================================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

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


                  For the quarterly period ended March 31, 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, 24,731,142 shares issued and outstanding as of May 8, 2002.

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


================================================================================


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                      INDEX

                                                                            PAGE
                                                                            ----
PART I    FINANCIAL INFORMATION...............................................3

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

          Condensed Consolidated Balance Sheet as of March 31, 2002...........3

          Condensed Consolidated Statements of Operations for the
          three months ended March 31, 2002 and March 31, 2001................4

          Condensed Consolidated Statements of Cash Flows for the
          three months ended March 31, 2002 and March 31, 2001................5

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

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

PART II   OTHER INFORMATION..................................................25

Item 2.   Changes in Securities and Use of Proceeds..........................25

Item 4.   Submission of Matters to a Vote of Security Holders................25

Item 6.   Exhibits and Reports on Form 8-K...................................25


                                     Page 2
<PAGE>


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS


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

                                                                MARCH 31,
                                                                   2002
                                                               ------------
ASSETS                                                          (unaudited)
Current assets:
   Cash and cash equivalents............................       $      771
   Accounts receivable, net.............................               71
   Other assets, net....................................              236
                                                               -----------
Total current assets....................................            1,078
Property, plant and equipment, net......................              127
Other assets, net.......................................              405
                                                               -----------
Total assets............................................       $    1,610
                                                               ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable.....................................       $      368
   Accrued expenses.....................................            1,096
   Deferred revenue.....................................              917
   Capital financing, net of discount...................            1,123
   Current portion of notes payable.....................              137
                                                               -----------
Total current liabilities...............................            3,641
Deferred revenue........................................            2,326
Notes payable, less current portion.....................               20
Other long term liabilities.............................               50
                                                               -----------
Total liabilities.......................................            6,037
Commitments and contingencies
Stockholders' deficit:
   Common stock.........................................               22
   Additional paid-in capital...........................           51,732
   Accumulated deficit..................................          (55,888)
   Cumulative other comprehensive loss..................             (293)
                                                               -----------
Total stockholders' deficit.............................           (4,427)
                                                               -----------
Total liabilities and stockholders' deficit.............       $    1,610
                                                               ===========

                 See Notes to Consolidated Financial Statements.


                                     Page 3
<PAGE>


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

                                                                           THREE MONTHS
                                                                          ENDED MARCH 31,
                                                                     -------------------------
                                                                         2002         2001
                                                                     -----------   -----------
                                                                     (unaudited)   (unaudited)
<S>                                                                  <C>           <C>
Revenues..........................................................   $     293     $    390
Costs and expenses:
    Costs of revenues.............................................          52           33
    Sales and marketing...........................................          22          297
    General and administrative....................................         557        1,007
    Research and development......................................          90          678
    Depreciation and amortization.................................          17          120
                                                                     ----------    ---------
                                                                           738        2,135
                                                                     ----------    ---------
Loss from operations..............................................        (445)      (1,745)
Other income (expense):
    Export market development grant...............................          --           33
    Gain on foreign exchange......................................          --           23
    Interest income (expense), net................................        (866)          14
                                                                     ----------    ---------
    Total other income (expense)..................................        (866)          70
                                                                     ----------    ---------
Loss from continuing operations...................................      (1,311)      (1,675)
Loss from discontinued operations.................................          --         (460)
                                                                     -----------   ---------
Net loss before income taxes......................................      (1,311)      (2,135)
Provision for income taxes........................................          --           --
                                                                     ----------    ---------
Net loss..........................................................      (1,311)      (2,135)

Foreign currency translation adjustment (net of tax effects)......          (4)         (62)
                                                                     ---------     ---------
Comprehensive loss................................................   $  (1,315)    $ (2,197)
                                                                     ==========    =========

Basic and diluted continuing operations loss per share............   $   (0.07)    $  (0.10)
                                                                     ==========    =========
Basic and diluted for discontinued operations per share...........   $   (0.00)    $  (0.03)
                                                                     ==========    =========
Basic and diluted net loss per share..............................   $   (0.07)    $  (0.13)
                                                                     ==========    =========
Weighted average number of shares used in computing
    basic and diluted net loss per share..........................      17,850       16,054
                                                                     ==========    =========
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                     Page 4
<PAGE>


