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 June 30, 1997

[ ]  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) 346-3653
               (Issuer's Telephone Number, Including Area Code)


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

                              Yes X     No 
                                 ----      ---

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:  Common Stock, par value
$0.001, 7,200,001 shares issued and outstanding as of August 11, 1997.

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

Exhibit index is located on page 21.


<PAGE>

<TABLE>
                     BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                     INDEX

<CAPTION>
                                                                     PAGE NO.
<S>                                                                  <C>
PART I    Financial Information                                       3

Item 1.   Financial Statements (unaudited)                            3

          Condensed Consolidated Balance Sheet - June 30, 1997        3

          Condensed Consolidated Statements of Operation - Six months 
          ended June 30, 1997 and l996                                4

          Condensed Consolidated Statements of Cash Flows - Six months 
          ended June 30, 1997 and 1996                                5

          Notes to Consolidated Financial Statements                  6

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

          Risk  Factors                                              10


PART II   Other Information                                          19

Item 4.   Submission of matters to a vote of security holders        19

Item 6.   Exhibits and Reports on Form 8-K                           19

</TABLE>


PAGE 2
<PAGE>

                                    PART I

                             FINANCIAL INFORMATION


ITEM I.  FINANCIAL STATEMENTS

                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEET
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           June 30,
                                                             1997
                                                          ---------
                                                         (UNAUDITED)
<S>                                                      <C>
ASSETS:

Current assets:

  Cash and cash equivalents.........................     $     5,442

  Accounts receivable, net..........................              77

  Accounts receivable from related parties..........              27

  Other assets......................................             105
                                                            --------
Total current assets................................           5,651

Property, plant and equipment, net..................             537

Other assets........................................             273
                                                            --------
Total assets........................................       $   6,461
                                                            ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Accounts payable and accrued expenses.............       $     798

  Notes payable, related party......................              79
                                                            --------
Total current liabilities...........................             877

Stockholders' equity:

  Common Stock......................................               7

  Additional paid-in capital........................          11,321

  Accumulated deficit...............................          (5,714)

  Cumulative translation adjustment.................             (30)
                                                            --------
Total stockholders' equity..........................           5,584
                                                            --------
Total liabilities and stockholders' equity..........       $   6,461
                                                            ========
</TABLE>


                            See accompanying notes.

PAGE 3
<PAGE>

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


<TABLE>
<CAPTION>
                         3 MONTHS       3 MONTHS      6 MONTHS       6 MONTHS
                           ENDED          ENDED         ENDED          ENDED
                          6/30/97        6/30/97       6/30/97        6/30/97
                       -----------    -----------   -----------   -----------
                       (UNAUDITED)    (UNAUDITED)   (UNAUDITED)   (UNAUDITED)

<S>
REVENUE:               <C>            <C>           <C>            <C>

    Total revenues     $       248    $       267   $       322    $      857
                        ----------     ----------    ----------     ---------

COST OF REVENUES AND EXPENSES:

Cost of revenues                10           135             17           271
Sales & marketing              142            93            205           129
General and administrative     459           101            999           206
Research and development       572            30          1,060           131
Depreciation                    66            31            117            56
                        ----------     ----------    ----------     ---------
Total cost of revenues and
  expenses                   1,249           390          2,398           793
                        ----------     ----------    ----------     ---------

Income (loss) from
  operations                (1,001)         (123)        (2,076)           64

OTHER INCOME (EXPENSE):

Export market development
  grant                        154           127            155           124

Gain (loss) on foreign
  exchange                       5            (8)            (5)           (4)

Interest income
  (expense), net                78           (17)           169           (28)
                        ----------     ----------    ----------     ---------
    Total other income
      (expense)                237           102            319            92
                        ----------     ----------    ----------     ---------
Income (loss) before
  income taxes                (764)          (21)        (1,757)          156

Provision for income taxes      (1)           --             (2)
                        ----------     ----------    ----------     ---------
Net income (loss)      $      (765)   $      (21)   $    (1,759)   $      156
                        ==========     =========     ==========     =========

Net income (loss)
  per share            $     (0.11)   $     0.00    $     (0.24)   $     0.03
                        ==========     =========     ==========     =========
Common shares used in 
  computing income 
  (loss) per share           7,200         4,557          7,200         4,557
                        ==========     =========     ==========     =========

</TABLE>



                            See accompanying notes.

PAGE 4
<PAGE>

                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
<TABLE>
<CAPTION>
                                              SIX MONTHS ENDED JUNE 30,
                                    ------------------------------------------
                                       1997                   1996
                                 -----------------      -----------------
                                    (UNAUDITED)            (UNAUDITED)
<S>                             <C>                    <C>
OPERATING ACTIVITIES
Net income (loss)               $           (1,759)    $              156

Adjustments to reconcile net income (loss) to
  the net cash provided by (used in) operating
  activities:
    Depreciation and amortization              258                     56
    Changes in operating assets
      and liabilities:
      Accounts receivable                       --                    259
      Accounts payable and accruals            (76)                    24
      Other assets                             (80)                    --
      Deferred revenue                        (160)                    --
      Other liabilities                         --                     19
                                 -----------------      -----------------
Net cash provided by (used in)
  operating activities                      (1,817)                   514


INVESTING ACTIVITIES
Purchases of equipment                        (331)                   (38)
                                 -----------------      -----------------
Net cash used in investing activities         (331)                   (38)


FINANCING ACTIVITIES
Increases in notes payable                      --                    633
Repayments of notes payable                     --                 (1,146)
                                 -----------------      -----------------
Net cash provided by financing
  activities                                    --                   (513)
                                 -----------------      -----------------

Net increase (decrease) in cash and 
  cash equivalents                          (2,148)                   (37)
Translation adjustments                         (1)                     4
Cash and cash equivalents at beginning
  of period                                  7,591                     86
                                 -----------------      -----------------
Cash and cash equivalents at end of
  Period                        $            5,442     $               53
                                 =================      =================
Supplemental disclosure of cash flow information:
  Cash paid during the period
  for:                          $                      $
       Interest                                 --                     --
                                 =================      =================
       Income taxes             $                3     $               --
                                 =================      =================

</TABLE>



                            See accompanying notes.


