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                       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, 1999


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

         For the transition period from ___________ to _______________.


                         Commission file number 0-21637


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

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


                    6355 TOPANGA CANYON BOULEVARD, SUITE 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, 11,546,884 shares issued and outstanding as of May 12, 1999.

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


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<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                      INDEX


                                                                           PAGE

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

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

          Condensed Consolidated Balance Sheet as of March 31, 1999.......   3

          Condensed Consolidated Statements of Operations for the 
            three months ended March 31, 1999 and March 31, l998..........   4

          Condensed Consolidated Statements of Cash Flows for the 
            three months ended March 31, 1999 and March 31, 1998..........   5

          Notes to Consolidated Financial Statements......................   6

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


PART II   OTHER INFORMATION...............................................  21

Item 6.   Exhibits and Reports on Form 8-K................................  21


                                       2
<PAGE>


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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


                                                                       MARCH 31,
                                                                         1999
                                                                     -----------
ASSETS                                                               (UNAUDITED)
Current assets:
   Cash and cash equivalents.....................................      $  1,632
   Accounts receivable, net......................................         2,084
   Other current assets, net.....................................           258
                                                                       ---------
Total current assets.............................................         3,974
Property, plant and equipment, net...............................           684
Movie software costs.............................................           491
Other assets.....................................................           426
                                                                       ---------
Total assets.....................................................      $  5,575
                                                                       =========

LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
   Accounts payable..............................................      $    264
   Accrued expenses..............................................         1,148
   Current portion of notes payable..............................           172
                                                                       ---------
Total current liabilities........................................         1,584
Notes payable, less current portion..............................            91
Convertible debenture............................................           100
Other long term liabilities......................................           110
                                                                       ---------
Total liabilities................................................         1,885
Commitments and contingencies
Stockholders' equity:
   Common stock..................................................             9
   Additional paid-in capital....................................        21,357
   Accumulated deficit...........................................       (17,575)
   Cumulative other comprehensive income (loss)..................          (101)
                                                                       ---------
Total stockholders' equity.......................................         3,690
                                                                       ---------
Total liabilities and stockholders' equity.......................      $  5,575
                                                                       =========

                             See accompanying notes.


                                       3
<PAGE>


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


<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED MARCH 31,
                                                             ---------------------------
                                                                  1999         1998
                                                              ----------   ----------
                                                              (UNAUDITED)  (UNAUDITED)
<S>                                                            <C>          <C>    
Revenues ...................................................   $   206      $    31

Costs and expenses:
   Costs of revenues .......................................       205          266
   Sales and marketing .....................................       222          305
   General and administrative ..............................       619          524
   Research and development ................................       981          317
   Depreciation ............................................       130           18
                                                               -------      -------
                                                                 2,157        1,430
                                                               -------      -------
Income (loss) from operations ..............................    (1,951)      (1,399)
Other income (expense):                                                    
   Gain (loss) on foreign exchange transactions ............        --           (8)
   Export market development grant .........................        37           --
   Interest income (expense), net ..........................        24          140
                                                               -------      -------
   Total other income (expense) ............................        61          132
                                                               -------      -------
Income (loss) before income taxes ..........................    (1,890)      (1,267)
Provision for income taxes .................................        --           --
                                                               -------      -------
Net income (loss) ..........................................    (1,890)      (1,267)
                                                                           
Foreign currency translation adjustment                                    
  (net of tax effects) .....................................        22           62
                                                               -------      -------
Comprehensive income (loss) ................................   $(1,868)     $(1,205)
                                                               =======      =======
                                                                           
Basic and diluted net income (loss) per share ..............   $ (0.20)     $ (0.13)
                                                               =======      =======
Weighted average number of shares used in computing                        
   basic and diluted net income (loss) per share ...........     9,409        9,403
                                                               =======      =======
</TABLE>


                             See accompanying notes.


                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED MARCH 31,
                                                                  ----------------------------
                                                                      1999            1998
                                                                  -----------     -----------
                                                                  (UNAUDITED)     (UNAUDITED)
<S>                                                                <C>             <C>       
OPERATING ACTIVITIES
Net income (loss)............................................      $  (1,890)      $  (1,267)
Adjustments to reconcile net income (loss) to the net 
  cash provided by (used in) operating activities:
     Depreciation and amortization...........................            186             109
     Amortization of movie software costs....................            160             220
     Effect of warrants granted..............................             32              --
     Changes in operating assets and liabilities:
        Accounts receivable..................................             55              15
        Movie software costs.................................             --            (841)
        Other assets.........................................            (22)            (21)
        Accounts payable and accruals........................              6            (356)
        Long-term liabilities................................            (36)             --
                                                                    --------       --------- 
Net cash provided by (used in) operating activities..........         (1,509)         (2,141)

INVESTING ACTIVITIES
Purchases of equipment.......................................            (37)           (184)
                                                                    --------       --------- 
Net cash used in investing activities........................            (37)           (184)

FINANCING ACTIVITIES
Repayment of notes...........................................             (8)             --
                                                                    --------       --------- 
Net cash provided by financing activities ...................             (8)             --


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.........         (1,554)         (2,325)
Translation adjustments......................................             (1)             51
Cash and cash equivalents at beginning of period.............          3,187          12,338
                                                                    --------       --------- 
Cash and cash equivalents at end  of period..................       $  1,632       $  10,064
                                                                    ========       ========= 
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
        Interest ............................................       $      4       $      --
                                                                    ========       ========= 
        Income taxes.........................................       $      1       $      --
</TABLE>


                             See accompanying notes.


                                       5
<PAGE>



                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1999
                                   (UNAUDITED)


1.      BASIS OF PRESENTATION

        The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying unaudited condensed
consolidated financial statements reflect all adjustments that, in the opinion
of management, are considered necessary for a fair presentation of the financial
position, results of operations, and cash flows for the periods presented. The
results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period. The
accompanying financial statements should be read in conjunction with the audited
consolidated financial statements of Brilliant Digital Entertainment, Inc. (the
"Company") included in the Company's Form 10-KSB for the fiscal year ended
December 31, 1998.

2.      STOCKHOLDERS' EQUITY

        Options and warrants representing common shares of 1,458,000 and
2,085,000 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, 1998 and 1999, respectively, because they were anti-dilutive.

3.      COMMITMENTS AND CONTINGENCIES

        The Company leases its office and production facilities and certain of
its office equipment. The Company has commitments under its lease agreements for
approximately $755,000 at March 31, 1999. In addition the Company has
obligations of $142,000 under licensing commitments at March 31, 1999. The
Company has an obligation under its joint venture agreement with KISS Digital,
LLC to fund 75% of the development of a Multipath Movie, up to $900,000.

4.      SIGNIFICANT ACCOUNTING POLICIES

        CONCENTRATION OF CREDIT RISK

        Management is aware that Packard Bell NEC has significantly delayed
distribution of the Company's titles bundled with Packard Bell NEC's computers.
In addition to the delay, Packard Bell NEC has bundled the Company's software on
significantly fewer computers than required. As a result of these factors
management believes that Packard Bell NEC will not be able to comply with the
terms of the Distribution Agreement, specifically Packard Bell NEC's commitment
to ship the Company's software with up to 6 million computers with at least 2
million of such computers being shipped within 12 months of the commencement of
such shipment, subject to an extension not to exceed 6 months (the "shipment
period"). Such shipment triggers Packard Bell NEC's obligation to pay a minimum
royalty of $1,973,333 at the rate of $1 for each Packard Bell NEC computer
shipped with the Company's product. The full minimum royalty amount is
contractually due by no later than the end of the shipment period, regardless of
actual shipments by Packard Bell NEC of personal computers containing the
Company's product. Management believes that it has a contractual right to
payment by Packard Bell NEC of the minimum guaranteed amount no later than the
end of the shipment period.

