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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

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

                For the quarterly period ended September 30, 2005

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

  For the transition period from __________________ to ______________________.

                        Commission file number 001-14480

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

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

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

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

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

                               Yes |X|     No |_|

         Indicate by check mark whether the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Exchange Act).

                               Yes [_]     No [X]

         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, 56,523,820 issued and outstanding as of November 6, 2005.

         Transitional Small Business Disclosure Format (check one):

                               Yes |_|     No |X|

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<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                              INDEX TO FORM 10-QSB

                                                                            PAGE
                                                                            ----

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

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

          Condensed Consolidated Balance Sheet as of
             September 30, 2005 (unaudited)....................................3

          Condensed Consolidated Statements of Operations for the
             three and nine months ended September 30, 2005 and
             September 30, 2004 (unaudited)....................................4

          Consolidated Statement of Stockholders' Deficit (unaudited)..........5

          Condensed Consolidated Statements of Cash Flows for the
             nine months ended September 30, 2005 and
             September 30, 2004 (unaudited)....................................6

          Notes to Consolidated Financial Statements (unaudited)...............7

Item 2.   Management's Discussion and Analysis or Plan of Operation ..........18

Item 3.   Controls and Procedures.............................................34

PART II   OTHER INFORMATION...................................................35

Item 1.   Legal Proceedings...................................................35

Item 6.   Exhibits............................................................35

          Signatures..........................................................36


                                       2
<PAGE>



                                     PART I
                              FINANCIAL INFORMATION

Item 1.  Financial Statements

                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                 (In thousands)
                                                                   SEPTEMBER 30,
                                                                        2005
                                                                     ----------
ASSETS                                                              (unaudited)
Current assets:
    Cash and cash equivalents ..............................         $    1,248
    Restricted cash ........................................                 75
    Accounts receivable, net ...............................                190
    Accounts receivable, related parties ...................                625
    Other assets, net ......................................                 20
                                                                     ----------
Total current assets .......................................              2,158
Property, plant and equipment, net .........................                 95
License rights .............................................                524
                                                                     ----------
Total assets ...............................................         $    2,777
                                                                     ==========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
    Accounts payable .......................................         $      709
    Accrued expenses, related parties ......................                728
    Accrued expenses .......................................                735
    Guaranteed minimum payments, related party .............                361
    Deferred revenue .......................................                294
    Secured convertible promissory notes,
       including accrued interest, net of Debt
       Discount of $2,949,000 ..............................                828
                                                                     ----------
Total current liabilities ..................................              3,655
Other long term liabilities ................................                145
                                                                     ----------
Total liabilities ..........................................              3,800

Stockholders' deficit:
    Common stock ...........................................                 61
    Additional paid-in capital .............................             76,875
    Accumulated deficit ....................................            (77,953)
    Unrealized gain(loss) on marketable
       securities and foreign exchange transactions ........                 (7)
                                                                     ----------
Total stockholders' deficit ................................             (1,023)
                                                                     ----------
Total liabilities and stockholders' deficit ................         $    2,777
                                                                     ==========

                 See Notes to Consolidated Financial Statements.


                                       3
<PAGE>


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

<CAPTION>
                                                 THREE MONTHS            NINE MONTHS
                                              ENDED SEPTEMBER 30,     ENDED SEPTEMBER 30,
                                             --------------------    --------------------
                                               2004        2005       2004         2005
                                             --------    --------    --------    --------
                                                  (unaudited)            (unaudited)
<S>                                          <C>         <C>         <C>         <C>
Revenues:
      Marketing services .................   $  1,461    $  1,010    $  4,890    $  3,324
      Licensing and other services .......        523         360       1,588       1,121
       Digital content ...................        130         115         358         273
                                             --------    --------    --------    --------
           Total revenues ................      2,114       1,485       6,836       4,718

Costs and expenses:
     Costs of revenues ...................        247          78         945         335
     Sales and marketing .................        282         143         946         524
     General and administrative ..........      1,513         808       4,734       2,544
     Research and development ............        122          96         356         293
     Depreciation and amortization .......          6           3          28          16

     Loss on impairment of Big Seven .....          0           0           0         400

     Loss on impairment of Altnet purchase          0           0           0         350
                                             --------    --------    --------    --------
                                                2,170       1,128       7,009       4,462
                                             --------    --------    --------    --------
Income(loss) from operations .............        (56)        357        (173)        256
Other income (expense):
     Other Income ........................          1           6           6           8
     Interest expense ....................     (2,004)       (990)     (4,445)     (2,988)
                                             --------    --------    --------    --------
     Total other income (expense) ........     (2,003)       (984)     (4,439)     (2,980)
                                             --------    --------    --------    --------
Net income ( loss) .......................     (2,059)       (627)     (4,612)     (2,724)

Foreign currency translation adjustment
   (net of tax effects) ..................         41          19         123        --
                                             --------    --------    --------    --------
Comprehensive loss .......................     (2,018)       (608)     (4,489)     (2,724)
                                             ========    ========    ========    ========

Basic and fully-diluted net income (loss)
   per share .............................   $  (0.05)   $  (0.01)   $  (0.11)   $  (0.06)
                                             ========    ========    ========    ========
Weighted average number of shares used
   in computing basic and fully-diluted
   net income (loss) per share ...........     42,857      56,524      42,686      48,898
                                             ========    ========    ========    ========
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                       4
<PAGE>


<TABLE>
                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                        (In thousands, except share data)
                                   (unaudited)

<CAPTION>
                                                                                     UNREALIZED
                                                                                      GAIN ON
                                     COMMON STOCK                                    MARKETABLE
                                -----------------------                              SECURITIES
                                                          ADDITIONAL                AND FOREIGN
                                  NO. OF                    PAID-IN   ACCUMULATED     EXCHANGE
                                  SHARES       AMOUNT       CAPITAL     DEFICIT     TRANSACTIONS      TOTAL
                                ----------   ----------   ----------   ----------    ----------    ----------
<S>                             <C>          <C>          <C>          <C>           <C>           <C>
BALANCE AT DECEMBER 31, 2004    41,916,610   $       47   $   73,125   $  (75,228)   $       71    $   (1,985)

    Grant of warrants .......         --           --          3,014         --            --           3,014
    Issuance of shares to
       acquire remaining
       shares of subsidiary .    7,000,000   $        7   $      343         --            --             350
    Issuance of shares to
       acquire Big Seven ....    6,666,667   $        7   $      393         --            --             400
    Foreign exchange
       translation ..........         --           --           --           --             (78)          (78)
   Net loss .................         --           --           --         (2,724)         --          (2,724)
                                ----------   ----------   ----------   ----------    ----------    ----------
BALANCE AT SEPTEMBER 30, 2005   55,583,277   $       61   $   76,875   $  (77,953)   $       (7)   $   (1,023)
</TABLE>

                 See Notes to Consolidated Financial Statements


                                       5
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                                                NINE MONTHS
                                                             ENDED SEPTEMBER 30,
                                                            -------------------
                                                             2004        2005
                                                            -------     -------
                                                                (unaudited)
OPERATING ACTIVITIES
Net loss ...............................................    $(4,612)    $(2,724)
Adjustments to reconcile net loss to the net cash
   provided by (used in) operating activities:
     Depreciation and amortization .....................         27          16
     Effect of accrued interest expense on
        convertible debt and capital funding ...........        226        (257)
     Effect of amortization of debt issuance costs .....      3,869       2,734
     Effect of warrant amortization related to
        purchase of license rights .....................        524         524
     Impairment Loss on Altnet and Big Seven
        purchase .......................................       --           750

     Changes in operating assets and liabilities:
        Accounts receivable ............................        196       1,730
        Accounts receivable related party ..............       --          (625)
        Accrued expenses related party .................       --        (1,431)
        Accrued expenses ...............................       --            78
        Other assets ...................................        214         103
        Accounts payable and accruals ..................       (440)         70
        Deferred revenue ...............................        (54)        262
        Notes receivable ...............................         71        --
        Guaranteed minimum payments due to related
           parties .....................................       (240)       (209)
                                                            -------     -------
Net cash (used in) provided by operating activities ....       (219)      1,021

INVESTING ACTIVITIES
Purchase of equipment ..................................        (49)         (3)
                                                            -------     -------
Purchase of technology .................................       --          --
                                                            -------     -------
Net cash used in investing activities ..................        (49)         (3)

FINANCING ACTIVITIES
Repayments of notes payable ............................        (50)         (5)
                                                            -------     -------
Net cash used in financing activities ..................        (50)         (5)
                                                            -------     -------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...       (318)      1,013

Effect of exchange rate changes on cash ................        135         (78)
Cash and cash equivalents at beginning of period .......        880         313
                                                            -------     -------
Cash and cash equivalents at end of period .............    $   697     $ 1,248
                                                            =======     =======

Supplemental disclosure of cash flow information:
Cash paid during the period for:
   Interest ............................................    $     0     $   443
                                                            =======     =======

                 See Notes to Consolidated Financial Statements.


                                       6
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2005

1.       BASIS OF PRESENTATION, RISKS AND GOING CONCERN UNCERTAINTY

         The accompanying  unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted  accounting  principles
in the United States for interim financial information and with the instructions
to Form 10-QSB and Item 310 of Regulation S-B. Accordingly,  they do not include
all of the information and footnotes required by generally  accepted  accounting
principles  in  the  United  States  for  complete  financial  statements.   The
accompanying  unaudited condensed  consolidated financial statements reflect all
adjustments that, in the opinion of management,  are considered  necessary for a
fair  presentation of the financial  position,  results of operations,  and cash
flows for the periods presented.  The results of operations for such periods are
not necessarily  indicative of the results  expected for the full fiscal year or
for any future period. The accompanying  financial  statements should be read in
conjunction  with the audited  consolidated  financial  statements  of Brilliant
Digital  Entertainment,  Inc.  and  consolidated  subsidiaries  (the  "Company")
included in the  Company's  Form 10-KSB for the fiscal year ended  December  31,
2004

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

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

         The accompanying  consolidated  financial statements have been prepared
assuming that the Company will continue as a going concern,  which  contemplates
the  realization  of assets and the  satisfaction  of  liabilities in the normal
course of business.  The carrying amounts of assets and liabilities presented in
the financial  statements  do not purport to represent  realizable or settlement
values.  However,  the Company has suffered  recurring  operating  losses and at


                                       7
<PAGE>


September 30, 2005, had negative  working  capital of  approximately  $4,446,000
(excluding  non-cash  debt  discount of  $2,949,000  related to the  issuance of
warrants) and a stockholders' deficit of approximately $1,023,000. These factors
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern. In its report on the Company's financial  statements for the year ended
December 31, 2004, the Company's  Independent  Registered Public Accounting Firm
included  an  explanatory  paragraph  expressing  substantial  doubt  about  the
Company's ability to continue as a going concern.

