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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 June 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.)

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

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

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

                                 Yes [X] No [ ]

     State the number of shares  outstanding of each of the issuer's  classes of
common  equity,  as of the latest  practicable  date:  Common  Stock,  par value
$0.001, 24,891,142 shares issued and outstanding as of August 2, 2002.

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

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<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                      INDEX



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

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

           Condensed Consolidated Balance Sheet as of
           June 30, 2002 (unaudited)...........................................3

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

           Condensed Consolidated Statements of Cash Flows
           for the six months ended June 30, 2002 (unaudited)
           and June 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

PART II    OTHER INFORMATION..................................................27

Item 2.    Changes in Securities and Use of Proceeds..........................27

Item 4.    Submission of Matters to a Vote of Security Holders................28

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



<PAGE>


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

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


                                                                       JUNE 30,
                                                                         2002
                                                                       --------
ASSETS                                                               (unaudited)
Current assets:
     Cash and cash equivalents .................................       $    330
     Accounts receivable, net ..................................            213
     Other assets, net .........................................            180
                                                                       --------
Total current assets ...........................................            723
Property, plant and equipment, net .............................            142
Other assets, net ..............................................            364
                                                                       --------
Total assets ...................................................       $  1,229
                                                                       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable ..........................................       $    480
     Accrued expenses ..........................................            356
     Deferred revenue ..........................................            917
     Capital financing, net of discount ........................          1,979
     Current portion of notes payable ..........................            116
                                                                       --------
Total current liabilities ......................................          3,848
Deferred revenue ...............................................          2,097
Long-term debt .................................................          1,067
Notes payable, less current portion ............................              9
Other long term liabilities ....................................             50
                                                                       --------
Total liabilities ..............................................          7,071
Commitments and contingencies
Stockholders' deficit:
     Common stock ..............................................             25
     Additional paid-in capital ................................         52,386
     Accumulated deficit .......................................        (57,972)
     Cumulative other comprehensive loss .......................           (281)
                                                                       --------
Total stockholders' deficit ....................................         (5,842)
                                                                       --------
 Total liabilities and stockholders' deficit ...................       $  1,229
                                                                       ========

                 See Notes to Consolidated Financial Statements.


                                       3


<PAGE>


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



                                      3 MONTHS ENDED          6 MONTHS ENDED
                                   --------------------    --------------------
                                   6/30/01     6/30/02     6/30/01     6/30/02
                                   --------    --------    --------    --------
                                 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUE:
   Revenues ....................   $    652    $    375    $  1,042    $    668
                                   --------    --------    --------    --------


COST OF REVENUES AND EXPENSES:
Cost of revenues ...............        384          39         417          91
Sales & marketing ..............        223         103         520         125
Website development ............         20          97          87          97
General and administrative .....      1,416       1,251       2,423       1,808
Research and development .......        299          46         909         136
Depreciation ...................         58          14         178          31
                                   --------    --------    --------    --------
Total cost of revenues and
   expenses ....................      2,400       1,550       4,534       2,288
                                   --------    --------    --------    --------
Loss from operations ...........     (1,748)     (1,175)     (3,492)     (1,620)
OTHER INCOME (EXPENSE):
Export market development grant        --          --            31        --
Gain (loss) on foreign exchange          19        --            44        --
Gain (loss) on sale of assets ..         25        --            25        --
Debenture expense ..............        (14)       --           (14)       --
Interest income (expense), net .         15        (909)         29      (1,775)
                                   --------    --------    --------    --------
   Total other income (expense)          45        (909)        115      (1,775)
                                   --------    --------    --------    --------

Loss from continuing operations      (1,703)     (2,084)     (3,377)     (3,395)
Gain (loss) from discontinued
   operations ..................        484        --            23        --
                                   --------    --------    --------    --------
Net loss before income tax .....     (1,219)     (2,084)     (3,354)     (3,395)
Provision for income tax .......       --          --          --          --
                                   --------    --------    --------    --------
Net loss .......................     (1,219)     (2,084)     (3,354)     (3,395)
Foreign currency translation
   adjustment ..................        (18)         12         (80)          8
                                   --------    --------    --------    --------
Comprehensive loss .............   $ (1,237)   $ (2,072)   $ (3,434)   $ (3,387)
                                   ========    ========    ========    ========
Basic and diluted net loss
   continuing operations .......      (0.11)      (0.09)      (0.21)      (0.16)
                                   ========    ========    ========    ========
Basic and diluted net loss
   discontinuing operations ....       0.03        --          0.00        --
                                   ========    ========    ========    ========