5.      SUBSEQUENT EVENTS

        On April 27,1999, the Company issued to Roseworth Group, Ltd. a 4%
convertible debenture in the principal amount of $1,000,000 due on the later of
April 27, 2000 or six months following the date the Securities and Exchange
Commission declares effective a registration statement with respect to the
resale of the shares of Common Stock underlying the debenture. The debenture may
be converted by Roseworth Group, Ltd. into shares of the Company's Common Stock
at a conversion price for each share of Common Stock equal to the lower of 95%
of its Market Price at the conversion date or $6.00. On the maturity date of the
debenture, the unpaid balance of the debenture and any accrued and unpaid
interest will convert automatically into shares of Common Stock at the
conversion price on the 


                                       6
<PAGE>

maturity date. Market Price is defined as the lowest volume weight adjusted
price of the Common Stock on the American Stock Exchange (as reported on
Bloomberg) during the 10 business days prior to the business day on which the
conversion notice is sent to the Company. In connection with the transaction,
the Company paid to Roseworth a fee of $30,000 and issued to Roseworth 5,883
shares of Common Stock.

        On March 30, 1999, the Company entered into agreements for the sale of
2,132,000 shares of its Common Stock to seven investors. The sales of the shares
closed in May 1999 and raised aggregate proceeds of $4,311,250. Of the 2,132,000
shares of Common Stock, 1,880,000 shares were issued to five investors at $2.00
per share and 252,000 shares were issued to two investors at $2.1875 per share.
The purchase prices for the shares were negotiated with each of the investors.
On March 29, 1999, the closing sales price of the Company's Common Stock was
$2.25 per share, and the lowest sales price of the Common Stock was $2.1875 per
share. The 1,880,000 shares were issued at a discount to the sales prices of the
Common Stock to reflect the illiquidity risk associated with the shares. All of
the shares constitute restricted stock that cannot be sold in the public market
until such shares are registered or until an exemption from registration is
available. We have agreed to register all 2,132,000 shares for resale by the
investors.


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


        The following discussion and analysis should be read together with the
Consolidated Financial Statements of Brilliant 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 FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998.
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 is a production and development studio producing a new 
generation of digital entertainment that is currently being distributed over the
Internet and on CD-ROM. We are headquartered in the United States and were
incorporated in July 1996. We were formed through the combination of two
businesses: Brilliant Interactive Ideas, Pty. Ltd. ("BII Australia"), an
entertainment software developer and producer and Sega Australia New
Developments ("SAND"), a "skunk works" research and development operation for
leading edge software tools. BII Australia became our wholly owned subsidiary in
August 1996, and we acquired SAND in September 1996. SAND was established during
the second quarter of 1994 by Sega Ozisoft Pty., Ltd, one of the largest
publishers and distributors of entertainment software products in Australia and
New Zealand, the predecessor of which was co-founded by Mark Dyne and Kevin
Bermeister.

        Our annual and quarterly revenue will depend upon the successful
development, distribution, timing and market acceptance of our interactive
products and upon the costs to distribute and promote these products.
Specifically, the revenues derived from the production and distribution of our
Multipath Movies will depend primarily on the acceptance by the market of the
Multipath Movie concept and the underlying content of the Multipath Movie,
neither of which can be predicted nor necessarily bear a direct correlation to
the production or distribution costs incurred. See "Cautionary Statements and
Risk Factors - If we do not achieve commercial acceptance of our Multipath
Movies our business will be adversely affected." The commercial success of a
Multipath Movie is also expected to depend upon promotion and marketing,
production costs, impact of competition and other factors. Accordingly, our
annual and quarterly revenues are, and will continue to be extremely difficult
to forecast.

CD ROM RETAIL CHANNELS AND DIRECT-TO-RETAIL

        We are continuing to establish a retail distribution program in which
Multipath Movies are marketed through traditional software publishers and
distributors nationwide. In addition, we will seek to substantially broaden
distribution in retail and mass market outlets, including video retailers,
during 1999. Progress is being made in the retail channel 


                                       7
<PAGE>

through our relationship with GT Interactive, who is representing selected
titles sold in jewel case CD-ROM formats. Certain titles are now available in
stores such as Wal-Mart, Target and other mass merchant retailers. In addition
to distribution through GT Interactive, we have entered into a distribution
agreement with The Learning Company to sell 4 boxed titles, including Superman
and Gravity Angels, into computer retail stores and to expand distribution based
upon the success of the initial title launch. There are, however, numerous
obstacles and uncertainties involved in developing a retail distribution
channel. In the past, we have experienced significant delays in our introduction
of titles in the retail channel. For instance, delays in duplication, packaging
and distribution caused our first movies to begin arriving at retailers at the
end of December 1997, after the holiday selling season. Similarly, we
experienced distribution delays in the fourth quarter of 1998 that caused our
products to reach retail shelves only at the end of December. We cannot
guarantee that similar delays will not occur in the future. However, since
December, GT Interactive has placed additional orders for XENA and ACE VENTURA.

DVD MARKET

        We intend to release Multipath Movie titles to the DVD market for
distribution commencing in 1999. We believe that distributing our titles on DVD
will increase the awareness of Multipath Movies in the retail market. We entered
into an agreement with SlingShot, a special purpose DVD publisher and
distributor, in March 1999. We granted to SlingShot exclusive worldwide rights
to distribute 20 of our Multipath Movies in DVD format. Under the agreement,
SlingShot has made an up-front, non-refundable cash advance and provided a
minimum guarantee in exchange for its exclusive retail DVD distribution rights.
OEM and bundled sales of DVD products will be managed jointly by SlingShot and
us. SlingShot will also use a DVD version of our Digital Projector to drive
traffic to our web site. We have begun delivery of titles to SlingShot for
conversion to the DVD format and have developed a release plan to ensure timely
delivery of DVD titles into the retail channel. DVD titles are expected to be
available in retail outlets in the second half of 1999.

INTERNET AND ONLINE SERVICES

        We continue to seek distribution of our Multipath Movies through
bundling arrangements which allow the user to purchase and unlock titles through
our website. In addition to our existing relationships, we have signed an
agreement to distribute certain title previews through Midas Interactive
Entertainment BV, a Netherlands-based publisher and distributor of PC CD-ROM
software. In addition, we have entered into online content and distribution
arrangements to promote and sell Multipath Movies. These include arrangements
with @Home Networks, @Home Benelux, DVD Express, Mediadome and Gamestorm. We
currently are pursuing relationships with other on-line partners but cannot be
certain that they will be concluded. We will continue our efforts to deliver
content to both the narrowband and broadband markets, and we are pursuing
opportunities to syndicate and license our content to these markets. We have
made significant progress in reducing the file sizes of our content and expect
this to be a major advantage in our ability to exploit the narrowband
marketplace.