         The Company is seeking additional  funding.  There can be no assurance,
however,  that the Company will be able to secure additional  funding or that if
such funding is available,  whether the terms or conditions  would be acceptable
to the Company.

2.       SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

RESTRICTED CASH

         At September  30, 2005,  $75,000 of cash was pledged as  collateral  on
outstanding  secured   convertible   promissory  notes  and  was  classified  as
restricted cash on the Balance Sheet.

REVENUE RECOGNITION

         Under SEC Staff  Accounting  Bulletin  No. 104,  generally  the Company
recognizes  revenue when all of the following  criteria are met: (1)  persuasive
evidence of an  arrangement  exists,  (2) delivery has occurred or services have
been rendered, (3) the seller's price to the buyer is fixed or determinable, and
(4) collectibility is reasonably  assured.  In the case of each of the Company's
products  and service  lines,  the Company  establishes  a contract or insertion
order  with its  customers  with  specific  requirements  for a fixed  price,  a
delivery schedule,  and terms for payment.  The Company regularly  evaluates the
collectibility  of its  receivables  based on a combination  of factors.  When a
customer's  account becomes past due, it initiates dialogue with the customer to
determine the cause. If the Company  determines that the customer will be unable
to meet its financial obligations,  due to a bankruptcy filing, deterioration in
the customer's  operating results or financial position or other material events
impacting its business,  the Company records a specific  reserve for bad debt to
reduce the  related  receivable  to the  amount it expects to recover  given all
information presently available.  If circumstances related to specific customers
change,  the  Company's  estimate of the  recoverability  of  receivables  could
materially  change. At September 30, 2005, the Company had a reserve of $127,000
to cover several customers from whom collectibility is uncertain.

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


                                       8
<PAGE>


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

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

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


                                       9
<PAGE>


LICENSE RIGHTS

         In October 2002, the Company  entered into a patent  license  agreement
with  Kinetech,  Inc.,  pursuant to which the Company  acquired a license to the
TruNames patent,  and in consideration  for such license,  the Company issued to
Kinetech a warrant to  purchase  up to  5,000,000  shares of common  stock at an
exercise price of $0.001 per share. In July 2003, the Company modified the terms
of the  warrants  with  Kinetech,  to  accelerate  vesting.  As a result  of the
accelerated  vesting and the fact that the Company now  recognizes  revenue on a
monthly basis from  sub-licensing  the TruNames patent,  the Company  determined
that the warrants granted to Kinetech as consideration for the patent rights had
a determinable value. The fair value of the warrants was re-examined at the date
of  modification  and was  based on a  Black-Scholes  model  with the  following
weighted average  assumptions for 2003:  interest rates of 4.5%;  dividend yield
rates of 0; volatility  factors of expected market price of the Company's common
stock of 50%; and the expected  life of the warrants,  or 6 years.  The value of
these  warrants was  determined to be $2,096,000  and will be amortized over the
remaining useful life of the patent license  agreement,  or 3 years.  During the
first nine months of 2005,  the Company has  recorded  $524,000 of  amortization
expense  related to the patent,  leaving an  unamortized  balance of $524,000 at
September 30, 2005, which is reflected on the Balance Sheet as License Rights.

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

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

                 2005                           $ 174,000
                 2006                             350,000
                                       -------------------
                 Total                          $ 524,000
                                       ===================

CONCENTRATION OF REVENUE RISK

         For the nine months ended  September  30, 2005,  the Company  generated
approximately  100% of its total  revenue  either  directly from Sharman or from
other parties based on activities  dependent upon the  availability of the Kazaa
Media Desktop to computer users.

         For the nine months ended September 30, 2005,  Sharman  contributed 30%
of the Company's revenue, from content sales, patent licensing,  advertising and
payment  processing.  Focus Interactive,  Inc.  contributed 70% of the Company's
revenue  from  bounties  earned  on  activated  installations  of the My  Search
toolbar,  and profit  sharing on paid  searches  via the My Search  toolbar,  as
amended in April, 2005.

         The Company  maintains the majority of its cash and cash equivalents in
one bank in the United States and with one bank in  Australia.  The bank account
maintained in the United States is guaranteed by the Federal  Deposit  Insurance
Corporation  ("FDIC") up to $100,000.  The banking  system in Australia does not
provide the same guarantees. At September 30, 2005 the


                                       10
<PAGE>


Company had  approximately  $1,208,000 at the United  States bank,  which was in
excess of the FDIC insurance limit and  approximately  $40,000 in the Australian
bank, which was not guaranteed.

3.       RELATED PARTY TRANSACTIONS

         In May 2003,  Altnet  entered  into a license  to use  rights to Joltid
Ltd.'s Content Distribution Environment peer-to-peer computer program,  commonly
referred to as  PeerEnabler.  In exchange for the license,  Altnet agreed to pay
Joltid a guaranteed  monthly fee of $30,000  based on a  percentage  of revenues
earned  from the  exploitation  of the  licensed  rights,  subject  to a maximum
aggregate  amount.  The  Company  has  reflected  the  current  portion  of  the
guaranteed payment of $361,000 as a current liability.  The company assesses the
recoverability  of  long-lived  assets  whenever  events or changes in  business
circumstances  indicate  that  the  carrying  value  of  an  asset  may  not  be
recoverable.  During the fourth quarter of 2003, in connection with this review,
the Company  obtained an independent  valuation to assist them in evaluating the
Company's  intangible  assets for  impairment  in  accordance  with FAS 144.  An
impairment loss is recognized when the sum of the expected  undiscounted  future
net cash flows over the remaining  useful life, is less than the carrying amount
of the asset.  Prior to the impairment  evaluation the Company  capitalized  and
reflected on its balance sheet an asset;  Purchased  Technology  associated with
our purchase of additional  shares of our Altnet  subsidiary  from Joltid.  As a
result of the independent  evaluation of these assets,  the Company  recorded an
impairment  charge of $1,484,000  during the fourth  quarter of 2003. We now own
100% of the  outstanding  capital stock of Altnet having  acquired the remaining
24.5% of Altnet from  Joltid,  Ltd. on May 17, 2005 in exchange for the issuance
to Joltid  of  7,000,000  shares of  Brilliant's  common  stock.  At the time we
acquired the shares,  we determined  that the asset was impaired and we recorded
an impairment charge for the full value of the purchase,  totaling $350,000. The
Company paid Joltid $120,000 for services  provided during the nine months ended
September 30, 2005, and had an outstanding trade payable to them of $19,176.

         The Company  entered into a Patent  Sublicense  Agreement with Sharman,
the distributor of the Kazaa Media Desktop file sharing software application (or
KMD). Pursuant to the Patent Sublicense Agreement, the Company granted Sharman a
limited,  non-exclusive  sublicense  to the  Company's  rights  to the  TruNames
patent, which the Company licenses from Kinetech Inc. The TruNames patent covers
a method of  identifying  digital files based on the actual data contents of the
file, rather than by its name, origin,  location,  address, or other information
that can easily be changed.  As  consideration  for the sublicense,  the Company
will receive from Sharman a monthly license fee. Additionally, in June 2003, the
Company and Altnet entered into a Joint  Enterprise  Agreement with Sharman,  to
act  as  its  exclusive  representative  for  the  sale,  license  and/or  other
commercial  exploitation  of index  search  results  displayed  on or  otherwise
accessed  using the KMD in response to end user search  requests.  The agreement
also granted the Company a  non-exclusive  right to enter into  agreements  with
third parties to provide for the  establishment  of one or more browse  channels
within the KMD that enable  users to find and  download  rights-managed  content
from the relevant  browse channel in a single click process,  and to provide for
all the terms and conditions governing the management,  maintenance,  operation,
and other elements of each browse  channel.  The Company shall share in revenues
derived from the browse  channels.  As of September 30, 2005, the Company has an
outstanding accounts


                                       11
<PAGE>


receivable balance from Sharman of $625,000,  which is classified on the Balance
Sheet as Accounts Receivable Related Parties.

         As of September  30, 2005,  the Company has an  outstanding  balance to
Europlay  Capital  Advisors,  LLC of $728,000 which is classified on the balance
sheet as Accrued Expenses Related Parties.

4.       SIGNIFICANT AGREEMENTS

SECURED CONVERTIBLE PROMISSORY NOTES

         At  September  30,  2005,  the Company was indebted to its secured debt
holders with  aggregate  principal  and accrued  interest of $ 3,777,000,  which
indebtedness  is due and payable on March 31, 2006  pursuant to an  agreement to
extend the maturity date from the previous due date of September  26, 2005.  The
principal and accrued  interest is convertible by the holders into the Company's
common stock at a price of $0.07 per share, for a total of 53,957,143  shares of
common stock at September  30, 2005.  In  connection  with the  extension of the
maturity date of these notes to March 31, 2006, the Company:

         (i)      adjusted the conversion price of the secured indebtedness from
                  $0.07 to $0.02 per share  effective  upon the amendment of the
                  Company's Amended and Restated Certificate of Incorporation to
                  provide  for  a   one-for-ten   reverse  stock  split  of  the
                  outstanding shares of the Company's common stock (the "Reverse
                  Split");

         (ii)     adjusted  the  purchase  price of all  warrants  issued to the
                  Holders in consideration  of the secured  indebtedness and all
                  amendments  thereto (for a total of 73,787,613 common shares),
                  from $0.07 to $0.02 per share;

         (iii)    issued to the Holders  warrants  dated  September 26, 2005 and
                  expiring on October 5, 2009,  with an exercise  price of $0.02
                  per share,  to purchase an aggregate of 111,000,000  shares of
                  the Company's common stock; and

         (iv)     issued to the Holders  warrants  dated  September 26, 2005 and
                  expiring on October 5, 2009,  with an exercise  price of $0.02
                  per share,  to purchase an aggregate of 152,738,125  shares of
                  the  Company's  common  stock,  which  warrants  will vest and
                  become exercisable effective upon the Reverse Split.