PAGE 5
<PAGE>


                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
                                 June 30, 1997
                                  (UNAUDITED)

1.       BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B.  Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.  The accompanying unaudited condensed
consolidated financial statements reflect all adjustments which, in the opinion
of management, are considered necessary for a fair presentation of the
financial position, results of operations, and cashflows for the periods
presented.  The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period.  The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements of Brilliant Digital
Entertainment, Inc. (the "Company") included in the Company's Form 10-KSB for
the transition period from July 1, 1996 to December 31, 1996.  The results for
the three and six months ended June 30, 1996 include the operations of BII
Australia only, while the results for the three and six months ended June 30,
1997 include the operations of the parent company (Brilliant Digital
Entertainment, Inc.), which was incorporated in July 1996, BII Australia and
SAND, which was acquired by the Company in September 1996 (see the Overview
section of Management's Discussions and Analysis of Financial Condition and
Results of Operations).  As a result of the restructuring of the group and the
change in the focus of the business, the results for the three and six months
ended June 30, 1996 are not comparable to those for the three and six months
ended June 30, 1997.

2.       NET INCOME (LOSS) PER SHARE

         Net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding.  Common equivalent shares from
stock options and warrants (using the treasury stock method) have been included
in the computation when dilutive.  Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins and Staff policy, all common and common
equivalent shares issued by the Company at an exercise price below the public
offering price during the twelve-month period prior to the Company's initial
public offering (in November 1996) have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method at an initial public offering price of $5.00 per share for stock options
and warrants).

         In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128").  SFAS No. 128, effective for periods ending after December
15, 1997, revises the computation and disclosure of earnings per share. 
Principal among computation revisions is the replacement of primary earnings
per share with basic earnings per share, which does not consider common stock
equivalents.  In addition, SFAS No. 128 modifies certain dilutive computations
and replaces fully diluted earnings per share with diluted earnings per share. 
Disclosure requirements include, among others, dual presentation of basic and
diluted earnings per share, along with a reconciliation of the elements used in
computing basic and diluted earnings per share.  At this time, the Company does
not expect that the adoption of SFAS No 128 will have a material impact on the
Company's reported results.

3.       COMMITMENTS AND CONTINGENCIES

         The Company has a commitment under its rental agreements for
approximately $930,000.

PAGE 6
<PAGE>

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

OVERVIEW

         The Company's historical operations discussed in this section reflect
only the operations of BII Australia.  Since its founding in September 1993,
BII Australia has developed and sold interactive education and entertainment
CD-ROM titles primarily for children.  With the completion of the acquisition
of SAND in September 1996, the nature of the Company's business changed
significantly.  SAND is responsible for developing the Multipath Movie(TM)
suite of proprietary software tools, production process and first Multipath
Movie product.  The Company is focusing its efforts on the development of the
Multipath Movie tools and production process, as well as the commercialization
of the Multipath Movie (including the StoryTeller) genre and has
significantly scaled back its traditional CD ROM business.  As a result of this
change in the Company's business, the following discussion of historical
results is not representative of its expected future operations.  The Company
changed its fiscal year end from June 30 to December 31, effective December 31,
1996.

         The Company intends to generate a substantial majority of its future
revenue from the development and production of Multipath Movies and other
three-dimensional digitally created entertainment.  The first of its Multipath
Movies, CYBERSWINE, is expected to be released in the fall of 1997.  The first
product in the StoryTeller Series is  expected to be released in late 1997. 
The Company's annual and quarterly revenue will depend upon the successful
development, timing and market acceptance of its interactive products and upon
the costs to distribute and promote these products.  Specifically, the revenues
derived from the production and distribution of the Company's Multipath Movies
will depend primarily on the acceptance by the market of the Multipath Movie
concept and the underlying content of the Multipath Movie, neither of which can
be predicted nor necessarily bear a direct correlation to the production or
distribution costs incurred.  The commercial success of a Multipath Movie is
also expected to depend upon promotion and marketing, production costs, impact
of competition, timing of introduction and other factors.  Accordingly, the
Company's annual and quarterly revenues are, and will be, extremely difficult
to forecast.

         The Company incurred significant operating expenses and development
costs as it continued development of its proprietary software tools and its
Multipath Movies and as it continued to expand in anticipation of growth.  As a
result, the Company incurred losses in the six months ended June 30, 1997.  Due
to the timing of sales of personal computers on which the Company's product is
bundled, revenues from the bundled version of the Company's Multipath Movies
could commence in the latter part of the third quarter of 1997.  Revenues in
the third quarter may therefore be insufficient to avoid a loss in that
quarter.


RESULTS OF OPERATIONS

         REVENUES.  The Company historically has derived its revenues from
royalties, development fees and software sales.  Brilliant licenses its CD-ROM
software products to publishers and distributors in exchange for non-refundable
advances, and royalties based on product sales.  Royalties based on product
sales are due only to the extent revenues exceed any associated non-refundable
royalty advance.  Royalties related to non-refundable advances are recognized
when the CD-ROM master is delivered to the licensees.  Royalty revenues in
excess of non-refundable advances are recognized upon notification by the
distributor that a royalty has been earned by the Company. Development fees are
paid by customers in exchange for the Company's development of software
packages in accordance with customer specifications.  The software development
agreements generally specify certain "milestones" which must be achieved
throughout the development process.  As these milestones are achieved, the
Company recognizes the portion of the development fee allocated to each
milestone.  Software sales result from the Company selling to customers
completed software products developed by the Company.  Software sales revenues
are recognized upon shipment of product.  

The Company anticipates that revenues from the sale of Multipath Movies through
retail outlets will be recognized when the product is shipped.  Revenues from
the sale of tickets to view Multipath Movies over the Internet will be
recognized when the sales transaction is recorded.

Revenues decreased from $857,000 for the six months ended June 30, 1996 to
$322,000 for the six months ended June 30, 1997.  This represents a decrease of
$535,000 or 62%.  The decrease is mainly attributable to a change in the
Company's focus to the development of Multipath Movies.

PAGE 7
<PAGE>

         COST OF REVENUES.  Cost of revenues related to royalties consists
primarily of royalty obligations to third parties.  Cost of revenues related to
development fees consists primarily of salaries, benefits and overhead
associated with the development of specific software products to customer
specifications, as well as costs of outside contractors engaged from time to
time in creating aspects of software products such as animation, voice
recording and music.  Cost of revenues related to software sales consists
primarily of royalties to third parties and the direct costs and manufacturing
overhead required to reproduce and package software products.  Cost of revenues
decreased from $271,000 for the six months ended June 30, 1996 to $17,000 for
the six months ended June 30, 1997.  This represents a decrease of $254,000, or
94%.  Cost of revenues in the 1996 period included costs associated with
development of the Company's own titles.  The reduction in cost of revenues in
the 1997 period is a result of the Company's change in focus to the development
of Multipath Movies and the development of the associated software tools, and
the resulting cessation of development of software products for others.  The
cost of developing Multipath Movies is currently included in Research &
Development expenses.