B3D - MINIMIZE FOR MAX

        In addition to consumer product sales and marketing, we are pursuing
a strategy designed to encourage active use of our tools and technology by a
broad market of animators who are currently using 3D Studio Max, an animation
and 3D design software package developed and marketed by Kinetix, a division of
Autodesk. Our B3D - Minimize for Max tool is a plug-in to 3D Studio Max. It
enables animators to output their animation to be played back in real time on
the Internet using our Digital Projector playback system. B3D - Minimize for Max
will be distributed by Digimation Inc., an authorized distributor of 3D Studio
Max plug-ins, and by us directly to the market. The marketing program is
designed to encourage content creation and distribution on the Internet using
B3D - Minimize for Max to further encourage use of the Digital Projector, and
through this, to establish broader demand for our other tools and technology
that we intend to continue to release to the market. Animation content generated
using B3D - Minimize for Max can be of any type. The tool is not limited to the
production of entertainment content. It can be applied to the production of
artistic renderings, education, architecture, engineering, e-commerce and other
solutions that require animation. A limited 30-day trial version of the tool has
been released on various Internet sites for use by animators worldwide. The
complete license version is available at $495.00 per user. Other versions of the
tool, to be released at a later date, will be sold or will be the subject of
joint venture arrangements.


                                       8
<PAGE>


NON-INTERACTIVE FORMAT FOR TELEVISION, CABLE AND VIDEO

        We have progressed with our plans to release some of our Multipath
Movies in non-interactive format as television broadcast/cable programming and
home video features. In January 1999, we entered into an agreement with
Kaleidoscope Media Group for the distribution of GRAVITY ANGELS, a two hour 3D
animated science fiction thriller, to the television broadcast/cable and home
video markets. In April 1999, we attended Mipcom in Cannes (France) where
several TV Broadcasters expressed interest in the rights for their individual
territories. The final rendered property is due for completion in May, at which
time we expect agreements currently under negotiation to be concluded. However,
we do not guarantee that such agreements will be concluded or that the terms of
such agreements, if concluded, will be favorable to us.

PACKARD BELL

        Management is aware that Packard Bell NEC has significantly delayed
distribution of the Company's titles bundled with Packard Bell NEC's computers.
In addition to the delay, Packard Bell NEC has bundled the Company's software on
significantly fewer computers than required. As a result of these factors
management believes that Packard Bell NEC will not be able to comply with the
terms of the Distribution Agreement, specifically Packard Bell NEC's commitment
to ship the Company's software with up to 6 million computers with at least 2
million of such computers being shipped within 12 months of the commencement of
such shipment, subject to an extension not to exceed 6 months (the "shipment
period"). Such shipment triggers Packard Bell NEC's obligation to pay a minimum
royalty of $1,973,333 at the rate of $1 for each Packard Bell NEC computer
shipped with the Company's product. The full minimum royalty amount is
contractually due by no later than the end of the shipment period, regardless of
actual shipments by Packard Bell NEC of personal computers containing the
Company's product. Management believes that it has a contractual right to
payment by Packard Bell NEC of the minimum guaranteed amount no later than the
end of the shipment period.

PRODUCTION

        During the first quarter of 1999, we have begun reducing the number of 
employees working in our production studio and research and development
facilities. Reduction in staff numbers is based upon production demands at any
point in time.

NEW BUSINESS OPPORTUNITIES

        We continue to carefully consider new business opportunities that could
be strategic to the development of the Company. We have acquired an option to
purchase a business for consideration of 500,000 to 1.5 million shares of our
common stock and warrants to purchase up to an additional 400,000 shares of our
common stock. We currently are in discussions and performing due diligence
relating to this possible acquisition. There can be no assurance, however, that
our discussions will lead to any acquisition or that the acquisition, if
consummated, will be beneficial to us. See "Cautionary Statements and Risk
Factors - We may experience risks associated with acquisitions."


RESULTS OF OPERATIONS

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

        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. Revenues from the sale of electronic
tickets to view Multipath Movies over the Internet are recognized when the
tickets are sold.

        Historically, 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 revenues exceed any associated non-refundable royalty advance.
Royalties related to non-refundable advances are recognized when the CD-ROM
master is delivered to the licensees. Royalty revenues in excess of
non-refundable advances are recognized upon notification by the distributor that
a royalty has been earned by us. Development fees are paid by customers in
exchange for our development of software 


                                       9
<PAGE>


packages in accordance with customer specifications. The software development
agreements generally specify certain "milestones" which must be achieved
throughout the development process. As these milestones are achieved, we
recognize the portion of the development fee allocated to each milestone.
Software sales revenues are recognized upon shipment of product.

        Revenues increased from $31,000 for the three months ended March 31, 
1998 to $206,000 for the three months ended March 31, 1999. This represents an
increase of $175,000. Revenues for the three months ended March 31, 1999 reflect
$54,000 earned under a Multipath Movie technology and content development
agreement and Multipath Movie retail sales of $152,000. Revenues for the prior
year's first quarter, ended March 31, 1998, were primarily the result of
$31,000 in Multipath Movie retail sales.

        During the three months ended March 31, 1999, we received $25,000 and 
$73,000 in royalty payments from Packard Bell for the quarters ended September
30, 1998 and December 31, 1998, respectively. We have not received the royalty
statement and payment due for the three months ended March 31, 1999.

        To address our slower than anticipated revenue growth and resulting
losses, we have taken steps to reduce overhead expenditures at our production
studio in Bondi Junction, Australia and will consider further reductions.

        COST OF REVENUES. Cost of revenues consists primarily of the 
amortization and writedown 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 $266,000 for the three months ended March 31, 1998 to
$205,000 for the three months ended March 31, 1999. This represents a decrease
of $61,000. The primary reason for the decrease is the fact that in the first
quarter of 1998 a $145,000 writedown of the development costs occurred. Costs of
revenues in 1999 include costs of $45,000 associated with software sales and
amortization of capitalized movie software costs of $160,000. For the first
quarter of 1998, costs of $89,000 are attributable to the amortization of
capitalized movie software costs. To the extent capitalized Multipath Movie
software costs are attributable to titles that we have begun to ship, these
costs are subject to amortization. To the extent the software costs are
estimated to exceed the total anticipated revenues, charges are made to
operations to reduce these costs to net realizable value. We will monitor the
level of commercial success of our Multipath Movies and, depending upon results,
may write down additional capitalized movie software costs in subsequent periods
in accordance with Statement of Financial Accounting Standards No. 86 ("SFAS No.
86"). See "Accounting Treatment for Development Costs and Research 
Expenditures."

        SALES AND MARKETING. Sales and marketing expenses include primarily 
costs for salaries, advertising, promotions, brochures, travel and trade shows.
Sales and marketing expenses decreased from $305,000 for the three months ended
March 31, 1998 to $222,000 for the three months ended March 31, 1999. The
decrease is primarily attributable to a change in our promotional efforts. Sales
and marketing expenses are expected to increase in future periods due to the
expansion of our sales force and marketing efforts. We implemented an online
marketing program in connection with the release of Multipath Movies in the
fourth quarter of 1998 and continued the program into the first quarter of 1999.
The marketing expense for the three months ended March 31, 1999 is primarily
attributable to the online marketing program.

        GENERAL AND ADMINISTRATIVE. General and administrative expenses include 
primarily salaries and benefits of management and administrative personnel,
rent, insurance costs and professional fees. General and administrative expenses
increased from $524,000 for the three months ended March 31, 1998 to $619,000
for the three months ended March 31, 1999. This represents an increase of
$95,000 that is attributable to increased employment costs associated with the
development of internal management and the addition of personnel.