         The Company has called a special meeting of its stockholders, presently
scheduled for December 12, 2005, to vote on the Reverse Split,  and expects that
the Reverse Split will become  effective  shortly  following  the  stockholders'
meeting.  The Company's failure to effect the Reverse Split constitutes an event
of default under the secured indebtedness.

         In addition, the Company agreed to make payments to the note holders in
repayment of the indebtedness as follows:  (i) $75,000 per month,  plus (ii) 50%
of any quarterly  EBITDA in excess of $500,000,  plus (iii) 50% of any increased
revenue  received  from  existing  sources  of  revenue  or from new  sources of
revenue.


                                       12
<PAGE>


         On April 28,  2005,  the Company  amended its  Strategic  Alliance  and
Distribution  Agreement,  dated April 14,  2003,  with Focus  Interactive,  Inc.
(formerly known as The Excite Network,  Inc.), a subsidiary of Ask Jeeves, Inc.,
to modify the royalty and other economic terms of the Agreement, provide for the
payment by Focus of an additional  advance  against  future  royalties and other
payments,  and extend the term of the  agreement  for an  additional  year.  The
agreement with Focus now expires on July 26, 2006, unless terminated  earlier in
accordance with its terms.  Under the terms of the amendments,  we have recorded
only our portion of the advance payment less  commission  received from Focus as
deferred  revenue.  Under the terms of our Strategic  Alliance and  Distribution
Agreement, dated April 14, 2003, as amended in April 2005, we have received from
Focus Interactive,  Inc. $1,360,000,  which is our portion of an advance against
future  payments  less  commissions.  This amount has been  recorded as deferred
revenue in the amount of $294,000.  A contingent liability exists, on default of
the  Agreement,  to the  extent  that we are  required  to pay back to Focus the
amount of any unearned advance  (recorded as deferred  revenue) that we received
and any unearned  advances that were paid to the other parties  benefiting  from
the  Agreement.  Since June,  2003,  payments to us by Focus under our agreement
have  funded  a  substantial  portion  of our  working  capital.  We  anticipate
receiving  only small cash  payments  from Focus until  approximately  November,
2005, when we expect the remaining portion of the advance to be fully earned.

         In October 2005, the holders of the Notes agreed to extend the maturity
date of the Notes from September 26, 2005 to March 31, 2006. In consideration of
their  agreement  to extend the  maturity  date,  we issued to the Note  holders
warrants to  purchase up to an  aggregate  of  111,000,000  shares of our common
stock at an  exercise  price of $0.02 per  share.  Further we issued to the Note
holders warrants to purchase an additional  152,738,125  shares of the Company's
common stock, which warrants will vest and become exercisable effective upon the
Reverse Split and the conversion price of the secured indebtedness from $0.07 to
$0.02 per share will also  become  effective.  As of  September  26,  2005,  the
152,738,125  shares are in excess of the Company's  authorized  number of common
stock. The Company  calculated the fair value of the warrants for 111,000,000 of
common  stock by using  the  Black  Scholes  model  with the  following  inputs:
interest rate of 4.1%;  dividend yield of 0; volatility  factors of the expected
market price of the Company's common stock of 115%; and the expected life of the
warrants of 4.02 years.  The Beneficial  Conversion  Feature for the warrants to
purchase 111,000,000 shares of common stock is calculated at the commitment date
which is as of September 26, 2005,  and the  calculated  value is limited to the
face amount of the convertible debt which is $3,014,150. Because the debt is due
in six months, the "Debt Discount," (a contra-liability account) is amortized to
"Interest  Expense" over 186 days or period of the note extension from September
26, 2005 to March 31, 2006. The Company expensed $65,000 of debt discount in the
third quarter of 2005,  with the remainder to be expensed in the fourth  quarter
of 2005 and first quarter of 2006.

5.       STOCKHOLDERS' DEFICIT

         Options and warrants  representing  common  shares of  142,022,319  and
144,943,790  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,  2005  and  2004,   respectively,   because   they  were
anti-dilutive.


                                       13
<PAGE>


         On  October  2005,  the  Company  issued,  in  consideration  of  their
agreement to extend the maturity  date,  warrants to purchase up to an aggregate
of  111,000,000  shares of our common  stock at an  exercise  price of $0.02 per
share.  The number of shares  underlying  each warrant  issued to each Holder is
equal to 175% of the face  amount of the  convertible  debt which is  $3,014,150
divided  by the  exercise  price of $0.02  per  share.  In  connection  with the
issuance of warrants  from the Notes,  a Beneficial  Conversion  Feature for the
warrants to purchase  111,000,000  shares of common stock is  calculated  at the
commitment  date which is as of September 26, 2005, and the calculated  value is
limited to the face amount of the  convertible  debt which is $3,014,150  and is
being amortized over 186 days or period of the note extension from September 26,
2005 to March 31, 2006.  The Company  expensed  $65,000 of debt  discount in the
third quarter of 2005.

         The Company has called a special meeting of its stockholders, presently
scheduled for December 12, 2005, to vote on the Reverse Split,  and expects that
the Reverse Split will become  effective  shortly  following  the  stockholders'
meeting.

6.       COMMITMENTS AND CONTINGENCIES

         The Company  continues its obligation under two facility leases.  As of
September 30, 2005, the commitments under these leases were as follows:

                YEAR           UNITED STATES        AUSTRALIA
                ----           -------------        ---------
                2005              $2,100             $3,000

         Rent  expense  was  $101,000  and  $55,000  for the nine  months  ended
September 30, 2004 and 2005, respectively.

         In March  2004,  in the  Federal  Court of  Australia,  New South Wales
District  Registry,  Brilliant  Digital  Entertainment,  Inc., its  subsidiaries
Altnet  Inc.  and  Brilliant  Digital  Entertainment  Pty.  Limited,  and  Kevin
Bermeister and Anthony Rose, the Chief  Executive  Officer and Chief  Technology
Officer, respectively,  were joined as defendants in the suit by Universal Music
Australia Pty. Ltd. and other record labels against Sharman Networks Limited and
other  defendants,  alleging  infringement of the copyright in sound  recordings
controlled by the  plaintiffs.  The plaintiffs  allege that due to the Company's
business  dealings  with Sharman  Networks  Limited,  the Company is  integrally
involved in the operation of the Kazaa Media  Desktop and  therefore  liable for
the  alleged   copyright   infringement   occasioned  by  its   development  and
distribution.  The plaintiffs are seeking damages under the Australian Copyright
Act of  1968,  recovery  of  costs  and  interest,  and a  permanent  injunction
restraining the Company from making copies of,  communicating to the public,  or
distributing the Plaintiff's sound recordings without a license. On September 5,
2005, the Court rendered its judgment in the  Australian  litigation,  declaring
that Sharman Networks Ltd., Altnet Inc., Brilliant Digital Entertainment,  Inc.,
Kevin Glen  Bermeister  and certain other  defendants  were liable for copyright
infringement for activities  associated with the development and distribution of
the Kazaa Media Desktop file sharing  software  application.  The proceeding was
wholly dismissed as against Brilliant Digital  Entertainment  Pty. Ltd., Anthony
Rose and certain other  defendants.  We have filed  documents to proceed with an
appeal of the Court's decision which we believe


                                       14
<PAGE>


will be heard sometime  during the first quarter of 2006. Any  determination  of
damages  payable by the  defendants in the case will be stayed pending appeal of
the lower Court's decision.

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

7.       STOCK BASED COMPENSATION

1996 STOCK OPTION PLAN

         The Company adopted a Stock Option Plan (the "1996 Plan"), which became
effective on September 13, 1996. Each director,  officer, employee or consultant
of the Company or any of its  subsidiaries  is eligible to be considered for the
grant of awards  under the 1996  Plan.  The  maximum  number of shares of Common
Stock  that may be  issued  pursuant  to awards  granted  under the 1996 Plan is
35,000,000,  subject to certain  adjustments to prevent dilution.  Any shares of
Common Stock  subject to an award,  which for any reason  expires or  terminates
unexercised  are again  available for issuance  under the 1996 Plan. The maximum
number of shares of Common Stock with respect to which  options or rights may be
granted under the 1996 Plan to any executive or other employee during any fiscal
year is one-half of the number of shares reserved for issuance under the amended
1996 Plan  Although any award that was duly granted may  thereafter be exercised
or settled in accordance with its terms, no shares of Common Stock may be issued
pursuant to any award made after September 13, 2006.  Options granted  generally
have a term of 10 years  and  usually  vest  over 4 years at the rate of 25% per
year beginning on the first day in the year subsequent to the year of the grant.

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

         These pro forma amounts may not be representative of future disclosures
since the  estimated  fair value of the options is amortized to expense over the
options' vesting  periods.  The pro forma effect on net loss for the nine months
ended September 30, 2005 and 2004 is not  representative of the pro forma effect
on net loss in future periods because it reflects expense for only three-months'
vesting.   Pro  forma   information  in  future  years  will  also  reflect  the


                                       15
<PAGE>


amortization of any stock options granted in succeeding years. The Company's pro
forma information is as follows:

                                                         NINE MONTHS ENDED
                                                           SEPTEMBER 30
                                                     --------------------------
                                                         2004           2005
                                                     -----------    -----------
Net loss, as reported ............................   $(4,489,000)   $(2,724,000)
Employee compensation expense ....................   $  (124,000)   $   (19,000)
Net loss, pro forma ..............................   $(4,613,000)   $(2,743,000)
Basic and diluted loss per share, as reported ....   $     (0.11)   $     (0.06)
Basic and diluted loss per share, pro forma ......   $     (0.11)   $     (0.06)

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

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

8.       GUARANTEES

         In November  2002, the FASB issued FIN No. 45  "Guarantor's  Accounting
and Disclosure  Requirements for Guarantees,  including  Indirect  Guarantees of
Indebtedness of Others - an  interpretation of FASB Statements No. 5, 57 and 107
and rescission of FIN 34."

