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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 September 30, 2002

[_]  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)

     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, 32,014,978 shares issued and outstanding as of October 30, 2002.

     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 September 30, 2002
          (unaudited)..........................................................3

          Condensed Consolidated Statements of Operations for the three
          and nine months ended September 30, 2002 (unaudited) and
          September 30, 2001 (unaudited).......................................4

          Condensed Consolidated Statements of Cash Flows for the nine
          months ended September 30, 2002 (unaudited) and September 30,
          2001 (unaudited).....................................................5

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

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

Item 3.   Controls and Procedures.............................................28

PART II   OTHER INFORMATION...................................................29

Item 2.   Changes in Securities and Use of Proceeds...........................29

Item 6.   Exhibits and Reports on Form 8-K....................................29


                                       2


<PAGE>


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

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


                                                                   SEPTEMBER 30,
                                                                         2002
                                                                       --------
ASSETS                                                               (unaudited)
Current assets:
     Cash and cash equivalents ...............................         $    785
     Accounts receivable, net ................................              495
     Other assets, net .......................................              191
                                                                       --------
Total current assets .........................................            1,471
Property, plant and equipment, net ...........................              122
Other assets, net ............................................              338
                                                                       --------
Total assets .................................................         $  1,931
                                                                       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable ........................................         $    681
     Accrued expenses ........................................              281
     Deferred revenue ........................................              917
     Capital financing, net of discount ......................            2,835
     Current portion of notes payable ........................               56
                                                                       --------
Total current liabilities ....................................            4,770
Deferred revenue .............................................            1,868
Long-term debt ...............................................            1,180
Other long term liabilities ..................................               50
                                                                       --------
Total liabilities ............................................            7,868
Commitments and contingencies
Stockholders' deficit:
     Common stock ............................................               32
     Additional paid-in capital ..............................           53,487
     Accumulated deficit .....................................          (59,191)
     Cumulative other comprehensive loss .....................             (265)
                                                                       --------
Total stockholders' deficit ..................................           (5,937)
                                                                       --------
 Total liabilities and stockholders' deficit .................         $  1,931
                                                                       ========

                 See Notes to Consolidated Financial Statements.


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

                                         3 MONTHS ENDED        9 MONTHS ENDED
                                       9/30/01    9/30/02    9/30/01    9/30/02
                                      --------   --------   --------   --------
                                          (unaudited)           (unaudited)

REVENUE:
     Revenues ......................  $    397   $    601   $  1,439   $  1,269
                                      --------   --------   --------   --------

COST OF REVENUES AND EXPENSES:
Cost of revenues ...................       125         67        542        158
Sales & marketing ..................        44        133        564        258
Website development ................       (57)       (57)        30         40
General and administrative .........     1,082        716      3,505      2,524
Research and development ...........       453         46      1,362        182
Depreciation .......................        57         23        235         54
                                      --------   --------   --------   --------
Total cost of revenues and
   expenses ........................     1,704        928      6,238      3,216
                                      --------   --------   --------   --------
Loss from operations ...............    (1,307)      (327)    (4,799)    (1,947)

OTHER INCOME (EXPENSE):
Export market development grant ....        25       --           56       --
Gain (loss) on foreign exchange ....      --         --           44       --
Gain (loss) on sale of assets ......       (15)      --           10       --
Debenture expense ..................      (232)      --         (246)      --
Interest income (expense), net .....       (10)      (892)        19     (2,667)
                                      --------   --------   --------   --------
     Total other income (expense) ..      (232)      (892)      (117)    (2,667)
                                      --------   --------   --------   --------

Loss from continuing operations ....    (1,539)    (1,219)    (4,916)    (4,614)
Gain (loss) on disposal of
   discontinued operations .........       290       --          313       --
                                      --------   --------   --------   --------
Net loss before income tax .........    (1,249)    (1,219)    (4,603)    (4,614)
Provision for income tax ...........      --         --         --         --
                                      --------   --------   --------   --------
Net loss ...........................    (1,249)    (1,219)    (4,603)    (4,614)
Foreign currency translation
   adjustment ......................        (9)        16        (89)        24
                                      --------   --------   --------   --------
Comprehensive loss .................  $ (1,258)  $ (1,203)  $ (4,692)  $ (4,590)
                                      ========   ========   ========   ========

Basic and diluted net loss
   continuing operations ...........     (0.10)     (0.05)     (0.30)     (0.20)
                                      ========   ========   ========   ========
Basic and diluted net loss
   discontinuing operations ........      0.02      (0.00)      0.02      (0.00)
                                      ========   ========   ========   ========
Basic & diluted net loss per
   share ...........................  $  (0.08)  $  (0.05)  $  (0.28)  $  (0.20)

Weighted average number of shares
   used in computing basic and
   diluted net loss per share ......    16,372     25,212     16,160     22,602
                                      ========   ========   ========   ========

                 See Notes to Consolidated Financial Statements.


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

                                                               NINE MONTHS
                                                           ENDED SEPTEMBER 30,
                                                          ---------------------
                                                            2001          2002
                                                          -------       -------
                                                               (unaudited)

OPERATING ACTIVITIES
Net loss ...........................................      $(4,885)      $(4,614)
Adjustments to reconcile net loss to the
   net cash used in operating activities:
      Depreciation and other amortization ..........          964           147
      Loss from discontinued operations ............          371          --
      Debt discount and financing interest .........          165         2,578
      Loss (gain) on foreign exchange ..............           49          --
      Effect of warrants granted ...................        1,590           342
      Changes in operating assets and
         liabilities:
         Accounts receivable .......................         (131)         (423)
         Other assets ..............................         (334)         --
         Accounts payable and accruals .............         (507)         (457)
         Deferred revenue ..........................         (578)         (686)
         Other long-term liabilities ...............       (1,202)        1,076
                                                          -------       -------
Total adjustments ..................................          387         2,577
                                                          -------       -------
Net cash used in continuing activities .............       (4,498)       (2,037)
Net cash used in discontinued operations ...........         (301)         --
                                                          -------       -------
Net cash used in operating activities ..............       (4,799)       (2,037)

INVESTING ACTIVITIES
Purchases of equipment .............................           (1)           (7)
                                                          -------       -------
Net cash used in continuing operations for
   investing .......................................           (1)           (7)
Net cash used in discontinued activities
   for investing ...................................         --            --
                                                          -------       -------
Net cash used in investing activities ..............           (1)           (7)

FINANCING ACTIVITIES
Proceeds from issuance of shares, net of
   costs ...........................................         --           2,286
Capital financing ..................................        2,324           400
Repayments of notes ................................          (40)          (66)
                                                          -------       -------
Net cash provided by financing activities ..........        2,284         2,620
                                                          -------       -------

NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS .....................................       (2,516)          576
Translation adjustments ............................          (89)           24
Cash and cash equivalents at beginning of
   period ..........................................        3,187           185
                                                          -------       -------
Cash and cash equivalents at end of period .........      $   582       $   785
                                                          =======       =======
Supplemental disclosure of cash flow
   information:
      Cash paid during the period for
         interest ..................................      $    10       $    15
                                                          =======       =======

                 See Notes to Consolidated Financial Statements.


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SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

     Between May 2001 and January  2002, we issued an aggregate of $3,014,150 in
principal  amount  of  Secured  Convertible  Promissory  Notes and  warrants  to
purchase up to 44,542,717  shares of our common stock at an exercise price equal
to  $0.1353375.  Interest  accrues at 10% per  annum.  A  beneficial  conversion
feature of $3,320,000 was recorded in connection with this transaction, which is
being amortized on a straight-line basis over the life of the Notes.

     In connection with these promissory Notes, we amortized  $2,354,764 of debt
discount  expense and $224,439 of interest  expense during the nine months ended
September 30, 2002.

     In 2002,  we issued  warrants  and  options to  purchase  an  aggregate  of
1,619,286  shares of  common  stock in  consideration  for  consulting  services
provided by ten  consultants,  including  options to purchase  500,000 shares of
common  stock  issued to Abe Sher, a member of our board of directors as of June
20, 2002. We expensed $278,900 in connection with these warrants and options.


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                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2002


1.   BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally  accepted  accounting  principles for
interim financial  information and with the instructions to Form 10-QSB and Item
310 of Regulation S-B.  Accordingly,  they do not include all of the information
and footnotes required by generally accepted accounting  principles for complete
financial  statements.   The  accompanying   unaudited  condensed   consolidated
financial statements reflect all adjustments that, in the opinion of management,
are  considered  necessary for a fair  presentation  of the financial  position,
results of operations,  and cash flows for the periods presented. The results of
operations  for such  periods  are not  necessarily  indicative  of the  results
expected  for the full fiscal year or for any future  period.  The  accompanying
financial statements should be read in conjunction with the audited consolidated
financial  statements of Brilliant Digital  Entertainment,  Inc. included in the
Company's Form 10-KSB for the fiscal year ended December 31, 2001.

