SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

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

                  For the quarterly period ended March 31, 2001

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

  For the transition period from __________________ to ______________________.

                         Commission file number 0-21637

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

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

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

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

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

                                  Yes X    No___

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common Stock, par value
$0.001, 16,044,660 shares issued and outstanding as of May 1, 2001.

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


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                      INDEX

                                                                           PAGE

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

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

         Condensed Consolidated Balance Sheet as of March 31, 2001............3

         Condensed Consolidated Statements of Operations for the
         three months ended March 31, 2001 and March 31, 2000.................4

         Condensed Consolidated Statements of Cash Flows for the
         three months ended March 31, 2001 and March 31, 2000.................5

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

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...........................................10

PART II  OTHER INFORMATION...................................................23

Item 2.  Changes in Securities and Use of Proceeds...........................23

Item 6.  Exhibits and Reports on Form 8-K....................................23


                                     Page 2
<PAGE>


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                 (In thousands)

                                                                     MARCH 31,
                                                                       2001
                                                                   ------------
<S>                                                                <C>
ASSETS                                                              (unaudited)
Current assets:
    Cash and cash equivalents....................................  $     1,074
    Accounts receivable, net.....................................          498
    Other assets, net............................................          404
                                                                   ------------
Total current assets.............................................        1,976
Property, plant and equipment, net...............................          364
Other assets, net................................................          611
                                                                   ------------
Total assets.....................................................  $     2,951
                                                                   ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable.............................................  $       193
    Accrued expenses.............................................          968
    Deferred revenue.............................................          917
    Net liabilities of discontinued operations...................          623
    Current portion of notes payable.............................          153
                                                                   ------------
Total current liabilities........................................        2,854
Deferred revenue.................................................        3,243
Notes payable, less current portion..............................           72
Other long term liabilities......................................           50
                                                                   ------------
Total liabilities................................................        6,219
Commitments and contingencies
Stockholders' deficit:
    Common stock.................................................           16
    Additional paid-in capital...................................       47,328
    Accumulated deficit..........................................      (50,384)
    Cumulative other comprehensive loss..........................         (228)
                                                                   ------------
Total stockholders' deficit......................................       (3,268)
                                                                   ------------
Total liabilities and stockholders' deficit......................  $     2,951
                                                                   ============
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                     Page 3
<PAGE>


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

                                                                         THREE MONTHS
                                                                        ENDED MARCH 31,
                                                                  --------------------------
                                                                       2001         2000
                                                                  ------------  ------------
                                                                   (unaudited)   (unaudited)
<S>                                                               <C>            <C>
Revenues........................................................  $      390     $     187

Costs and expenses:
     Costs of revenues..........................................          33           136
     Sales and marketing........................................         297           115
     General and administrative.................................       1,007           923
     Research and development...................................         678           962
     Depreciation and amortization..............................         120            71
                                                                  -----------    ----------
                                                                       2,135         2,207
                                                                  -----------    ----------
Loss from operations............................................      (1,745)       (2,020)
Other income (expense):
     Export market development grant............................          33            --
     Debenture expense..........................................          --           (30)
     Gain on foreign exchange...................................          23             7
     Interest income (expense), net.............................          14            47
                                                                  -----------    ----------
     Total other income (expense)...............................          70            24
                                                                  -----------    ----------
Loss from continuing operations.................................      (1,675)       (1,996)
Loss from discontinued operations...............................        (460)       (2,221)
                                                                  -----------    ----------
Net loss before income taxes....................................      (2,135)       (4,217)
Provision for income taxes......................................          --            --
                                                                  -----------    ----------
Net loss........................................................      (2,135)       (4,217)

Foreign currency translation adjustment (net of tax effects)....         (62)           84
                                                                  -----------    ----------
Comprehensive loss..............................................  $   (2,197)    $  (4,133)
                                                                  ===========    ==========
Basic and diluted continuing operations loss per share..........  $    (0.10)    $   (0.15)
                                                                  ===========    ==========
Basic and diluted for discontinued operations per share.........  $    (0.03)    $   (0.16)
                                                                  ===========    ==========
Basic and diluted net loss per share............................  $    (0.13)    $   (0.31)
                                                                  ===========    ==========
Weighted average number of shares used in computing
     basic and diluted net loss per share.......................      16,054        13,751
                                                                  ===========    ==========
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                     Page 4
<PAGE>