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

                                                                       THREE MONTHS
                                                                     ENDED MARCH 31,
                                                                 -------------------------
                                                                    2002          2001
                                                                 -----------   -----------
                                                                 (unaudited)   (unaudited)
OPERATING ACTIVITIES
<S>                                                              <C>           <C>
Net loss.......................................................   $  (1,311)    $  (2,135)
Adjustments to reconcile net loss to the net cash
   used in operating activities:
     Depreciation and other amortization.......................         936           478
     Loss from discontinued operations.........................          --           460
     Loss (gain) on foreign exchange...........................          --            25
     Effect of warrants granted................................          21           298
     Changes in operating assets and liabilities:
       Accounts receivable.....................................           1          (138)
       Other assets............................................           2          (229)
       Accounts payable and accruals...........................          46          (219)
       Deferred revenue........................................        (229)         (229)
       Other long-term liabilities.............................         (65)          (60)
                                                                  ----------    ----------
Total adjustments..............................................         712           386
                                                                  ----------    ----------
Net cash used in continuing activities.........................        (599)       (1,749)
Net cash used in discontinued operations.......................          --          (490)
                                                                  ----------    ----------
Net cash used in operating activities..........................        (599)       (2,239)

INVESTING ACTIVITIES
Purchases of equipment.........................................          --           (12)
                                                                  ----------    ----------
Net cash used in investing activities..........................          --           (12)

FINANCING ACTIVITIES
Proceeds from issuance of shares, net of costs.................         800            --
Proceeds from the issuance of capital financing................         400            --
Repayments of notes............................................         (11)          (14)
                                                                  ----------    ----------
Net cash provided by financing activities......................       1,189           (14)
                                                                  ----------    ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...........         590        (2,265)

Translation adjustments........................................          (4)          (62)
Cash and cash equivalents at beginning of period...............         185         3,401
                                                                  ----------    ----------
Cash and cash equivalents at end of period.....................   $     771     $   1,074
                                                                  ==========    ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
   Interest....................................................   $       4     $       4
                                                                  ==========    ==========
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                     Page 5
<PAGE>


SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

     In May 2001, we issued $2,264,150 in principal amount of Secured
Convertible Promissory Notes (the "Original Notes") with warrants to purchase
shares of our common stock. A beneficial conversion feature of $1,056,000 was
recorded in connection with this transaction, which is being amortized on a
straight-line basis over the life of the Original Notes.

     In December 2001, we issued an additional $350,000 in principal amount of
Secured Convertible Promissory Notes as part of an overall financing of
$750,000, the balance of which was funded in 2002 (the "New Notes"), with
warrants to purchase shares of our common stock. A beneficial conversion feature
of $295,000 was recorded in connection with this transaction, which is being
amortized on a straight-line basis over the life of the New Notes.

     Also in December 2001, the conversion feature and warrants issued in
connection with the Original Notes were adjusted to the same terms as the New
Notes. As such, an additional beneficial conversion feature of $1,632,000 was
recorded and will be amortized on a straight-line basis over the remaining life
of the Original Notes.

     In January 2002, we issued the remaining $400,000 in principal amount of
Secured Convertible Promissory Notes as part of the overall New Notes financing.
A beneficial conversion feature of $337,000 was recorded in connection with this
transaction, which is being amortized on a straight-line basis over the life of
the New Notes.

     In connection with these promissory Notes, we amortized $793,000 of debt
discount expense and $73,000 interest expense in the first quarter of 2002.


                                     Page 6
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 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. The Company has a limited operating history and has not
attained profitability. Since inception, the Company has incurred significant
losses and negative cash flow, and as of March 31, 2002 had an accumulated
deficit of $55.9 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.

2.   STOCKHOLDERS' EQUITY

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

     Options and warrants representing common shares of 3,384,140 and 58,514,828
were excluded from the average number of common and common equivalent shares
outstanding in the diluted EPS calculation for the three months ended March 31,
2001 and 2002, respectively, because they were anti-dilutive. The increase in
the warrants is due to warrants issued in connection with capital financing
agreements transacted from May 1, 2001 through March 31, 2002.