     The  Company  has a history of losses,  a negative  net worth and may never
attain  profitability.  Since  inception,  the Company has incurred  significant
losses and negative cash flow,  and as of September 30, 2002 had an  accumulated
deficit  of  $59.2  million.  These  conditions,  combined  with  the  Company's
historical operating losses, raise substantial doubt about the Company's ability
to  continue  as  a  going  concern.  The  accompanying  condensed  consolidated
financial  statements  do not include any  adjustments  to reflect the  possible
future  effects  on  the   recoverability   and  classification  of  assets  and
liabilities that may result from the outcome of this uncertainty. The Company is
seeking  additional  funding and believes  that the receipt and  application  of
additional  funding  may result in  improved  operating  results.  However,  the
Company cannot guarantee that it will be able to secure additional  funding,  or
that if such funding is available, the terms or conditions will be acceptable to
the Company.

Recent Accounting Pronouncements:

     In April 2002, the FASB issued SFAS No. 145,  Rescission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections.  This statement  eliminates the current  requirement that gains and
losses on debt  extinguishment  must be classified as extraordinary items in the
income  statement.  Instead,  such  gains  and  losses  will  be  classified  as
extraordinary  items only if they are deemed to be unusual  and  infrequent,  in
accordance with the current GAAP criteria for extraordinary  classification.  In
addition,  SFAS 145 eliminates an inconsistency in lease accounting by requiring
that  modifications  of  capital  leases  that  result  in  reclassification  as
operating  leases be accounted for  consistent  with  sale-leaseback  accounting
rules.  The  statement  also  contains  other   nonsubstantive   corrections  to
authoritative accounting literature.  The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for  transactions  occurring after
May 15, 2002.  Adoption of this standard  will not have any immediate  effect on
the Company's consolidated financial statements.


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                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2002


     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal  Activities,  which addresses accounting for restructuring
and  similar  costs.  SFAS No.  146  supersedes  previous  accounting  guidance,
principally  Emerging  Issues Task Force (EITF) Issue No. 94-3. The Company will
adopt the  provisions  of SFAS No. 146 for  restructuring  activities  initiated
after  December 31, 2002.  SFAS No. 146 requires  that the  liability  for costs
associated with an exit or disposal activity be recognized when the liability is
incurred.  Under EITF No. 94-3, a liability  for an exit cost was  recognized at
the  date  of a  company's  commitment  to an  exit  plan.  SFAS  No.  146  also
establishes that the liability should initially be measured and recorded at fair
value.  Accordingly,  SFAS No. 146 may affect the timing of  recognizing  future
restructuring costs as well as the amount recognized.  See Cautionary Statements
and Risk Factors.

2.       STOCKHOLDERS' EQUITY

         In March 2002, the Company sold an aggregate of 6,051,437 shares of its
common stock in a private  placement to Harris Toibb,  Markev Services,  LLC and
David  Wilson at a price per share of  $0.1322  for  aggregate  proceeds  to the
Company of $800,000. In connection with the offering, the Company also issued to
the investors,  warrants to purchase up to an aggregate of 10,758,110  shares of
common stock at an exercise price of $0.148725 per share. The warrants expire on
May 23,  2004.  Mark Dyne,  the  Company's  Chairman,  and Kevin  Bermeister,  a
director and the Company's Chief Executive Officer and President,  are owners of
Markev  Services,  LLC and  Harris  Toibb is a  significant  stockholder  of the
Company.

         In April 2002, the Company sold an aggregate of 2,276,045 shares of its
common stock to eight investors in a private placement for aggregate proceeds to
the Company of $450,000.  The prices per share ranged from $0.1731 to $0.25, and
were based on the Company's  market price at the time the investor  committed to
purchase the shares. In connection with the offering, the Company also issued to
the  investors,  warrants to purchase up to an aggregate of 4,145,921  shares of
common stock at exercise prices ranging from $0.19474 to $0.28125 per share. The
warrants expire on May 23, 2004.

         In August 2002,  the Company  sold an aggregate of 7,123,836  shares of
its common stock in a private placement to six investors, including Harris Toibb
and Markev Services, LLC, at a price per share of $0.1502 for aggregate proceeds
to the Company of $1,070,000.  In connection with the offering, the Company also
issued to the  investors,  warrants to purchase up to an aggregate of 12,664,597
shares of common stock at an exercise price of $0.168975 per share. The warrants
expire on  September  3, 2005.  Mark Dyne,  the  Company's  Chairman,  and Kevin
Bermeister,  a director and the Company's Chief Executive Officer and President,
are owners of Markev Services, LLC and Harris Toibb is a significant stockholder
of the Company.

         Options  and  warrants  representing  common  shares of  6,210,000  and
79,540,000 were excluded from the average number of common and common equivalent
shares  outstanding  in the diluted EPS  calculation  for the nine months  ended
September 30, 2001 and 2002, respectively,


                                       8


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2002


because they were anti-dilutive. The increase in the warrants is due to warrants
issued in connection  with capital  financing and equity  agreements  transacted
during the period from May 1, 2001 through September 30, 2002.

3.   COMMITMENTS AND CONTINGENCIES

     At September 30, 2002,  the Company was obligated  under certain  licensing
agreements  to  make  minimum  payments  totaling  $37,000  for  use of  certain
properties and characters in development of the Company's products.

     The Company has one fixed asset financing note with future minimum payments
as of September 30, 2002 as follows:

                          YEAR                        AMOUNT
                    -----------------              -------------

                          2002                           11,000
                          2003                           22,000
                                                   -------------
                                                        $33,000
                                                   =============

     The Company leases its facilities under operating lease agreements expiring
through  2003.  Future  minimum  payments as of  September  30, 2002 under these
leases are as follows:

                          YEAR                        AMOUNT
                    -----------------              -------------

                          2002                           21,000
                          2003                            7,000
                                                   -------------
                                                        $28,000
                                                   =============

     Rent expense was  $354,000 and $66,000 for the nine months ended  September
30, 2001 and the nine months ended September 30, 2002, respectively.

4.   GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

     The Company's  operations  consist of the  operations of Brilliant  Digital
Entertainment,  Pty. Ltd. in Australia and Brilliant Digital Entertainment, Inc.
in the  United  States.  The  following  schedule  sets forth the  revenues  and
long-lived assets by geographic area:


                                       9


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                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2002


                                                      UNITED
                                                      STATES     AUSTRALIA
                                                    ----------   ----------
     NINE MONTHS ENDED SEPTEMBER 30, 2002:
        Revenues from unaffiliated customers ....   $1,250,000   $   19,000
        Revenues from affiliated customers ......         --           --
                                                    ----------   ----------
        Total revenues ..........................   $1,250,000   $   19,000
                                                    ==========   ==========
     NINE MONTHS ENDED SEPTEMBER 30, 2001:
        Revenues from unaffiliated customers ....   $1,429,000   $   10,000
        Revenues from affiliated customers ......         --           --
                                                    ----------   ----------
        Total revenues ..........................   $1,429,000   $   10,000
                                                    ==========   ==========
     LONG-LIVED ASSETS AS OF:
        September 30, 2002 ......................   $  389,000   $   71,000
                                                    ==========   ==========


     For each of the periods shown above,  a portion of the  operating  expenses
and  most of the  research  and  development  costs  were  incurred  and paid in
Australia.  The costs  associated  with  animation  design,  banner  advertising
design,  a major  portion of the sales and  marketing  costs,  and a majority of
corporate expenses were incurred and paid in the United States.

     For the nine months  ended  September  30,  2002,  e-New Media and Internet
Fuel, Inc. accounted for 54% ($688,000) and 16% ($209,000), respectively, of our
revenues,  followed by Sharman  Networks with 12% ($154,000) and DelFin Project,
Inc.  with 2% ($17,400)  of the revenue.  An  advertising  representative  firm,
Winstar Interactive Media,  produced 6% ($79,000) of the revenue,  while various
other advertisers made up the balance of the revenues. For the nine months ended
September  30,  2001,   e-New  Media   represented  48%  of  the  revenues  with
distribution and licensing rights ($688,000).  Island Def Jam contributed 18% of
the  revenue  ($250,000).   Warner  Bros.  Online  contributed  revenue  of  17%
($240,000),  while Infogrames  contributed 7% ($100,000) of the revenue and Rock
the Vote contributed 6% ($88,000).