         SALES AND MARKETING.  Sales and marketing expenses include primarily
costs for advertising, promotions, brochures, travel and trade shows.  Sales
and marketing expenses increased from $129,000 for the six months ended June
30, 1996 to $205,000 for the six months ended June 30, 1997.  This increase is
attributable to increased costs associated with the Company's participation in
trade shows.  Sales and marketing expenses are expected to increase due to the
expansion of the Company's sales force and expected continued expansion in this
area.

         GENERAL AND ADMINISTRATIVE.  General and administrative expenses
include primarily salaries and benefits of management and administrative
personnel, rent, insurance costs and professional fees.  General and
administrative expenses increased from $206,000 for the six months ended June
30, 1996 to $999,000 for the six months ended June 30, 1997.  This increase is
attributable to increased costs associated with the development of internal
management and infrastructure to support the Company's increased development
activity, and other services (such as accounting, legal and consulting
services) which are consistent with the Company's new status as a public
company.

         RESEARCH AND DEVELOPMENT.  Research and development expenses include
primarily salaries and benefits of personnel conducting research and
development of software products.  Research and development costs also include
costs associated with creating the Company's traditional CD-ROM software tools
and the software tools used to develop Multipath Movies.  Research and
development expenses increased from $131,000 for the six months ended June 30,
1996 to $1,060,000 for the six months ended June 30, 1997. This increase is
attributable to the in-process research and development costs incurred in
connection with the development of Multipath Movies and the Multipath Movie
software tools.  In accordance with Statement of Financial Accounting Standards
No. 86 ("SFAS No. 86"), the results of operations for the six months ended June
30, 1997 include in research and development expenses of the Multipath Movie 
development costs and the Multipath Movie software tools. 

         The Company has chosen to focus on the personal computer and has
deferred development of other platforms until warranted by market conditions. 
This focus allows the Company to devote more of its resources to development of
Multipath Movie technology and development of additional titles.  The Company
believes that its decision will have no adverse impact on revenues in the near
or medium term.

         DEPRECIATION.  Depreciation expense relates to depreciation of fixed
assets such as computer equipment and cabling, furniture and fixtures and
leasehold improvements.  These fixed assets are depreciated over their
estimated useful lives (up to four years) using the straight-line method. 
Depreciation expense increased from $56,000 for the six months ended June 30,
1996 to $117,000 for the six months ended June 30, 1997.  This increase is
primarily attributable to additional computer equipment put in place and
leasehold improvements made during 1997.

         OTHER INCOME AND EXPENSE.  Other income includes interest income and
expenses, gains and losses on foreign exchange transactions and export
development grants paid to BII by the Australian Trade Commission for BII's
participation in certain export activities.  Interest increased from a net
expense of $28,000 for the six months ended June 30, 1996 to a net income of
$169,000 for the six months ended June 30, 1997 due to the higher cash balances
as a result of the initial public offering in November 1996 and the extinction
of all interest bearing debt.

PAGE 8
<PAGE>

FLUCTUATING OPERATING RESULTS

         Historically, the Company has experienced significant fluctuations in
its operating results from quarter to quarter and it expects these fluctuations
to continue in the future.  Factors that may influence the Company's quarterly
operating results include customer demand for the Company's products, shipping
schedules for personal computers upon which Multipath Movies are bundled,
introduction or enhancement of products by the Company and its competitors, the
timing of releases of new products or product enhancements by the Company and
its competitors, introduction or availability of new hardware, market
acceptance of the Multipath Movies and other new products, development and
promotional expenses relating to the introduction of new products or
enhancements of existing products, reviews in the industry press concerning the
products of the Company or its competitors, changes or anticipated changes in
pricing by the Company or its competitors, mix of distribution channels through
which products are sold, mix of products sold, product returns, the timing of
orders from major customers, order cancellations, delays in shipment and other
developments and decisions including the timing and extent of development
expenditures, management's evaluation and judgment regarding a title's
acceptance, and other unanticipated operating expenses and general economic
conditions.  Additionally, a majority of the unit sales for a product typically
occurs in the quarter in which the product is introduced.  As a result, the
Company's revenues may increase significantly in a quarter in which a major
product introduction occurs and may decline in following quarters.  The
Company's revenues both domestically and internationally have varied
significantly between monthly and quarterly periods.  Therefore, in the future,
the operating results for any quarter should not be taken as indicative of the
results for any quarter in subsequent periods.

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

         The entertainment industry historically has been subject to
substantial cyclical variation, with consumer spending for entertainment
products tending to decline during recessionary periods.  There can be no
assurance that the Company will be able to adjust its anticipated product
development expenditures and other expenses in the event of an economic
downturn during such development.  Accordingly, if a recessionary period
occurs, tending to result in decreased sales of the Company's products, product
development expenses likely will remain constant and the Company's business,
operating results and financial condition could be adversely affected.


LIQUIDITY AND CAPITAL RESOURCES

         Prior to the Company's initial public offering in November 1996, a
substantial portion of its operations were financed through loans from PIE, a
significant shareholder.  PIE provided loans to the Company of approximately
$1,021,000, $746,000 and $8,000 during the fiscal years ended June 30, 1995 and
1996, and the six months ended December 31, 1996, respectively.  In the fiscal
years ended June 30, 1995 and 1996 and the six months ended December 31, 1996,
the Company repaid $541,000, $680,000 and $733,000, respectively.  As at
December 31, 1996, the loans had been fully repaid.

         During the six months ended December 31, 1996, the Company executed
three promissory notes in favor of Reefknot in the principal amounts of
$150,000, $50,000 and $145,000 to fund certain costs in connection with the
initial public offering.  These notes bore interest at the rate of 10% per
annum and were fully repaid by December 31, 1996.  In  November 1996, the
Company's initial public offering of 2,000,000 shares of Common Stock at $5 per
share provided approximately $8.5 million in cash after underwriters' discounts
and commissions and offering expenses.

         Net cash provided by operating activities during the six months ended
June 30, 1996 was primarily attributable to revenues of $857,000 and a
reduction in accounts receivable of $259,000.  Net cash used in operating
activities during the six months ended June 30, 1997 was primarily attributable
to a net loss of $1,759,000.  Net cash used in investing activities in the six
months ended June 30, 1997 was due primarily to the purchase of computer
equipment.  Cash flows used in financing activities in the six months ended
June 30, 1996 was primarily attributable to the repayment of loans from PIE
and Reefknot.