Basic & diluted net loss per
   share .......................   $  (0.08)   $  (0.09)   $  (0.21)   $  (0.16)
                                   ========    ========    ========    ========
Weighted average number of
   shares used in computing
   basic and diluted net loss
   per share ...................     16,054      24,317      16,054      21,197
                                   ========    ========    ========    ========

                 See Notes to Consolidated Financial Statements.


                                       4


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

                                                               SIX MONTHS
                                                              ENDED JUNE 30,
                                                          ---------------------
                                                            2002          2001
                                                          -------       -------
                                                       (unaudited)   (unaudited)
OPERATING ACTIVITIES
Net loss ...........................................      $(3,395)      $(3,354)
Adjustments to reconcile net loss to the
   net cash used in operating activities:
      Depreciation and other amortization ..........          174           776
      Debt discount and financing interest .........        1,723         1,054
      Loss from discontinued operations ............         --             363
      Loss (gain) on foreign exchange ..............         --              40
      Effect of warrants granted ...................          229           509
      Changes in operating assets and
        liabilities:
         Accounts receivable .......................         (140)           30
         Other assets ..............................         --            (313)
         Accounts payable and accruals .............          480          (345)
         Deferred revenue ..........................         (457)         (458)
         Other long-term liabilities ...............          (84)       (1,178)
                                                          -------       -------
Total adjustments ..................................        1,925           478
                                                          -------       -------
Net cash used in continuing activities .............       (1,470)       (2,876)
Net cash used in discontinued operations ...........         --            (311)
                                                          -------       -------
Net cash used in operating activities ..............       (1,470)       (3,187)

INVESTING ACTIVITIES
Purchases of equipment .............................         --             (21)
                                                          -------       -------
Net cash used in investing activities ..............         --             (21)

FINANCING ACTIVITIES
Proceeds from issuance of shares, net
   of costs ........................................        1,229          --
Proceeds from the issuance of capital
   financing .......................................          400         2,268
Repayments of notes ................................          (22)          (27)
                                                          -------       -------
Net cash provided by financing activities ..........        1,607         2,241
                                                          -------       -------
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS .....................................          137          (967)

Translation adjustments ............................            8           (80)
Cash and cash equivalents at beginning
   of period .......................................          185         3,187
                                                          -------       -------
Cash and cash equivalents at end of
   period ..........................................      $   330       $ 2,140
                                                          =======       =======

Supplemental  disclosure of cash flow
   information:
   Cash paid during the period for:
      Interest .....................................      $     9       $    10
                                                          =======       =======

                 See Notes to Consolidated Financial Statements.


                                       5


<PAGE>


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 (the "Original Notes")
with warrants to purchase shares of our common stock. Interest accrues at 10%. 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 Original Notes.

     In connection with these promissory Notes, we amortized  $1,595,897 of debt
discount expense and $149,086 interest expense in the first six months of 2002.

     In the  first  half of  2002,  the  Company  issued  warrants  to  purchase
1,259,286  shares of  common  stock in  consideration  for  consulting  services
provided by six  consultants,  and expensed  $229,000 in  connection  with these
warrants.


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<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 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 June 30,  2002 had an  accumulated
deficit  of  $58.0  million.  These  conditions,  combined  with  the  Company's
historical  operating  losses,  raise  substantial  doubt  about our  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.

     The Company adopted two new 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
our consolidated financial statements.


                                       7


<PAGE>


     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 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.

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 for Harris  Toibb,
Markev Services, LLC and David Wilson. 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.

     Options and warrants representing common shares of 6,221,443 and 65,675,034
were excluded  from the average  number of common and common  equivalent  shares
outstanding  in the diluted EPS  calculation  for the six months  ended June 30,
2001 and 2002,  respectively,  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 June 30,
2002.

3.   COMMITMENTS AND CONTINGENCIES

     At June 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.


