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, 1998

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

  For the transition period from __________________ to ______________________.


                        Commission file number  0-21637


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

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

                  6355 Topanga Canyon Boulevard, Suite 120
                      Woodland Hills, California 91367
                    (Address of Principal Executive Offices)


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


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

                              Yes   X        No
                                  -----         -----
     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:  Common Stock, par value
$0.001, 9,403,001 shares issued and outstanding as of April 30, 1998.

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

Exhibit index is located on page 21.


<PAGE>

                      BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                     INDEX


                                                                PAGE NO.

PART I      Financial Information                                  3

Item 1.     Financial Statements                                   3

            Condensed Consolidated Balance Sheet as of
              March 31, 1998                                       3

            Condensed Consolidated Statements of Operation
              for the three months ended March 31, 1998
              and March 31, l997                                   4

            Condensed Consolidated Statements of Cash Flows
              for the three months ended March 31, 1998 and
              March 31, 1997                                       5

            Notes to Consolidated Financial Statements             6

Item 2.     Management's Discussion and Analysis of Financial
              Condition and Results of Operations                  6


PART II     Other Information                                      19

Item 2.     Changes in Securities and Use of Proceeds              19

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

Page 2
<PAGE>

                                 PART I
                        FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

                                                                 
                                                      MARCH 31, 
                                                        1998
                                                      ---------
ASSETS                                               (UNAUDITED)    
Current assets:                  
 Cash and cash equivalents                         $     10,064
 Accounts receivable, net                                 2,073 
 Other current assets, net                                  338 
                                                   ------------  
Total current assets                                     12,475 
Property, plant and equipment, net                          806 
Movie software costs                                      1,673 
Other assets                                                335
                                                   ------------ 
Total assets                                       $     15,289
                                                   ============
                                                                
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:                                            
 Accounts payable and accrued expenses             $      1,672
                                                   ------------
Total current liabilities                                 1,672 
Commitments and contingencies                                   
Stockholders' equity:            
     Common stock                                             9 
 Additional paid-in capital                              21,268 
 Accumulated deficit                                     (7,527)
 Cumulative other comprehensive income (loss)              (133)
                                                   ------------
Total stockholders' equity                               13,617
                                                   ------------ 
Total liabilities and stockholders' equity          $    15,289
                                                   ============
                                                                 
                           See accompanying notes.

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




                                                                               
                                             THREE MONTHS ENDED MARCH 31,
                                           ---------------------------------
                                                  1998               1997    
                                           -------------       -------------
                                             (UNAUDITED)       (UNAUDITED) 
                                          
                                          
Revenues                                  $           31       $          74 
                                                       
Costs and expenses:                                                 
Costs of revenues                                    266                   8 
Sales and marketing                                  305                  63 
General and administrative                           524                 541 
Research and development                             317                 489 
Depreciation                                          18                  51
                                            ------------       ------------- 
                                                   1,430               1,152
                                            ------------       ------------- 
Income (loss) from operations                     (1,399)             (1,078)
Other income (expense):                                                        
Gain (loss) on foreign exchange                                                 
    transactions                                      (8)                (10)
Interest income (expense), net                       140                  92
                                            ------------       ------------- 
Total other income (expense)                         132                  82 
                                            ------------       -------------
Income (loss) before income taxes                 (1,267)               (996)
Provision for income taxes                            --                  --
                                            ------------       ------------- 
Net income (loss)                                 (1,267)               (996)
                                                                                
Foreign currency translation adjustment               62                   7 
 (net of tax effects)                       ------------       -------------
Comprehensive income (loss)               $       (1,205)      $        (989)
                                           =============       =============
                                                                                
Basic and diluted net income (loss)                                             
 per share                                $        (0.13)      $       (0.14)
                                           =============       =============
Weighted average number of shares used in                                       
 computing basic and diluted net income                                      
 (loss) per share                                  9,403               7,200
                                           =============       =============
                                                                                
                                                                              
                                                                                

                        See accompanying notes.