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

                                                                           THREE MONTHS
                                                                          ENDED MARCH 31,
                                                                      ----------------------
                                                                          2001       2000
                                                                      ----------- ----------
                                                                      (unaudited) (unaudited)
<S>                                                                   <C>         <C>
OPERATING ACTIVITIES
Net loss............................................................  $  (2,135)  $  (4,217)
Adjustments to reconcile net loss to the net cash
   used in operating activities:
      Depreciation and other amortization...........................        478         266
      Loss from discontinued operations.............................        460       2,221
      Amortization of movie software costs..........................         --          95
      Loss (gain) on foreign exchange...............................         25          (1)
      Effect of warrants granted....................................        298           6
      Changes in operating assets and liabilities:
         Accounts receivable........................................       (138)     (2,416)
         Other assets...............................................       (229)     (1,027)
         Accounts payable and accruals..............................       (219)        722
         Deferred revenue...........................................       (229)      2,477
         Other long-term liabilities................................        (60)          6
                                                                      ----------  ----------
Total adjustments...................................................        386       2,349
                                                                      ----------  ----------
Net cash used in continuing activities..............................     (1,749)     (1,868)
Net cash used in discontinued operations............................       (490)     (1,893)
                                                                      ----------  ----------
Net cash used in operating activities...............................     (2,239)     (3,761)

INVESTING ACTIVITIES
Purchases of equipment..............................................        (12)       (335)
                                                                      ----------  ----------
Net cash used in continuing operations for investing................        (12)       (335)
Net cash used in discontinued activities for investing..............         --        (124)
                                                                      ----------  ----------
Net cash used in investing activities...............................        (12)       (459)

FINANCING ACTIVITIES
Proceeds from issuance of shares, net of costs......................         --       6,530
Proceeds from e-New Media for licensing rights......................         --       2,500
Repayments of notes.................................................        (14)        (98)
                                                                      ----------  ----------
Net cash provided by financing activities...........................        (14)      8,932
                                                                      ----------  ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................     (2,265)      4,712

Translation adjustments.............................................        (62)        118
Cash and cash equivalents at beginning of period....................      3,401       2,506
                                                                      ----------  ----------
Cash and cash equivalents at end of period..........................  $   1,074   $   7,336
                                                                      ==========  ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
   Interest.........................................................      $   4     $    16
                                                                      ==========  ==========
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                     Page 5
<PAGE>


SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

        We issued warrants and stock options to purchase 50,000 and 10,000
shares of our common stock, respectively, on March 16, 2001 in connection with
two consulting agreements and incurred $22,000 in expenses.


                                     Page 6
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2001

1.       BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying unaudited condensed
consolidated financial statements reflect all adjustments that, in the opinion
of management, are considered necessary for a fair presentation of the financial
position, results of operations, and cash flows for the periods presented. The
results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period. The
accompanying financial statements should be read in conjunction with the audited
consolidated financial statements of Brilliant Digital Entertainment, Inc.
included in our Form 10-KSB for the fiscal year ended December 31, 2000.

2.       STOCKHOLDERS' EQUITY

         Options and warrants representing common shares of 3,062,439 and
3,384,140 were excluded from the average number of common and common equivalent
shares outstanding in the diluted EPS calculation for the three months ended
March 31, 2000 and 2001, respectively, because they were anti-dilutive.

3.       COMMITMENTS AND CONTINGENCIES

         At March 31, 2001, we were obligated under certain licensing agreements
to make minimum payments totaling $37,000 for use of certain properties and
characters in development of our products.

         The Company has two fixed asset financing notes with future minimum
payments as of March 31, 2001 as follows:

                            YEAR                    AMOUNT
                      -----------------         -------------
                            2001                     $40,000
                            2002                      54,000
                            2003                      31,000
                                                -------------
                                                    $125,000
                                                =============

         The Company leases its facilities under operating lease agreements
expiring through 2003. Future minimum payments as of March 31, 2001 under these
leases are as follows:

                         YEAR                       AMOUNT
                      -----------------         -------------
                            2001                    $284,000
                            2002                     255,000
                            2003                      51,000
                                                -------------
                                                    $590,000
                                                =============


                                     Page 7
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2001


         Rent expense was $143,000 and $99,000 for the three months ended March
31, 2000 and the three months ended March 31, 2001, respectively.

4.       GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

         The Company's operations consist of the operations of Brilliant
Interactive Ideas Pty. Ltd. in Australia, Brilliant Digital Entertainment in the
United States and The Auction Channel in the United States and the United
Kingdom. The following schedule sets forth the revenues and long-lived assets,
including those of the discontinued operations of The Auction Channel, by
geographic area:

<TABLE>
<CAPTION>
                                                          UNITED                    UNITED
                                                          STATES       AUSTRALIA    KINGDOM
                                                         ---------    -----------  ---------
<S>                                                       <C>            <C>        <C>
THREE MONTHS  ENDED MARCH 31, 2000 :
   Revenues from unaffiliated customers............       $174,000       $13,000    $56,000
   Revenues from affiliated customers..............             --            --         --
                                                         ----------   -----------  ---------
   Total revenues..................................       $174,000       $13,000    $56,000
                                                         ==========   ===========  =========
THREE MONTHS ENDED MARCH 31, 2001:
   Revenues from unaffiliated customers............       $151,000       $10,000     $9,000
   Revenues from affiliated customers..............        229,000            --         --
                                                         ----------   -----------  ---------
   Total revenues..................................       $380,000       $10,000     $9,000
                                                         ==========   ===========  =========
LONG-LIVED ASSETS AS OF:
   March 31, 2001..................................       $760,000      $181,000    $82,000
                                                         ==========   ===========  =========
</TABLE>