                                       8


<PAGE>


     The  Company  has two fixed  asset  financing  notes  with  future  minimum
payments as of June 30, 2002 as follows:

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

              2002                                    25,000
              2003                                    31,000
                                                -------------
                                                     $56,000
                                                =============

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

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

              2002                                    41,000
              2003                                     7,000
                                                -------------
                                                     $48,000
                                                =============

     Rent  expense was  $281,000  and $42,000 for the six months  ended June 30,
2001 and the six months ended June 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:

                                                        UNITED
                                                        STATES         AUSTRALIA
                                                      ----------      ----------

SIX MONTHS ENDED JUNE 30, 2002:
   Revenues from unaffiliated customers ........      $  661,000      $    7,000
   Revenues from affiliated customers ..........            --              --
                                                      ----------      ----------
   Total revenues ..............................      $  661,000      $    7,000
                                                      ==========      ==========

SIX MONTHS ENDED JUNE 30, 2001:
   Revenues from unaffiliated customers ........      $1,032,000      $   10,000
   Revenues from affiliated customers ..........            --              --
                                                      ----------      ----------
   Total revenues ..............................      $1,032,000      $   10,000
                                                      ==========      ==========

LONG-LIVED ASSETS AS OF:
   June 30, 2002 ...............................      $  431,000      $   75,000
                                                      ==========      ==========


                                       9


<PAGE>


     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,  royalties due to third
parties, a major portion of the sales and marketing costs, and certain corporate
expenses were incurred and paid in the United States.

     For the six months ended June 30, 2002, e-New Media and Internet Fuel, Inc.
accounted for 69% ($458,000) and 13% ($89,000),  respectively,  of our revenues,
while  various  advertisers  made up the  balance of the  revenues.  For the six
months ended June 30, 2001,  e-New Media  represented  44% of the revenues  with
distribution and licensing rights ($458,000).  Island Def Jam contributed 22% of
the  revenue  ($226,000).   Warner  Bros.  Online  contributed  revenue  of  13%
($136,000), while Infogrames contributed 10% ($100,000) of the revenue.


                                       10


<PAGE>


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 six months ended June 30, 2002 and
June 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  computer  networking  solutions.  We commercialize our advertising
technology  in two primary ways.  We license our rich media  advertising  server
technologies  to web sites to enable the selling and serving of our  proprietary
rich media advertising  format,  and 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.

     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 are also  introducing  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 other  information,  processing cycles (the cycles
by which data is processed in the central


                                       11


<PAGE>


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 files that respond
to particular  search words associated with those files (we call this TopSearch)
for display in the search results  section  inside the KaZaA Media  Desktop.  We
charge a placement fee, fee per download  and/or  participate on a revenue share
basis.. To protect against  infringement of the proprietary rights of the owners
of the content  distributed  over the Altnet  network,  we license  commercially
available  digital  rights  management   ("DRM")  technology  and  "wrap"  files
propagated  on the  network  with the DRM.  Additionally,  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  serving and authoring tools businesses,  and to
pursue the development of our Altnet subsidiary.

     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.


                                       12


<PAGE>


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 our
content on third party web sites,  are recognized  when the third party accounts
to us. 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 36% from  $1,042,000  for the six months ended June 30,
2001 to $668,000 for the six months  ended June 30, 2002.  During the six months
ended June 30, 2002, our primary  sources of revenue were from our  distribution
and technology agreements with e-New Media, which generated $458,000 in revenue,
and from advertising activities.  In 2001, e-New Media generated $458,000, while
Island Def Jam produced $226,000 and Warner Bros. Online generated $136,000.  We
also earned $100,000 from an advertising agreement with Infogrames. 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.

     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 productions. Cost of revenues decreased significantly from $417,000
for the six months  ended June 30, 2001 to $91,000 for the six months ended June
30, 2002. This represents a decrease of $326,000, or 78%, 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  $53,000  in 2001 to  $39,000  in 2002,  as two of our  licensing
agreements were fully amortized during 2001.

     SALES AND MARKETING.  Sales and marketing expenses were reduced by 76% from
$520,000  for the six months  ended June 30, 2001 to $125,000 for the six months
ended June 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 is also  attributable to the reduction
in our use of outside sales and marketing consultants.  The $125,000 incurred in
the six months  ended June 30, 2002 is primarily  attributable  to fees to sales
consultants and our initial marketing efforts for Altnet, Inc.