PAGE 9
<PAGE>

         As of June 30, 1997, the Company had no material commitments other
than an obligation under its agreement with Crawford Productions to contribute
up to one half of the costs incurred to develop and produce each project
selected by the parties, if any, for development into Multipath Movies, which
total cost per title is anticipated to be approximately $790,000, an obligation
under its agreement with Morgan Creek to fund entirely the development of two
Multipath Movies and a commitment under its rental agreements for approximately
$930,000.

A product had previously been identified for development by the Company in
conjunction with Crawford Productions. Management of the two companies
subsequently determined that the product was inappropriate and are currently
attempting to identify a new product for development.  The Company is currently
developing the `ACE VENTURA' series under its agreement with Morgan Creek.

         As of June 30, 1997, the Company's principal source of liquidity was
approximately $5.4 million in cash.  The Company believes that these funds
together with cash generated from operations will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. If cash generated by operations is insufficient to
satisfy the Company's liquidity requirements, the Company may sell additional
equity or debt securities or obtain credit facilities.  The sale of additional
equity or convertible debt securities will result in additional dilution to the
Company's shareholders.  There can be no assurance that financing will be
available to the Company in an amount and on terms acceptable to it.

                                                                               

                                 RISK FACTORS

         This Report contains certain forward looking statements.  Actual
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth below.


ACCEPTANCE OF MULTIPATH MOVIE CONCEPT; SUCCESSFUL DEVELOPMENT OF MULTIPATH
MOVIES WITH APPEALING CREATIVE CONTENT

         The success of the Company's Multipath Movie products will depend to a
significant extent on acceptance by the market of the Multipath Movie concept. 
The market for entertainment software is emerging and is dependent upon a
number of variables, including consumer preferences, the installed base of
personal computers and a sufficient number of entertainment software titles to
stimulate market development.  Any competitive, technological or other factor
materially adversely affecting the introduction or sale of personal computers
or entertainment software would have a material adverse effect on the Company. 
Because the market for entertainment software is relatively small in comparison
with the overall market for consumer software products, it is impossible to
predict with any degree of certainty the future rate of growth, if any, and the
size of the market for the Company's products. 

         Each Multipath Movie will be an individual artistic work, and its
commercial success primarily will be determined by user reaction, which is
unpredictable.  The Company has not yet introduced its first Multipath Movie. 
The commercial success of the Company's Multipath Movies will depend on its
ability to predict the type of content that will appeal to a broad audience and
to develop stories and characters that capture the attention and imagination of
the market.  In addition, the success of the Company's Multipath Movies will
depend upon the Company's ability to develop popular characters and to license
recognized characters and properties from third parties for its software
titles.  There can be no assurance that the Company will be able to develop or
license popular stories or characters.  The success of a Multipath Movie also
depends upon the effectiveness of the Company's marketing and successful
introduction of the first Multipath Movie through the Company's bundling
relationship with Packard Bell NEC, as well as the quality and acceptance of
other competing programs released into the market at or near the same time,
critical reviews, the availability of alternative forms of entertainment and
leisure time activities, general economic conditions and other tangible and
intangible factors, all of which can change and cannot be predicted with
certainty.  There can be no assurance that the Company will be able to
successfully introduce the Multipath Movie through its bundling relationship
with Packard Bell NEC or otherwise.  Accordingly, there exists substantial risk
that some or all of the Company's Multipath Movies will not be commercially
successful, resulting in certain costs not being recouped or anticipated
profits not being realized.  Further, the success of the Multipath Movie genre
will substantially depend on the market's reception of the first Multipath
Movie.  The failure of the Company's initial Multipath Movie to achieve
commercial success would 

PAGE 10
<PAGE>

damage the ability of the Company to introduce additional titles.  Accordingly,
the failure of any of the Company's Multipath Movies, and especially its first
Multipath Movie, to achieve commercial success, could have a material adverse
affect on the business, operating results and financial condition of the
Company.


FLUCTUATING OPERATING RESULTS

         The Company intends to generate a substantial majority of its future
revenue from the development and production of Multipath Movies and other
three-dimensional digitally created entertainment.  The first of its Multipath
Movies, Cyberswine, is expected to be released in the fall of 1997.  The first
product in the StoryTeller Series is not expected to be released until late
1997.  The Company's annual and quarterly revenue will depend upon the
successful development, timing and market acceptance of its interactive
products and upon the costs to distribute and promote these products. 
Specifically, the revenues derived from the production and distribution of the 
Company's Multipath Movies will depend primarily on the acceptance by the
market of the Multipath Movie concept and the underlying content of the
Multipath Movie, neither of which can be predicted nor necessarily bear a
direct correlation to the production or distribution costs incurred.  The
commercial success of a film also depends upon promotion and marketing,
production costs, impact of competition and other factors. Accordingly, the
Company's annual and quarterly revenues are and will continue to be extremely
difficult to forecast. 

         The Company's expense levels are, to a large extent, fixed.  The
Company may be unable to adjust spending in a timely manner to compensate for
any revenue shortfall.  As a result, any significant shortfall in revenue from
the Company's Multipath Movies would have an immediate material adverse effect
on the Company's business, operating results and financial condition.  The
Company plans to increase its operating expenses to fund greater levels of
Multipath Movie and traditional CD-ROM development, research and development,
increased marketing operations and expansion of its distribution channels.  To
the extent that such expenses precede or are not subsequently followed by
increased revenues, the Company's business, operating results and financial
condition will be materially adversely affected. 

         Historically, the Company has experienced significant fluctuations in
its operating results from quarter to quarter and it expects these fluctuations
to continue in the future.  Factors that may influence the Company's quarterly
operating results include customer demand for the Company's products,
introduction or enhancement of products by the Company and its competitors, the
timing of releases of new products or product enhancements by the Company and
its competitors, introduction or availability of new hardware, market
acceptance of the Multipath Movies and other new products, development and
promotional expenses relating to the introduction of new products or
enhancements of existing products, reviews in the industry press concerning the
products of the Company or its competitors, changes or anticipated changes in
pricing by the Company or its competitors, mix of distribution channels through
which products are sold, mix of products sold, product returns, the timing of
orders from major customers, order cancellations, delays in shipment and other
developments and decisions including the timing and extent of development
expenditures, management's evaluation and judgment regarding a title's
acceptance, other unanticipated operating expenses and general economic
conditions.  Additionally, a majority of the unit sales for a product typically
occurs in the quarter in which the product is introduced.  As a result, the
Company's revenues may increase significantly in a quarter in which a major
product introduction occurs and may decline in following quarters.  The
Company's revenues both domestically and internationally have varied
significantly between monthly and quarterly periods.  Therefore, in the future,
the operating results for any quarter should not be taken as indicative of the
results for any quarter in subsequent periods. 