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

         For the three months ended March 31, 2001, e-New Media represented 59%
of the revenues with distribution and licensing rights ($229,000). Infogrames
contributed 18% ($70,000) of the revenues, while Warner Bros. Online contributed
advertising revenues of 12% ($46,000). For the three months ended March 31,
2000, SlingShot, Inc., GT Interactive and Entertaindom, a Time Warner website,
accounted for 57% ($107,000), 17% ($32,000) and 9% ($16,000) of the revenues,
respectively.

5.       SEGMENT INFORMATION

         The Company had two major lines of businesses: digital animation and
live auction facilitation. Brilliant Digital Entertainment, in the United
States, together with its subsidiary Brilliant Interactive Ideas Pty. Ltd. in
Australia, is a production and development studio that uses its proprietary
software tool set to create digital entertainment for distribution primarily
over the Internet. Brilliant Digital Entertainment also offers for sale its
proprietary authoring tools, b3d


                                     Page 8
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2001


Studio and b3d Studio Pro. Each segment is incorporated and maintains separate
sets of books, which are combined on consolidation. As The Auction Channel is
accounted for as discontinued operations, the Company believes that it currently
operate as one segment.

6.       SUBSEQUENT EVENTS

         The Company has resolved to issue and sell $2,264,150 in principal
amount of Secured Convertible Promissory Notes for an aggregate purchase price
of $2,264,150 per agreements between the Company and the purchasers of such
notes. The notes will have a term of eighteen (18) months from the date of
issuance and an interest rate of 10% per annum payable at maturity. The
principal amount of the notes and, at the option of the holder, all accrued
interest may be converted by the holder into shares of Common Stock of the
Company at a conversion price of $.706 per share, which price is the 10 day
average trading price of the Company's Common Stock on AMEX over the 10 day
period prior to execution of the first purchase agreement. The notes are secured
by all of the assets of the Company and its two subsidiaries, B3D, Inc. and
Brilliant Studios, Inc., and guaranteed by B3D, Inc. and Brilliant Studios,
Inc.. At the closing, the investors will receive warrants to purchase a number
of shares of Common Stock equal to 100% of the principal amount of the note
acquired by the investor divided by 112.5% of the average trading price of the
Company's Common Stock on the AMEX over the 10 day period prior to execution by
the investor of the purchase agreement. The warrants may be exercised at any
time during their three (3) year term.

         On April 30, 2001 the Company sold substantially all of the assets of
The Auction Channel to Metro Channels, LLC, a division of Rainbow Media
Holdings, Inc. The Auction Channel has ceased operations and some of the
employees have resigned from The Auction Channel and have relocated to Metro
Channels' offices. The Company's London based subsidiary, Trojan Television,
Ltd., has also ceased operations.


                                     Page 9
<PAGE>


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

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

         THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT DIGITAL ENTERTAINMENT FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND
MARCH 31, 2001. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES
AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS
DESCRIBED BELOW UNDER THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS."

OVERVIEW

         Brilliant Digital Entertainment, Inc. (AMEX: BDE) is a leading
entertainment content producer, technology developer and provider of rich media
b3d software tools for 3D animation on the World Wide Web. We have established a
library of episodic serial content created in our proprietary format. Our rich
media technologies include proprietary authoring tools used to create, author
and serve content for the World Wide Web. We market the technology used to view
content created using our tools by syndicating our b3d-produced content to third
party web sites. The content is seamlessly associated with our Digital
Projector, the technology required to playback b3d-produced content. We are
commercializing the technology in various ways, including through our
syndication relationships where we enable web sites to serve Brilliant Banners,
a proprietary Rich Media ad format for the World Wide Web. We also license our
b3d authoring tools to production studios and our Brilliant Banner advertising
server technologies to the web based advertising industry. Through our
subsidiary, The Auctionchannel, Inc., we also have provided services to auction
houses that enabled participants to watch auction events in real time on
television, and over the Internet, and to bid using their telephone or the
Internet. We discontinued operations at The Auction Channel and sold
substantially all of its assets on April 30, 2001.