     GENERAL AND ADMINISTRATIVE.  General and administrative  expenses primarily
include salaries and benefits of management and administrative personnel,  rent,
insurance  costs and


                                       13


<PAGE>


professional fees. General and administrative expenses decreased $615,000 or 25%
from $2,423,000 for the six months ended June 30, 2001 to $1,808,000 for the six
months  ended June 30,  2002.  This  decrease  is  primarily  attributable  to a
decrease in salaries  and  employee  benefits of $277,000  due to a reduction in
headcount in the Los Angeles  office and a decrease in insurance  costs,  plus a
reduction of $30,000 in travel costs. Additionally,  rent expense was reduced by
$42,000 due to the partial closing of office space 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 $175,000.  Expenses  were  additionally
decreased  by $234,000  by the  closure of the Digital Hip Hop office.  With the
commencement  of  operations  at  our  Altnet  peer-to-peer  subsidiary,   other
consulting  and  professional  fees  remained  consistent  for the 2001 and 2002
periods.  The decreases in general and  administrative  expenses were  partially
offset by a one-time  expense of $135,000  that we incurred in  connection  with
warrants issued for consulting services during the 2002 period.

     RESEARCH  AND  DEVELOPMENT.   Research  and  development  expenses  include
salaries and  benefits of  personnel  conducting  research  and  development  of
software products.  Research and development costs also include costs associated
with creating our software tools used to develop MultipathTM Movies, 3D animated
content for banner ads and  Internet  web site  development  costs.  These costs
decreased  85% from  $909,000 for the six months ended June 30, 2001 to $136,000
for the six months ended June 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 June 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 83% from $178,000 for the six months ended June
30,  2001 to $31,000 for the six months  ended June 30,  2002.  The  decrease is
attributable  to the full  amortization of certain fixed assets prior to the six
months ended June 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
subsidiary,  Brilliant  Interactive  Ideas Pty.  Ltd., by the  Australian  Trade
Commission for its participation in certain export activities.  Other income and
expense decreased from income of $115,000 for the six months ended June 30, 2001
to a loss of $1,775,000  for the six months ended June 30, 2002. The loss is due
to a non-cash debt discount  expense of $1,596,000 and accrued  interest expense
of $149,000  incurred in  connection  with our sale of  $3,014,150  in principal
amount of convertible  promissory notes in 2001. During the remaining two fiscal
quarters  of 2002,  we will incur an  additional  $1,301,000  in  non-cash  debt
discount expense in connection with this financing transaction. We have incurred
an  additional  $30,000 in  interest  expense  pertaining  to several  licensing
agreements and a note.  During the first half of 2001, we earned $31,000 for the
trade  export  grant,  recognized  a


                                       14


<PAGE>


gain of  $25,000  on the sale of assets,  recognized  a $44,000  gain on foreign
exchange transactions and earned $15,000 of interest income, net of expense.

     NET LOSS ON DISCONTINUED OPERATIONS. The Auction Channel has been accounted
for as a discontinued  operation  pursuant to  Management's  formal  adoption on
December 31, 2000 of a plan to dissolve the business unit. A net gain of $23,000
was  recognized  for the six months ended June 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 June 30, 2002, our cash and cash  equivalents  totaled  approximately
$330,000,  of which  $75,000 is  restricted  and held in  escrow.  This is a net
increase of $145,000 as compared to December  31,  2001.  The increase is due to
debt and equity financing  transactions  consummated  during January,  March and
April in which we raised an  aggregate  of  $1,629,000,  offset by a net loss of
$3,395,000.

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

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

        Continuing Operations         $  ( 1,470,000)        $  (2,876,000)
        Discontinuing Operations      $          --          $    (311,000)
        Investing                     $          --          $     (21,000)
        Financing                     $    1,607,000         $   2,241,000

     Net cash of $1,470,000 used in operating  activities  during the six months
ended June 30, 2002 was primarily  attributable to a net loss from operations of
$3,395,000.  This is compared  to a net use of cash during the six months  ended
June 30, 2001 of  $2,876,000  attributable  to a net loss of  $3,354,000  and an
additional use of cash of $311,000 attributable to discontinued operations.