        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 traditional CD-ROM software tools and the software tools used
to develop Multipath Movies. Research and development expenses increased from
$317,000 for the three months ended March 31, 1998 to $981,000 for the three
months ended March 31, 1999. In accordance with SFAS No. 86, the results of
operations for the three months March 31, 1999 include Multipath Movie software
development costs and research and development expenses. Technological
feasibility of our original Digital Projector software tool was reached during
the third quarter of 1997. Since the date of achieving technological
feasibility, the costs of developing Multipath Movies intended to be viewed on
the original projector have been capitalized. Multipath Movies developed by us
subsequent to the first quarter of 1998 are intended to be viewed on our new
Internet Digital Projector, which we released in the fourth quarter of 1998. To
the extent capitalized Multipath Movie software costs are attributable to titles
that we have begun to ship, these costs are subject to amortization. We have
written off amounts incurred subsequent to the first quarter of 1998 in the
development and production of Multipath Movies designed 


                                       10
<PAGE>


to be viewed on the new Digital Projector. As the technology on which our
product is designed to operate is continuously changing, a reserve against
capitalized costs is necessary until shortly before the release of the title.
Therefore, no additional movie development costs are anticipated to be
capitalized in the future.

        We have chosen to focus our development of Multipath Movies for the PC. 
We have deferred development of Multipath Movies for other platforms, including
game consoles, until warranted by market conditions. This focus allows us to
devote more of our resources to development of Multipath Movie technology and
development of additional titles. We believe that our decision will have no
adverse impact on revenues in the near or medium term.

        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 increased from $18,000 for the three months ended March 31, 1998 to
$130,000 for the three months ended March 31, 1999. The increase is attributable
to the increase in depreciable assets resulting from the growth of our
operations, primarily from production and general overhead activities.
Additionally, in the first quarter 1998, a large portion of BII's depreciation
was considered production overhead, which was capitalized into movie software
costs.

        OTHER INCOME AND EXPENSE. Other income includes interest income and
expenses, gains and losses on foreign exchange transactions and export
development grants paid to BII Australia by the Australian Trade Commission for
BII Australia's participation in certain export activities. Trade grant revenue
earned was $37,000 for the three months ended March 31, 1999. Net interest
income decreased from $140,000 for the three months ended March 31, 1998 to
$24,000 for the three months ended March 31, 1999. This decrease is due to the
lower cash balances during the first quarter of 1999.


ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES

        Our accounting policy follows SFAS No. 86, which provides for the
capitalization of certain software development costs once technological
feasibility is established. The capitalized costs are then amortized 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 the establishment of technological feasibility,
these costs are expensed as incurred. Historically, we have expensed all costs
related to the development of both our software tools and Multipath Movie
titles. We achieved technological feasibility of our original Digital Projector
during the third quarter of 1997. Since the date of achieving technological
feasibility, the costs of developing Multipath Movies intended to be viewed on
the original projector have been capitalized in accordance with SFAS No. 86. To
the extent capitalized Multipath Movie software costs are attributable to titles
which have begun to ship, they are subject to amortization. Amortized amounts
have been included in costs of revenues. Multipath Movies developed by us
subsequent to the first quarter of 1998 are intended to be viewed on our new
Internet Digital Projector, which we released in the fourth quarter of 1998. We
have written off amounts incurred subsequent to the first quarter of 1998 in the
production of Multipath Movies designed to be viewed on our new projector. As
the technology on which our product is designed to operate is continuously
changing, management considers that a reserve against capitalized costs is
necessary until shortly before the release of the title. Therefore, no
additional movie development costs are anticipated to be capitalized in the
future.

        In the future, if we incur costs to develop digital entertainment
products for distribution as home video features or television programming, such
discrete costs may be capitalized and amortized in the proportion that gross
revenues realized bear to management's estimate of the total gross revenues
expected to be received, in accordance with Statement of Financial Accounting
Standards No. 53, "Financial Reporting by Producers and Distributors of Motion
Picture Films."


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 transactions entered into after December 15, 1997 we
recognize 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.


                                       11
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

        On December 10, 1997, we closed a public offering of 2,500,000 shares of
Common Stock at $5 per share, 2,200,000 of which were sold by us. The public
offering resulted in gross proceeds of approximately $9,800,000 in cash after
underwriters' discounts and commissions and offering expenses. As of March 31,
1999, approximately $1,632,000 of the net proceeds of the public offering remain
available for product development and working capital and general corporate
purposes.

        Net cash used in operating activities during the three months ended 
March 31, 1999 was primarily attributable to a net loss of $1,890,000. Net cash
used in investing activities in the three months ended March 31, 1999 was due
primarily to the purchase of computer equipment. Cash used in financing
activities for the three months ended March 31, 1999 was for the repayment of
notes for the financing of office furniture and computer equipment. In April
1999, we redeemed a convertible debenture we issued in December 1998 for
$100,000 plus accrued interest, and we redeemed a related warrant for $5,000,
and entered into an alternative financing arrangement with St. Annes Investment,
Ltd. as described below.

        We have an obligation under our agreement with Morgan Creek to fund
entirely the development of two Multipath Movies, the first of which, ACE
VENTURA, was developed and shipped in the fourth quarter of 1998. We have an
obligation under our joint venture agreement with Crawfords to jointly fund two
Multipath Movies. No projects have been identified for development by the
parties and we are doubtful that we will ever develop a project with Crawford
under our agreement. We have an obligation under our joint venture agreement
with KISS Digital, LLC to fund 75% of the development of a Multipath Movie up to
$900,000. This project currently is in development. We also are required as of
March 31, 1999 to make minimum payments of $142,000 under various licensing
agreements. At March 31, 1999, we had rental commitments for our offices and
production facilities of $755,000 and a promissory note for the financing of
fixed assets in the amount of $118,000 payable over the next 5 years.

        In March 1999, we entered into a securities purchase agreement with St. 
Annes Investment, Ltd. The agreement gives us the right at our election to sell
to the investor up to a total of $6 million of our Common Stock at a discount to
its "Market Price" from time to time during the three year term of the
agreement. Each sale of shares under the agreement is subject to certain minimum
and maximum dollar amounts and certain other conditions, including that the
"Market Price" of our Common Stock at the time we give a sale notice is at least
$1 per share and that a registration statement under the Securities Act of 1933,
as amended, covering St. Annes' resale of the shares is in effect at the closing
of the sale. "Market Price" is defined as the lowest daily volume weight
adjusted price of our Common Stock (as reported on Bloomberg) for any trading
day during the 10-trading day period ending on the day before the day that we
give a sale notice to St. Annes. The purchase price that we will receive for our
shares in each sale will be 88% of the Market Price of our Common Stock if the
Market Price is more than $4 per share, and 86% of the Market Price if the
Market Price is $4 per share or less. We have agreed to pay to Trinity Capital
Advisors, Inc. an amount equal to 3% of the purchase price, and to issue to
Trinity Capital Advisors shares of Common Stock having an aggregate value equal
to 2% of the purchase price of the shares of Common Stock to be issued and sold
to St. Annes under the securities purchase agreement.

        On April 27,1999, we issued to Roseworth Group, Ltd. a 4% convertible
debenture in the principal amount of $1,000,000 due on the later of April 27,
2000 or six months following the date the Securities and Exchange Commission
declares effective a registration statement with respect to the resale of the
shares of common stock underlying the debenture. The debenture may be converted
by Roseworth into shares of our Common Stock at a conversion price for each
share of Common Stock equal to the lower of 95% of its Market Price at the
conversion date or $6.00. On the maturity date of the debenture, the unpaid
balance of the debenture and any accrued and unpaid interest will convert
automatically into shares of Common Stock at the conversion price on the
maturity date. Market Price is defined as the lowest volume weight adjusted
price of our Common Stock on the American Stock Exchange (as reported on
Bloomberg) during the 10 business days prior to the business day on which the
conversion notice is sent to us. In connection with the loan, we paid to
Roseworth a fee of $30,000 and issued to Roseworth 5,883 shares of our Common
Stock.