5.   SUBSEQUENT EVENT

     In October 2002, the Company  entered into an agreement with holders of the
Secured  Convertible  Promissory  Notes issued between May 2001 and January 2002
(the  "Original  Notes") to extend the maturity date of the Original  Notes from
November 10, 2002 to December 31, 2003.  All of the terms and  conditions of the
Original Notes remained the same except for the maturity date. As  consideration
to the holders for extending the maturity  date, the Company issued an aggregate
of 25,226,028  warrants to purchase  shares of its common stock,  at an exercise
price per share equal to $0.2091.  The fair value of the warrants is assessed at
$1,513,562, which the Company will expense over the term of the extension.


                                       10


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

     The  information  contained  in this Form  10-QSB is intended to update the
information  contained  in our Annual  Report on Form  10-KSB for the year ended
December 31, 2001 and presumes  that readers have access to, and will have read,
the "Management's  Discussion and Analysis of Financial Condition and Results of
Operations" and other information  contained in such Form 10-KSB.  The following
discussion  and  analysis  also should be read  together  with our  consolidated
financial  statements  and the notes to the  consolidated  financial  statements
included elsewhere in this Form 10-QSB.

     THIS   DISCUSSION   SUMMARIZES  THE  SIGNIFICANT   FACTORS   AFFECTING  THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT DIGITAL  ENTERTAINMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
AND SEPTEMBER 30, 2001. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED
IN THIS MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF  OPERATIONS   ARE  FORWARD   LOOKING   STATEMENTS   THAT  INVOLVE  RISKS  AND
UNCERTAINTIES AND ARE BASED UPON JUDGMENTS  CONCERNING  VARIOUS FACTORS THAT ARE
BEYOND OUR CONTROL.  ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE  FORWARD-LOOKING  STATEMENTS  AS A RESULT OF,  AMONG  OTHER  THINGS,  THE
FACTORS  DESCRIBED  BELOW  UNDER THE  CAPTION  "CAUTIONARY  STATEMENTS  AND RISK
FACTORS."

OVERVIEW

     Brilliant  Digital  Entertainment,  Inc. is a developer and  distributor of
rich media advertising  technologies and through its Altnet  subsidiary,  secure
peer-to-peer  solutions.  We  commercialize  our  advertising  technology in two
primary ways: (i) we license our rich media Brilliant Banner  advertising server
technologies  to web sites to enable the selling and serving of our  proprietary
rich  media  advertising  format,  and (ii) we license  our rich  media  content
authoring tools - "b3d Studio" and "b3d Studio Pro" - to production  studios and
content  developers  interested in creating content for the Internet,  primarily
rich media Brilliant Banner content.

     We launched  our rich media 3D  advertising  banners - Brilliant  Banners -
into the market to offer advertisers and web sites an alternative to the current
Graphics  Interchange  Format,  or GIF,  banners that are prevalent on web sites
today.  We  license  our  rich  media  ad  serving  technologies,   through  our
wholly-owned  subsidiary  B3D,  Inc.,  to high traffic web sites,  including the
peer-to-peer network of Sharman Networks,  for the serving of Brilliant Banners.
We have  also  introduced  our ad format to third  party ad  serving  companies,
making our technologies  available for them to commence selling and serving this
new rich media ad format.

     In February 2002, we formed Altnet, Inc. to create a private,  peer-to-peer
network  utilizing  existing,  proven  technology to allow Altnet's users to (i)
securely and efficiently  distribute digital files,  propagated solely by Altnet
on behalf of its clients,  from one end user to another,  and (ii)  leverage the
processing,  storage and distribution power of a peer-to-peer  network comprised
of tens of millions of users.  Peer-to-peer computing is the sharing of computer
resources and services by direct  exchange  between  computer  systems,  and not
through  a central  server.  Peer-to-peer  computing  applications  include  the
exchange of digital files and


                                       11


<PAGE>


other  information,  processing cycles (the cycles by which data is processed in
the central processing unit of a computer),  cache storage (temporary storage of
files  in  the  central  processing  unit  of a  computer),  and  disk  storage.
Peer-to-peer  computing takes advantage of existing desktop  computing power and
networking  connectivity,  allowing  users to  access  the  collective  power of
individual computers to benefit the entire enterprise.

     We have initially  commercialized  Altnet by propagating  authorized  files
from the secure Altnet  peer-to-peer  system for display in, and download  from,
the search  results  section  inside the KaZaA  Media  Desktop.  The KaZaA Media
Desktop,  owned and  operated  by Sharman  Networks,  currently  is the  leading
peer-to-peer  file sharing system,  with an average of approximately 3.5 million
users at any given time  sharing  media files.  We have entered into  agreements
with  owners  of  proprietary  media  content,  such as music,  movie  trailers,
computer  games,  and software  products,  that permit us to display  authorized
files to end users in  response to the end user's  search  request (we call this
TopSearch).  Pursuant to our agreement with Sharman Networks, we currently offer
our  customers  (the owners of media  files) the ability to display  their media
files to the millions of users of the KaZaA Media Desktop, and we facilitate the
secure delivery of these files from the Altnet peer-to-peer system to users upon
request in  accordance  with  parameters,  including  price,  set by the content
owner,  to the extent the  content  owner  desires to offer its media  files for
sale.  To protect the content  owner's files  against  infringement,  we license
commercially  available digital rights management  ("DRM") technology and "wrap"
files  propagated  on the network  with the DRM.  We charge the content  owner a
placement  fee or fee per  download,  or we share  with the  content  owner  any
revenue  generated  from the sale of the file to an end user.  We have  recently
tested and commercially launched a micro-payment processing system, which allows
for the individual sale of digital content at any price point,  including prices
well below $1.00.

     We intend to further  commercialize Altnet through licensing agreements for
Altnet's  three  main  services:  Network  Services,   Distributed  Storage  and
Distributed Processing.

     In  2001,  we  substantially   reduced  our  internal  production  and  web
distribution of episodic  animations,  called  MultipathTM  Movies, and animated
music  videos,  in order to  reduce  our costs  and our cash  requirements.  The
reduction in our content production and syndication activities has allowed us to
focus our efforts and allocate  our  resources  to the further  development  and
exploitation of our advertising  and authoring tools  businesses,  and to pursue
the development of our Altnet subsidiary.

     In August 2002,  we engaged  Europlay  Capital  Advisors,  LLC ("ECA"),  an
entity in which Mark Dyne, our Chairman,  is a principal  owner, for a period of
12 months to assist in business development  activities primarily for Altnet. We
will remit  $10,000 per month to ECA as a retainer  fee.  This retainer fee will
accrue  until such time as we  recognize  at least Two  Hundred  Fifty  Thousand
Dollars ($250,000) in revenues (determined in accordance with generally accepted
accounting  principles) in two consecutive  calendar months.  Additionally,  ECA
will be  eligible  to receive a  commission  with  respect  to any net  receipts
recognized by us resulting from ECA's direct efforts.  Such commission  shall be
calculated as a percentage of net receipts  calculated on a cumulative  basis as
follows:  12.5% of net  receipts up to $20  million;  and 15% of net receipts in
excess of $20 million.


                                       12


<PAGE>


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



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

RESULTS OF OPERATIONS

     REVENUES.  Production  fees are paid to us by customers in exchange for our
development  of animated  content,  including  banner ads,  in  accordance  with
customer  specifications.  The development  agreements generally specify certain
"milestones" which must be achieved  throughout the production process. As these
milestones  are  achieved,  we  recognize  the  portion of the  development  fee
allocated to each milestone.

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

     Advertising  revenues,  which  are  revenues  earned  from the  placing  of
Internet  advertising  on third party web sites,  are  recognized  on a pro rata
basis as the advertising  commitment is fulfilled.  Ad server licensing revenues
are  recognized  when we invoice the licensee,  which  usually  occurs after the
terms of the advertising campaign insertion order are fulfilled.