         Under its bylaws,  the Company has agreed to  indemnify  its  officers,
directors and employees for certain events or occurrences arising as a result of
the  officer,  director,  or  employee  serving in such  capacity.  The  maximum
potential  amount of future payments the Company could be required to make under
these  indemnification  agreements  is  unlimited.  However,  the  Company has a
directors and officer liability insurance policy that mitigates its exposure and
enables  it to  recover a portion of any  future  amounts  paid,  subject to the
applicable  terms of the policy.  As a result of its insurance  policy coverage,
the  Company  believes  the  estimated  fair  value  of  these   indemnification
agreements is minimal and has no liabilities recorded for these agreements as of
September 30, 2005.

         The Company occasionally enters into  indemnification  provisions under
(i) its  agreements  with other  companies in its  ordinary  course of business,
typically with business partners,  contractors,  customers,  and landlords,  and
(ii) its agreements with investors. Under


                                       16
<PAGE>


these  provisions  the Company  generally  indemnifies  and holds  harmless  the
indemnified  party for losses suffered or incurred by the indemnified party as a
result  of the  Company's  activities  or,  in some  cases,  as a result  of the
indemnified  party's  activities  under  the  agreement.  These  indemnification
provisions often include  indemnifications  relating to representations  made by
the Company with regard to intellectual  property rights. These  indemnification
provisions  generally  survive  termination  of  the  underlying  agreement.  In
addition,  in some  cases,  the Company has agreed to  reimburse  employees  for
certain  expenses  and  to  provide  salary   continuation   during   short-term
disability. The maximum potential amount of future payments the Company could be
required  to make under  these  indemnification  provisions  is  unlimited.  The
Company has not  incurred  material  costs to defend  lawsuits or settle  claims
related to these indemnification  agreements.  As a result, the Company believes
the  estimated  fair value of these  agreements  is  minimal.  Accordingly,  the
Company has no  liabilities  recorded for these  agreements  as of September 30,
2005.


                                       17
<PAGE>


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

         The information contained in this Form 10-QSB is intended to update the
information  contained  in our Annual  Report on Form  10-KSB for the year ended
December 31, 2004 and presumes  that readers have access to, and will have read,
the "Management's  Discussion and Analysis of Financial Condition and Results of
Operations" and other information  contained in such Form 10-KSB.  The following
discussion  and  analysis  also should be read  together  with our  consolidated
financial  statements  and the notes to the  consolidated  financial  statements
included elsewhere in this Form 10-QSB.

         THIS  DISCUSSION  SUMMARIZES  THE  SIGNIFICANT  FACTORS  AFFECTING  THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT DIGITAL  ENTERTAINMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
AND SEPTEMBER 30, 2004. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED
IN THIS  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OR PLAN OF OPERATION ARE FORWARD
LOOKING  STATEMENTS  THAT  INVOLVE  RISKS AND  UNCERTAINTIES  AND ARE BASED UPON
JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR CONTROL. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE  FORWARD-LOOKING  STATEMENTS
AS A RESULT OF,  AMONG  OTHER  THINGS;  THE  FACTORS  DESCRIBED  BELOW UNDER THE
CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS."

OVERVIEW

         Brilliant Digital  Entertainment,  Inc. is a company which, through our
Altnet, Inc.  subsidiary,  operates a  peer-to-peer-based  content  distribution
network that allows us to securely and efficiently  distribute a content owner's
music,  video,  software  and  other  digital  files to  computer  users via the
Internet.  Using internally developed and licensed  technology,  we have created
technologies for a private, or "closed" peer-to-peer network, which allows us to
centrally  control the distribution of a digital file, with  authorization  from
the copyright  owner,  directly from one computer user (peer) to another (peer).
Our ability to control files  distributed over our private  network,  as well as
our use of widely available digital rights management (or DRM) technologies from
Microsoft Corporation, TryMedia Systems, Softwrap Limited and others prevent the
distribution of unauthorized  files over our network and help to protect against
the  unauthorized  use of a  digital  file  once  it  resides  on an end  user's
computer.  We  commercialize  Altnet by partnering with third party operators of
web sites and other Internet applications to enable users of those web sites and
applications  to search for and download  digital files over the Altnet network.
We also operate a payment  processing  "gateway" that enables  computer users to
purchase content distributed over our network.

         We own 100% of the  outstanding  capital stock of Altnet and manage all
of its  day-to-day  operations.  We acquired the remaining  24.5% of Altnet from
Joltid, Ltd. on May 17, 2005 in exchange for the issuance to Joltid of 7,000,000
shares of  Brilliant's  common stock.  Joltid,  Ltd. is the company from whom we
license a substantial portion of Altnet's peer-to-peer  technology.  Previously,
we  increased  our  ownership  of Altnet from 51% to 75.5% in May 2003,  when we
acquired  1,102,500  shares of Altnet's common stock from Joltid in exchange for
7,000,000 shares of Brilliant's common stock. We also issued to Joltid 1,000,000
shares of Brilliant's  common stock as  consideration  for an option to purchase
Joltid's remaining shares of Altnet.  The option,  which was scheduled to expire
in May 2005, entitled us to purchase Joltid's


                                       18
<PAGE>


remaining  1,102,500  shares of Altnet  common stock in exchange  for  7,000,000
shares of Brilliant's  common stock,  with a value of $350,000.  In May 2005, we
exercised the option and acquired Joltid's remaining  interest in Altnet.  Prior
to these  transactions,  we received 51% of the  outstanding  capital  stock and
Joltid,  Ltd.  received 49% of the capital stock.  Neither party was required to
make a capital  contribution in connection with the formation of Altnet.  At the
time of the  transaction,  the only  significant  asset  owned by Altnet was its
technology.

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

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

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

         Digital  content  revenues are derived from  processing  digital  media
content  (music,  PC  games,  software,  movies)  for  placement  on our  Altnet
peer-to-peer network, and by promoting, distributing, and selling the content to
end users which we access via our Internet  affiliates.  We may charge clients a
processing fee to prepare content for distribution on the network. The amount of
this fee  varies  based on the number of files,  the size of the files,  digital
encoding costs, and the preparation of collateral marketing  materials,  such as
artwork. We charge clients for content promotions on a


                                       19
<PAGE>


cost per specified number of downloaded files. The amounts charged vary based on
volume and the  complexity of the campaign.  We charge clients for content sales
based on a revenue  sharing basis where we receive an agreed upon  percentage of
the sales price for each  transaction  or a  combination  of revenue share and a
cost per specified number of downloaded files.

SIGNIFICANT CHALLENGES AND RISKS

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

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

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

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

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

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

         o        A successful appeal to the unfavorable  ruling rendered by the
                  Court in the Australian litigation in which we are involved.

         We intend to continue to aggressively  pursue content  acquisition with
both  the  major  and  smaller   independent   musical   recording   and  filmed
entertainment  companies  in order to address our content  needs and to increase
revenue from the  distribution  of content.  To date, our efforts in this regard
have been  hampered  by the  litigation  surrounding  our  largest  distribution
partner, Sharman Networks, over the legality of the KMD. Despite our efforts, we
have been  unable to obtain  download  licenses  for music  files from the major
musical recording  companies,  even though these companies have granted licenses
to our competitors. Several of these musical recording companies have sued us in
the Federal Court of Australia for activities  relating to our business dealings
with  Sharman  Networks.  A  ruling  was  handed  down by the  Federal  Court of
Australia in early September, 2005 and we are currently appealing that decision.
There can be no assurance  that we will be granted such  licenses at any time in
the future.

         On September 5, 2005, the Court in the  Australian  litigation in which
we are involved  rendered its judgment,  declaring  that Sharman  Networks Ltd.,
Altnet Inc.,  Brilliant Digital  Entertainment,  Inc., Kevin Glen Bermeister and
certain other  defendants were liable for copyright  infringement for activities
associated with the development and distribution of the Kazaa Media Desktop file
sharing  software  application.  The proceeding was wholly  dismissed as against
Brilliant  Digital  Entertainment  Pty.  Ltd.,  Anthony  Rose and certain  other
defendants.  We have filed  documents  to proceed  with an appeal of the Court's
decision  which we believe will be heard  sometime  during the first  quarter of
2006. Any determination of damages payable by the defendants in the case will be
stayed  pending  appeal  of the lower  Court's  decision.  If the  appeal is not
successful,  the  Company  and  certain  of  our  officers  may  be  subject  to
substantial


                                       20
<PAGE>


damages,  and we may be prevented from engaging in certain business  activities.
Either of these results would have a material  adverse  affect on our ability to
continue as a going concern.

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

         We intend to  continue  our pursuit of  additional  capital to fund our
expansion  efforts and to pay both our secured debt holders and unsecured  trade
creditors.  At September  30, 2005, we were indebted to our secured note holders
with  aggregate  principal  and accrued  interest of  $3,777,000,  and our trade
payables,  including related parties, were $2,533,000.  We are also working with
both our secured debt holders and certain of our  unsecured  trade  creditors to
restructure  amounts owed them into long-term  arrangements.  We did complete an
extension of the secured  debt that was due on  September  26, 2005 to March 31,
2006.  However,  there can be no assurance that we will be successful in raising
additional  capital  to  pay  these  obligations,   or  in  restructuring  these
obligations to avoid a payment default.