        In May 1999, we closed a private placement of 2,132,000 shares of our
Common Stock, which were issued to seven investors. The private placement raised
aggregate proceeds of $4,311,250. Of the 2,132,000 shares of Common Stock,
1,880,000 shares were issued to five investors at $2.00 per share and 252,000
shares were issued to two investors at $2.1875 per share.


                                       12
<PAGE>


        We believe that our existing funds, cash generated from operations and 
proceeds from the securities purchase agreement with St. Annes, the convertible
debenture and the private placement will be sufficient to fund our working
capital requirements for at least the next twelve months. See "Cautionary
Statements and Risk Factors - If we are unable to raise additional funds our
business will be adversely affected."


YEAR 2000

        We are continuing our project to address the potential impact of the
Year 2000 problem on the processing of date-sensitive information by our
information technology systems and the information technology systems used by
our significant customers and vendors. The Year 2000 problem is the result of
computer programs being written using two digits to define the applicable year.
As a result, certain computer programs may recognize a date using "0" as the
year 1900 rather than 2000, which could cause miscalculations or system
failures. The objectives of our Year 2000 project are to determine and assess
the risks of the Year 2000 problem and to plan and institute mitigating actions
to minimize those risks to an acceptable level.

        We are dependent upon both internally developed and vendor supplied
information systems. Our core operations systems are largely standard package
systems for business management and inventory control, which have been developed
by vendors whose products are widely used in the industry. We have already
contacted our key information technology vendors and suppliers as to their Year
2000 compliance to determine what changes, if any, must be made to the vendor
supplied systems used by us in our operations.

        We also are in the process of evaluating our internally developed
information technology systems to determine their Year 2000 compliance. Our Vice
President of Technology is coordinating this process. We do not presently
anticipate any material Year 2000 issues or significant expenses from the
conversion of our own information systems, databases or programs. However, if
our current estimates of the resources required to address and resolve Year 2000
issues prove to be understated, the additional costs and resources required to
address the Year 2000 problem could result in a material financial risk.

        We have communicated with our significant customers and vendors to 
understand their Year 2000 issues and how they may affect us and to determine
what steps these customers and vendors have taken to prepare and manage their
Year 2000 issues as they relate to us. These customers and vendors include the
host of our web site and significant distributors of our products. At this time,
we do not know what measures our customers and vendors have taken to address the
Year 2000 problem or how that problem's effect on our customers and vendors will
impact us. The failure by any of these third parties to adequately address the
Year 2000 problem could result in disruptions in the supply or sale of our
products, either of which would have a material adverse effect on our business,
financial condition and results of operations. We plan to devote the necessary
resources to resolve all significant Year 2000 issues in a timely manner.

        Readers are cautioned that this Year 2000 disclosure contains forward-
looking statements. Readers should understand that the dates on which we believe
the Year 2000 project will be completed are based upon management's best
estimates. These estimates were derived utilizing numerous assumptions of future
events, including the availability of certain resources, third party
modification plans and other factors. There can be no guarantee, however, that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of our Year 2000 compliance
project. A delay in specific factors that might cause differences between the
estimates and actual results include, but are not limited to:

        o    the availability and cost of personnel trained in these areas;
        o    the ability of locating and correcting all relevant computer code;
        o    timely responses to and corrections by third parties and suppliers;
             and
        o    the ability to implement interfaces between any new systems and
             systems not being replaced.

        Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third
parties and the inter-connection of national and international businesses, we
cannot ensure that we will be able to timely and cost effectively resolve
problems associated with the Year 2000 issue, which may effect our operations
and business, or expose us to third party liability.


                                       13
<PAGE>


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 which could cause actual results to differ
materially from those projected or forecast appear in the statements below. In
addition to other information contained in this document, readers should
carefully consider the following cautionary statements and risks factors:

        IF WE DO NOT ACHIEVE COMMERCIAL ACCEPTANCE OF OUR MULTIPATH MOVIES OUR
BUSINESS WILL BE ADVERSELY AFFECTED. Our success will depend largely upon the
market's acceptance of the Multipath Movie concept. The entertainment software
market is emerging and depends upon a number of factors, including:

        o    consumer preferences;
        o    the installed base of personal computers; and
        o    the existence of recognizable titles to interest consumers and
             stimulate market development.

        The market for entertainment software is relatively small in comparison
to the overall market for consumer software products. This makes it impossible
to predict with any degree of certainty the future rate of growth, if any, and
the size of the market for our products.

        Each Multipath Movie will be an individual artistic work, and its
commercial success primarily will be determined by consumer reaction, which is
unpredictable. To be successful, we will need to develop stories and characters
that capture the attention and imagination of consumers and to license
recognized characters and properties from third parties for use in our Multipath
Movies. We cannot be certain that we will be able to do so. Other factors that
influence the commercial success of our Multipath Movies include:

        o    our marketing strategies;
        o    the quality of our products and competing products;
        o    critical reviews;
        o    the availability of alternative forms of entertainment and
             leisure time activities; and
        o    general economic conditions.

        The market's acceptance of our Multipath Movies has taken longer than we
initially anticipated. This is due, in part, to the disappointing performance by
Packard Bell NEC of its obligations under our agreement to bundle our titles
with Packard Bell NEC computers, and delays in the retail distribution of our
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."

        WE MAY EXPERIENCE DELAYS IN THE INTRODUCTION AND DISTRIBUTION OF OUR
PRODUCTS WHICH MAY RESULT IN REDUCED REVENUES AND INCREASED LOSSES. We plan to
release a number of new Multipath Movies in 1999. Due to the numerous obstacles
and uncertainties involved in developing and distributing software to the
market, however, we cannot be certain that we will be able to meet our planned
release dates for our new Multipath Movies. If we are unable to begin shipping
an important new product during the scheduled quarter, our revenue and earnings
would likely be materially and adversely affected in that quarter. In the past,
we have experienced significant delays in our introduction of certain new
products. For instance, delays in duplication, packaging and distribution caused
our first Multipath Movies, CYBERSWINE, POPEYE AND THE QUEST FOR THE WOOLLY
MAMMOTH, NIGHT OF THE WEREWOLF and the HALLOWEEN PARTY to begin arriving at
retailers at the end of December 1997, after the holiday selling season.
Similarly, we experienced distribution delays in the fourth quarter of 1998 that
caused our products to reach retail shelves only at the end of December. Our
dependence upon certain strategic partners has also caused delays in the release
of our products. See " --We substantially depend upon third parties for many
elements of our business--Dependence Upon Strategic Relationships." It is likely
in the future that delays will continue to occur and that certain new products
will not be released in accordance with our internal development schedule or the
expectations of public market analysts and investors.

        WE HAVE ONLY BEEN OPERATING OUR CURRENT BUSINESS SINCE AUGUST 1996 WHICH
PROVIDES A LIMITED PERIOD FOR INVESTORS TO EVALUATE OUR BUSINESS MODEL. We were
founded in September 1993 and shipped our initial traditional CD-ROM product in
November 1994. In 1996, we substantially reduced this aspect of our business to
begin producing and distributing Multipath Movies. We acquired the software
tools necessary to produce Multipath Movies in August 


                                       14
<PAGE>


1996 and introduced our first Multipath Movie in December 1997. We have a
limited operating history upon which to evaluate our future prospects. You must
consider our prospects in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as entertainment
software. These risks include, but are not limited to, the inability to respond
promptly to changes in a rapidly evolving and unpredictable business environment
and the inability to manage growth. To address these risks, we must, among other
things:

        o    expand our customer base;
        o    enter into distribution and revenue generating arrangements and
             arrangements with Internet service providers, traditional CD-ROM
             publishers and retailers;
        o    successfully implement our business and marketing strategies;
        o    continue to develop Multipath Movies with appealing content;
        o    respond to competitive developments; and
        o    attract and retain qualified personnel.

        IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS OUR BUSINESS WILL BE
ADVERSELY AFFECTED. We believe that our existing funds, cash generated from
operations and proceeds from our sale of common stock under the securities
purchase agreement we entered into in March 1999 will be sufficient to fund our
working capital requirements for at least the next twelve months. Following
fiscal 1999, we may need to raise additional funds through debt or equity
financing or by other means. We cannot be certain that additional financing will
be available at the time we need additional funds or that, if available, it can
be obtained on terms that we deem favorable. If necessary funds are not
available, we may be required to defer completion of Multipath Movie titles and
reduce overhead significantly, which could have a material adverse effect on our
business. Additionally, our stockholders may be diluted if we raise additional
funds through the sale of our stock.

        WE SUBSTANTIALLY DEPEND UPON THIRD PARTIES FOR MANY ELEMENTS OF OUR
BUSINESS. We substantially depend upon third parties for several critical
elements of our business, including our development and licensing of content and
the distribution of our products.

        o    DEPENDENCE UPON STRATEGIC RELATIONSHIPS. We have entered into 
strategic relationships with software distributors and publishers and OEM
providers, as well as licensing arrangements with numerous companies that own
the stories or characters used in many of our Multipath Movies. Our business
strategy is based largely on our strategic and licensing relationships and our
ability to continue to enter into similar relationships in the future. These
relationships may affect our ability to release our products for a number of
reasons, such as:

             o   A strategic partner or content licensor may, in the exercise of
                 its product approval rights, arbitrarily reject our products,
                 require expensive and time consuming changes to the products or
                 otherwise delay their introduction; and
             o   An OEM provider could change the shipping schedule of the
                 equipment with which our products are bundled and thereby 
                 affect their distribution.

        One delay has already occurred. Packard Bell NEC, which agreed to
distribute some of our Multipath Movie titles bundled with Packard Bell
computers, has significantly delayed the introduction of some titles beyond the
initially anticipated launch dates. Additionally, we believe that because
Packard Bell NEC is distributing our titles with only its middle- to high-end
machines, Packard Bell NEC will not comply with its commitment to ship our
products with 6 million computers during the term of our agreement. We cannot be
certain that we will resolve these issues with Packard Bell NEC, that Packard
Bell NEC will achieve its committed shipment level or that adequate remedies
will be available to us to compensate for Packard Bell NEC's failure to perform
under our agreement.

        Delays resulting from disagreements with licensors or joint venture
partners or our failure to renew or extend a key license, maintain any of our
strategic relationships or enter into new licenses and strategic relationships
on sound financial terms could materially adversely affect our business,
operating results and financial condition.

        o    USE OF INDEPENDENT SOFTWARE DEVELOPERS. In addition to internally
developing software, we use entertainment software created by independent
software developers. We have less control over the scheduling and the quality of
the software generated by independent contractors than over that developed by
our own employees. Our success will depend in part on our continued ability to
maintain relationships with skilled independent software 


                                       15
<PAGE>


developers, and to enter into and renew product development agreements with such
developers. There can be no assurance that we will be able to maintain such
relationships or enter into and renew such agreements.

        o    USE OF INDEPENDENT CONTENT PROVIDERS. We use content developed by
third parties in our Multipath Movies. To be successful, we will need to
continue to develop new relationships and maintain existing relationships with
content providers. Many content providers are reluctant to grant broad licenses
for their properties covering multiple formats (e.g., a license covering both
Internet and television distribution rights) to companies without a proven track
record in the particular industry. When rights are available, there is often
significant competition for licenses. We may not be able to acquire licensed
content at prices or upon terms or conditions that we consider acceptable. Some
content licenses may require us to make advance payments of royalties and
guarantee minimum royalty payments. If our product sales are not sufficient to
recover these advances and guarantees, we will be required to write-off the
unrecovered portions of these payments, which could materially affect our
financial condition.

        o    USE OF A SINGLE VENDOr. We presently use a single vendor to deliver
our Multipath Movies through our Internet site. Any significant interruption in
service provided by this vendor could interrupt sales and delivery of Multipath
Movies and adversely affect our ability to conduct our business and maintain
customer satisfaction.

        WE DEPEND ON THE INTERNET TO DISTRIBUTE SOME OF OUR PRODUCTS. We
distribute some of our Multipath Movies through our Internet site and through a
site on the CompuServe on-line service. In 1999, we also intend to distribute
some of our products through the @Home Network and Kesmai Corporation's popular
online games service, GameStorm. Our success depends in part upon the widespread
consumer acceptance and use of the Internet as a medium of commerce. We have
experienced delays in the development of compression technologies designed to
reduce the time it takes a user to download from our website the data necessary
to view a Multipath Movie. We believe that large, time-consuming downloads have
deterred potential users of our products and have reduced the effectiveness of
our marketing campaigns with Microsoft and Disney. 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. We believe that
reductions in the time to download Multipath Movie content over the Internet may
be a requirement to any increase in online sales of our products. However, we
are not certain that we will be able to sufficiently shrink download time to the
degree that may be required to satisfy consumer demands for downloads over
non-broadband delivery systems and such a failure would adversely affect
marketing of our products over the Internet.

        WE MAY EXPERIENCE PROBLEMS IN DISTRIBUTING OUR PRODUCTS THROUGH
TRADITIONAL RETAILERS. We anticipate that a significant amount of sales of
Multipath Movies will be made through distributors to traditional retailers. We
are currently expending significant resources to develop a retail sales channel.
We will likely be required to make these expenditures before we realize any
significant sales through a retail sales channel. We have no prior experience in
the development or management of a retail sales channel or sales through retail
stores. The competition for shelf space in retail stores is intense. Our
products are expected to constitute a small percentage of a retailer's sales
volume, and we cannot be certain that retailers will provide our products with
adequate levels of shelf space and promotional support. Due to the increased
competition for limited retail shelf space and promotional resources, retailers
and distributors are increasingly in a better position to negotiate favorable
terms of sale, including terms relating to price discounts, product return
rights and cooperative market development funds. Increased competition could
result in loss of shelf space for our products at retail stores, as well as
significant price competition, any of which could adversely affect our business
and financial condition.

        OUR PRODUCTS MAY BE RETURNED. At the time we ship our products to
retailers, we will establish reserves, including reserves which estimate the
potential for future product returns. We will base these reserves on seasonal
terms of sale and distributor and retailer inventories of our products, as well
as on other factors. We intend to recognize revenue from the sale of our
products upon shipment. Product returns or price protection concessions that
exceed our reserves could materially and adversely affect our business and
financial condition, and could increase the magnitude of quarterly fluctuations
in our operating and financial results. Furthermore, if we incorrectly assess
the creditworthiness of customers who receive our products on credit, we could
be required to significantly increase the reserves previously established. We
cannot be certain that such future write-offs will not occur or that amounts
written off will not have a material adverse effect on our business and
financial condition.