     Revenues  decreased 12% from $1,439,000 for the nine months ended September
30, 2001 to $1,269,000 for the nine months ended September 30, 2002.  During the
nine months ended September 30, 2002, our primary source of revenue was from our
distribution and


                                       13


<PAGE>


technology  agreements with e-New Media,  which  generated  $688,000 in revenue.
Internet Fuel, an agent for placement of Internet advertising, provided revenues
of $209,000 while Sharman Networks  generated  revenues of $154,000 as part of a
revenue sharing  agreement for advertising  deals brokered by us. We also earned
$79,000 in advertising  revenues from Winstar  Interactive,  an advertising  rep
firm. In 2001,  e-New Media  generated  $688,000,  while Island Def Jam produced
$250,000 related to web video production fees and Warner Bros.  Online generated
$240,000 of production and advertising  revenue. We also earned $100,000 from an
advertising  agreement with  Infogrames in 2001. The decrease in revenues in the
2002 period is due primarily to a reduction in revenues  from the  production of
animated music videos  following our closure of Digital Hip Hop in November 2001
and the  discontinuation  of production of our Superman series with Warner Bros.
Online.  This reduction was partially  offset by the increase in advertising and
other revenue from Internet Fuel, Winstar Interactive and Sharman Networks.

     COST OF REVENUES.  Cost of revenues consists  primarily of the amortization
of licensing  royalties payable to third parties and the direct costs associated
with  content  production  and  animation  design.  Cost of  revenues  decreased
significantly  from  $542,000  for the nine months ended  September  30, 2001 to
$158,000  for the nine months  ended  September  30,  2002.  This  represents  a
decrease of $384,000,  or 71%,  which is  primarily  due to the  termination  of
production  of content  for Warner  Bros.  Online and the closure of Digital Hip
Hop.  Additionally there was a decrease in royalty expense, from $79,000 in 2001
to $59,000 in 2002,  as two of our  licensing  agreements  were fully  amortized
during 2001.

     SALES AND MARKETING.  Sales and marketing expenses were reduced by 54% from
$564,000 for the nine months ended  September  30, 2001 to $258,000 for the nine
months ended September 30, 2002. In the first half of 2001, we incurred $426,000
in expense for warrants  issued in connection  with our  agreement  with Yahoo!,
which was fully  amortized  during  2001.  The  decrease  in warrant  expense is
partially offset by an increase in Internet bandwidth  expense,  from $34,000 in
2001 to $124,000 in 2002. Our bandwidth  expense  increased due to our launch of
Altnet  whereby  we  hosted  some  files   propagated  on  the  Altnet  network.
Additionally,  in the nine months ended September 30, 2002, we incurred $129,000
in fees paid to sales  consultants  primarily  in  connection  with our  initial
marketing efforts for Altnet.

     GENERAL AND ADMINISTRATIVE.  General and administrative  expenses primarily
include salaries and benefits of management and administrative personnel,  rent,
insurance  costs and  professional  fees.  General and  administrative  expenses
decreased  $981,000 or 28% from  $3,505,000 for the nine months ended  September
30, 2001 to $2,524,000 for the nine months ended September 30, 2002.

     The over-all  decrease is a composite of the U.S office cutting expenses by
$939,000 and the Australian  office cutting expenses by $187,000.  Additionally,
due to the  closure  of  Digital  Hip Hop,  expenses  were  further  reduced  by
$532,000.  This  was  offset  by the  addition  of  general  and  administrative
expenses,  including legal and consulting fees related to the  establishment and
launch of Altnet,  of $675,000.  This  decrease in the U.S.  office is primarily
attributable to a decrease in salaries and employee  benefits of $389,000 due to
a reduction  in  headcount  in the Los Angeles  office,  a decrease in insurance
costs of $81,000,  a reduction in the rent expense of $41,000,  plus a reduction
of $41,000 in travel costs. Expenses were additionally  decreased by $532,000 by
the closure of the Digital Hip Hop office in Los Angeles, of which $270,000 was


                                       14


<PAGE>


attributable to payroll costs. With the commencement of operations of our Altnet
peer-to-peer  subsidiary,  other consulting and  professional  fees increased by
$125,000 in Los  Angeles.  In  Australia,  a cut in the  production  space and a
reduction in the headcount caused a decrease in general and administrative costs
of $187,000.  The overall  decrease in general and  administrative  expenses was
partially offset by a one-time, non-cash expense of $279,000 that we incurred in
connection with options and warrants issued for consulting  services,  primarily
related to the  launch of  Altnet,  during  the 2002  period.  Additionally,  we
incurred $10,000 of consulting  expenses in the third quarter of 2002 related to
the engagement of ECA.

     RESEARCH  AND  DEVELOPMENT.   Research  and  development  expenses  include
salaries and benefits of personnel as well as payments to third party developers
attributable to the research and development of software products, including the
software  used by Altnet.  Research and  development  costs also  include  costs
associated with creating our software tools used to develop 3D animated  content
for banner ads and Internet web site  development  costs.  These costs decreased
87% from $1,362,000 for the nine months ended September 30, 2001 to $182,000 for
the nine months ended September 30, 2002 primarily due to a decrease in web site
development  costs,  research  and  development  personnel  and  overhead  costs
associated  with  research and  development.  We decreased  the headcount of our
research and development  personnel in our Sydney,  Australia office during 2001
from 53 employees to 7 employees at September 30, 2002.

     DEPRECIATION AND AMORTIZATION. Depreciation expense relates to depreciation
of fixed assets such as computer  equipment and cabling,  furniture and fixtures
and  leasehold  improvements.  These  fixed  assets are  depreciated  over their
estimated  useful  lives  (up to five  years)  using the  straight-line  method.
Depreciation  expense  decreased  77% from  $235,000  for the nine months  ended
September 30, 2001 to $54,000 for the nine months ended  September 30, 2002. The
decrease is attributable to the full  amortization of certain fixed assets prior
to the nine months  ended  September  30,  2002 and the  disposal of other fixed
assets in connection with the closing of office space in Los Angeles and Sydney.

     OTHER INCOME AND EXPENSE. Other income and expense includes interest income
and interest expense and debt discount on capital financing, gains and losses on
foreign exchange  transactions,  and export  development  grants paid to our now
closed  subsidiary,  Brilliant  Interactive  Ideas Pty.  Ltd., by the Australian
Trade  Commission  for its  participation  in certain export  activities.  Other
income and expense  decreased  from a loss of $117,000 for the nine months ended
September 30, 2001 to a loss of $2,667,000  for the nine months ended  September
30, 2002. The loss is due to a non-cash debt discount  expense of $2,355,000 and
accrued  interest  expense of $224,000  incurred in connection  with our sale of
$3,014,150 in principal amount of convertible  promissory notes in 2001.  During
the remaining quarter of 2002, we will incur an additional  $520,000 in non-cash
debt discount expense in connection with this financing transaction.  See Note 5
for  additional  information.  We have  incurred  $57,000  in  interest  expense
pertaining to several  licensing  agreements  and a note.  During the first nine
months of 2001,  we earned  $56,000 for the trade export grant and  recognized a
$44,000 gain on foreign exchange transactions.

     NET GAIN ON DISPOSAL OF  DISCONTINUED  OPERATIONS.  The Auction Channel has
been accounted for as a discontinued  operation pursuant to Management's  formal
adoption on December  31, 2000 of a plan to dissolve  the  business  unit. A net
gain of $313,000 was


                                       15


<PAGE>


recognized  for the nine months ended  September 30, 2001. The net assets of The
Auction  Channel  were sold in the second  quarter of 2001 and the  company  was
subsequently dissolved.

LIQUIDITY, CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

     As  of  September  30,  2002,  our  cash  and  cash   equivalents   totaled
approximately  $785,000.  This is a net  increase  of  $600,000  as  compared to
December 31, 2001. The increase is due to debt and equity financing transactions
consummated  during  the  nine  months  ended  September  30,  2002,  offset  by
continuing losses from operations.

     Cash flows from operating,  financing and investing activities for the nine
months ended September 30, 2002 and 2001 are summarized in the following table:

     ACTIVITY:                                   2002              2001
     --------                                    ----              ----

     Continuing Operations ............      $(2,037,000)      $(4,498,000)
     Discontinuing Operations .........      $      --         $  (301,000)
     Investing ........................      $    (7,000)      $    (1,000)
     Financing ........................      $ 2,620,000       $ 2,284,000

     Net cash of $2,037,000 used in operating  activities during the nine months
ended  September  30,  2002  was  primarily  attributable  to a  net  loss  from
operations of $4,614,000.  This is compared to a net use of cash during the nine
months ended  September  30, 2001 of  $4,498,000  attributable  to a net loss of
$4,885,000  and  an  additional  use  of  cash  of  $301,000   attributable   to
discontinued operations.

     Net cash used to purchase computer equipment amounted to $7,000 in the nine
months ended September 30, 2002.

     We are  required  as of  September  30,  2002 to make  minimum  payments of
$37,000 under various licensing agreements.