         The accompanying  financial statements have been prepared assuming that
we will continue as a going  concern,  which  contemplates  the  realization  of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amount of assets and liabilities  presented in the financial statements
do not purport to represent  realizable or settlement  values.  We have suffered
recurring  operating  losses and at  September  30, 2005,  had negative  working
capital  of  approximately  $4,446,000  (excluding  non-cash  debt  discount  of
$2,949,000  related to the issuance of warrants) and a stockholders'  deficit of
approximately  $1,023,000.  These  factors  raise  substantial  doubt  about our
ability to continue as a going  concern.  We  anticipate  that our current  cash
reserves, plus our expected generation of cash from existing operations in 2005,
may not be sufficient to fund our anticipated expenditures. Consequently, we may
require  additional  equity or debt financing during 2005, the amount and timing
of which will depend in large part on our  spending  program.  The report of our
Independent  Certified  Public  Accountants  for the December 31, 2004 financial
statements included an explanatory paragraph expressing  substantial doubt about
our ability to continue as a going concern.

SETTLEMENT AGREEMENT AND MUTUAL RELEASE

         On June 16,  2005,  we issued  6,666,667  shares of our Common Stock to
Harris  Toibb,  with a value of $400,000,  in exchange for all of the  ownership
interests  in Big Seven  Entertainment,  LLC.  The shares  were issued to Harris
Toibb  in  accordance  with the  terms  of that  certain  Assignment  of  Rights
Agreement,  dated June 15, 2005,  among  Harris  Toibb,  Michael  Toibb and Omni
Management Group, LLC, and acknowledged by us, whereby Michael Toibb assigned to
Harris Toibb, in consideration  of a cash payment,  Michael Toibb's rights under
that certain Settlement Agreement and Mutual Release, dated as of June 16, 2004,
among us, Big Seven  Entertainment,  LLC,  Michael  Toibb and the other  parties
thereto.  Pursuant to the terms of the Settlement  Agreement and Mutual Release,
we agreed to acquire from Michael Toibb,  on or before the first  anniversary of
the date of the Settlement Agreement and Mutual


                                       21
<PAGE>


Release,  all of the  ownership  interest  in Big  Seven  Entertainment,  LLC in
exchange for the issuance of 6,666,667 shares of our Common Stock.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

         Our  critical  accounting  policies  are  described  in  Note  2 to the
consolidated  financial  statements  included in Item 1 of this Form 10-QSB.  We
believe our most critical accounting policies include revenue  recognition,  the
corresponding  accounts  receivable and long-lived asset impairment.  We believe
the following critical accounting policies affect our more significant judgments
and estimates used in preparation of our consolidated financial statements.

         Under  SEC  Staff  Accounting  Bulletin  No.  104 (SAB  104) and  AICPA
Statement  of Position  97-2 (SOP 97-2),  we  recognize  revenue when all of the
following  criteria are met: (1) persuasive  evidence of an arrangement  exists,
(2) delivery has occurred or services have been rendered, (3) the seller's price
to the buyer is fixed or  determinable,  and (4)  collectibility  is  reasonably
assured.  In the case of each of our product and  service  lines we  establish a
contract or insertion order with our customers with specifics for  requirements,
a fixed price, a delivery schedule,  and terms for payment.  Unless cash is paid
in advance,  our  receivables  are  recorded as revenue is earned.  We regularly
evaluate  the  collectibility  of our  receivables  based  on a  combination  of
factors.  When a customer's  account becomes past due, we initiate dialogue with
the customer to determine the cause.  If we determine  that the customer will be
unable to meet its  financial  obligations  to us, due to a  bankruptcy  filing,
deterioration in the customer's operating results or financial position or other
material events  impacting their business,  we record a specific reserve for bad
debt to reduce the related  receivable  to the amount we expect to recover given
all  information  presently  available.  If  circumstances  related to  specific
customers  change,  our estimates of the  recoverability  of  receivables  could
materially change.

         Long-lived  assets and intangible  assets with  determinable  lives are
reviewed for impairment  quarterly or whenever events or circumstances  indicate
that the carrying  amounts of assets may not be recoverable  in accordance  with
SFAS No. 144,  "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS".
We  evaluate  recoverability  of  assets  to be held and used by  comparing  the
carrying  amount  of an  asset  to  future  net  undiscounted  cash  flows to be
generated  by the asset.  If such  assets are  considered  to be  impaired,  the
impairment  to be  recognized  is measured  as the amount by which the  carrying
amount of the assets exceeds the


                                       22
<PAGE>


fair value of the assets. Such reviews assess the fair value of the assets based
upon our  estimates of the future cash flows we expected the assets to generate.
In response to changes in industry and market conditions,  we may be required to
strategically  realign our  resources  in the future,  which could  result in an
impairment of long lived assets.

RESULTS OF OPERATIONS

         REVENUES.  Revenues  decreased 32% from  $6,836,000 for the nine months
ended  September 30, 2004 to $4,718,000 for the nine months ended  September 30,
2005. Revenues by groups of similar service were as follows:

                REVENUES                  2004           2005       NET CHANGE
---------------------------------   --------------  --------------  ----------
Marketing services...............       $4,890,000      $3,324,000    (32%)
Licensing and other services.....        1,588,000       1,121,000    (29%)
Digital content..................          358,000         273,000    (24%)
                                    --------------  --------------  ----------
Total Revenue....................       $6,836,000      $4,718,000    (31%)
                                    ==============  ==============  ==========

         Marketing  services revenue decreased to $3,324,000 for the nine months
ended September 30, 2005 from $4,890,000 for the nine months ended September 30,
2004  primarily  as a result of a decrease in revenue  from our  agreement  with
Focus  Interactive,  Inc.  Licensing and other  services  revenues  decreased to
$1,121,000 for the nine months ended  September 30, 2005 from $1,588,000 for the
nine months ended  September 30, 2004,  due to a decrease in payment  processing
revenues  as  a  result  of  our   discontinuation   of  processing  Kazaa  Plus
transactions  that occurred in early  February,  2005.  Digital  content revenue
decreased  from  $358,000  for the nine months  ended  September  30,  2004,  to
$273,000 for the nine months ended September 30, 2005 primarily as a result of a
decrease in software sales through the Altnet Network.

         COST OF REVENUES. Cost of revenues decreased from $945,000 for the nine
months ended September 30, 2004, to $335,000 for the nine months ended September
30, 2005.  This net decrease of $610,000 is primarily  related to a  substantial
decrease in the costs  associated  with the  operation  of our  payment  gateway
services as a result of our discontinuation of processing for Kazaa Plus.

         SALES AND MARKETING. Sales and marketing expenses decreased by 46% from
$946,000 for the nine months ended  September  30, 2004 to $524,000 for the nine
months ended  September  30,  2005.  The net decrease of $422,000 in 2005 is due
primarily to a reduction in marketing and promotion  costs of $274,000  spent to
support  our  marketing  efforts  for the Altnet  network,  and a  reduction  in
commissions of $148,000.

         GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses
primarily  include  salaries  and  benefits  of  management  and  administrative
personnel,  rent,  insurance  costs,  professional  fees  and  non-cash  warrant
expense. General and administrative expenses decreased $2,190,000,  or 46%, from
$4,734,000  for the nine months ended  September 30, 2004 to $2,544,000  for the
nine months ended September 30, 2005. This decrease is primarily attributable to
payroll  related  cost  savings of  $765,000  and  decreases  in legal  costs of
$1,043,102.


                                       23
<PAGE>


         RESEARCH AND  DEVELOPMENT.  Research and development  expenses  include
salaries and benefits of personnel  conducting research and development relating
to our Internet web site, payment gateway and related information database,  and
the development of the Altnet Peer Points Manager  software  application.  These
costs  decreased  from $356,000 for the nine months ended  September 30, 2004 to
$293,000  for  the  nine  months  ended  September  30,  2005,  as  most  of the
development  costs  incurred for the  development of our Peer Points program and
our payment gateway have been incurred.

         DEPRECIATION.  Depreciation  expense  relates to  depreciation of fixed
assets such as computer  equipment  and  cabling,  furniture  and  fixtures  and
leasehold improvements.  These fixed assets are depreciated over their estimated
useful lives (up to five years)  using the  straight-line  method.  Depreciation
expense was $28,000 for the nine months ended  September 30, 2004 as compared to
$16,000 for the nine months ended  September,  2005, as many of the  depreciable
assets have been fully depreciated.

         LOSS ON IMPAIRMENT OF BIG SEVEN AND ALTNET. At the time we acquired the
remaining shares of Altnet from Joltid and purchased the shares of Big Seven, we
determined  that both Big Seven and Altnet  were  impaired  and we  recorded  an
impairment charge for the full value of the purchases, totaling $750,000.

         OTHER INCOME AND EXPENSE.  Other income and expense primarily  includes
interest  expense.  Other  income  and  expense  decreased  from net  expense of
$4,439,000  for the nine  months  ended  September  30, 2004 to a net expense of
$2,980,000 for the nine months ended September 30, 2005.  During the nine months
ended  September  30,  2005,  interest  expense  included  interest  accrued  on
outstanding  convertible  promissory  notes  and  an  additional  $2,756,000  of
amortized debt issuance costs  associated  with agreements to further extend the
maturity date of the indebtedness.

LIQUIDITY AND CAPITAL RESOURCES

         As of  September  30,  2005,  our  cash and  cash  equivalents  totaled
approximately  $1,248,000.  This is an  increase  of  $945,000  as  compared  to
December 31, 2004. As of September 30, 2005, we had a working capital deficit of
$4,446,000  (excluding  non-cash  debt  discount  of  $2,949,000  related to the
issuance of  warrants).  Included in this working  capital  deficit are accounts
payable,  accrued  expenses and accrued  expenses to related parties of $728,000
which are over 90 days past due, and $3,777,000 of secured indebtedness.

         Our cash and cash  equivalents at September 30, 2005 included  $294,000
of an advance against future payments due us from Focus Interactive,  Inc. under
our  Strategic  Alliance and  Distribution  Agreement,  dated April 14, 2003, as
amended in April  2005.  Since  June,  2003,  payments  to us by Focus under our
agreement  have  funded  a  substantial  portion  of  our  working  capital.  We
anticipate  receiving  only small cash payments  from Focus until  approximately
November,  2005, when we expect the remaining portion of the advance to be fully
earned.

         We currently satisfy our working capital requirements primarily through
cash flows  generated  from  operations and sales of equity  securities.  We are
seeking additional funding.


                                       24
<PAGE>


There can be no assurance that with any additional financing,  higher cash flows
will be generated by operations.