         We are a Delaware corporation that was incorporated in July 1996. We
were formed through the combination of two businesses: Brilliant Interactive
Ideas, Pty. Ltd., an entertainment software developer and producer, and Sega
Australia New Developments, a research and development operation for leading
edge software tools. Our executive offices are located at 6355 Topanga Canyon
Boulevard, Suite 120, Woodland Hills, California 91367, and our telephone number
is (818) 615-1500. Information on our web sites, www.brilliantdigital.com and
www.b3d.com, does not constitute part of this Form 10-QSB.

B3D SOFTWARE TOOLS

         In July 2000, we made our b3d software tools available to parties
interested in participating in the beta test phase of the product. Our b3d
Studio tool was made available to these participants in a downloadable version
on the Internet. b3d Studio is designed to work as a plug-in with Discreet's 3D
Studio Max and an Alias|Wavefront Maya animation software version is in
development. Final release versions of b3d Studio and b3d Studio Pro were made
available at


                                    Page 10
<PAGE>


the end of the first quarter of 2001. These tools will provide individual
artists, animators and studios with the capability to create their own multipath
movies and b3d content for commercial distribution on the Internet, and should
ultimately provide a wide and varied base of b3d content to enrich the consumer
web experience. Animation content generated using our b3d software tools can be
of any type. The tools are not limited to the production of entertainment
content. The tools can be applied to the production of artistic renderings,
education, architecture, engineering, e-commerce and other solutions that
require animation. In addition, we intend to have a compatible version of the
b3d Digital Projector completed for the Apple Macintosh in the second quarter of
2001, followed by a Sony Playsation2 version. This will further broaden the
market for the b3d software tools.

         We have launched our rich media 3D advertising banners - Brilliant
Banners - into the market to offer advertisers and web sites an alternative to
the current GIF banners that are prevalent on web sites today. With the decline
of industry wide banner advertising revenues and click through rates, we believe
that our animated 3D banner advertisements will reinvigorate online advertising
campaigns. We are introducing the Brilliant Banner to our syndication partners,
making the technologies available for them to commence selling and serving this
new ad format.

CONTENT DISTRIBUTION

         We have licensed some of the world's best known characters for the
production and web distribution of episodic animations, called MultipathTM
Movies, that include SUPERMAN, XENA: WARRIOR PRINCESS, KISS, and ACE VENTURA,
and have produced animated music videos of top selling artists including Ja
Rule, Ludacris and Redman. These full-screen productions, developed using our
proprietary suite of b3d software tools, have small files for faster download.
Our content currently is distributed broadly through Internet syndication
partners including Yahoo, Warner Brothers On-line, Roadrunner and VH1.com.
Additionally, agreements to host our content have been reached with third-party
sites such as Lycos, Vidnet, and StreamSearch, thus enabling even more consumer
reach in the near term. Revenue is split with the distribution partner according
to various deal structures, many of which are traffic dependent.

         At this time, we have five MultipathTM Movie animated series in
syndicated distribution on the Internet: SUPERMAN, XENA: WARRIOR PRINCESS, KISS:
IMMORTALS, CHOOSE YOUR OWN NIGHTMARE, ACE VENTURA and the online film festival
property, SHORT ATTENTION SPAN THEATRE. Each of the series differs in the scale
of distribution, with some enjoying wider distribution than others depending on
a number of factors including demographics and content type. In addition, we
have three animated music videos in distribution on the Internet: Ja Rule's (an
Island Def Jam artist) 6 FEET UNDERGROUND, Ludacris's (an Island Def Jam artist)
HO song and the Long Beach Dub All Stars (a DreamWorks artist) Sawred.

DIGITAL HIP HOP

         We entered into an agreement with Russell Simmons and Stan Lathan that
provided for the formation of Los Angeles-based Digital Hip Hop, Inc., a joint
venture production studio headed by Stan Lathan. Digital Hip Hop produces and
distributes full screen animated music videos and other content primarily for
Internet and broadband distribution. To date, three music videos have been
commercially released on the Internet. The joint venture is owned and was
initially funded 50% by us and 50% by Messrs. Lathan and Simmons.


                                    Page 11
<PAGE>


         Digital Hip Hop also received from our wholly-owned subsidiary, B3D,
Inc., a 5-year exclusive Alpha level license to our b3d production tool suite
for the production of hip hop content for non-Asian markets. Digital Hip Hop has
agreed to pay B3D, Inc. a fee of $1,500,000 for this license payable in
installments over the first three years of the license, $1,450,000 of which is
contingent on the raising of capital by the joint venture. Digital Hip Hop has
also agreed to pay B3D, Inc. a royalty of 10% of Digital Hip Hop's gross
revenues.

DVD MARKET

         We began a limited release of selected MultipathTM Movie titles to the
DVD market in the fourth quarter of 2000 pursuant to a March 1999 agreement with
SlingShot, Inc., a special purpose DVD publisher and distributor.