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

         The entertainment industry historically has been subject to
substantial cyclical variation, with consumer spending for entertainment
products tending to decline during recessionary periods.  There can be no
assurance that the Company will be able to adjust its anticipated product
development expenditures and other expenses in the event of an economic
downturn during such development.  Accordingly, if a recessionary period
occurs, tending to result in decrease sales of the Company's products, product
development expenses likely will remain constant and the Company's business,

PAGE 11
<PAGE>

operating results and financial condition could be adversely affected. 

         Due to all of the foregoing factors, it is also likely that in some
future periods the Company's operating results will be below the expectations
of public market analysts and investors.  In such event, the price of the
Company's Common Stock would likely be materially adversely affected.


SOFTWARE TOOLS AND PRODUCT DEVELOPMENT

         The suite of software tools that will enable the Company to create its
Multipath Movie has been developed over the past two years and additional
refinement of these tools may be necessary in order to create the Multipath
Movie.  The Company believes that its future success depends in large part upon
the continuous enhancement of the software tools necessary to create the
Multipath Movie.  If problems in the development of the Company's software
tools arise, no assurance can be given that the Company will be able
successfully to remedy these problems.  Even if the Company can remedy these
potential problems, the creation, and consequently the distribution, of the
Multipath Movie may be significantly delayed or could become significantly more
expensive.  Any such delay or increase in cost would have a material adverse
affect on the business, operating results and financial condition of the
Company. 

         For the foreseeable future, the Company expects to be significantly
dependent upon the success of the Multipath Movie.  The Multipath Movie is
still in the development stage.  The Company expects to release its first
product in the  Multipath Movie product line in the fall of 1997.  There can be
no assurance that these products will be successfully developed at all, or if
successfully developed, will be released during these periods.  If the Company
is unable to timely produce and develop these products and subsequent digital
entertainment products that meet with broad market acceptance, the Company's
business, operating results and financial condition will be materially
adversely affected. 

         Also, entertainment products as complex as those offered by the
Company may contain undetected errors or defects when first introduced or as
new versions are released.  The Company has in the past discovered software
errors in certain of its new products and enhancements after their
introduction.  Although the Company has not experienced material adverse
effects resulting from any such errors to date, there can be no assurance that
errors or defects will not be found in new products or releases after
commencement of commercial shipments, resulting in adverse product reviews and
a loss of or delay in market acceptance, which would have a material adverse
effect upon the Company's business, operating results and financial condition.


DEPENDENCE ON DEVELOPMENT OF ADDITIONAL MULTIPATH MOVIES

         The Company's success will depend largely upon its ability in the
future to continuously develop new, commercially-successful Multipath Movie
titles and to replace revenues from Multipath Movie titles in the later stages
of their life cycles.  If revenues from new products or other activities fail
to replace declining revenues from existing products, the Company's business,
operations and financial condition could be materially adversely affected.  In
addition, the Company's success will depend upon its ability to develop popular
characters and to license recognized characters and properties from third
parties for its digital entertainment products.  If the Company is unable to
develop popular characters or if the cost of licensing characters and
properties from third parties becomes prohibitive, the Company's business,
operating results and financial condition could be adversely affected.  Also,
pursuant to certain of its licensing arrangements, the Company historically
has, and may continue to, prepay royalties to third parties.  There can be no
assurance that the sales of products associated with these royalties will equal
or exceed the amount of the prepayment


LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY 

         The Company was founded in September 1993, and shipped its initial CD-
ROM product in November 1994.  The Company has not introduced its first
Multipath Movie and has only recently acquired the software tools necessary to
produce a Multipath Movie.  Accordingly, the Company has only a limited
operating history in the case of CD-ROM development and no operating history in
the case of Multipath Movies upon which an evaluation of the Company and its
prospects can be based.  There can be no assurance that the revenues of the
Company will continue at their current level or will increase, or that the
Company will be able to achieve profitability.  

PAGE 12
<PAGE>

         The Company incurred a loss in the six months ended June 30, 1997. 
The Company expects to incur significant operating expenses and development
costs as it continues development, and commences marketing, of its Multipath
Movies and continues to expand in anticipation of growth.  The Company expects
revenues from its Multipath Movies to commence in the third quarter of 1997. 
As a result of the timing of Packard Bell NEC's sales it is likely that these
revenues will only commence in September 1997.  Revenues in the third quarter
may therefore be insufficient to avoid a loss in that quarter. 

SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES

         The Company depends substantially upon third parties for several
critical elements of its business including the development and licensing of
content and the distribution of its products. 

         DEPENDENCE UPON STRATEGIC RELATIONSHIPS

         The Company has entered into strategic relationships with Packard Bell
NEC, Crawford and Morgan Creek, as well as licensing arrangements with numerous
additional companies that own the stories underlying and/or characters in many
of the Company's products.  The Company's business strategy is based largely on
its strategic relationships with these and other companies.  In each of these
relationships, mutual agreement of the parties is required for significant
matters, or approval of the strategic partner or both parties is required to
release products or to commence distribution of products.  For example, the
Company will rely on Packard Bell NEC to distribute CD-ROMs to purchasers of
certain Packard Bell NEC computers as a significant element of the Company's
launch of the Multipath Movie genre.  Packard Bell NEC's obligation to
distribute such CD-ROMs will depend upon Packard Bell NEC's acceptance of
master CD-ROMs complying with the Company's specifications.  Consequently,
Packard Bell NEC may, in the exercise of its approval rights, delay the
introduction of the Company's first Multipath Movie.  Also, Morgan Creek and
Crawford have various creative controls and  approval rights pursuant to their
joint venture agreements with the Company.  These creative controls and
approval rights allow Morgan Creek or Crawford to reject or delay the Multipath
Movie productions of the respective joint ventures.  There can be no assurance
that the Company will not be subject to delays resulting from disagreements
with or an inability to obtain approvals from its strategic partners or that
the Company will achieve its objectives in respect of any or all of its
strategic relationships or continue to maintain and develop these or other
strategic relationships, or that licenses between the Company and any such
third party will be renewed or extended at their expiration dates.  Any such
delays or the Company's failure to renew or extend a key license or maintain
any of its strategic relationships could materially and adversely affect the
Company's business, operating results and financial condition.  In addition,
under certain key license agreements, the Company must obtain approval on a
timely basis from the licensor in order to ship products it develops under the
license.  There can be no assurance that the Company will obtain such approval
and failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition.