CASH FLOWS

         Cash flows from operating,  investing and financing  activities for the
nine months ended  September  30, 2005 and 2004 are  summarized in the following
table:

ACTIVITY:                                          2004                 2005
--------------------------------------         ------------         ------------
Continuing Operations ................         $  (219,000)         $ 1,021,000
Investing ............................         $   (49,000)         $    (3,000)
Financing ............................         $   (50,000)         $    (5,000)

         During the nine months ended  September  30, 2005 we had a net increase
in cash of $993,000.  The net increase in cash from operating  activities during
the nine months ended  September  30, 2005 was  primarily  the result of the net
loss of $2,724,000, a decrease of $209,000 in guaranteed minimum payments, and a
$1,353,000 decrease in accrued expenses.  These amounts were offset primarily by
$2,734,000  in  non-cash   interest   expense,   $524,000  in  non-cash  warrant
amortization,  a decrease of $1,105,000 in accounts  receivable,  an increase of
$262,000 in deferred revenue and an impairment loss of $750,000.

         We are  not  generating  sufficient  cash  flow  to  meet  our  monthly
obligations and pay our existing  current  liabilities and secured debt which is
due in March 2006.  While we have been  successful  in the past working with our
secured debt holders to achieve short term extensions, and will continue working
with our secured  debt  holders  and  unsecured  creditors  to  restructure  our
obligations,  there  can be no  guarantee  that  we will  be  successful  in our
efforts. Consequently, we may require additional equity or debt financing during
2005 and 2006,  the amount and timing of which will  depend in large part on our
spending program and our success in  restructuring  our secured debt and current
liabilities.  Our previous  financings have been  significantly  dilutive to our
stockholders  and if additional  funds are raised through the issuance of equity
securities,  our stockholders may experience  significant  additional  dilution.
Furthermore,  there  can be no  assurance  that  additional  financing  will  be
available  when needed or that if available,  such  financing will include terms
favorable to our  stockholders  or us. If such  financing is not available  when
required or is not  available on acceptable  terms,  we may be unable to pay our
secured  debt  holders  as their  debt  matures  or trade  creditors  under  our
contractual terms with them, develop or enhance our products and services,  take
advantage of business opportunities or respond to competitive pressures,  any of
which could have a material adverse effect on our business,  financial condition
and results of  operations,  and would most likely  result in our having to file
for bankruptcy protection under the Bankruptcy Code.

         On September 5, 2005, the Court in the  Australian  litigation in which
we are involved  rendered its judgment,  declaring  that Sharman  Networks Ltd.,
Altnet Inc.,  Brilliant Digital  Entertainment,  Inc., Kevin Glen Bermeister and
certain other  defendants were liable for copyright  infringement for activities
associated with the development and distribution of the Kazaa Media Desktop file
sharing  software  application.  The proceeding was wholly  dismissed as against
Brilliant  Digital  Entertainment  Pty.  Ltd.,  Anthony  Rose and certain  other
defendants.  We have filed  documents  to proceed  with an appeal of the Court's
decision which we believe


                                       25
<PAGE>


will be heard sometime  during the first quarter of 2006. Any  determination  of
damages  payable by the  defendants in the case will be stayed pending appeal of
the lower Court's  decision.  If the appeal is not  successful,  the Company and
certain of our officers  may be subject to  substantial  damages,  and we may be
prevented from engaging in certain business activities.  Either of these results
would have a material  adverse  affect on our  ability  to  continue  as a going
concern.

CONTRACTUAL OBLIGATIONS

         At September  30, 2005, we were indebted to our secured debt holders in
the amount of  $3,777,000,  which  indebtedness  is due and payable on March 31,
2006, pursuant to an agreement to extend the due date of the debt from September
26, 2005 to March 31, 2006. The principal and accrued interest is convertible by
the holders into our common stock at a price of $0.07 per share,  for a total of
54,113,478 shares of common stock at September 30, 2005. In connection with this
extension,  in  addition  to the note  holders'  previously  issued  warrants to
purchase up to an  aggregate of  73,787,613  shares of common stock at a current
exercise price of $0.07 per share, we:

         (i)      adjusted the conversion price of the secured indebtedness from
                  $0.07 to $0.02 per share  effective  upon the amendment of our
                  Amended and Restated  Certificate of  Incorporation to provide
                  for a  one-for-ten  reverse  stock  split  of the  outstanding
                  shares of our common stock (the "Reverse Split");

         (ii)     adjusted  the  purchase  price of all  warrants  issued to the
                  Holders in consideration  of the secured  indebtedness and all
                  amendments  thereto (for a total of 73,787,613 common shares),
                  from $0.07 to $0.02 per share;

         (iii)    issued to the Holders  warrants  dated  September 26, 2005 and
                  expiring on October 5, 2009,  with an exercise  price of $0.02
                  per share,  to purchase an aggregate of 111,000,000  shares of
                  our common stock; and

         (iv)     issued to the Holders  warrants  dated  September 26, 2005 and
                  expiring on October 5, 2009,  with an exercise  price of $0.02
                  per share,  to purchase an aggregate of 152,738,125  shares of
                  our  common  stock,   which  warrants  will  vest  and  become
                  exercisable effective upon the Reverse Split.

         We  have  called  a  special  meeting  of our  stockholders,  presently
scheduled for December 12, 2005, to vote on the Reverse  Split,  and expect that
the Reverse Split will become  effective  shortly  following  the  stockholders'
meeting. Our failure to effect the Reverse Split constitutes an event of default
under the secured indebtedness.

         In  addition,  we  agreed  to make  payments  to the  note  holders  in
repayment of the indebtedness as follows:  (i) $75,000 per month,  plus (ii) 50%
of any quarterly  EBITDA in excess of $500,000,  plus (iii) 50% of any increased
revenue  received  from  existing  sources  of  revenue  or from new  sources of
revenue.

         Unless we are able to raise additional capital, which we do not believe
will occur, we will not have sufficient cash in 2006 to repay the senior secured
notes. Accordingly,  we may again seek to extend the maturity date of the notes.
We cannot make assurances that the note holders


                                       26
<PAGE>


will  agree to an  extension  at all or on terms  that do not  result in further
significant additional dilution to holders of our common stock.

OFF-BALANCE SHEET ARRANGEMENTS

         At September 30, 2005 and 2004, we did not have any relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as structured finance or special purpose entities,  which would have
been established for the purpose of facilitating  off-balance sheet arrangements
or other contractually  narrow or limited purposes.  As such, we are not exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.

NEW ACCOUNTING PRONOUNCEMENTS

         In December 2004,  the FASB issued SFAS No. 123  (revised),  Accounting
for Stock Based Compensation, which supersedes Accounting Principles Board (APB)
Opinion  No. 25,  Accounting  for Stock  Issued to  Employees,  and its  related
implementation  guidance. This Statement requires a public entity to measure the
cost  of  employee  services  received  in  exchange  for  an  award  of  equity
instruments  based on the grant  date  fair  value of the  award  (with  limited
exceptions);  the fair value of that award will be  remeasured  subsequently  at
each reporting date through the settlement  date. This Statement is effective as
of the  beginning of the first  interim or annual  reporting  period that begins
after  December  15, 2005 for small  business  issuers.  The  Company  currently
applies  APB  Opinion  No. 25 in  accounting  for its stock  based  compensation
(options).  The amended provisions of SFAS No. 123 had no material effect on the
Company's  consolidated  financial position or results of operation for the year
ended December 31, 2004.

         In December  2004,  FASB issued SFAS No. 153,  Exchanges of Nonmonetary
Assets an amendment of APB Opinion No. 29. SFAS 153 addresses the measurement of
exchanges of  nonmonetary  assets.  It eliminates  the exception from fair value
measurement for nonmonetary  exchanges of similar productive assets in paragraph
21(b) of APB  Opinion  No. 29,  Accounting  for  Nonmonetary  Transactions,  and
replaces  it  with an  exception  for  exchanges  that  do not  have  commercial
substance.  This Statement specifies that a nonmonetary  exchange has commercial
substance  if the  future  cash  flows of the  entity  are  expected  to  change
significantly as a result of the exchange. SFAS 153 is effective for nonmonetary
asset exchanges  occurring in fiscal periods  beginning after June 15, 2005. The
Company  is  considering  the  provisions  of SFAS  No.  153 and its  effect  on
nonmonetary exchanges in the future.

         In May 2005,  FASB issued SFAS No.  154,  Accounting  Changes and Error
Corrections,  a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS
154  applies  to all  voluntary  accounting  principle  changes  as  well as the
accounting  for and  reporting  of  such  changes.  SFAS  154 is  effective  for
accounting  changes and  corrections  of errors made in fiscal  years  beginning
after December 15, 2005.

         SFAS  154  requires  voluntary  changes  in  accounting   principle  be
retrospectively  applied to financial  statements  from previous  periods unless
such application is  impracticable.  Changes in depreciation,  amortization,  or
depletion for long-lived, non-financial assets are accounted for


                                       27
<PAGE>


as a change in  accounting  estimate  that is affected by a change in accounting
principle, under the newly issued standard.

         SFAS 154  replaces  APB  Opinion  No. 20 and SFAS 3.  SFAS 154  carries
forward many provisions of Opinion 20 and SFAS 3 without change  including those
provisions  related to reporting a change in  accounting  estimate,  a change in
reporting  entity,  correction of an error and reporting  accounting  changes in
interim financial statements.  The FASB decided to completely replace Opinion 20
and SFAS 3 rather than amending them in keeping to the goal of simplifying  U.S.
GAAP. The provisions of SFAS No. 154 are not expected to have a material  effect
on the Company's consolidated financial position or results of operation.

