR 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


                                    Page 22
<PAGE>


of our proprietary technology could result in an increase in competing products
and a reduction in our sales. We rely on trademark, trade secret and copyright
laws to protect our technology, and require all employees and third-party
developers to sign nondisclosure agreements. We cannot be certain, however, that
these precautions will provide meaningful protection from unauthorized use by
others. We do not copy-protect our software, so it may be possible for
unauthorized third parties to copy our products or to reverse engineer or
otherwise obtain and use information that we regard as proprietary. Our
customers may take inadequate precautions to protect our proprietary
information. If we must pursue litigation in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others, we may not prevail and
will likely make substantial expenditures and divert valuable resources. In
addition, many foreign countries' laws may not protect us from improper use of
our proprietary technologies overseas. We may not have adequate remedies if our
proprietary rights are breached or our trade secrets are disclosed.

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

     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.


                                    Page 23
<PAGE>


     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.

     BECAUSE OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT PORTION OF OUR COMMON
STOCK, THEY MAY BE ABLE TO INFLUENCE STOCKHOLDER VOTES AND DISCOURAGE OTHERS
FROM ATTEMPTING TO ACQUIRE US. As of September 29, 2000, our officers and
directors owned, in total, approximately 13.1% of the outstanding shares of our
common stock. As a result, our officers and directors may be able to exert
influence over the outcome of all matters submitted to a vote of the holders of
our common stock, including the election of our Board of Directors. The voting
power of these officers and directors could also discourage others from seeking
to acquire control of us through the purchase of our common stock, which might
depress the price of our common stock.

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

     OUR SALE OF SHARES TO ST. ANNES AT A PRICE BELOW THE MARKET PRICE OF OUR
COMMON STOCK WILL HAVE A DILUTIVE IMPACT ON OUR STOCKHOLDERS. We have entered
into a securities purchase agreement with St. Annes Investments, Ltd. that
allows us to sell to St. Annes up to $6,000,000 worth of shares of our common
stock at a discount to the then-prevailing market price of our common stock. If
the market price is $4.00 or less, St. Annes will receive a discount equal to
14% of the market price, and if the market price is greater than $4.00, St.
Annes will receive a discount equal to 12% of the market price. Additionally, we
have agreed to issue to St. Annes as a fee shares of common stock having an
aggregate market price equal to 2% of the purchase price of the shares of common
stock that are issued and sold to St. Annes under the securities purchase
agreement. Accordingly, the issuance of shares under the securities purchase
agreement will have a dilutive impact on our stockholders. As a result, our net
income or loss per share could be materially impacted in future periods, and the
market price of our common stock could be materially and adversely affected. As
of September 29, 2000, we have sold 230,075 shares of our common stock to St.
Annes for gross proceeds of $1,000,000. We also have issued 4,049 shares of our
common stock to St. Annes as a fee.


                                    Page 24
<PAGE>


     The table below sets forth the number of shares and the percentages of our
common stock that St. Annes would own if we elected to sell the remaining
$5,000,000 worth of stock under the purchase agreement. The share amounts and
the percentages include 234,124 shares already issued to St. Annes under the
securities purchase agreement and shares St. Annes will receive as a fee under
the securities purchase agreement. The share amounts and the percentages are
based on our closing share price of $3.25 on September 29, 2000, and on assumed
closing share prices of $2.44, $1,63 and $.82 which prices represent a 25%, 50%
and 75% decline, respectively, in our September 29, 2000 closing share price.
The percentages are also based on 16,044,660 shares of our common stock
outstanding on September 29, 2000.

<TABLE>
<CAPTION>
   PERCENTAGE DECLINE
  IN SEPTEMBER 29, 2000       ASSUMED         SHARES OF COMMON    PERCENTAGE OF OUTSTANDING
     CLOSING PRICE         CLOSING PRICE            STOCK               COMMON STOCK
-----------------------    -------------      ----------------    -------------------------
<S>                            <C>                <C>                       <C>
         --                    $3.25              2,053,802                 11.5%
         25%                   $2.44              2,657,876                 14.4%
         50%                   $1.63              3,862,317                 19.6%
         75%                   $0.82              7,446,262                 32.0%
</TABLE>

     WE MAY NOT BE ABLE TO SELL THE ENTIRE $6,000,000 WORTH OF SHARES OF OUR
COMMON STOCK TO ST. ANNES WITHOUT OBTAINING STOCKHOLDER APPROVAL, WHICH MAY
REQUIRE THAT WE SEEK ALTERNATIVE SOURCES OF FINANCING THAT MAY NOT BE AVAILABLE
ON TERMS FAVORABLE TO US. Under the rules of the American Stock Exchange, we
cannot sell to St. Annes under our securities purchase agreement more than
1,881,800 shares of common stock unless we obtain stockholder approval of the
issuance of shares in excess of this amount. Accordingly, if the average price
at which we sell our stock to St. Annes under the securities purchase agreement
is less than $3.19 per share, we will not be able to sell the entire $6,000,000
worth of shares of our common stock to St. Annes without first obtaining
stockholder approval. If we are unable to obtain stockholder approval, or if we
choose not to pursue stockholder approval, we may be required to seek
alternative sources of financing to fund our working capital requirements. We
cannot guarantee that additional financing will be available or that, if
available, it can be obtained on terms favorable to our stockholders and us.

     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 to St. Annes at a
discount to the market price of our common stock 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.


                                    Page 25
<PAGE>


                                     PART II

                                OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     In March 2000, we issued to Martin Schuermann and Lee Jaffe warrants to
purchase up to 25,000 and 5,000 shares of our common stock, respectively, at an
exercise price of $6.00 per share. The warrants have a term of 24 months. The
warrants were issued to Messrs. Schuermann and Jaffe in consideration of
consulting services provided to us. In connection with this issuance, each of
Mr. Schuermann and Mr. Jaffe covenanted that he was an "accredited investor" as
that term is defined under Rule 501(a)(4) of Regulation D promulgated by the
Commission under the Securities Act. 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 September 2000, we issued to Enewmedia Digital Entertainment Limited
1,130,000 shares of our Common Stock for $4.28 per share for total proceeds to
us of $4,837,500. In connection with this issuance, Enewmedia covenanted that it
was acquiring the securities for its own account for investment purposes only
and not with a view to any distribution of the securities except pursuant to
registration under the Securities Act, and that it was an "accredited investor"
as that term is defined under Rule 501(a)(4) of Regulation D promulgated by the
Commission under the Securities Act. The issuance and sale of these securities
was exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act as a transaction
not involving any public offering.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

            (a)     Exhibits.

                    27.1     Financial Data Schedule.

            (b)     Reports on Form 8-K.

                    Current Report on Form 8-K filed on September 27, 2000,
                    reporting under Item 5 the sale by Registrant of its common
                    stock to Enewmedia Digital Entertainment Ltd.

                    Current Report on Form 8-K filed on October 18, 2000,
                    reporting under Item 4 the change in the Registrant's
                    certified public accountants.


                                    Page 26
<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: November 9, 2000       /S/ MICHAEL OZEN
                           ------------------------------------------------
                           By:    Michael Ozen
                           Its:   Chief Financial Officer (Principal Financial
                                  and Accounting Officer) and Secretary


                                    Page 27