                                     Page 7
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2002


3.   COMMITMENTS AND CONTINGENCIES

     At March 31, 2002, the Company was obligated under certain licensing
agreements to make minimum payments totaling $71,000 for use of certain
properties and characters in development of the Company's products.

     The Company has two fixed asset financing notes with future minimum
payments as of March 31, 2002 as follows:

                        YEAR                          AMOUNT
                    --------------                  -----------
                        2002                            40,000
                        2003                            31,000
                                                    -----------
                                                       $71,000
                                                    ===========

     The Company leases its facilities under operating lease agreements expiring
through 2003. Future minimum payments as of March 31, 2002 under these leases
are as follows:

                        YEAR                          AMOUNT
                    --------------                  -----------
                        2002                            62,000
                        2003                             7,000
                                                    -----------
                                                       $69,000
                                                    ===========

     Rent expense was $99,000 and $21,000 for the three months ended March 31,
2001 and the three months ended March 31, 2002, respectively.

4.   GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

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


                                     Page 8
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 2002


<TABLE>
<CAPTION>
                                                 UNITED                      UNITED
                                                 STATES       AUSTRALIA     KINGDOM
                                               ------------  ------------  -----------
<S>                                            <C>           <C>           <C>
THREE MONTHS ENDED MARCH 31, 2001:
   Revenues from unaffiliated customers...        $151,000       $10,000       $9,000
   Revenues from affiliated customers.....         229,000            --           --
                                               ------------  ------------  -----------
   Total revenues.........................        $380,000       $10,000       $9,000
                                               ============  ============  ===========
THREE MONTHS ENDED MARCH 31, 2002:

   Revenues from unaffiliated customers...         $58,000        $6,000           --
   Revenues from affiliated customers.....         229,000            --           --
                                               ------------  ------------  -----------
   Total revenues.........................        $287,000        $6,000           --
                                               ============  ============  ===========

LONG-LIVED ASSETS AS OF:
   March 31, 2002.........................        $479,000       $53,000           --
                                               ============  ============  ===========
</TABLE>


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

     For the three months ended March 31, 2002, e-New Media represented 80% of
the revenues with distribution and licensing rights ($229,000). For the three
months ended March 31, 2001, e-New Media represented 59% of the revenues with
distribution and licensing rights ($229,000). Infogrames contributed 18%
($70,000) of revenues, while Warner Bros. Online contributed advertising
revenues of 12% ($46,000).

5.   SUBSEQUENT EVENTS

     In April 2002, the Company sold 2,116,045 shares of its common stock to
investors in a private placement at a price per share of $0.1731 for 491,045
shares and a price per share of $0.20 for 1,625,000 shares, for aggregate
proceeds to the Company of $410,000. In connection with the offering, the
Company also issued to the investors warrants to purchase up to 3,861,476 shares
of common stock at exercise prices of $0.19474 per share (for warrants for
491,045 shares) and $0.2175 per share (for warrants for 1,625,000 shares). The
warrants expire on May 23, 2004.


                                     Page 9
<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-K. 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 THREE MONTHS ENDED MARCH 31, 2002 AND
MARCH 31, 2001. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES
AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS
DESCRIBED BELOW UNDER THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS."

OVERVIEW

     Brilliant Digital Entertainment, Inc. is a developer of rich media
advertising serving technologies, software authoring tools and content for three
dimensional, or 3D, animation on the World Wide Web. During the third quarter of
2001, we began marketing and distributing our player, the "Digital Projector"
(required for the playback of our rich media content and advertisements) through
two large peer-to-peer, or P2P, networks, Sharman Networks, which operates the
KaZaA network (formerly operated by Consumer Empowerment B.V.), and StreamCast
Networks, which operates the Morpheus network. Previously, our primary method of
distribution was through the bundling of the Digital Projector with our
animation content which we syndicated to third party web sites. At December 31,
2001, we estimate that our Digital Projector had been distributed to tens of
millions of users based on KaZaA's weekly downloads as reported on Download.com,
as additional P2P connected computers and other users accessed the KaZaA and
Morpheus networks. Sharman Networks continues to distribute our player and
StreamCast Networks has discontinued its distribution. We commercialize our
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. With the decline of industry wide banner advertising revenues and click
through rates, we believe that our animated 3D banner advertisements perform
better than GIF banners and may help reinvigorate certain online advertising
campaigns. We license our rich media ad serving technologies, through our
wholly-owned subsidiary B3D, Inc., to high traffic web sites, including the P2P
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


                                    Page 10
<PAGE>


November 2001, we became a Rich Media Silver Vendor of DoubleClick, Inc. This
rich media certification was awarded after our technology passed the DoubleClick
tests for functionality, impression tracking and click tracking.