CAUTIONARY STATEMENTS AND RISK FACTORS

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

       RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK

         THERE IS DOUBT ABOUT OUR ABILITY TO  CONTINUE  AS A GOING  CONCERN.  We
currently  have a number  of  obligations  that we are  unable  to meet  without
generating  additional  revenues  or raising  additional  capital.  If we cannot
generate  additional revenues or raise additional capital in the near future, we
may  become  insolvent.   As  of  September  30,  2005,  our  cash  balance  was
approximately  $1,248,000  and we had a working  capital  deficit of  $4,446,000
(excluding  non-cash  debt  discount of  $2,949,000  related to the  issuance of
warrants).  Historically,  we have funded our capital requirements with debt and
equity  financing.  Our ability to obtain  additional  equity or debt  financing
depends on a number of  factors  including  our  financial  performance  and the
overall  conditions  in our  industry.  If we are not able to  raise  additional
financing or if such  financing is not  available on  acceptable  terms,  we may
liquidate assets, seek or be forced into bankruptcy,  and/or continue operations
but suffer  material  harm to our  operations  and  financial  condition.  These
measures  could have a material  adverse  affect on our ability to continue as a
going concern.

         WE HAVE A HISTORY OF LOSSES,  A NEGATIVE NET WORTH AND MAY NEVER ATTAIN
PROFITABILITY.  We  realized a  comprehensive  loss of  $2,744,000  for the nine
months ended September 30, 2005. Since inception,  we have incurred  significant
losses  and  negative  cash  flow,  and  as of  September  30,  2005  we  had an
accumulated  deficit of  approximately  $78 million.  We anticipate that we will
continue  to generate  operating  losses for the  foreseeable  future as we fund
operating  and  capital  expenditures  in the  areas  of  sales  and  marketing,
administration,  and  research  and  development,  all  principally  related  to
deployment  of our Altnet  peer-to-peer  network and  operating  infrastructure.
Additionally,   as  of  the  date  of  this  report,  our  current   liabilities
significantly exceed our current assets.

         Our business model assumes that our growth and substantially all of our
future  revenues will be derived from our Altnet  peer-to-peer  business,  which
only became operational in the


                                       28
<PAGE>


fourth quarter of 2002. This business model is not yet proven and we cannot make
assurances  that we will  ever  achieve  or  sustain  profitability  or that our
operating  losses will not  increase in the future or be  inconsistent  with the
expectations  of the  public  market.  Primarily  as a result  of our  continued
losses, our independent public accountants included an explanatory  paragraph in
its opinion on our financial statements wherein they expressed substantial doubt
about our ability to continue as a going concern.

         WE HAVE A  SUBSTANTIAL  NUMBER  OF  OUTSTANDING  DERIVATIVE  SECURITIES
WHICH,  IF EXERCISED OR CONVERTED INTO COMMON STOCK,  WILL RESULT IN SUBSTANTIAL
DILUTION  TO OUR  STOCKHOLDERS.  At  September  30,  2005,  we  had  outstanding
$3,777,000  of senior  secured  indebtedness  which is evidenced by  convertible
promissory  notes due March 31, 2006.  The  following  table  illustrates  as of
November 10, 2005, the number of shares issued and  outstanding,  as well as the
number of shares that may be issued in the future upon conversion of outstanding
secured  convertible  promissory  notes and exercise of outstanding  options and
warrants.  For the purposes of this table we have included all warrants  whether
they are  "in-the-money"  or not,  and the  number of  shares  of  common  stock
underlying the outstanding warrants has been calculated on a "paid-for" exercise
basis,  whereby the holder of each warrant  receives  upon  exercise a number of
shares of common stock equal to the number of warrants  held.  Additionally,  we
have assumed the  occurrence  of the  reduction in the  conversion  price of the
convertible promissory notes from $0.07 to $0.02, and the vesting of warrants to
purchase  152,738,125  shares of our common stock, both of which are conditional
upon our stockholders  approving a one-for-ten reverse split of our common stock
at a special meeting of stockholders presently scheduled for December 12, 2005.

                                                                   PERCENTAGE
                                                 SHARES OF          OF FULLY
SECURITY                                       COMMON STOCK      DILUTED SHARES
-------------------------------------------     -----------       -----------
Outstanding Common Stock ..................      56,523,820               9.0%
Secured Convertible Promissory Notes,
  with accrued interest ...................     183,728,410              57.8%
Outstanding Warrants ......................     364,043,959              29.1
Outstanding Options .......................      25,809,019               4.1%
                                                -----------       -----------
  Fully Diluted Shares of Common Stock ....     630,105,208             100.0%

         Additionally,  we  anticipate  that during  2006,  we may need to raise
additional  capital. As such, any additional capital raising efforts would cause
further dilution to stockholders.  Additionally,  any further  extensions of the
maturity  date of our  convertible  promissory  notes will likely  require us to
issue a substantial number of additional warrants to the note holders.

         IF WE  BECOME  INSOLVENT,  WE  WILL BE IN  DEFAULT  UNDER  OUR  SECURED
CONVERTIBLE  PROMISSORY  NOTES,  WHICH  COULD  RESULT IN OUR  OBLIGATION  TO PAY
IMMEDIATELY ALL AMOUNTS THEN OUTSTANDING UNDER THE NOTES. If we generally do not
pay,  or become  unable to pay,  our debts as such  debts  become  due,  we will
default  under  our  outstanding  Secured  Convertible  Promissory  Notes,  with
aggregate principal and accrued interest and fees of $3,777,000 at September 30,
2005.  If a default  occurs,  all amounts owed to the holders of the notes would
immediately become due and payable. If we are not able to repay the indebtedness
when due,


                                       29
<PAGE>


the holders of the notes will be entitled  to exercise  all of their  rights and
remedies,  including  foreclosure  on all of our  assets  which  we  pledged  as
collateral to secure repayment of the debt.

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

         o        variations in quarterly operating results;

         o        the gain or loss of significant contracts;

         o        changes in management;

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

         o        recommendations by securities industry analysts;

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

         o        short sales and hedging of our common stock; and

         o        adverse legal rulings.

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

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

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

         o        the  introduction  or  enhancement  of software  products  and
                  technology by us and/or our competitors,

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


                                       30
<PAGE>


         o        our ability to fund our legal fees.

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

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

         WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE
PRICE OF OUR  COMMON  STOCK.  Our  ability  to issue up to  1,000,000  shares of
preferred  stock and some  provisions of our  certificate of  incorporation  and
bylaws and of  Delaware  law could make it more  difficult  for a third party to
make an unsolicited  takeover  attempt of us. These  anti-takeover  measures may
depress  the price of our  common  stock by making  third  parties  less able to
acquire  us by  offering  to  purchase  shares of our stock at a premium  to its
market  price.  Our  Board of  Directors  can  issue up to  1,000,000  shares of
preferred  stock and determine the price,  rights,  preferences,  privileges and
restrictions,  including voting rights, of those shares without any further vote
or action by our stockholders.  Our Board of Directors could issue the preferred
stock with voting, liquidation, dividend and other rights superior to the rights
of our common  stock.  The rights of holders of our common stock will be subject
to,  and may be  adversely  affected  by,  the  rights of  holders  of the share
purchase rights and of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing desirable flexibility in connection
with  possible  acquisitions  and other  corporate  purposes  could make it more
difficult  for a third  party to acquire a majority  of our  outstanding  voting
stock.

       RISKS RELATED TO OUR BUSINESS

         WE HAVE  BEEN  SUED IN  AUSTRALIAN  FEDERAL  COURT AS A  RESULT  OF OUR
BUSINESS DEALINGS WITH SHARMAN NETWORKS  LIMITED.  In March 2004, in the Federal
Court of  Australia,  New  South  Wales  District  Registry,  Brilliant  Digital
Entertainment,   Inc.,  its  subsidiaries  Altnet  Inc.  and  Brilliant  Digital
Entertainment  Pty.  Limited,  and Kevin  Bermeister and Anthony Rose, the Chief
Executive  Officer and Chief Technology  Officer,  respectively,  were joined as
defendants in the suit by Universal  Music  Australia Pty. Ltd. and other record
labels  against  Sharman  Networks  Limited  and  other   defendants,   alleging
infringement of the copyright in sound recordings  controlled by the plaintiffs.
The plaintiffs  allege that due to our business  dealings with Sharman  Networks
Limited,  we are integrally involved in the operation of the Kazaa Media Desktop
and therefore liable for the alleged  copyright  infringement  occasioned by its


                                       31
<PAGE>


development  and  distribution.  The  plaintiffs  are seeking  damages under the
Australian  Copyright  Act of  1968,  recovery  of  costs  and  interest,  and a
permanent injunction  restraining us from making copies of, communicating to the
public, or distributing the Plaintiff's sound recordings  without a license.  On
September 5, 2005, the Court rendered its judgment in the Australian litigation,
declaring  that  Sharman   Networks  Ltd.,   Altnet  Inc.,   Brilliant   Digital
Entertainment,  Inc.,  Kevin Glen  Bermeister and certain other  defendants were
liable for copyright infringement for activities associated with the development
and distribution of the Kazaa Media Desktop file sharing  software  application.
The proceeding was wholly dismissed as against Brilliant  Digital  Entertainment
Pty. Ltd., Anthony Rose and certain other defendants. We have filed documents to
proceed  with an appeal of the Court's  decision  which we believe will be heard
sometime during the first quarter of 2006. Any  determination of damages payable
by the defendants in the case will be stayed pending appeal of the lower Court's
decision.  If the  appeal is not  successful,  the  Company  and  certain of our
officers may be subject to  substantial  damages,  and we may be prevented  from
engaging in certain  business  activities.  Either of these results would have a
material adverse affect on our ability to continue as a going concern.

         WE DERIVE A SUBSTANTIAL  AMOUNT OF OUR REVENUE FROM OUR AGREEMENT  WITH
FOCUS INTERACTIVE,  INC. We recognized installation bounties and search revenues
from our Strategic  Alliance,  Marketing and  Distribution  Agreement with Focus
Interactive,  Inc.,  totaling  $3,257,000 and $4,755,000  during the nine months
ended  September 30, 2005 and fiscal 2004,  respectively,  representing 69 % and
70% of our total revenues during such periods. If Focus breaches its obligations
to us under our agreement,  or the agreement  terminates prior to its expiration
date in  July,  2006,  our  revenues  and cash  flows  from  operations  will be
materially adversely affected.