     At September 30, 2002, we had rental commitments for our office facility of
$28,000  and one  promissory  note for the  financing  of office  furniture  and
computer  equipment  in the  amount  of  $33,000  over  the  next 2  years.  Our
contractual obligations are as follows:

             CONTRACTUAL                              LESS THAN       1-3
             OBLIGATIONS                 TOTAL         1 YEAR        YEARS
             -----------                 -----         ------        -----

     Capital Lease ..............       $33,000       $11,000       $22,000
     Operating Lease ............       $28,000       $21,000       $ 7,000


     In March 2002, we sold an aggregate of 6,051,437 shares of common stock and
warrants to purchase up to an aggregate of 10,758,110  shares of common stock in
a private placement for aggregate proceeds to us of $800,000.  In April 2002, we
sold an additional  2,276,045 shares of common stock and warrants to purchase up
to an aggregate of 4,145,921 shares common stock for aggregate proceeds to us of
$450,000. In August 2002, we sold an aggregate of 7,123,836


                                       16


<PAGE>


shares of common stock and warrants to purchase up to an aggregate of 12,664,597
shares  common  stock in a private  placement  for  aggregate  proceeds to us of
$1,070,000.  Markev Services,  LLC, owned by Mark Dyne, our Chairman,  and Kevin
Bermeister, a director and our Chief Executive Officer and President, and Harris
Toibb, a significant stockholder of the Company, purchased securities in some of
these  financing  transactions.  See Note 2 to Notes to  Consolidated  Financial
Statements.

     Our  operations  generated  negative cash flow during the nine months ended
September 30, 2001 and 2002, and we expect a significant  use of cash during the
remaining  months of the 2002 fiscal year as we continue to develop the business
opportunity for Altnet, as well as continue to develop our software and continue
our  marketing  efforts for our 3D rich media  banners  ads. We  anticipate  our
current  cash  reserves,  plus our  expected  generation  of cash from  existing
operations,  will be sufficient to fund our  anticipated  expenditures  into the
first quarter of fiscal 2003. Consequently, we will require additional equity or
debt financing commencing in the first quarter of 2003, the amount and timing of
which will depend in large part on our spending  program.  Our recent financings
have been significantly dilutive to our stockholders and if additional funds are
raised  through  the  issuance of equity or  convertible  debt  securities,  our
stockholders may experience significant additional dilution.  Furthermore, there
can be no assurance that  additional  financing will be available when needed or
that  if  available,   such  financing  will  include  terms  favorable  to  our
stockholders  or us. If such  financing is not available when required or is not
available  on  acceptable  terms,  we may be unable to develop  or  enhance  our
products and services,  take advantage of business  opportunities  or respond to
competitive pressures,  any of which could have a material adverse effect on our
business,  financial condition and results of operations,  and would most likely
result in our  having to file for  bankruptcy  protection  under the  Bankruptcy
Code.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming  that we will  continue  as a going  concern,  which  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business.  The carrying  amounts of assets and  liabilities  presented in the
financial  statements  do not  purport to  represent  realizable  or  settlement
values.  The report of our  Independent  Certified  Public  Accountants  for the
December  31,  2001  financial  statements  included  an  explanatory  paragraph
expressing substantial doubt about our ability to continue as a going concern.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001,  the Financial  Accounting  Standards  Board  finalized  FASB
Statements No. 141, BUSINESS  COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND
OTHER  INTANGIBLE  ASSETS (SFAS 142).  SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business  combinations  initiated  after June 30, 2001.  SFAS 141
also requires that we recognize  acquired  intangible assets apart from goodwill
if the acquired intangible assets meet certain criteria. SFAS 141 applies to all
business  combinations  initiated after June 30, 2001 and for purchase  business
combinations  completed on or after July 1, 2001.  It also requires  that,  upon
adoption of SFAS 142, we reclassify  the carrying  amounts of intangible  assets
and goodwill based on the criteria in SFAS 141.


                                       17


<PAGE>


     SFAS 142 requires,  among other things,  that companies no longer  amortize
goodwill,  but instead  test  goodwill  for  impairment  at least  annually.  In
addition, SFAS 142 requires that we identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the useful lives of
other  existing   recognized   intangible  assets,  and  cease  amortization  of
intangible  assets with an indefinite  useful life. An intangible  asset with an
indefinite  useful life should be tested for  impairment in accordance  with the
guidance  in SFAS 142.  SFAS 142 is  required  to be  applied  in  fiscal  years
beginning  after December 15, 2001 to all goodwill and other  intangible  assets
recognized  at  that  date,  regardless  of when  those  assets  were  initially
recognized.  SFAS 142 requires us to complete a transitional goodwill impairment
test nine months from the date of adoption. We are also required to reassess the
useful lives of other  intangible  assets within the first interim quarter after
adoption of SFAS 142.

     In  August  2001,  the FASB  issued  SFAS No.  143,  "Accounting  for Asset
Retirement Obligations". SFAS No. 143 requires the fair value of a liability for
an asset  retirement  obligation  to be  recognized in the period in which it is
incurred  if a  reasonable  estimate of fair value can be made.  The  associated
asset  retirement  costs are  capitalized as part of the carrying  amount of the
long-lived  asset.  SFAS No. 143 is effective for fiscal years  beginning  after
June 15, 2002. We believe the adoption of this  Statement  will have no material
impact on our financial statements.

     In  October  2001,  the FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets".  SFASB 144 requires  that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell,  whether  reported in  continuing  operations  or in  discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable  value or include  amounts  for  operating  losses  that have not yet
occurred.  SFASB 144 is effective  for  financial  statements  issued for fiscal
years  beginning  after  December  15,  2001 and,  generally,  are to be applied
prospectively.  We believe the adoption of this  Statement will have no material
impact on our financial statements.

     In April 2002, the FASB issued SFAS No. 145,  Rescission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections.  This statement  eliminates the current  requirement that gains and
losses on debt  extinguishment  must be classified as extraordinary items in the
income  statement.  Instead,  such  gains  and  losses  will  be  classified  as
extraordinary  items only if they are deemed to be unusual  and  infrequent,  in
accordance with the current GAAP criteria for extraordinary  classification.  In
addition,  SFAS 145 eliminates an inconsistency in lease accounting by requiring
that  modifications  of  capital  leases  that  result  in  reclassification  as
operating  leases be accounted for  consistent  with  sale-leaseback  accounting
rules.  The  statement  also  contains  other   nonsubstantive   corrections  to
authoritative accounting literature.  The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for  transactions  occurring after
May 15, 2002.  Adoption of this standard  will not have any immediate  effect on
our consolidated financial statements.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal  Activities,  which addresses accounting for restructuring
and  similar  costs.  SFAS No.  146  supersedes  previous  accounting  guidance,
principally  Emerging Issues Task Force (EITF) Issue No. 94-3. We will adopt the
provisions of SFAS No. 146 for restructuring


                                       18


<PAGE>


activities  initiated  after  December 31, 2002.  SFAS No. 146 requires that the
liability for costs  associated with an exit or disposal  activity be recognized
when the  liability  is incurred.  Under EITF No. 94-3, a liability  for an exit
cost was recognized at the date of a company's  commitment to an exit plan. SFAS
No. 146 also  establishes  that the liability  should  initially be measured and
recorded  at fair  value.  Accordingly,  SFAS No.  146 may  affect the timing of
recognizing  future  restructuring  costs  as  well  as the  amount  recognized.
Cautionary Statements and Risk Factors.

CAUTIONARY STATEMENTS AND RISK FACTORS

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

     IF WE ARE UNABLE TO RAISE  ADDITIONAL  FUNDS,  WE MAY BE  REQUIRED TO DELAY
IMPLEMENTATION  OF OUR BUSINESS PLAN,  REDUCE OVERHEAD  SIGNIFICANTLY OR SUSPEND
OPERATIONS. We currently have a number of obligations that we are unable to meet
without  generating  additional  revenues or raising additional  capital.  If we
cannot  generate  additional  revenues or raise  additional  capital in the near
future, we may become insolvent.  As of September 30, 2002, our cash balance was
approximately  $785,000 and our outstanding  accounts payable,  accrued expenses
and  current  notes  payable  totaled  $1,018,000,  not  including  the  capital
financing notes, which have a convertible feature.  Historically, we have funded
our capital  requirements with debt and equity financing.  Our ability to obtain
additional equity or debt financing depends on a number of factors including our
financial  performance and the overall conditions in our industry. If we are not
able to raise  additional  financing or if such  financing  is not  available on
acceptable  terms, we may liquidate  assets,  seek or be forced into bankruptcy,
and/or  continue  operations  but suffer  material  harm to our  operations  and
financial condition.  These measures could have a material adverse affect on our
ability to continue as a going concern.