THE AUCTION CHANNEL

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

         In late 2000, we decided to sell The Auction Channel. The Auction
Channel has been accounted for as a discontinued operation pursuant to
Management's formal adoption on December 31, 2000 of a plan to dissolve the
business unit. Net liabilities to be disposed of, at their expected realizable
values, have been separately classified in the accompanying balance sheet at
March 31, 2001. Subsequent to this period, on April 30, 2001, we sold
substantially all of the assets of The Auction Channel to Metro Channels, LLC
and closed The Auction Channel's New York and London offices.

RESULTS OF OPERATIONS

         REVENUES. Revenues from the sale of MultipathTM Movies through retail
outlets are recognized when the product is shipped. Product returns or price
protection concessions that exceed our reserves could materially adversely
affect our business and operating results and could increase the magnitude of
quarterly fluctuations in our operating and financial results.

         We enter into distribution contracts under which we are entitled to
fixed minimum guaranteed payments. The minimum guaranteed payments are
recognized as revenue when the CD-ROM master is delivered to the distributor and
the terms of the sale are considered fixed. We have derived our revenues from
royalties, development fees and software sales. We license our traditional
CD-ROM products to publishers and distributors in exchange for non-refundable
advances and royalties based on product sales. Royalties based on product sales
are due only to the extent they exceed any associated non-refundable royalty
advance. Royalties related to non-refundable advances are recognized when the
CD-ROM master is delivered to the licensees. Royalty revenues in excess of
non-refundable advances are recognized upon notification by the distributor that
a royalty has been earned.


                                    Page 12
<PAGE>


         Development fees are paid by customers in exchange for our development
of animated content and/or software packages in accordance with customer
specifications. The development agreements generally specify certain
"milestones" which must be achieved throughout the development process. As these
milestones are achieved, we recognize the portion of the development fee
allocated to each milestone.

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

         Revenues, which are earned from the sale or licensing of our software
tools, are recognized when the sales or licensing agreements are entered into.
If the agreement covers a period in excess of one year, the revenue associated
with this agreement is recognized on a straight-line basis over the life of the
agreement.

         Advertising revenues, which are earned revenues from the placing of our
content on third party web sites, are recognized when the third party accounts
to us.

         Revenues increased from $187,000 for the three months ended March 31,
2000 to $390,000 for the three months ended March 31, 2001. For the three months
ended March 31, 2001, e-New Media represented 59% of the revenues with
distribution and licensing rights ($229,000). Infogrames contributed 18%
($70,000) of the revenues, while Warner Bros. Online contributed advertising
revenues of 12% ($46,000). For the three months ended March 31, 2000, SlingShot,
Inc., GT Interactive and Entertaindom, a Time Warner website, accounted for 57%
($107,000), 17% ($32,000) and 9% ($16,000) of our revenues, respectively.

         COST OF REVENUES. Cost of revenues consists primarily of the
amortization and write-down of capitalized movie software costs for previously
released titles, royalties to third parties and the direct costs and
manufacturing overhead required to reproduce and package software products. Cost
of revenues decreased from $136,000 for the three months ended March 31, 2000 to
$33,000 for the three months ended March 31, 2001. This represents a decrease of
$103,000. The primary reason for the decrease is that during the first and
second quarter of 2000, we fully amortized the remaining capitalized movie
software costs of $158,000, for previously released titles.

         SALES AND MARKETING. Sales and marketing expenses increased $182,000
from $115,000 for the three months ended March 31, 2000 to $297,000 for the
three months ended March 31, 2001. Although consulting, advertising and web
development costs were reduced in 2001 by $73,000, we incurred a $255,000
distribution expense for warrants issued in connection with our agreement with
Yahoo!.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses include
primarily salaries and benefits of management and administrative personnel,
consultants, rent, insurance costs and professional fees. General and
administrative expenses increased from $923,000 for the three months ended March
31, 2000 to $1,007,000 for the three months ended March 31, 2001. This
represents a net increase of $84,000, which is primarily attributable to an
increase in salaries of $277,000 and insurance costs of $39,000, offset by a
decrease in employment costs of $48,000, investor costs of $67,000, travel costs
of $29,000 and professional fees of $48,000 plus other offsets.


                                    Page 13
<PAGE>


         RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and benefits of personnel conducting research and development of
software products. Research and development costs also include costs associated
with creating our software tools used to develop MultipathTM Movies and other 3D
animated content. The costs decreased from $962,000 for the three months ended
March 31, 2000 to $678,000 for the three months ended March 31, 2001 primarily
due to personnel layoffs and a decrease in production in our Australian company
of $380,000, offset by increased activity in the United States company.

         DEPRECIATION AND AMORTIZATION. Depreciation expense relates to
depreciation of fixed assets such as computer equipment and cabling, furniture
and fixtures and leasehold improvements. These fixed assets are depreciated over
their estimated useful lives (up to five years) using the straight-line method.
Depreciation expense increased from $71,000 for the three months ended March 31,
2000 to $120,000 for the three months ended March 31, 2001. The increase is
attributable to an increase in depreciable assets, primarily computer equipment
purchased in the second and third quarters of 2000.