     In February 2002, we formed Brilliant P2P, Inc., later renamed Altnet,
Inc., to create a private, peer-to-peer network utilizing existing, proven
technology to leverage the processing, storage and distribution power of a
peer-to-peer network comprised of tens of millions of users. Altnet intends to
license commercially available digital rights management technology to protect
against infringement of the proprietary rights of the owners of the content
distributed over the Altnet network. Altnet licensed the peer-to-peer technology
necessary to operate the network from Blastoise, Ltd. doing business as Joltid.
Blastoise is owned and operated by the developers of the FastTrack P2P
technology, the underlying technology which operates the KaZaA and Grokster P2P
networks. Pursuant to our agreement, Blastoise acquired 49% of the outstanding
common stock of Altnet.

     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 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. Millions of computers are
logged onto the Internet at any given time, each with excess processing power,
excess storage capacity and unused bandwidth. Through Altnet, we intend to
create a private peer-to-peer network to enable our clients to access and
utilize this excess processing power, storage capacity and unused bandwidth for
multiple applications.

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

     We have licensed some of the world's best known characters for the
production and web distribution of episodic animations, called MultipathTM
Movies, that include SUPERMAN, XENA: WARRIOR PRINCESS, KISS, and ACE VENTURA,
and have produced animated music videos of top selling artists including Ja
Rule, Ludacris, DMX and Li'l Romeo. These full-screen productions, developed
using our proprietary suite of b3d software tools, have small files for faster
download relative to full video files. Currently we distribute our animated
content through Internet syndication partners including Warner Bros. Online,
Roadrunner and selected sites from the Universal Music Group.

     In 2001, we substantially reduced our internal production and syndication
of 3D animation, which we used primarily to distribute our Digital Projector, in
order to reduce our costs and our cash requirements. We have discontinued
operations at Digital Hip Hop, the joint venture we formed to produce animated
music videos for the World Wide Web, and have discontinued operations at, and
placed into liquidation, Brilliant Interactive Ideas Pty. Ltd., our
Australian-based production company. 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 a private,
peer-to-peer network business through our Altnet subsidiary.


                                    Page 11
<PAGE>


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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

RESULTS OF OPERATIONS

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

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

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


                                    Page 12
<PAGE>


non-refundable advances are recognized when the CD-ROM master is delivered to
the licensees. Royalty revenues in excess of non-refundable advances are
recognized upon notification by the distributor that a royalty has been earned.

     Revenues decreased 25% from $390,000 for the three months ended March 31,
2001 to $293,000 for the three months ended March 31, 2002. The primary source
of revenue is our distribution and technology agreements with e-New Media which
resulted in revenue of $229,000 in the three months ended March 31, 2001 and the
three months ended March 31, 2002 and from advertising revenues. The decrease in
revenues is due to a reduction in advertising revenue resulting from the
non-recurrence of a one-time advertising sale for $70,000, which occurred during
the three months ended March 31, 2001.

     COST OF REVENUES. Cost of revenues consists primarily of the amortization
of licensing royalties to third parties and the direct costs of banner
advertising. Cost of revenues increased from $33,000 for the three months ended
March 31, 2001 to $52,000 for the three months ended March 31, 2002. This
represents an increase of $19,000, or 58%, which is primarily due to the
development of banner ads created for Internet advertisers at a cost of $26,000
for the three months ended March 31, 2002. This increase is offset by a
reduction in royalty expense, from $26,000 in 2001 to $18,000 in 2002, as two of
our licensing agreements were fully amortized during 2001 and the three months
ended March 31, 2002. We also incurred initial costs of $5,000 pertaining to the
newly formed company, Altnet, Inc.