     WE HAVE A HISTORY OF  LOSSES,  A  NEGATIVE  NET WORTH AND MAY NEVER  ATTAIN
PROFITABILITY.  We have a  limited  operating  history  and  have  not  attained
profitability. Since inception, we have incurred significant losses and negative
cash flow, and as of September 30, 2002 we had an  accumulated  deficit of $59.2
million.  Additionally,  as of the date of this report, our current  liabilities
exceed our current  assets.  We have not  achieved  profitability  and expect to
continue  to  incur  operating  losses  for the  foreseeable  future  as we fund
operating and capital  expenditures in the areas of software tools  development,
brand promotion, sales and marketing,  administration,  deployment of our Altnet
peer-to-peer  network and operating  infrastructure.  Our business model assumes
that consumers and advertisers  will be attracted to our rich media  advertising
formats  (Brilliant  Banners),  and that  animators and those who produce banner
advertisements will use our b3d tools and technology in the development of other
b3d-produced content. Our business model also assumes that a significant portion
of our future  revenues will be derived from our Altnet  peer-to-peer  business,
which has only  recently  become  operational.  This  business  model is not yet
proven  and  we  cannot  assure  you  that  we  will  ever  achieve  or  sustain
profitability or that our operating losses will not increase in the future or be
inconsistent  with the expectations of the public market.  Primarily as a result
of our continued losses, our independent public accountants modified the opinion
on our December 31, 2001 financial statements to include an


                                       19


<PAGE>


explanatory paragraph wherein they expressed substantial doubt about our ability
to continue as a going concern.

     OUR RECENT CAPITAL RAISING EFFORTS HAVE RESULTED IN SUBSTANTIAL DILUTION TO
OUR  STOCKHOLDERS  AND OUR FUTURE  CAPITAL NEEDS WOULD  INCREASE THIS  DILUTION.
During 2001, we raised $3.0 million  through the sale of convertible  promissory
notes and common stock purchase warrants. The promissory notes, which now mature
on December  31, 2003,  and accrued  interest may be converted by the holders at
any time into a number of shares of our common stock  determined by dividing the
amount due under the notes,  including interest,  by a price equal to the lesser
of $0.20 and the lowest 5 day volume weighted  average price of our common stock
as reported by the  American  Stock  Exchange at any time during the term of the
notes.  At October 30, 2002,  the principal and interest  outstanding  under the
Notes could be converted by the holders into 28,169,269  shares of common stock,
which  would  represent  46.8%  of  our  outstanding  common  stock  immediately
following the conversion.  The warrants attached to the Notes have an expiration
date of May 23, 2004 and entitle the holders to purchase up to an  aggregate  of
69,768,745  shares of our Common Stock at an exercise  price of  $0.1353375  per
share on 44,542,717  shares,  and at an exercise  price of $0.2091 on 25,226,028
shares.  The  exercise  of the  warrants  would  increase  the  number of shares
outstanding  and  result  in  further   dilution  to  our  other   stockholders.
Additionally,  during the first  nine  months of 2002,  we raised an  additional
$2,320,000  through the sale of 15,451,318  shares of common stock at an average
price  per  share of $0.15,  and in  connection  therewith  issued  warrants  to
purchase  up to an  additional  27,568,627  shares of common  stock at  exercise
prices ranging from $0.148725 to $0.28125 per share.  We anticipate  that during
the first  quarter of 2003,  we will need to raise  additional  capital,  as our
current  operations do not generate  positive cash flow. As such, any additional
capital raising efforts would cause further dilution to stockholders.

     The following table illustrates our  capitalization as of October 30, 2002,
and identifies  the number of shares issued and  outstanding as of such date, as
well as the number of shares that may be issued in the future upon conversion of
outstanding convertible promissory notes and exercise of outstanding options and
warrants:

                                                                     PERCENTAGE
                                                       SHARES OF      OF FULLY
                                                        COMMON         DILUTED
SECURITY                                                 STOCK         SHARES
------------------------------------------------      -----------      ------

Outstanding Common Stock .......................       32,014,978       26.5%
Convertible Promissory Notes, with
   accrued interest ............................       34,494,092       28.6%
Outstanding Warrants(1) ........................       47,708,184       39.5%
Outstanding Options ............................        6,459,000        5.4%
                                                      -----------      -----
  Fully Diluted Shares of Common Stock(2) ......      120,676,254      100.0%
------------------

(1)  For  purposes  of this  table,  we have  only  included  warrants  that are
     "in-the-money"  (the  exercise  price of the warrants is below the price of
     our common stock),  and the number of shares of common stock underlying the
     outstanding  warrants has been  calculated on a "cashless"  exercise basis,
     whereby  the  holder of each  warrant  receives  upon  exercise a number of
     shares of common  stock  with a value  equal to (i) the total  value of the
     shares underlying the warrants less (ii) the aggregate


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<PAGE>


     exercise  price of the  warrants,  and is  calculated  based on the closing
     sales price of our common stock on the American  Stock  Exchange on October
     30, 2002, which was $0.32.

(2)  This number  excludes  (i)  13,495,375  shares that have been  reserved for
     issuance  under our 1996 Stock  Option Plan that were not the subject of an
     outstanding  stock  option or other  award at October  30,  2002,  and (ii)
     70,035 shares  underlying  warrants that have exercise  prices ranging from
     $0.3216 to $0.75 per share, and thus not "in-the-money."

------------------

     IF WE BECOME INSOLVENT, WE WILL BE IN DEFAULT UNDER OUR SECURED CONVERTIBLE
PROMISSORY  NOTES,  WHICH COULD RESULT IN OUR OBLIGATION TO PAY  IMMEDIATELY ALL
AMOUNTS THEN OUTSTANDING  UNDER THE NOTES. If we generally do not pay, or become
unable to pay,  our debts as such debts  become due, we will  default  under our
outstanding  Secured  Convertible  Promissory Notes, in the aggregate  principal
amount of $3.0 million.  If a default occurs, all amounts owed to the holders of
the notes would  immediately  become due and  payable.  If the debt  becomes due
before its maturity in December 2003, we likely will not have  sufficient  funds
to repay the  indebtedness,  which  will  entitle  the  holders  of the notes to
exercise all of their rights and remedies,  including  foreclosure on all of our
assets which we pledged as collateral to secure repayment of the debt.

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

     ALTNET'S MICRO-PAYMENT PROCESSING SYSTEM IS RELIANT UPON THE TECHNOLOGY AND
SYSTEMS OF THIRD PARTY VENDORS THAT PROVIDE THEIR SERVICES TO ALTNET. We use the
technology  and services of third parties to process  payment for the individual
sale of digital  content  over our Altnet  peer-to-peer  system.  The ability to
process  payment for  individual  sales at price points well below $1.00 (better
known as micro payments) is integral to our ability to commercialize  the secure
distribution to and sale of our customers' digital content to millions of users.
Our ability to commercialize Altnet could be materially adversely affected if we
do not maintain our  relationships  with the vendors that provide these services
on our behalf.  Additionally,  a disruption in these vendors' services, problems
with their technology,  or any other matters that interfere with their provision
of services to us could disrupt our ability to collect fees for the


                                       21


<PAGE>


digital content we distribute,  which would have a materially  adverse affect on
our operations and our relationship with our customers.

     OUR BUSINESS MODEL CONTEMPLATES  RECEIVING A PORTION OF OUR FUTURE REVENUES
FROM RICH MEDIA INTERNET ADVERTISEMENTS  DEVELOPED AND SERVED USING OUR SOFTWARE
TOOLS AND FROM INTERNET ADVERTISING SERVICES.  INTERNET ADVERTISING IS DEPENDENT
ON THE ECONOMIC PROSPECTS OF ADVERTISERS AND THE ECONOMY IN GENERAL AND RECENTLY
HAS EXPERIENCED A SIGNIFICANT  DECLINE.  A CONTINUED DECREASE IN EXPENDITURES BY
ADVERTISERS  OR A PROLONGED  DOWNTURN  IN THE ECONOMY  COULD CAUSE US TO FAIL TO
ACHIEVE OUR REVENUE  PROJECTIONS.  We are focusing a portion of our resources on
generating  revenues  from the sale of our b3d  tools for the  creation  of rich
media Internet  advertisements and from the sale of technologies and services to
Web publishers,  third party advertising  representation firms,  advertisers and
agencies.   In  recent  quarters,   the  market  for  Internet  advertising  has
experienced lower demand,  lower prices for  advertisements and the reduction of
marketing and advertising  budgets. As a consequence,  expenditures for Internet
advertisements  have decreased.  We cannot be certain that future decreases will
not occur and that spending on Internet  advertisement will return to historical
levels.  A continued  decline in the economic  prospects of  advertisers  or the
economy in general  could  cause us to fail to achieve  our  advertising-related
revenue projections.