     Net cash used to purchase computer equipment amounted to $21,000 in the six
months ended June 30, 2001.

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

     At June 30,  2002,  we had rental  commitments  for our office  facility of
$48,000 and two  promissory  notes for the  financing  of office  furniture  and
computer  equipment in the amount of $26,000 and $30,000 payable over the next 2
years. Our contractual obligations are as follows:

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

        Capital Leases          $56,000           $25,000           $31,000
        Operating Lease         $48,000           $41,000           $ 7,000


                                       15


<PAGE>


     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. See Note 2 to Notes to Consolidated Financial Statements.

     Our  operations  generated  negative  cash flow during the six months ended
June 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 initiate the business
opportunity for Altnet,  Inc., as well as continue to develop our software tools
and continue our marketing  efforts for our tools and 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 latter half of the third quarter of 2002. Consequently, we
will require  additional  equity or debt  financing  during 2002, 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  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.


                                       16


<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


                                       17


<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 June 30,  2002,  our cash  balance was
approximately  $330,000 and our outstanding  accounts payable,  accrued expenses
and current notes payable totaled $952,000,  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 June  30,  2002 we had an  accumulated  deficit  of $58.0
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 is not fully  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 explanatory


                                       18


<PAGE>


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 mature on
November 10, 2002,  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 $.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 August 2, 2002, the principal and interest outstanding under the Notes
could be converted by the holders into 27,549,846 shares of common stock,  which
would represent 52.5% 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
44,542,717shares  of our Common Stock at an exercise price of $0.1203 per share.
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 and second  quarters of 2002, we raised an additional  $1,250,000  through
the sale of 8,327,482  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  14,904,031  shares of common stock at exercise  prices  ranging from
$0.148725  to $0.28125 per share.  We  anticipate  that during the  remainder of
2002, 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 August 2, 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:

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

Outstanding Common Stock                       24,891,142          33.5%
Convertible Promissory Notes                   33,755,181          45.4%
Outstanding Warrants(1)                        10,368,874          13.9%
Outstanding Options                             5,324,000           7.2%
                                             ------------    -------------------
  Fully Diluted Shares of Common Stock(2)      74,339,197         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  exercise price of
     the  warrants,  and is  calculated  based on the closing sales price of our
     common stock on the American  Stock  Exchange on August 2, 2002,  which was
     $0.17.


                                       19


<PAGE>


(2)  This number  excludes  (i)  14,530,375  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  August  2,  2002,  and (ii)
     49,897,160  shares  underlying  warrants that have exercise  prices ranging
     from $0.195 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 stated  maturity in November 2002, 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 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,   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.

     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.


                                       20


<PAGE>


     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 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
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 the future  distribution of our technology.  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


                                       21


<PAGE>


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.

     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


                                       22


<PAGE>


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.

     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;


                                       23


<PAGE>


     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:

     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


                                       24


<PAGE>


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 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


                                       25


<PAGE>


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.


                                       26


<PAGE>


                                     PART II

                                OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     In April 2002, we sold an aggregate of 2,276,045 shares of its common stock
to eight  investors  in a private  placement  for  aggregate  proceeds  to us of
$450,000.  The prices per share ranged from $0.1731 to $0.25,  and were based on
the  market  price of our common  stock at the time the  investor  committed  to
purchase the shares.  In  connection  with the  offering,  we 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.  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  February  2002,  we issued to VoxPop,  LLC  warrants  to purchase up to
200,000 shares of our common stock at an exercise price of $0.15 per share.  The
warrants  have a term of 4 years.  The  warrants  were issued to VoxPop,  LLC in
consideration of consulting  services provided to us. VoxPop, LLC 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.

     In April  2002,  we issued to The Rose Group  warrants  to  purchase  up to
14,823 shares with an exercise price of $0.4385,  20,212 shares with an exercise
price of $0.3216,  and 39,251  shares  with an exercise  price of $0.1656 of our
common stock.  The warrants have a term of 3 years.  The warrants were issued to
The Rose Group in consideration of consulting  services provided to us. The Rose
Group 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.