     SALES AND MARKETING. Sales and marketing expenses were reduced by 93% from
$297,000 for the three months ended March 31, 2001 to $22,000 for the three
months ended March 31, 2002. In the first quarter of 2001, we incurred $255,000
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 $22,000
incurred in the three months ended March 31, 2002 is primarily due 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 professional fees. General and administrative expenses
decreased $450,000 or 45% from $1,007,000 for the three months ended March 31,
2001 to $557,000 for the three months ended March 31, 2002. This decrease is
primarily attributable to a decrease in salaries and employee benefits of
$359,000 due to a reduction in headcount in the Los Angeles office and a
decrease in insurance costs. Additionally, rent expense was reduced by $78,000
due to the closing of production space in Australia and reduction of office
space in Los Angeles. The decrease was partially offset by an increase in legal
fees relating to our financing transactions in the three months ended March 31,
2002 and costs incurred related to Altnet, Inc.

     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 87% from $678,000 for the three months ended March 31, 2001 to $90,000
for the three months ended March 31, 2002 primarily due to a decrease in web
site development costs, research and development personnel and overhead costs
associated with research and


                                    Page 13
<PAGE>


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 March 31, 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 86% from $120,000 for the three months ended
March 31, 2001 to $17,000 for the three months ended March 31, 2002. The
decrease is attributable to completion of depreciation of certain fixed assets
prior to the three months ended March 31, 2002 and the disposal of other fixed
assets.

     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 $70,000 for the three months ended March 31,
2001 to a loss of $866,000 for the three months ended March 31, 2002. The loss
is due to a non-cash debt discount expense of $793,000 and accrued interest
expense of $73,000 incurred in connection with our sale of $3,014,150 in
principal amount of Convertible Promissory Notes in 2001. During the remaining
three fiscal quarters of 2002, we will incur an additional $2,082,000 in
non-cash debt discount expense in connection with this financing transaction.
During the first quarter of 2001, we earned $33,000 for the trade export grant,
recognized $23,000 in gain on foreign exchange transactions and earned $14,000
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 loss of
$460,000 was recognized for the three months ended March 31, 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 March 31, 2002, our cash and cash equivalents totaled approximately
$771,000. This is an increase of $586,000 as compared to December 31, 2001. The
increase is due to debt and equity financing transactions consummated during the
quarter in which we raised an aggregate of $1,200,000, partially offset by a net
loss of $1,311,00.

     Cash flows from operating, financing and investing activities for the three
months ended March 31, 2002 and 2001 are summarized in the following table:

<TABLE>
<CAPTION>
        ACTIVITY:                           2002              2001
        ----------------------------    --------------    --------------
        <S>                             <C>               <C>
        Continuing Operations           $  ( 599,000)     $  (1,749,000)
        Discontinuing Operations        $         --      $    (490,000)
        Investing                       $         --      $     (12,000)
        Financing                       $  1,189,000      $     (14,000)
</TABLE>

     Net cash of $599,000 used in operating activities during the three months
ended March 31, 2002 was primarily attributable to a net loss from operations of
$1,311,000. This is compared to a


                                    Page 14
<PAGE>


net use of cash during the three months ended March 31, 2001 of $1,749,000
attributable to a net loss of $2,135,000 and an additional use of cash of
$490,000 attributable to discontinued operations.

     Net cash used to purchase computer equipment amounted to $12,000 in the
three months ended March 31, 2001.

     We are required as of March 31, 2002 to make minimum payments of $37,000
under various licensing agreements.

     At March 31, 2002, we had rental commitments for our office facility of
$69,000 and two promissory notes for the financing of office furniture and
computer equipment in the amount of $36,000 and $35,000 payable over the next 2
years. Our contractual obligations are as follows:

<TABLE>
<CAPTION>
          CONTRACTUAL                      LESS THAN        1-3
          OBLIGATIONS          TOTAL         1 YEAR        YEARS
        -----------------    ----------   -----------    ---------
        <S>                  <C>          <C>            <C>
        Capital Leases         $71,000       $40,000      $31,000
        Operating Lease        $69,000       $62,000      $ 7,000
</TABLE>


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

     In April 2002, we sold an additional 2,116,045 shares of common stock to
investors in a private placement at a price per share of $0.1731 for 491,045
shares and a price per share of $0.20 for 1,625,000 shares, for aggregate
proceeds to the Company of $410,000. In connection with the offering, the
Company also issued to the investors warrants to purchase up to 3,861,476 shares
common stock at exercise prices of $0.19474 per share (for warrants for 491,045
shares) and $0.2175 per share (for warrants for 1,625,000 shares). The warrants
expire on May 23, 2004.