         OTHER INCOME AND EXPENSE. Other income and expense includes interest
income and interest expense, gains and losses on foreign exchange transactions
and export development grants paid to our subsidiary, Brilliant Interactive
Ideas Pty. Ltd., by the Australian Trade Commission for its participation in
certain export activities. Other income and expense increased from income of
$24,000 in the first quarter of 2000 to income of $70,000 in the first quarter
of 2001. The increase is primarily due to $33,000 received for the export grant.

         NET LOSS ON DISCONTINUED OPERATIONS. The Auction Channel has been
accounted for as a discontinued operation pursuant to Management's formal
adoption on December 31, 2000 of a plan to dissolve the business unit. Net
liabilities to be disposed of are recorded at their expected realizable values,
and have been separately classified in the accompanying balance sheet at March
31, 2001.

         Operating results of this discontinued operation, a loss of $460,000
for the three months ended March 31, 2001, are shown separately in the
accompanying income statement. The income statement for the three months ended
March 31, 2000 has been restated to conform to the current year's presentation.
Included in the loss of the discontinued operation is an amortization expense
for the three months ended March 31, 2000 composed of amortization of goodwill
of $292,000, software technology of $20,000 and customer database of $8,000, all
attributable to the purchase of Trojan Television Limited in July 1999. Due to
an impairment of goodwill, the amount was written down by $4,189,000 at December
31, 2000, reducing the balance to zero. The Auction Channel was sold on April
30, 2001 and the New York and London offices ceased to operate.

LIQUIDITY AND CAPITAL RESOURCES

         As of March 31, 2001, our principal source of liquidity was
approximately $1,074,000 in cash, which we primarily raised through the issuance
of shares of our common stock and advertising, licensing and distribution
arrangements.

         Net cash used in operating activities during the three months ended
March 31, 2001 was primarily attributable to a net loss from continuing
operations of $1,675,000, with an additional loss due to discontinued operations
of $460,000 pertaining to The Auction Channel. Net cash of $12,000 used in
investing activities during the three months ended March 31, 2001 was due
primarily


                                    Page 14
<PAGE>


to the purchase of computer equipment. Cash used in financing activities for the
year was primarily for repayment of notes for the financing of office furniture
and computer equipment.

         We are required as of March 31, 2001 to make minimum payments of
$37,000 under various licensing agreements. At March 31, 2001, we had rental
commitments for our offices and production facilities of $590,000 and two
promissory notes for the financing of fixed assets in the amount of $125,000
payable over the next 3 years.

         Our operations generated a negative cash flow during the years ended
December 31, 1999 and 2000 and the three months ended March 31, 2001. We expect
a significant use of cash during the coming months of 2001 as we continue to
develop our software tools and continue our marketing efforts for our tools and
3D animated content. We will require additional equity or debt financing during
2001, the amount and timing depending in large part on our spending program. If
additional funds are raised through the issuance of equity securities, our
stockholders may experience significant dilution. Furthermore, there can be no
assurance that additional financing will be available when needed or that if
available, such financing will include terms favorable to our stockholders or
us. If such financing is not available when required or is not available on
acceptable terms, we may be unable to develop or enhance our products and
services, take advantage of business opportunities or respond to competitive
pressures, any of which could have a material adverse effect on our business,
financial condition and results of operations. Please see "Cautionary Statements
and Risk Factors - If we are unable to raise additional funds, we may be
required to delay implementation of our business plan and reduce overhead
significantly."

ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES

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

ACCOUNTING GUIDANCE FOR REVENUE RECOGNITION FOR SOFTWARE TRANSACTIONS

         Software sales entered into prior to December 15, 1997 were accounted
for in accordance with AICPA Statement of Position ("SOP") 91-1, "Software
Revenue Recognition." For


                                    Page 15
<PAGE>


transactions entered into after December 15, 1997 the Company recognizes revenue
from the sale of software in accordance with SOP 97-2, "Software Revenue
Recognition". SOP 97-2 provides guidance on when revenue should be recognized
and in what amounts for licensing, selling, leasing, or otherwise marketing
computer software.

NEW ACCOUNTING PRONOUNCEMENTS

         In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC.
Subsequently, the SEC released SAB 101B, which delayed the implementation date
of SAB 101 for registrants with fiscal years that begin between December 16,
1999 and March 15, 2000. We were required to be in conformity with the
provisions of SAB 101, as amended by SAB 101B, no later than October 1, 2000.
The adoption of SAB 101, as amended by SAB 101B, has not had a material adverse
effect on our financial position, results of operations or cash flows.