         USE OF INDEPENDENT SOFTWARE DEVELOPERS AND CONTENT PROVIDERS

         In addition to internally developing software and creating content,
the Company uses software created by independent software developers as well as
content developed by third parties.  The Company has less control over the
scheduling and the quality of the software generated by independent contractors
than over that developed by its own employees.  Additionally, the Company may
not be able to secure the services of talented content developers.  The
Company's business and future operating results will depend in part on the
Company's continued ability to maintain relationships with skilled independent
software developers and content providers, and to enter into and renew product
development agreements with such developers.  There can be no assurance that
the Company will be able to maintain such relationships or enter into and renew
such agreements. 


RISKS ASSOCIATED WITH INTERNET DELIVERY

         The Company intends to distribute its Multipath Movies via an Internet
site to be established by the Company.  The Company also intends to distribute
certain of its Multipath Movies through a link connecting Packard Bell NEC's
"Planet Oasis" Web site to the Company's Internet site.  Accordingly, any
system failure that causes interruption or an increase in response time on the
Company's Internet site or the Planet Oasis Web site could result in less
traffic to and 

PAGE 13
<PAGE>

distribution of Multipath Movies via the Company's Internet site and, if
sustained or repeated, could reduce the attractiveness of the Company's
products.  The Company is also dependent upon Web browsers and Internet and
online service providers to ensure user access to its products.  User
acceptance with respect to payment methods over the Internet may also create
barriers to distribution of the Company's products through the Internet.  Any
disruption in the Internet access provided to the Company's Internet and online
service providers or any failure by the Company's Internet site to handle
higher volumes of transactions could have a material adverse effect on the
Company's business, operating results and financial condition. 

         The seamless appearance of Multipath Movies delivered via the Internet
requires that while a scene is being viewed, succeeding scenes must be
downloaded.  This requires the use of 28.8 kilobits per second or faster
modems, computers equipped with high-speed Pentium (or equivalent)
microprocessors, 24 megabytes of random access memory and appropriately
configured operating systems.  These requirements generally are not satisfied
by the majority of the base of currently installed PCs.  There can be no
assurance that adequately equipped and configured computers will become
widespread prior to release of the Company's Multipath Movies.  Users of
computers with less sophisticated PCs may experience noticeable latencies or
"lag times" between scene changes.  Additionally, the performance
characteristics of Multipath Movies delivered via the Internet may not equal
those of Multipath Movies delivered solely on CD-ROMs, particularly with
respect to perceived seamlessness and sound quality.  Moreover, communications
between the user and an Internet site delivering Multipath Movies may require
routing of Multipath Movie instructions through several servers and may result
in brief but noticeable lag times.  Noticeable lag times or negative
comparisons to Multipath Movies distributed on CD-ROM may reduce the
attractiveness of online versions of the Multipath Movies. 


COMPETITION

         The markets for the Company's digital entertainment products are
intensely competitive, subject to rapid change and characterized by constant
demand for new product features at reduced prices and pressure to accelerate
the release of new products and product enhancements.  The Company expects to
compete with computer graphics special effects firms, including Pixar, ILM,
Digital Domain, Sony ImageWorks, Pacific Data Images, Rhythm & Hues and Boss
Film Studios, Inc.  The CD-ROM industry is intensely competitive and consumer
demand for particular software products may be adversely affected by the 
proliferation of competitive products.  The Company believes that the primary
competitive factors in the market for CD-ROM products include creative content,
product quality, technological capabilities, pricing, breadth of features,
marketing and distribution resources and customer service and support.  The
Company will compete primarily against companies offering entertainment
software and related products such as Broderbund, 7th Level, GT Interactive,
Electronic Arts, Softkey, and Sierra On-Line, and companies offering
traditional feature films and television programming produced by major movie
studios, including Disney, Warner Bros., Twentieth Century Fox, Paramount,
Sony, Lucasfilm, MCA Universal, and MGM/UA.  In addition, the Company will
compete with movie studios for the acquisition of literary properties,
production financing, the services of performing artists, and the services of
other creative and technical personnel, particularly in the fields of animation
and technical direction.  Most of the companies with which the Company will
compete have significantly greater name recognition and significantly greater
financial, technical, creative, marketing, and other resources than does the
Company.  Due to their substantially greater resources, these competitors
likely will be able to enter into more favorable distribution arrangements and
to promote their products more successfully than the Company.  Further, the
Company believes that continuing enhancements in computer hardware and 
software technology will lower barriers to entry for studios or special
effects companies which intend to produce computer animated feature films or
other products. 

         In response to all of these competitive forces, the Company will be
required to make a high level of investment in content and tool development,
marketing and customer service and support.  There can be no assurance that the
Company will have sufficient resources to make such investments or, even if
they are made, that the Company's products will be competitive.  Additionally,
present or future competitors may be able to develop products comparable or
superior to those offered by the Company or adapt more quickly than the Company
to new technologies or evolving customer requirements.  The Company's
competitors also may increase their efforts to gain and retain market share
through competitive pricing or product giveaways.  These competitive pressures
may necessitate price reductions by the Company, thus reducing the Company's
profit margins.  In addition, as the number of competitors increases and
competition for scarce consumer time available to be devoted to the products
such as those of the Company and equally scarce retail shelf space becomes more
intense, the Company may need to increase marketing expenditures to maintain
sales and product differentiation.  Also, as competition for popular titles and
themes that may be used in entertainment 

PAGE 14
<PAGE>

software increases, the cost of acquiring such titles and properties is likely
to increase, resulting in reduced margins.  There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially and adversely affect its business, operating results and financial
condition.  


RAPID TECHNOLOGICAL CHANGE; CHANGING PRODUCT PLATFORMS AND FORMATS

         The entertainment software market and the personal computer industry
in general are characterized by rapid and significant technological
developments and frequent changes in computer operating environments.  To
compete successfully in these markets, the Company must continually improve and
enhance its existing products and technologies and develop new products and
technologies that incorporate technological advances while remaining
competitive in terms of performance and price.  The Company's success also will
depend substantially upon its ability to anticipate the emergence of, and to
adapt its products to, popular platforms for consumer software. 