     WE WILL NOT BE ABLE TO GENERATE REVENUES FROM OUR BRILLIANT BANNERS IF THEY
DO NOT ACHIEVE MARKET ACCEPTANCE. The success of our Brilliant Banner rich media
ad format and our ability to generate revenues through sale and serving of these
advertisements  will be  determined  by consumer  reaction  and  acceptance.  To
generate revenues, we must develop advertisements that appeal to the advertising
community and the consumer, which is unpredictable.  Additionally, our Brilliant
Banner  advertisements face competition from other online advertising  companies
like Unicast, Eyeblaster and Viewpoint. Other factors that influence our ability
to generate revenues from our Brilliant Banners include:

     o    Acceptance of the Brilliant Banner advertising format by web sites;

     o    Performance   of  the   Brilliant   Banner  versus  other  rich  media
          advertising formats and traditional 2D advertisements; and

     o    Our ability to broadly  disseminate  our Digital  Projector,  which is
          necessary to view our Brilliant Banners.

     OUR FAILURE TO MAINTAIN STRATEGIC  RELATIONSHIPS WITH DISTRIBUTION PARTNERS
COULD  REDUCE THE NUMBER OF DIGITAL  PROJECTORS  WE ARE ABLE TO  DISSEMINATE  TO
CONSUMERS,  WHICH  WOULD  REDUCE  THE  NUMBER OF USERS THAT ARE ABLE TO VIEW OUR
MEDIA CONTENT,  DECREASE THE VALUE OF OUR BRILLIANT  BANNERS TO ADVERTISERS  AND
LIMIT THE NUMBER OF USERS FOR OUR ALTNET  PEER-TO-PEER  BUSINESS.  We distribute
our Digital  Projector  and the software  necessary to create and run our Altnet
peer-to-peer  business  primarily  by bundling it with Sharman  Networks'  KaZaA
Media Desktop.  We rely on computer users' demand for the KaZaA Media Desktop to
increase the installed base of our (1) Digital Projector,  which is necessary to
view  b3d-produced  content  such  as our  Brilliant  Banners,  and  (2)  Altnet
software,  which is  necessary  to  connect  users to our  private  peer-to-peer
network.  Our business,  results of operations and financial  condition could be
materially adversely affected if we do not maintain our distribution


                                       22


<PAGE>


relationship  with Sharman Networks on acceptable terms or if this  relationship
does not achieve the projected  distribution of our Digital Projector and Altnet
software.  Additionally,  a disruption  in the  distribution  of the KaZaA Media
Desktop or a  decrease  in demand for the  product  by users  would  necessarily
impact (1) the future  distribution of our technology,  and (2) revenues derived
from  advertisers  that  were  introduced  by us to  Sharman  Networks.  Sharman
Networks, the KaZaA Media Desktop, and other peer-to-peer software products, are
currently the subject of a lawsuit, METRO-GOLDWYN-MAYER STUDIOS, INC. ET. AL. V.
GROKSTER,  LTD.  ET.  AL.,  filed in the United  States  District  Court for the
Central District of California (Western Division) by twenty-eight  entertainment
companies   claiming  that,   among  other  things,   the  KaZaA  Media  Desktop
facilitates,  contributes to and encourages copyright infringement.  On November
18, 2001, there was an additional  complaint  filed,  LIEBER ET. AL. V. CONSUMER
EMPOWERMENT  B.V. ET. AL. To the extent that Sharman  Networks is precluded from
distributing  the KaZaA Media Desktop as a result of this  litigation,  it would
prevent  the  further   distribution   of  the  Digital   Projector  and  Altnet
peer-to-peer software with the KaZaA product which could have a material adverse
affect on our business and financial condition.

     OUR STOCK  PRICE MAY  DECLINE  SIGNIFICANTLY  IF WE ARE  DELISTED  FROM THE
AMERICAN STOCK  EXCHANGE.  Our common stock  currently is quoted on the American
Stock Exchange.  For continued inclusion on the American Stock Exchange, we must
meet certain  tests,  including  maintaining  a sales price for our common stock
above  $1.00 per  share,  and net  tangible  assets of at least $6  million.  We
currently are not in compliance  with both the bid price and net tangible assets
requirements.  Specifically, we are not in compliance with the following listing
requirements as set forth in the AMEX COMPANY GUIDE:

          o    Section  1003  (a)(i)  with  shareholders'  equity  of less  than
               $2,000,000  and  losses  from  continuing  operations  and/or net
               losses in two of our three most recent fiscal years;
          o    Section  1003  (a)(ii)  with  shareholders'  equity  of less than
               $4,000,000  and  losses  from  continuing  operations  and/or net
               losses in three of our four most recent fiscal years;
          o    Section  1003  (a)(iii)  with  shareholders'  equity of less than
               $6,000,000  and  losses  from  continuing  operations  and/or net
               losses in our five most recent fiscal years; and
          o    Section 1003 (a)(iv) in that we have  sustained  losses which are
               so  substantial  in  relation to our  overall  operations  or our
               existing  financial  resources,  or our  financial  condition has
               become so impaired that it appears  questionable,  in the opinion
               of the  exchange,  as to  whether  we will  be  able to  continue
               operations and/or meet our obligations as they mature.

     We were  afforded the  opportunity  to submit a plan of  compliance  to the
exchange,  which we did on  April  30,  2002.  On June 19,  2002,  the  exchange
notified us that it accepted our plan of compliance and granted us an extension,
the length of which is at the discretion of the exchange,  to regain  compliance
with the continued listing standards.  We are subject to periodic reviews by the
exchange staff during the extension period.


                                       23


<PAGE>


     Failure to make progress  consistent with the plan or to regain  compliance
with the continued  listing  standards by the end of the extension  period could
result in us being  delisted from the American Stock  Exchange.  If this occurs,
trading of our common stock may be conducted on (i) the NASDAQ SmallCap  Market,
if we qualify for listing at that time,  which we currently do not,  (ii) in the
over-the-counter market on the "pink sheets", or (iii) if available,  the NASD's
"Electronic Bulletin Board." In any of those cases, investors could find it more
difficult to buy or sell,  or to obtain  accurate  quotations as to the value of
our common  stock.  The trading price per share of our common stock likely would
be reduced as a result.

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

     WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH MICROSOFT,  REAL NETWORKS AND
OTHER  COMPANIES  IN THE MEDIA  DELIVERY  MARKET.  The market for  software  and
services for the delivery of media over the Internet is constantly  changing and
highly competitive.  Companies such as Microsoft  Corporation and Real Networks,
Inc.  have   substantial   penetration  in  the  media  delivery   market,   and
significantly  greater  resources  than we do. More  companies  are entering the
market for,  and  expending  increasing  resources  to develop,  media  delivery
software and services.  We expect that  competition  will continue to intensify.
Because our b3d content, such as our Brilliant Banners, can only be viewed using
our Digital  Projector,  if we do not achieve a widespread  distribution  of our
media player,  there will not be substantial demand for b3d-produced  content or
our software tools.

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

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


                                       24


<PAGE>


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

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

     o    variations in quarterly operating results;
     o    the gain or loss of significant contracts;
     o    changes in management;
     o    announcements  of  technological  innovations or new products by us or
          our competitors;
     o    recommendations by securities industry analysts;
     o    dilution  to  existing  stockholders  resulting  from the  issuance of
          additional shares of common stock; and
     o    short sales and hedging of our common stock.

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

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

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


                                       25


<PAGE>


     o    the introduction or enhancement of software products and technology by
          us and our competitors;
     o    the use by animators of our toolsets to create b3d-produced content;
     o    the market's acceptance of our 3D Brilliant Banner advertising format;
          and
     o    our ability to operate and expand our Altnet peer-to-peer business.

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

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

     WE WILL NOT BE ABLE TO GENERATE  SIGNIFICANT  REVENUES FROM OUR  TECHNOLOGY
BUSINESS IF OUR B3D TOOLSET DOES NOT ACHIEVE MARKET ACCEPTANCE.  Our b3d toolset
may have programming errors, may be incompatible with other software or hardware
products in the market,  may face slow adoption in the  marketplace and may face
competition from other  toolmakers.  Other factors that influence our ability to
generate revenues from our b3d toolset 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;
     o    our ability to sell advertising and sponsorships for the content;
     o    our ability to increase the installed  base of our Digital  Projector,
          which is necessary to view b3d-produced content;
     o    our b3d  toolset  may  contain  features,  functionality  or  workflow
          conventions that may not be widely accepted by our target audience;
     o    our ability to continue to develop, enhance and deliver the toolset in
          accordance with established milestones; and
     o    the marketplace's reluctance to adopt a new toolset.