         In October 2000, we adopted the Financial Accounting Standards Board
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments embedded
in other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The adoption of SFAS No. 133 has not had a material
effect on our financial statements.

         In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, and Interpretation of APB
Opinion No. 25" (FIN. 44). The Interpretation is intended to clarify certain
problems that have arisen in practice since the issuance of APB No. 25,
"Accounting for Stock Issued to Employees." The effective date of the
interpretation was July 1, 2000. The provisions of the interpretation apply
prospectively, but they will also cover certain events occurring after December
15, 1998 and after January 12, 2000. The adoption of FIN. 44 has not had a
material adverse effect on our current or historical consolidated financial
statements, but may affect future accounting regarding stock option
transactions.

         In March 2000, EITF 00-2 "Accounting for Web Site Development Costs"
was released. EITF 00-2 provides guidance on how an entity should account for
costs involved in such areas as planning, developing software to operate the web
site, graphics, content, and operating expenses. EITF 00-2 is effective for web
site development costs incurred for fiscal quarters beginning after June 30,
2000. The Company adopted EITF 00-2 during the year ending December 31, 2000,
and all amounts associated with our web sites were expensed in accordance with
EITF 00-2.

CAUTIONARY STATEMENTS AND RISK FACTORS

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


                                    Page 16
<PAGE>


         IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DELAY
IMPLEMENTATION OF OUR BUSINESS PLAN AND REDUCE OVERHEAD SIGNIFICANTLY. We have a
limited operating history and have not attained profitability. Since inception,
we have incurred significant losses and negative cash flow, and as of March 31,
2001 we had an accumulated deficit of $50.4 million. We have not achieved
profitability and expect to continue to incur operating losses for the
foreseeable future as we fund operating and capital expenditures in the areas of
tool development, brand promotion, content development, sales and marketing, and
operating infrastructure. Our business model assumes that consumers will be
attracted to our MultipathTM Movies, animated music videos and Brilliant
Banners, and that animators will use our b3d tools and technology in the
development of other b3d-produced content. This business model is not yet proven
and we cannot assure you 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.

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

         WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH MICROSOFT, REAL NETWORKS
AND OTHER COMPANIES IN THE MEDIA DELIVERY MARKET. The market for software and
services for the delivery of media over the Internet is constantly changing and
highly competitive. Companies such as Microsoft Corporation and Real Networks
have substantial penetration in the media delivery market, and significantly
greater resources than us to continue to grow their business in this area. More
companies are entering the market for, and expending increasing resources to
develop, media delivery software and services. We expect that competition will
continue to intensify. The other components of our business, such as our music
videos, Brilliant Banners and MultipathTM Movies, as well as the demand by
animators for our b3d tools in their production of 3D animated content, depends
in large part on a substantial user base of our Digital Projector, which is the
media player that must be used to view b3d enabled content. If we do not achieve
a widespread distribution of our media player, there will not be substantial
demand for b3d-produced content.

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

         ERRORS OR DEFECTS IN OUR SOFTWARE TOOLS AND PRODUCTS MAY CAUSE A LOSS
OF MARKET ACCEPTANCE AND RESULT IN FEWER SALES OF OUR PRODUCTS. Our products are
complex and may contain undetected errors or defects when first introduced or as
new versions are released. In the past, we have discovered software errors in
some of our new products and enhancements after their introduction into the
market. Because our products are complex, we anticipate that software errors and
defects will be present in new products


                                    Page 17
<PAGE>


or releases in the future. While to date these errors have not been material,
future errors and defects could result in adverse product reviews and a loss of,
or delay in, market acceptance of our products.

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

         OUR FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH
SYNDICATION PARTNERS MAY HARM OUR ANIMATED CONTENT BUSINESS AND THE
ESTABLISHMENT OF B3D AS AN INTERNET STANDARD FOR 3D ANIMATION. We depend on
establishing and maintaining strategic relationships for the co-creation of our
b3d-produced content and for the distribution of that content on third-party web
sites. Additionally, we rely on our syndication relationships to increase the
installed base of our Digital Projector, which is necessary to view b3d-produced
content, including our Brilliant Banners. Our business, results of operations
and financial condition could be materially adversely affected if we do not
establish additional, and maintain existing, strategic relationships on
commercially reasonable terms or if any of our strategic relationships do not
result in an increase in the demand for b3d-produced content and the use of our
Digital Projector.

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

     o    variations in quarterly operating results;

     o    the gain or loss of significant contracts;

     o    changes in management;

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

     o    recommendations by securities industry analysts;

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

     o    short sales and hedging of our common stock.

         Additionally, the stock market has experienced extreme price and
trading volume fluctuations that have affected the market price of securities of
many technology companies. These fluctuations have, at times, been unrelated to
the operating performances of the specific companies


                                    Page 18
<PAGE>


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.