     Our operations generated negative cash flow during the three months ended
March 31, 2001 and 2002, and we expect a significant use of cash during the
upcoming 2002 fiscal year as we 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
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


                                    Page 15
<PAGE>


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.

     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


                                    Page 16
<PAGE>


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.

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 March 31, 2002, our cash balance was
approximately $771,000 and our outstanding accounts payable, accrued expenses
and current debt totaled $2,724,000. 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 March 31, 2002 we had an accumulated deficit of $55.9
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 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 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


                                    Page 17
<PAGE>


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 May 6,
2002, the principal and interest outstanding under the Notes could be converted
by the holders into 26,937,385 shares of common stock, which would represent
52.1% of our outstanding common stock immediately following the conversion. The
warrants have an expiration date of May 23, 2004 and entitle the holders to
purchase up to an aggregate of 200% of their invested capital in shares of our
Common Stock at a per share exercise price equal to 112.5% of the conversion
price. 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 quarter of 2002, we raised an additional $800,000
through the sale of 6,051,437 shares of common stock and common stock purchase
warrants. These warrants have an expiration date of May 23, 2004 and entitle the
holders to purchase up to an aggregate of 10,758,110 shares of our Common Stock
at a per share exercise price of $0.148725. We anticipate that during 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 May 6, 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:

<TABLE>
<CAPTION>
                                           SHARES OF       PERCENTAGE OF FULLY
SECURITY                                  COMMON STOCK       DILUTED SHARES
--------------------------------------    ------------     -------------------
<S>                                       <C>              <C>
Outstanding Common Stock                   24,731,142            25.6%
Convertible Promissory Notes               33,024,575            34.2%
Outstanding Warrants(1)                    35,885,272            37.2%
Outstanding Options                         2,944,000             3.0%
                                          ------------     -------------------
 Fully Diluted Shares of Common Stock(2)   96,584,989           100.0%
<FN>
------------------
(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 May 6, 2002, which was
     $0.36.
(2)  This number excludes 410,375 shares that have been reserved for issuance
     under our 1996 Stock Option Plan that currently are not the subject of an
     outstanding stock option or other award.
</FN>
</TABLE>

     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


                                    Page 18
<PAGE>


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, 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 launch and fund Altnet 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 SIGNIFICANT 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
increasing our emphasis on generating revenues from the sale of our b3d tools
for the creation of rich media Internet advertisements and from the sale of
technologies and services to Web publishers, third party advertising
representation firms, advertisers and agencies. In recent quarters, the market
for Internet advertising has experienced lower demand, lower prices for
advertisements and the reduction of marketing and advertising budgets. As a
consequence, expenditures for Internet advertisements have decreased. We cannot
be certain that future decreases will not occur and that spending on Internet
advertisement will return to historical levels. A continued decline in the
economic prospects of advertisers or the economy in general could cause us to
fail to achieve our advertising-related revenue projections.

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


                                    Page 19
<PAGE>


     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 USER'S 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. The KaZaA Media Desktop, as
well as other peer-to-peer software products, is currently the subject of a
lawsuit; METRO-GOLDWYN-MAYER STUDIOS, INC. ET. AL. V. GROKSTER, LTD. ET. AL.,
filed in the United States District Court for the Central District of California
(Western Division) by twenty-eight entertainment companies claiming that, among
other things, the KaZaA Media Desktop facilitates, contributes to and encourages
copyright infringement. On November 18, 2001, there was an additional complaint
filed, LIEBER ET. AL. V. CONSUMER EMPOWERMENT B.V. ET. AL. To the extent that
Sharman Networks is precluded from distributing the KaZaA Media Desktop as a
result of this litigation, it would prevent the further distribution of the
Digital Projector and Altnet peer-to-peer software with the KaZaA product which
could have a material adverse affect on our business and financial condition.