        WE RELY ON OTHERS TO MANUFACTURE OUR PRODUCTS FOR RETAIL DISTRIBUTION.
The production of Multipath Movies for the retail distribution channel consists
of pressing CD-ROM disks, assembling purchased product components, printing
product packaging and user manuals and packaging finished products. This process
will be performed for us by third


                                       16
<PAGE>


party vendors in accordance with our specifications and forecasts. Currently, we
use primarily one vendor for these services. While these services currently are
available from multiple vendors and at multiple sites, we cannot be certain that
an interruption in the manufacture of our products could be remedied without
undue delay and without materially affecting our operations. We do not have
contractual agreements with any of our third party vendors, which may result in
our inability to secure adequate services in a timely manner. Demand for these
manufacturing services is seasonal, with peak demand and service and production
backlogs and delays occurring in September, October and November of each year.
We must compete for capacity and priority with the CD-ROM products of many much
larger competitors with substantially greater influence with our vendors. If we
fail to secure adequate manufacturing services to timely produce and deliver our
products, our business and financial condition would be materially and adversely
affected.

        WE ARE SUBJECT TO FLUCTUATING OPERATING RESULTS AND SEASONAL BUYING 
PATTERNS. We operate in an industry which is subject to significant fluctuations
in operating results from quarter to quarter. Factors that may influence our
quarterly operating results include:

        o    customer demand for our products;
        o    shipping schedules for PC hardware with which Multipath Movies are 
             bundled;
        o    introduction or enhancement of products by us and our competitors;
        o    our ability to produce and distribute retail packaged versions of
             Multipath Movies in advance of peak retail selling seasons;
        o    introduction or availability of new hardware;
        o    market acceptance of the Multipath Movies and other new products;
        o    reviews in the industry press concerning our products or those of
             our competitors;
        o    changes or anticipated changes in pricing by us or our
             competitors;
        o    mix of distribution channels through which products are sold;
        o    product returns and order cancellations;
        o    the timing of orders from major customers;
        o    management's evaluation and judgment regarding a title's
             acceptance; and
        o    unanticipated operating expenses and general economic conditions.

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

        Our expense levels are, to a large extent, fixed. We may be unable to
adjust spending in a timely manner to compensate for any revenue shortfall. As a
result, any significant shortfall in revenue from our Multipath Movies would
have an immediate material adverse effect on our business, operating results and
financial condition. We have increased our operating expenses to fund greater
levels of Multipath Movie production and research and development, increased
marketing operations and expanded distribution channels. As was the case during
1997 and 1998, to the extent that these expenses precede or are not subsequently
followed by increased revenues, our business, operating results and financial
condition will be materially adversely affected.

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

        THE CARRYING AMOUNT OF CERTAIN CAPITALIZED MOVIE SOFTWARE COSTS AND
LICENSING ADVANCES MAY BE MATERIALLY REDUCED. Our accounting policy follows
Statement of Financial Accounting Standards No. 86 ("SFAS No. 86"), which
statement provides for the capitalization of software development costs once
technological feasibility is established. The capitalized costs are amortized
beginning on the date the product is made available for sale either on a
straight-line basis over the product's estimated revenue or on a ratio of
current revenues to total projected product revenues, whichever results in the
greater amortization amount. Prior to establishing technological feasibility,
software development costs are expensed as incurred. In accordance with SFAS No.
86, we capitalized certain development costs related to the production of
Multipath Movies during the third and fourth quarters of 1997 and the first
quarter of 1998. It is possible that our estimates of anticipated future gross
revenues or the remaining estimated economic life of these products, or


                                       17
<PAGE>


both, will be reduced significantly in the near term, due to the actual
performance of our new products as compared to anticipated sales revenues for
those products. As a result, the carrying amount of the capitalized movie
software costs and licensing advances may be materially reduced in the short
term. Multipath Movies developed by us after the first quarter of 1998 are
intended to be viewed on our new Internet Digital Projector. We have written off
amounts incurred in the production of these Multipath Movies.

        IF WE EXPERIENCE PROBLEMS WITH OUR SOFTWARE TOOLS AND PRODUCTS, ARE
ABILITY TO GENERATE REVENUE WILL BE ADVERSELY AFFECTED. The software tools that
enable us to create Multipath Movies have been developed over the past three
years. Additional refinement of these tools may be necessary to continue to
enhance the Multipath Movie format. We cannot be certain that we will be able to
successfully develop improvements to these software tools. Also, 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 certain of our new products and enhancements after their introduction into
the market. Because our products are complex, we anticipate that software errors
and defects will be present in new products or releases in the future. While to
date these errors have not been material, future errors and defects could result
in adverse product reviews and a loss of or delay in market acceptance of our
products.

        WE MAY NOT BE ABLE TO MANAGE OUR EXPANSION AND GROWTH. We have
experienced a significant expansion due to the implementation of our business
plan, which includes:

        o    the introduction and marketing of our Multipath Movies;
        o    the management of our joint venture arrangements;
        o    the negotiation of additional content licensing and distribution
             agreements;
        o    the management of Internet service providers; and
        o    the prior expansion of our prior Multipath Movie production studio
             in Australia.

        The growth of our operations and activities has placed and will continue
to place a significant strain on our management, operational, financial and
accounting resources. To successfully manage our operations, we will need to
continue to implement and improve our financial and management information
systems. Our ability to manage future growth, if any, and to increase production
levels and continue to market and distribute our products also will require us
to hire and train new employees, including management and technical personnel.
Our failure to successfully manage the continued implementation of our business
plan could have a material adverse effect on our business and financial
condition.

        WE MAY EXPERIENCE RISKS ASSOCIATED WITH ACQUISITIONS. In the future, we
may acquire products, technologies or companies that are complimentary to our
business or that add new lines of business. The acquisitions involve numerous
risks, including:

        o    adverse short-term effects on the combined business' reported
             operating results;
        o    diversion of management's attention;
        o    dependence on retention, hiring and training of key personnel;
        o    amortization and/or impairment of goodwill and other intangible
             assets; and
        o    risks associated with unanticipated problems or legal liabilities.

        WE MAY NOT BE ABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL DEVELOPMENTS
AND CHANGING PRODUCT PLATFORMS THAT ARE TYPICAL IN OUR INDUSTRY. The
entertainment software market and the PC industry is subject to rapid
technological developments and frequent changes in computer operating
environments. To compete successfully, we must continually improve and enhance
our existing products and technologies and develop new products and technologies
that incorporate technological advances. We must make these improvements while
remaining competitive in terms of performance and price. Our success also will
depend substantially upon our ability to anticipate the emergence of, and adapt
our products to, popular platforms for consumer software.

        We intend to design future products for use with new platforms. To
coordinate the release of our products with the release of a new platform, we
will need to make substantial investments in research and development at least
one to two years in advance of the widespread release of the platform in the
market. We cannot be certain that we will have the financial and technical
resources available to make these substantial expenditures. Additionally, a new
platform for which we develop products may not achieve market acceptance. As a
result, we may incur substantial research and development expenses in developing
products that do not sell well in the market. Our failure to anticipate the
emergence of widely accepted product platforms and to timely develop products
for use on these new platforms would have a material adverse effect on our
business and financial condition.


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<PAGE>


        WE DEPEND ON CERTAIN KEY PERSONNEL TO OPERATE OUR BUSINESS. Our success
has and will continue to depend to a large extent upon certain key management,
product development and technical personnel, many of whom would be difficult to
replace, particularly Mark Dyne, our Chairman and Chief Executive Officer, and
Kevin Bermeister, our President. Although we have entered into employment
agreements with certain officers, they can terminate their employment agreements
upon 30 days notice. Accordingly, we cannot be certain that these employees will
continue to be available to us. The loss of the services of one or more of these
key employees could have a material adverse effect on our business. Our future
success will depend in large part upon our ability to attract, retain and
motivate personnel with a variety of technical and managerial skills, including
software development and programming expertise. Additionally, there is currently
an industry-wide shortage of technical personnel which makes it more difficult
to attract and retain this personnel. We cannot be certain that we will be able
to retain and motivate our managerial and technical personnel or attract
additional qualified members to our management or technical staff.