     OUR   PROPRIETARY   TECHNOLOGY   MAY  NOT  BE  ADEQUATELY   PROTECTED  FROM
UNAUTHORIZED  USE BY OTHERS,  WHICH  COULD  INCREASE  OUR  LITIGATION  COSTS AND
ADVERSELY  AFFECT OUR SALES.  Our  ability to compete  with other  entertainment
software companies depends in part upon our proprietary technology. Unauthorized
use by others of our proprietary technology could result in


                                       26


<PAGE>


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

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

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


                                       27


<PAGE>


ITEM 3.   CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

     We maintain disclosure  controls and procedures,  which we have designed to
ensure that all material information related to Brilliant Digital Entertainment,
Inc.,  including  our  consolidated  subsidiaries,  is  disclosed  in our public
filings on a regular  basis.  In response  to recent  legislation  and  proposed
regulations,  we reviewed  our internal  control  structure  and our  disclosure
controls and procedures.  We believe our  pre-existing  disclosure  controls and
procedures are adequate to enable us to comply with our disclosure obligations.

     Within  90  days  prior  to the  filing  of  this  report,  members  of our
management,   including  our  Chief  Executive  Officer  and  President,   Kevin
Bermeister,  and Chief  Financial  Officer and Chief Operating  Officer,  Robert
Chmiel,  evaluated  the  effectiveness  of  the  design  and  operation  of  our
disclosure controls and procedures.  Based upon that evaluation,  Mr. Bermeister
and Mr.  Chmiel  concluded  that our  disclosure  controls  and  procedures  are
effective in causing material information to be recorded, processed,  summarized
and reported by our  management on a timely basis and to ensure that the quality
and  timeliness  of our  public  disclosures  comply  with  our  SEC  disclosure
obligations.

CHANGES IN  CONTROLS  AND  PROCEDURES

     There were no significant  changes in the Company's internal controls or in
other factors that could significantly  affect these internal controls after the
date of our most recent evaluation.


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<PAGE>


                                     PART II

                                OTHER INFORMATION

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

     In August 2002,  we sold an  aggregate  of  7,123,836  shares of our common
stock to six investors in a private  placement  for aggregate  proceeds to us of
$1,070,000.  The price per share was $0.1502,  and was based on the market price
of our common stock at the time the investors  committed to purchase the shares.
In  connection  with the offering,  we also issued to the investors  warrants to
purchase up to an aggregate of 12,664,597  shares of common stock at an exercise
prices of $0.168975 per share. The warrants expire on September 3, 2005. Each of
the  investors  in the  transaction  represented  to us that the investor was an
"accredited  investor"  within the meaning of Rule 501 of Regulation D under the
Securities Act of 1933, and that such investor was purchasing the securities for
investment and not in connection with a distribution  thereof.  The issuance and
sale of these  securities  was  exempt  from  the  registration  and  prospectus
delivery  requirements  of the  Securities  Act  pursuant to Section 4(2) of the
Securities Act as a transaction not involving any public offering.

     In August 2002, we issued to SRO Consultants,  Inc. warrants to purchase up
to 150,000  shares of our common stock at an exercise  price of $0.17 per share.
The  warrants  have a  term  of 48  months.  The  warrants  were  issued  to SRO
Consultants,  Inc. in consideration of consulting  services  provided to us. SRO
Consultants,  Inc. represented to us that it was an "accredited investor" within
the meaning of Rule 501 of Regulation D under the  Securities  Act of 1933,  and
that it was purchasing the securities for investment and not in connection  with
a  distribution  thereof.  The issuance and sale of these  securities was exempt
from the registration and prospectus delivery requirements of the Securities Act
pursuant to Section 4(2) of the  Securities  Act as a transaction  not involving
any public offering.



ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits  - The  following  exhibits  are  filed  as part of this
               report:


               10.1  Common Stock  and Warrant  Purchase Agreement  dated August
                     26, 2002, by and among Registrant and Harris Toibb,  Markev
                     Services,  LLC, Ronald Lachman,  David Wilson, Bob Haya and
                     Scott Hergott.
               10.2  Form of Warrant to Purchase  Common  Stock from  August 26,
                     2002 financing.
               10.3  Warrant to Purchase Common  Stock,  dated  August 28, 2002,
                     issued in favor of SRO Consulting, Inc.
               10.4  Letter Agreement, dated August 19, 2002, between Registrant
                     and Europlay Capital Advisors, LLC.
               10.5  Letter  Agreement,  dated October 2, 2002, among Registrant
                     and  the  holders  of  Registrant's   Secured   Convertible
                     Promissory Notes.


                                       29


<PAGE>


               10.6  Form  of  Amendment  Number  One  to  Secured   Convertible
                     Promissory Note dated as of December 19, 2001.
               10.7  Form  of  Amendment  Number  Two  to  Secured   Convertible
                     Promissory Note dated as of May 23, 2001.
               10.8  Form of  Warrant issued in  connection  with  extension  of
                     maturity date of Secured Convertible Promissory Notes.
               10.9  Contractor, Confidential  Information and  Non-Solicitation
                     Agreement,  dated as of February  2002,  between Registrant
                     and Abe Sher.
               99.1  Certificate of  our  Chief  Executive   Officer  and  Chief
                     Financial   Officer   pursuant  to   Section   906  of  the
                     Sarbanes-Oxley Act of 2002.


(b) Reports on Form 8-K:

         None


                                       30


<PAGE>


                                   SIGNATURES

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

                                  BRILLIANT DIGITAL ENTERTAINMENT, INC.


Date: November 14, 2002                  /s/ Robert Chmiel
                                  ---------------------------------------------
                                  By:    Robert Chmiel
                                  Its:   Chief Operating Officer and Chief
                                         Financial Officer (Principal Financial
                                         and Accounting Officer)


                                       31


<PAGE>


                        Certification of CEO Pursuant to
                 Securities Exchange Act Rules 13a-14 and 15d-14
                             as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Kevin Bermeister, certify that:

         1. I have  reviewed this  quarterly  report on Form 10-QSB of Brilliant
Digital Entertainment, Inc.;

         2. Based on my knowledge,  this  quarterly  report does not contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
quarterly report;

         3. Based on my knowledge, the financial statements, and other financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                  a) designed such disclosure  controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this quarterly report is being prepared;

                  b) evaluated the effectiveness of the registrant's  disclosure
controls and  procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

                  c) presented in this quarterly  report our  conclusions  about
the  effectiveness  of the  disclosure  controls  and  procedures  based  on our
evaluation as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

                  a) all significant  deficiencies in the design or operation of
internal  controls  which could  adversely  affect the  registrant's  ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

                  b)  any  fraud,   whether  or  not  material,   that  involves
management or other  employees who have a significant  role in the  registrant's
internal controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this quarterly report whether or not there were significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:    November 14, 2002

                                       /s/ Kevin Bermeister
                                       -----------------------
                                       Kevin Bermeister
                                       Chief Executive Officer


                                       32


<PAGE>


                        Certification of CFO Pursuant to
                 Securities Exchange Act Rules 13a-14 and 15d-14
                             as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert Chmiel, certify that:

         1. I have  reviewed this  quarterly  report on Form 10-QSB of Brilliant
Digital Entertainment, Inc.;

         2. Based on my knowledge,  this  quarterly  report does not contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
quarterly report;

         3. Based on my knowledge, the financial statements, and other financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                  a) designed such disclosure  controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this quarterly report is being prepared;

                  b) evaluated the effectiveness of the registrant's  disclosure
controls and  procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

                  c) presented in this quarterly  report our  conclusions  about
the  effectiveness  of the  disclosure  controls  and  procedures  based  on our
evaluation as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

                  a) all significant  deficiencies in the design or operation of
internal  controls  which could  adversely  affect the  registrant's  ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

                  b)  any  fraud,   whether  or  not  material,   that  involves
management or other  employees who have a significant  role in the  registrant's
internal controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this quarterly report whether or not there were significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:    November 14, 2002

                                       /s/ Robert Chmiel
                                       -----------------------
                                       Robert Chmiel
                                       Chief Financial Officer


                                       33