         The Company's research and development efforts in connection with
games for certain advanced and emerging platforms may require greater financial
and technical resources than currently possessed by the Company.  In addition,
there can be no assurance that the new platforms for which the Company develops
products will achieve market acceptance and, as a result, there can be no
assurance that the Company's development efforts with respect to such new
platforms will lead to marketable products or products that generate sufficient
revenues to offset the research and development costs incurred in connection
with their development.  Failure to develop products for new platforms that
achieve significant market acceptance would have a material adverse effect on
the Company's business, operating results and  financial condition.  There can
be no assurance that technological developments will not render certain of the
Company's existing products obsolete, that the Company will be able to adapt
its products or technologies to emerging hardware platforms, that the Company
has and will choose to support platforms that ultimately will be successful or
that the Company will be able to successfully create software titles for such
platforms in a timely manner, or at all.  


DEPENDENCE ON KEY PERSONNEL

         The Company's success has and will continue to depend to a significant
extent upon certain key management, product development and technical
personnel, many of whom would be difficult to replace, particularly Mark Dyne,
its Chairman and Chief Executive Officer and Kevin Bermeister, its President. 
Although the Company has entered into employment agreements with certain
officers, such agreements are terminable upon 30 days notice by either party. 
Accordingly, there can be no assurance that such employees will continue to be
available to the Company.  The loss of the services of one or more of these key
employees could have a material adverse effect on the Company and the Company's
future success will depend in large part upon its ability to attract, retain
and motivate personnel with a variety of technical and managerial skills,
including software development and programming expertise.  Significant
competition exists for such personnel and the companies with which the Company
competes are often larger and more established than the Company.  Additionally,
there is currently an industry-wide shortage of technical personnel which makes
it more difficult to attract and retain such personnel.  There can be no
assurance that the Company will be able to retain and motivate its managerial
and technical personnel or attract additional qualified members to management
or technical staff.  The inability to attract and retain necessary technical
and managerial personnel could have a material and adverse effect upon the
Company's business, operating results and financial condition. 


SHARED RESPONSIBILITIES AND OTHER EMPLOYMENT COMMITMENTS OF CHIEF EXECUTIVE
OFFICER AND PRESIDENT

         The Company's Chief Executive Officer and Chairman, Mark Dyne and its
President, Kevin Bermeister, also serve as joint managing directors of Sega
Ozisoft and other businesses, including, in the case of Mr. Bermeister, Sega
Enterprises (Australia) Pty., Ltd. ("Sega Enterprises").  Although Messrs. Dyne
and Bermeister are active in the management of the Company, they are not
required to spend a certain amount of time at the Company nor are they able to
devote their full time and resources to the Company.  Further, the Company does
not have employment agreements with either of Messrs. Dyne or Bermeister. 
There can be no assurance that the inability of Messrs. Dyne and Bermeister to
devote their full time and resources to the Company will not adversely affect
the Company's business, operating results or financial condition.

PAGE 15
<PAGE>

CONFLICTS OF INTEREST

         Certain of the Company's directors and officers are directors or
officers of potential competitors and/or strategic partners of the Company. 
These relationships may give rise to conflicts of interest between the Company,
on the one hand, and one or more of the directors, or officers and/or their
affiliates, on the other hand.  The Company's Certificate of Incorporation
provides that Mark Dyne and Kevin Bermeister are required to present to the
Company any corporate opportunities for the development of any type of digital
entertainment with the exception of opportunities for (i) minority
participation in the development of digital entertainment and (ii)
participation in the development by others of digital entertainment where
publishing and distribution rights for the product to be developed are offered
to Messrs. Dyne and/or Bermeister solely for Australia, New Zealand and/or
Southern Africa.  The Company's Certificate of Incorporation provides that
Messrs. Dyne and Bermeister are not required to present to the Company any
other opportunities which potentially may be of benefit to the Company.


NEW PRODUCTION STUDIO

         The Company recently completed the buildout of its new production
studio in Australia and currently occupies the new space. There can be no
assurance that the Company will be successful in timely hiring and training new
content developers and software programmers necessary to conduct additional
operations in which event the development, and consequently the release, of the
Company's products may be delayed.  Any such delay would have a material
adverse effect upon the Company's business, operating results and financial
condition.


MANAGEMENT OF BUSINESS CHANGES; POTENTIAL GROWTH; POTENTIAL ACQUISITIONS

         Implementation of the Company's business plan, including introduction
of the Company's Multipath Movies, management of the Company's joint ventures
with Morgan Creek and Crawford, management of the Company's strategic
relationship with Packard Bell NEC, the establishment of a new production
studio in Australia, and the general strains of the Company's new role of a
public company require that the Company significantly expand its operations in
all areas.  This growth in the Company's operations and activities will place a
significant strain on the Company's management, operational, financial and
accounting resources.  Successful management of the Company's operations will
require the Company to continue to implement and improve its financial and
management information systems.  In addition, the restructuring of the Company
and resulting management and reporting of Australian operations and financial
results from the United States, as well as other aspects of the process of
preparing the Company for the Offering have placed and will continue to place
an additional strain on the Company's accounting and information systems
resources.  The Company's ability to manage its future growth, if any, will
also require it to hire and train new employees, including management and
technical personnel, and motivate and manage its new employees and integrate
them into its overall operations and culture.  The Company recently has made
additions to its management team and is in the process of modifying its
internal procedures to adapt to its new role as a public company, a process
which is expected to continue following the Offering.  The Company's failure to
manage implementation of its business plan and the changes made to structure
and prepare for the Offering would have a material adverse effect on the
Company's business, operating results and financial condition. 

         In the future, the Company may acquire complementary companies,
products or technologies, although no specific acquisitions currently are
pending or under negotiation.  Acquisitions involve numerous risks, including
adverse short-term effects on the combined business' reported operating
results, impairments of goodwill and other intangible assets, the diversion of
management's attention, the dependence on retention, hiring and training of key
personnel, the amortization of intangible assets and risks associated with
unanticipated problems or legal liabilities. 


LIMITED PROPRIETARY PROTECTION

         The Company's success and ability to compete is dependent in part upon
its proprietary technology.  The Company currently intends to file United
States patent applications relating to certain components of its proprietary
technology.  The Company also relies on trademark, trade secret and copyright
laws to protect its technology, with the source code for the Company's
proprietary software being protected both as a trade secret and as a
copyrighted work.  