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

         ALTNET'S MICRO-PAYMENT PROCESSING SYSTEM IS RELIANT UPON THE TECHNOLOGY
AND SYSTEMS OF THIRD PARTY VENDORS THAT PROVIDE THEIR SERVICES TO ALTNET. We use
the  technology  and  services  of third  parties  to  process  payment  for the
individual  sale  of  digital  content  over  our  Altnet  peer-to-peer  system.
NewGenPay Inc. currently provides payment processing  technology and services to
us. The ability to process  payment for  individual  sales at price  points well
below  $1.00  (better  known as micro  payments)  is  integral to our ability to
commercialize the secure distribution and sale of our customers' digital content
to millions of users. Our ability to


                                       32
<PAGE>


commercialize  Altnet  could  be  materially  adversely  affected  if we do  not
maintain our  relationships  with the vendors that provide these services on our
behalf.  Additionally,  a disruption in these vendors'  services,  problems with
their  technology,  or any other matters that interfere with their  provision of
services to us could disrupt our ability to collect fees for the digital content
we  distribute,  which would have a materially  adverse affect on our operations
and our relationship with our customers.

         OUR FAILURE TO MAINTAIN A STRATEGIC  RELATIONSHIP WITH SHARMAN NETWORKS
COULD  ADVERSELY  AFFECT  OPERATING  RESULTS.  We  receive  compensation  as the
exclusive representative of Sharman Networks for the sale, license, and/or other
commercial  exploitation  of index  search  results  displayed  on or  otherwise
accessed using the Kazaa Media Desktop in response to end user search  requests.
Additionally,  we receive compensation for the sale of advertising campaigns and
other revenue received by Sharman Networks,  as a result of our efforts. We also
receive a monthly  license  fee from  Sharman  networks in  connection  with our
sub-licensing  of  the  TruNames  patent  to  them.  If we do not  maintain  our
strategic  relationship with Sharman  Networks,  these sources of revenue may be
eliminated which would adversely  affect our financial  condition and results of
operations.

         OUR  FAILURE TO  MAINTAIN  STRATEGIC  RELATIONSHIPS  WITH  DISTRIBUTION
PARTNERS COULD REDUCE THE NUMBER OF ALTNET PEER-TO-PEER APPLICATIONS WE ARE ABLE
TO  DISSEMINATE  TO  CONSUMERS,  WHICH WOULD  REDUCE THE NUMBER OF USERS FOR OUR
ALTNET PEER-TO-PEER BUSINESS. We distribute the software necessary to create and
run our Altnet  peer-to-peer  business  primarily  by bundling  it with  Sharman
Networks'  Kazaa Media Desktop.  We rely on computer users' demand for the Kazaa
Media Desktop to increase the installed  base of our Altnet  software,  which is
necessary to connect users to our private  peer-to-peer  network.  Additionally,
through our  agreement  with  Sharman  Networks,  Altnet  distributes  and sells
digital  files to users of the Kazaa Media  Desktop.  Our  business,  results of
operations  and  financial  condition  could be adversely  affected if we do not
maintain our distribution relationship with Sharman Networks on acceptable terms
or if this  relationship  does not achieve  the  projected  distribution  of our
Altnet software or sales of authorized digital files.

         CURRENT LITIGATION AGAINST SHARMAN NETWORKS LIMITED MAY PREVENT FURTHER
DISTRIBUTION  OF OUR ALTNET  PEER-TO-PEER  SOFTWARE,  AND  ADVERSELY  AFFECT OUR
ABILITY  TO  DISTRIBUTE  AND SELL  DIGITAL  FILES TO  USERS OF THE  KAZAA  MEDIA
DESKTOP.  A disruption in the distribution of the Kazaa Media Desktop or its use
by consumers  would adversely  impact (1) the future  distribution of our Altnet
software,  and (2) Altnet's  sale of  authorized  digital  files to users of the
Kazaa Media Desktop.  For the nine months ended September 30, 2005, we generated
approximately  100% of our total  revenues from  activities  dependent  upon the
availability  of the  Kazaa  Media  Desktop.  If  there is a  disruption  in the
distribution  of the Kazaa Media Desktop or its use by consumers,  we may not be
able to replace  this  source of revenue in the short term,  or at all.  Sharman
Networks,  the Kazaa Media Desktop,  and other  peer-to-peer  software products,
currently are the subject of multiple  lawsuits,  including  METRO-GOLDWYN-MAYER
STUDIOS,  INC.  ET. AL. V.  GROKSTER  LTD. ET. AL.,  filed in the United  States
District  Court for the Central  District of  California  (Western  Division) by
twenty-eight  entertainment  companies  claiming that,  among other things,  the
Kazaa  Media  Desktop  facilitates,  contributes  to  and  encourages  copyright
infringement.  Initially,  the District Court granted the defendant's motion for
summary  judgment,  holding that Grokster's and Streamcast's P2P networks do not
contributorily or vicariously


                                       33
<PAGE>


infringe  the  copyrights  of the holders of music and movie  copyrights,  which
decision  was  affirmed by the U.S.  Court of Appeals for the 9th  Circuit.  The
plaintiffs  appealed to the U.S. Supreme Court, which reversed the lower courts'
decisions on summary  judgment and remanded the case back to the District Court.
To the extent that Sharman  Networks is precluded  from  distributing  the Kazaa
Media  Desktop  as a result  of this  litigation,  our  business  and  financial
condition could be materially and adversely  affected.  While we understand that
Sharman  Networks is  vigorously  defending  against  the claims  raised in this
litigation,  we are unable to determine at this time  whether  Sharman  Networks
will prevail.

         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
Altnet  software,  does not infringe any valid  existing  proprietary  rights of
third parties.  Any infringement  claims,  however,  whether or not meritorious,
could  result in costly  litigation  or  require  us to enter  into  royalty  or
licensing  agreements.  If we are found to have infringed the proprietary rights
of others,  we could be  required  to pay  damages,  redesign  the  products  or
discontinue  their sale. Any of these outcomes,  individually  or  collectively,
could have a material adverse effect on our business and financial condition.

         TO DEVELOP  PRODUCTS THAT CONSUMER'S  DESIRE,  WE MUST MAKE SUBSTANTIAL
INVESTMENTS IN RESEARCH AND DEVELOPMENT TO KEEP UP WITH THE RAPID  TECHNOLOGICAL
DEVELOPMENTS  THAT ARE TYPICAL IN OUR INDUSTRY.  The software  market and the PC
industry are subject to rapid  technological  developments.  To develop products
that consumer's  desire,  we must  continually  improve and enhance our existing
products  and  technologies  and  develop new  products  and  technologies  that
incorporate these technological developments.  We cannot be certain that we will
have the financial and technical resources available to make these improvements.
We must make improvements to our technology while remaining competitive in terms
of performance and price.  This will require us to make  investments in research
and  development,  often times well in advance of the widespread  release of the
products in the market and any revenues  these  products may generate.  Until we
become profitable,  we will need to fund these research and development  efforts
from  proceeds  we  receive  from  equity  or debt  financings.  We do not  have
sufficient  resources  to fund  long term  research  and  development,  which is
presently on hold.

ITEM 3.  CONTROLS AND PROCEDURES.

         Members of the  company's  management,  including  our Chief  Executive
Officer,  President and acting Chief Financial Officer,  Kevin Bermeister,  have
evaluated  the  effectiveness  of our  disclosure  controls and  procedures,  as
defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of September
30,  2005,  the end of the  period  covered  by this  report.  Based  upon  that
evaluation, Mr. Bermeister concluded that our disclosure controls and procedures
are effective.

         There were no changes in our internal control over financial  reporting
or in other factors  identified in connection  with the  evaluation  required by
paragraph  (d) of Exchange Act Rules 13a-15 or 15d-15 that  occurred  during the
nine months ended  September  30 , 2005 that have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.


                                       34
<PAGE>


                                     PART II

                                OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

         As  originally  disclosed  in our Annual  Report on Form 10-KSB for the
fiscal year ended  December 31,  2003,  in March 2004,  in the Federal  Court of
Australia,  New South Wales District Registry,  Brilliant Digital Entertainment,
Inc., its  subsidiaries  Altnet Inc. and Brilliant  Digital  Entertainment  Pty.
Limited,  and Kevin Bermeister and Anthony Rose, the Chief Executive Officer and
Chief Technology Officer, respectively, were joined as defendants in the suit by
Universal  Music  Australia  Pty. Ltd. and other record labels  against  Sharman
Networks Limited and other defendants, alleging infringement of the copyright in
sound recordings controlled by the plaintiffs. The plaintiffs allege that due to
the Company's  business dealings with Sharman Networks  Limited,  the Company is
integrally  involved in the  operation of the Kazaa Media  Desktop and therefore
liable for the alleged copyright infringement  occasioned by its development and
distribution.  The plaintiffs are seeking damages under the Australian Copyright
Act of  1968,  recovery  of  costs  and  interest,  and a  permanent  injunction
restraining the Company from making copies of,  communicating to the public,  or
distributing the Plaintiff's sound recordings without a license.

         On September 5, 2005, the Court rendered its judgment in the Australian
litigation, declaring that Sharman Networks Ltd., Altnet Inc., Brilliant Digital
Entertainment,  Inc.,  Kevin Glen  Bermeister and certain other  defendants were
liable for copyright infringement for activities associated with the development
and distribution of the Kazaa Media Desktop file sharing  software  application.
The proceeding was wholly dismissed as against Brilliant  Digital  Entertainment
Pty. Ltd., Anthony Rose and certain other defendants. We have filed documents to
proceed  with an appeal of the Court's  decision  which we believe will be heard
sometime during the first quarter of 2006. Any  determination of damages payable
by the defendants in the case will be stayed pending appeal of the lower Court's
decision.

ITEM 6.  EXHIBITS

THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:

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


                                       35
<PAGE>


                                   SIGNATURES

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

                                BRILLIANT DIGITAL ENTERTAINMENT, INC.


Dated: November 14, 2005           /S/ KEVIN BERMEISTER
                                ------------------------------------------------
                                By:    Kevin Bermeister
                                Its:   President, Chief Executive Officer and
                                       Acting Chief Financial Officer (Principal
                                       Financial and Accounting Officer)


                                       36