        OUR CHIEF EXECUTIVE OFFICER AND PRESIDENT HAVE OTHER EMPLOYMENT
COMMITMENTS. Our Chief Executive Officer and Chairman, Mark Dyne, and our
President, Kevin Bermeister, also serve in executive and director positions with
other businesses. Although Messrs. Dyne and Bermeister are active in our
management, they are not required to spend a specified amount of time with us
nor are they able to devote all of their time and resources to us. Further, we
do not have employment agreements with either Mr. Dyne or Mr. Bermeister.

        WE MAY EXPERIENCE CONFLICTS OF INTERESTS WITH SOME OF OUR DIRECTORS AND
OFFICERS. Some of our directors and officers are directors or officers of our
potential competitors and/or strategic partners. These relationships may give
rise to conflicts of interest between the Brilliant Digital Entertainment, on
the one hand, and one or more of our directors, officers and/or their
affiliates, on the other hand. Our Certificate of Incorporation provides that
Mark Dyne and Kevin Bermeister are required to present to us any corporate
opportunities for the development of any type of digital entertainment with the
exception of opportunities for (i) minority participation in the development of
digital entertainment and (ii) participation in the development by others of
digital entertainment where publishing and distribution rights for the product
to be developed are offered to Mr. Dyne and/or Mr. Bermeister solely for
Australia, New Zealand and/or Southern Africa. Our Certificate of Incorporation
provides that Mr. Dyne and Mr. Bermeister are not required to present to us any
other opportunities that may potentially be of benefit to us.

        THE PROTECTION OF OUR PROPRIETARY TECHNOLOGY IS LIMITED. Our future
success and ability to compete depends in part upon our proprietary technology.
We rely on trademark, trade secret and copyright laws to protect our technology,
and require all employees and third-party developers to sign nondisclosure
agreements. We cannot be certain, however, that such precautions will provide
meaningful protection from competition or that competitors will not be able to
develop similar or superior technology independently. 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.

        We believe that our products, including our software tools, do not
infringe any valid existing proprietary rights of third parties. The software
tools used to create Multipath Movies were developed by SAND, a division of Sega
Ozisoft. In connection with our acquisition of the software tools, Sega Ozisoft
represented to us that, to its best knowledge, the SAND technology and software
acquired by us does not infringe the proprietary rights of others. We rely
entirely on these representations of Sega Ozisoft. Additionally, although we
have received no communication from third parties alleging infringement of any
of their proprietary rights, we cannot be certain that any infringement claims
will not be made in the future. Any infringement claims, 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, cease sales
of the infringing products and 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.


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<PAGE>


        OUR STOCK PRICE FLUCTUATES WIDELY. Our common stock is traded on the
American Stock Exchange. The market price of our common stock has been subject
to substantial volatility, and is likely to continue to be subject to
significant fluctuations due to many factors, including:

        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    legislative or regulatory changes;
        o    general trends in the industry;
        o    recommendations by securities industry analysts;
        o    dilution to existing stockholders resulting from the issuance of
             additional shares of common stock; and
        o    short sales and hedging of our common stock.

        Additionally, the stock market has experienced extreme price and trading
volume fluctuations that have affected the market price of securities of many
technology companies. These fluctuations have, at times, been unrelated to the
operating performances of the specific companies whose stock is affected. In the
past, our common stock has not experienced significant trading volume, has not
been actively followed by stock market analysts and has had limited
market-making support from broker-dealers. If market-making support and analyst
coverage does not continue at present or greater levels, the average trading
volume in our common stock may not increase or even sustain its current levels.
We cannot be certain that an adequate trading market will exist to sell large
positions in our common stock.

        OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT AMOUNT OF OUR COMMON STOCK.
As of May 15, 1999, our officers and directors owned, in total, approximately
18.2% of the outstanding shares of our common stock. As a result, our officers
and directors are able to exert influence over the outcome of all matters
submitted to a vote of the holders of our common stock, including the election
of our Board of Directors. The voting power of these officers and directors
could also discourage others from seeking to acquire control of us through the
purchase of our common stock, which might depress the price of our common stock.

        WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES WHICH MAY DEPRESS THE
PRICE OF OUR COMMON STOCK. 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. In March 1998, we adopted a
stockholder's rights plan. Under the rights plan we distributed one preferred
share purchase right for each outstanding share of our common stock outstanding
on April 2, 1998. Upon the occurrence of certain triggering events related to an
unsolicited takeover attempt of us, each purchase right not owned by the party
or parties making the unsolicited takeover attempt will entitle its holder to
purchase shares of our Series A Preferred Stock at a value below the then market
value of the Series A Preferred 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. Further, certain provisions of our Certificate of
Incorporation and Bylaws and of Delaware law could delay or make more difficult
a merger, tender offer or proxy contest involving us.

        OUR SALE OF SHARES AT A PRICE BELOW THE MARKET PRICE OF OUR COMMON STOCK
WILL HAVE A DILUTIVE IMPACT ON OUR STOCKHOLDERS. We have entered into a
securities purchase agreement with an investor that allows us to sell to the
investor shares of our common stock at a discount to the then-prevailing market
price of our common stock. Additionally, we have issued a debenture that
entitles the holder to convert the debenture into common stock at a discount to
the then-prevailing market price of our common stock. Accordingly, the issuance
of shares under the securities purchase agreement and the debenture will have a
dilutive impact on our stockholders. As a result, our net income or loss per
share could be materially decreased in future periods, and the market price of
our common stock could be materially and adversely affected. These discounted
sales could have an immediate adverse effect on the market price of the common
stock. We also have agreed to issue to our financial advisor a fee in shares of
common stock having an aggregate market price equal to 2% of the purchase price
of the shares of common stock to be issued and sold under the securities
purchase agreement. The issuance or resale of these shares would have a further
dilutive effect on our common stock and could adversely affect its price.
Downward pressure on the market price of our common stock may result from sales
of 


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<PAGE>


common stock issued under the securities purchase agreement. This downward
pressure could encourage short sales of common stock by the investor (to the
extent permitted by, and pursuant to, the securities purchase agreement) or
others. A "short sale" is a sale of common stock by an investor that is marked
as a short sale and that is made at a time when there is no equivalent
offsetting long position in common stock held by the investor. Material amounts
of such short selling could place further downward pressure on the market price
of the common stock.



                                     PART II

                                OTHER INFORMATION


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

         (a)   Exhibits.
           
               10.1   Debenture and Warrant Purchase Agreement, dated as of
                      April 21, 1999, between the Registrant and Roseworth
                      Group, Ltd.
               10.2   4% Convertible Debenture Due April 27, 2000 of the
                      Registrant, in the principal amount of $1,000,000, dated
                      as of April 27, 1999.
               10.3   Registration Rights Agreement, dated as of April 21, 1999,
                      between the Registrant and Roseworth Group, Ltd.
               27.1   Financial Data Schedule.

         (b)   Reports on Form 8-K.

               None.


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<PAGE>


                                   SIGNATURES

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


                                           BRILLIANT DIGITAL ENTERTAINMENT, INC.

Date: May 12,1999                          /S/ MICHAEL OZEN                
                                           -------------------------------------
                                           By:  Michael Ozen
                                           Its: Chief Financial Officer 
                                                (Principal Financial and 
                                                Accounting Officer) and 
                                                Secretary


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