PAGE 16
<PAGE>

Also, it is the Company's policy that all employees and third-party 
developers sign nondisclosure agreements.  However, there can be no
assurance that such precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or superior
technology independently.  Also, the Company has no license agreements with the
end users of its products and does not copy-protect its software, so it may be
possible for unauthorized third parties to copy the Company's products or to
reverse engineer or otherwise obtain and use information that the Company
regards as proprietary.  Although the Company is not aware of unauthorized
copying of its products, if a significant amount of unauthorized copying of the
Company's products were to occur, the Company's business, operating results and
financial condition could be adversely affected.  Furthermore, policing
unauthorized use of the Company's products is difficult and costly, and
software piracy can be expected to be a persistent problem.  If litigation is
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets or to determine the validity and scope
of the proprietary rights of others, such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, operating results and financial condition. 
Ultimately, the Company may be unable, for financial or other reasons, to
enforce its rights under intellectual property laws and the laws of certain
countries in which the Company's products are or may be distributed may not
protect the Company's products and intellectual rights to the same extent as
the laws of the United States. 

         The Company believes that its products, including its suite of
software tools, do not infringe any valid existing proprietary rights of third
parties.  Since the software tools used to create the Multipath Movies were
developed by SAND, a former division of Sega Ozisoft, the Company relies
entirely on the representations of Sega Ozisoft contained in the SAND
Acquisition Agreement between BII Australia and Sega Ozisoft that, to Sega
Ozisoft's best knowledge, the SAND technology and software acquired by the
Company does not infringe the proprietary rights of others.  Additionally,
although the Company has received no communication from third parties alleging
the infringement of proprietary rights of such parties, there can be no
assurance that third parties will not assert infringement claims in the future.
Any such third party claims, whether or not meritorious, could result in costly
litigation or require the Company to enter into royalty or licensing
agreements.  There can be no assurance that the Company would prevail in any
such litigation or that any such licenses would be available on acceptable
terms, if at all.  If the Company were found to have infringed upon the
proprietary rights of third parties, it could be required to pay damages, cease
sales of the infringing products and redesign or discontinue such products, any
of which alternatives, individually or collectively could have a material
adverse effect on the Company's business, operating results and financial
condition.  


RECOVERY OF PREPAID ROYALTIES AND GUARANTEES

         The Company may from time to time, enter into agreements with
licensors of intellectual property that involve advance payments of royalties
and guaranteed minimum royalty payments.  If the sales volumes of products
subject to such arrangements are not sufficient to recover such advances and
guarantees, the Company will be required to write off unrecovered portions of
such payments.  If the Company is required to write off a material portion of
any advances, or ultimately accrue for the guarantees, its business, operating
results and financial condition could be adversely affected.


INTERNATIONAL BUSINESS

         Historically, international sales, principally in Australia, have
accounted for a significant portion of the Company's revenues and the Company
expects that international sales will continue to account for a significant
portion of the Company's total revenue.  The Company's international business
is subject to numerous risks, including the need to comply with a wide variety
of foreign and U.S. export and import laws, changes in export or import
controls, tariffs and other regulatory requirements, the imposition of
governmental controls, political and economic instability, trade restrictions,
the greater difficulty of administering business overseas and general economic
conditions.  Although the Company's international sales are denominated
principally in United States dollars,  sales to international customers may
also be affected by changes in demand resulting from fluctuations in interest
and currency exchange rates.  In addition, the laws of certain foreign
countries may not protect the Company's intellectual property to the same
extent as do the laws of the United States.  There can be no assurance that
these factors will not have a material adverse effect on the Company's business
and results of operations.

PAGE 17
<PAGE>

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

         The Company's future capital requirements will depend on many factors,
including but not limited to, the quantity of Multipath Movies developed, the
cost of content development, marketing and distribution, the size and timing of
future acquisitions, if any, and the availability of additional financing.  To
the extent that existing resources and future earnings are insufficient to fund
the Company's activities, the Company may need to raise additional funds
through debt or equity financings.  No assurance can be given that such
additional financing will be available or that, if available, it can be
obtained on terms favorable to the Company and its stockholders.  In addition,
any equity financing could result in dilution to the Company's stockholders. 
The Company's inability to obtain adequate funds would  adversely affect the
Company's operations and ability to implement its strategy.

PAGE 18
<PAGE>

                                    PART II
                               OTHER INFORMATION

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         The Company held its 1997 Annual Meeting of Stockholders on May 22,
1997.  The matters submitted to the stockholders were the election of two Class
I directors to hold office for a three year term and to approve an amendment to
the 1996 Stock Option Plan to provide a per employee limit on stock option
grants in any one year.  The number of votes cast for, against and withheld, as
well as the number of abstentions and broker non-votes, as to each matter are
presented immediately below.

<TABLE>
<CAPTION>

MATTERS SUBMITTED TO
STOCKHOLDERS                    FOR        AGAINST     WITHHELD   ABSTENTIONS

<S>                             <C>        <C>         <C>        <C>
I.  Election of Directors       

        Gary Barber             5,260,525                   600
        Garth Saloner           5,259,425                 1,700

II. Amendment to 1996
    Stock Option
        Plan                    5,248,995    6,330                      5,800

</TABLE>


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

         (a)     Exhibits.

                 10.1     Lease Agreement dated May 16, 1997 between Topanga &
                          Victory Partners L.P. and Brilliant Digital
                          Entertainment, Inc. [Confidential Treatment
                          Requested].
                 11.1     Computation of Per Share Earnings (Loss).
                 27.1     Financial Data Schedule.

         (b)     Reports on Form 8-K.
         
                 None.

PAGE 19
<PAGE>
                                  SIGNATURES

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

                                  BRILLIANT DIGITAL ENTERTAINMENT, INC.

Date:  August 13, 1997                  /s/Michael Ozen
                                  ------------------------------------
                                  By:   Michael Ozen
                                  Its:  Chief Financial Officer (Principal
                                        Financial and Accounting Officer)
                                        and Secretary

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<PAGE>
                                 EXHIBIT INDEX


EXHIBIT 
NUMBER                    EXHIBIT DESCRIPTION
-------                   -------------------
10.1                      Lease Agreement dated May 16, 1997 between Topanga &
                          Victory Partners L.P. and Brilliant Digital
                          Entertainment, Inc. [Confidential Treatment
                          Requested].

11.1                      Computation of Earnings (Loss) per Common Share.

27.1                      Financial Data Schedule.


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