     OUR STOCK PRICE MAY DECLINE SIGNIFICANTLY IF WE ARE DELISTED FROM THE
AMERICAN STOCK EXCHANGE. Our common stock currently is quoted on the American
Stock Exchange. For continued inclusion on the American Stock Exchange, we must
meet certain tests, including maintaining a sales price for our common stock
above $1.00 per share, and net tangible assets of at least $4 million. We
currently are not in compliance with both the bid price and net tangible assets
requirements.

     If we continue to fail to satisfy the listing standards on a continuous
basis, the American Stock Exchange may, at its sole discretion, delist our
common stock from the 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.


                                    Page 20
<PAGE>


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

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

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

     ERRORS OR DEFECTS IN OUR SOFTWARE TOOLS AND PRODUCTS MAY CAUSE A LOSS OF
MARKET ACCEPTANCE AND RESULT IN FEWER SALES OF OUR PRODUCTS. Our products are
complex and may contain undetected errors or defects when first introduced or as
new versions are released. In the past, we have discovered software errors in
some of our new products and enhancements after their introduction into the
market. Because our products are complex, we anticipate that software errors and
defects will be present in new products or releases in the future. While to date
these errors have not been material, future errors and defects could result in
adverse product reviews and a loss of, or delay in, market acceptance of our
products.

     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.


                                    Page 21
<PAGE>


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

     o    variations in quarterly operating results;

     o    the gain or loss of significant contracts;

     o    changes in management;

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

     o    recommendations by securities industry analysts;

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

     o    short sales and hedging of our common stock.

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

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

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

     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 launch and operate our Altnet peer-to-peer business.


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

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

     WE WILL NOT BE ABLE TO GENERATE SIGNIFICANT REVENUES FROM OUR TECHNOLOGY
BUSINESS IF OUR B3D TOOLSET DOES NOT ACHIEVE MARKET ACCEPTANCE. Our b3d toolset
may have programming errors, may be incompatible with other software or hardware
products in the market, may face slow adoption in the marketplace and may face
competition from other toolmakers. Other factors that influence our ability to
generate revenues from our b3d toolset include:

     o    our marketing strategies;

     o    the quality of our products and competing products;

     o    critical reviews;

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

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

     o    our ability to increase the installed base of our Digital Projector,
          which is necessary to view b3d-produced content;

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

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

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

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


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meaningful protection from unauthorized use by others. We do not copy-protect
our software, so it may be possible for unauthorized third parties to copy our
products or to reverse engineer or otherwise obtain and use information that we
regard as proprietary. Our customers may take inadequate precautions to protect
our proprietary information. If we must pursue litigation in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others, we may not
prevail and will likely make substantial expenditures and divert valuable
resources. In addition, many foreign countries' laws may not protect us from
improper use of our proprietary technologies overseas. We may not have adequate
remedies if our proprietary rights are breached or our trade secrets are
disclosed.

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

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


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<PAGE>


                                     PART II

                                OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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

     At a special meeting of our stockholders held on February 20, 2002, our
stockholders approved an amendment to our Amended and Restated Certificate of
Incorporation to increase the aggregate number of shares of common stock of the
company authorized for issuance from 30,000,000 shares to 150,000,000 shares. At
the meeting, 10,738,756 shares were voted in favor of, 2,710,277 shares were
voted against, and 7,930 shares were withheld from voting on the amendment.
There were 0 broker non-votes at the special meeting that were not counted as
votes cast for or against the proposal to amend our Amended and Restated
Certificate of Incorporation.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

     10.1 Contractor, Confidential Information and Non-Solicitation Agreement,
          dated as of February 28, 2002, between the Registrant and Abe Sher, an
          individual.

(b)  REPORTS ON FORM 8-K

     The Company filed a Current Report on Form 8-K on March 11, 2002, reporting
     the consummation of a financing transaction.


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<PAGE>


                                   SIGNATURES

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


                                          BRILLIANT DIGITAL ENTERTAINMENT, INC.


Date: May 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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