         WE WILL NOT BE ABLE TO GENERATE REVENUES IF OUR MULTIPATHTM MOVIES AND
B3D TOOLSET DO NOT ACHIEVE MARKET ACCEPTANCE. Each MultipathTM Movie is an
individual artistic work, and its ability to generate revenues primarily will be
determined by consumer reaction, which is unpredictable. To generate revenues,
we must develop stories and characters that capture the attention and
imagination of consumers and license recognized characters and properties from
third parties for use in our MultipathTM Movies. We cannot be certain that we
will be able to do so. Additionally, our b3d toolset may have programming
errors, may be incompatible with other software or hardware products in the
market, may face slow adoption in the marketplace and may face competition from
other toolmakers. Other factors that influence our ability to generate revenues
from our MultipathTM Movies and the b3d toolset include:

     o    consumer reluctance to initiate time consuming downloads of data
          necessary to view our products;

     o    our marketing strategies;

     o    the quality of our products and competing products;

     o    our ability to enter into revenue share agreements with third party
          web sites;

     o    critical reviews;

     o    the availability of alternative forms of entertainment and leisure
          time activities;

     o    our ability to sell advertising and sponsorships for the content;

     o    our b3d toolset may contain features, functionality or workflow
          conventions that may not be widely accepted by our target audience;

     o    our ability to continue to develop, enhance and deliver the toolset in
          accordance with established milestones; and

     o    the marketplace's reluctance to adopt a new toolset.

         WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT DEMAND FOR OUR PRODUCTS
VIEWED ON THE INTERNET UNLESS THERE IS A REDUCTION IN THE TIME IT TAKES TO
DOWNLOAD THE LARGE AMOUNTS OF DATA NECESSARY TO VIEW OUR PRODUCTS ON THE
INTERNET. Our revenue growth depends in part on our ability to distribute our
products for viewing on the Internet. We believe that without reductions in the
time to download animated content over the Internet, our MultipathTM Movies and
other b3d-produced content may be unable to gain consumer acceptance. This
reduction in download time depends in part upon advances in compression
technology. We have previously experienced delays in the development of
compression technologies,


                                    Page 19
<PAGE>


which, we believe, materially and adversely affected our online sales and
results of operations. We believe that large, time-consuming downloads have
previously deterred potential users of our products and have reduced the
effectiveness of our marketing campaigns at that time. The development of these
technologies continues to be a significant component of our business strategy
and a primary focus of our research and development efforts.

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

     o    A software distributor or a licensor of a story or character may, in
          the exercise of its product approval rights, arbitrarily require
          expensive and time consuming changes to our products, which may cause
          a delay in the release of the products; and

     o    A third party web site could delay the inclusion of our content on the
          site, and thereby cause a delay in distribution.

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

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

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

     o    the use by animators of our toolsets to create b3d-produced content;

     o    the market's acceptance of our 3D Brilliant Banner advertisements;

     o    our ability to create appealing content which will generate
          advertising revenue; and

     o    our ability to enter into revenue share agreements with third party
          web sites.

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


                                    Page 20
<PAGE>


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

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

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

         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


                                    Page 21
<PAGE>


market price of the common stock. A short sale is a sale of stock that is not
owned by the seller. The seller borrows the stock for delivery at the time of
the short sale, and buys back the stock when it is necessary to return the
borrowed shares. If the price of the common stock declines between the time the
seller sells the stock and the time the seller subsequently repurchases the
common stock, then the seller sold the shares for a higher price than he
purchased the shares and may realize a profit.


                                    Page 22
<PAGE>


                                     PART II

                                OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         In March 2000, we issued to EnterMission Advisors, LLC warrants to
purchase up to 50,000 shares of our common stock at an exercise price of $ 1.025
per share. The warrants have a term of 18 months. The warrants were issued to
EnterMission in consideration of consulting services provided to us. The
issuance and sale of these securities was exempt from the registration and
prospectus delivery requirements of the Securities Act pursuant to Section 4(2)
of the Securities Act as a transaction not involving any public offering.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

            (a)      Exhibits.

                    10.1 Executive Employment Agreement, dated as of December
                         18, 2000, by and between Registrant and Robert Chmiel.

                    10.2 Executive Employment Agreement, dated as of January 1,
                         2001, by and between Registrant and Kevin Bermeister.

            (b)      Reports on Form 8 K

                     None.


                                    Page 23
<PAGE>


                                   SIGNATURES

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

                                    BRILLIANT DIGITAL ENTERTAINMENT, INC.

Date: May 13, 2001                  /S/ ROBERT CHMIEL
                                    -------------------------------------------
                                    By:  Robert Chmiel
                                    Its: Chief Operating Officer and Chief
                                         Financial Officer (Principal Financial
                                         and Accounting Officer)


                                    Page 24