     In April 2002, we issued to Business Development Experts,  Inc. warrants to
purchase up to 250,000  shares of our common stock at an exercise price of $0.25
per share.  The warrants  have a term of 4 years.  The  warrants  were issued to
Business  Development  Experts,  Inc. in  consideration  of consulting  services
provided to us. Business Development Experts, 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


                                       27


<PAGE>


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 April 2002, we issued to mPRm Public  Relations  warrants to purchase up
to 75,000  shares of our common  stock at an exercise  price of $0.25 per share.
The warrants  have a term of 3 years.  The  warrants  were issued to mPRm Public
Relations in  consideration of consulting  services  provided to us. mPRm Public
Relations  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.

     In April 2002, we issued to KaZaA,  B.V. warrants to purchase up to 150,000
shares of our  common  stock at an  exercise  price of $0.2710  per  share.  The
warrants have a term of 30 months.  The warrants  were issued to KaZaA,  B.V. in
consideration of consulting services provided to us. KaZaA, B.V.  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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On June 20, 2002, we held our 2002 Annual Meeting of  Stockholders.  At the
annual meeting,  there were  24,731,142  shares entitled to vote, and 17,297,321
shares (70%) were represented at the meeting in person or by proxy.  Immediately
prior to and following the meeting, the Board of Directors was comprised of Mark
Dyne, Kevin Bermeister,  Mark Miller, Russell Simmons, Ray Musci, Garth Saloner,
Jeff Scheinrock and Abe Sher.

     The following  summarizes  vote results for those matters  submitted to our
stockholders for action at the annual meeting:

     1. Proposal to elect Mark Dyne,  Kevin  Bermeister and Abe Sher to serve as
our Class III  directors  for three years and until their  successors  have been
elected.

          Director                     For                      Withheld
          --------                     ---                      --------
         Mark Dyne                  17,234,763                   62,558
      Kevin Bermeister              17,234,763                   62,558
          Abe Sher                  17,234,763                   62,558


                                       28


<PAGE>


     2. Proposal to  amend our 1996 Stock  Option Plan to increase the number of
authorized shares by 16,500,000 shares.

            For              Against         Abstain         Broker Non-Votes
            ---              -------         -------         ----------------
         10,364,725          211,973          2,700             6,717,923

     3. Proposal to amend the  Company's  1996 Stock Option Plan to increase the
number of shares which may be granted to an individual in any single year.

            For              Against          Abstain        Broker Non-Votes
            ---              -------         -------         ----------------
         8,743,025           204,140         1,632,233          6,717,923

     4. Proposal to  amend the  Company's  Amended and Restated  Certificate  of
Incorporation  to increase the aggregate number of shares of common stock of the
Company, per value $0.001, from 150,000,000 to 250,000,000.

            For              Against         Abstain          Broker Non-Votes
            ---              -------         -------         ----------------
         17,227,383           67,190          2,748                  --


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

     3.1  Amended and Restated  Certificate of  Incorporation of the Registrant,
          as  amended  by  that  certain   Amendment  to  Amended  and  Restated
          Certificate of Incorporation of the Registrant
     10.1 Form of Warrant to Purchase  Common Stock from March 7, 2002 and March
          20, 2002 financings.
     10.2 Form of Warrant to Purchase Common Stock from April 2, 2002 financing.
     10.3 Form  of  Warrant  to  Purchase  Common  Stock  from  April  23,  2002
          financing.
     10.4 Warrant to Purchase  Common Stock,  dated February 1, 2002,  issued in
          favor of VoxPop, LLC.
     10.5 Form of Warrant to Purchase Common Stock,  dated April 5, 2002, issued
          in favor of The Rose Group.
     10.6 Warrant to Purchase  Common  Stock,  dated April 15,  2002,  issued in
          favor of Business Development Experts, Inc.
     10.7 Warrant to Purchase  Common  Stock,  dated April 15,  2002,  issued in
          favor of mPRm Public Relations.
     10.8 Warrant to Purchase  Common  Stock,  dated April 22,  2002,  issued in
          favor of KaZaA, B.V.
     99.1 Certificate of our Chief Executive Officer and Chief Financial Officer
          pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


                                       29


<PAGE>


(b)  Reports on Form 8-K:

     The Company filed a Current Report on Form 8-K on April 22, 2002, reporting
     termination of the Company's Rights Agreement.


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


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