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<PAGE>
                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (IN THOUSANDS)



                                              THREE MONTHS ENDED MARCH 31,
                                              -----------------------------
                                                  1998             1997     
                                              -------------    ------------
                                               (UNAUDITED)       (UNAUDITED) 
OPERATING ACTIVITIES                                                        
Net income (loss)                              $     (1,267)    $     (996)
                                                                  
                                                         
Adjustments to reconcile net income (loss) to                                
 the net cash provided by (used in) operating                            
 activities:                                                             
     Depreciation and amortization                      329            121
   Changes in operating assets and liabilities:                     
     Accounts receivable                                 15             -- 
     Movie software costs                              (841)            -- 
     Accounts payable and accruals                     (356)           247 
     Other assets                                       (21)           (87)
     Deferred revenue                                    --             70 
                                                -----------     ----------
Net cash provided by (used in)                                             
 operating activities                                (2,141)          (645)
                                                                           
INVESTING ACTIVITIES                                                       
Purchases of equipment                                 (184)          (111)
                                                -----------     ----------
Net cash used in investing activities                  (184)          (111)
                                                                           
NET INCREASE (DECREASE) IN CASH AND                                        
 CASH EQUIVALENTS                                    (2,325)          (756)
Translation adjustments                                  51              6 
Cash and cash equivalents at beginning                                     
 of period                                           12,338          7,591
                                                -----------     ----------
Cash and cash equivalents at end of                                       
 period                                         $    10,064     $    6,841
                                                ===========     ==========
Supplemental disclosure of cash flow                                       
  information:                                                             
 Cash paid during the period for:
       Interest                                 $        --     $       --
                                                ===========     ========== 
       Income taxes                             $        --     $       -- 
                                                ===========     ==========


                               See accompanying notes.

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<PAGE>


                     BRILLIANT DIGITAL ENTERTAINMENT, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 1998
                               (UNAUDITED)

1.   BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B.  Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.  The accompanying unaudited condensed
consolidation financial statements reflect all adjustments which, in the
opinion of management, are considered necessary for a fair presentation of the
financial position, results of operations, and cashflows for the periods
presented.  The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period.  The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements of Brilliant Digital
Entertainment, Inc. (the "Company") included in the Company's Form 10-KSB for
the fiscal year ended December 31, 1997.

2.   STOCKHOLDERS' EQUITY

     On March 20, 1998, the Company granted 513,500 options to employees
pursuant to the 1996 Stock Option Plan.

     In March 1998, the Company adopted a stockholder's rights plan and, in
connection therewith, will distribute one preferred share purchase right for
each outstanding share of the Company's Common Stock outstanding on April 2,
1998.  Upon the occurrence of certain events, each purchase right not owned by
certain hostile acquirers will entitle its holder to purchase shares of the
Company's Series A Preferred Stock, which is convertible into Common Stock, at
a value below the then current market value of the preferred stock.  The rights
of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of the share purchase rights and of any
Preferred Stock that may be issued in the future.

     Options and warrants representing common shares of 948,000 and 1,458,000
were excluded from the average number of common and common equivalent shares
outstanding in the diluted EPS calculation for the three months ended March 31,
1997 and 1998, respectively, because they were anti-dilutive.

3.   COMMITMENTS AND CONTINGENCIES

     During the first quarter of 1998, the Company entered into a commitment to
purchase equipment for $185,000.

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

OVERVIEW

     Brilliant is a production and development studio producing a new
generation of digital entertainment that is being distributed over the Internet
and on CD-ROM. The Company, headquartered in the United States, was
incorporated in July 1996.  The Company was formed through the combination of
two businesses:  Brilliant Interactive Ideas, Pty. Ltd. ("BII Australia"), an
entertainment software developer and producer; and Sega Australia New
Development ("SAND"), a "skunk works" research and development operation for
leading edge software tools.  BII Australia became a wholly owned subsidiary of
the Company through the exchange of all 100,000 outstanding shares of BII
Australia for 1,000,000 shares of Common Stock of the Company.  In addition,
the Company acquired SAND on September 30, 1996.  SAND was established during
the second quarter of 1994 by Sega Ozisoft Pty., Limited ("Sega Ozisoft"), one
of the largest publishers and distributors of entertainment software products
in Australia and New Zealand, the predecessor of which was co-founded by Mark
Dyne and Kevin Bermeister.

     The Company's historical operations prior to September 1996 discussed in
this section reflect only the operations of BII Australia.  Founded in
September 1993, BII Australia initially developed and sold interactive
education and

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entertainment CD-ROM titles primarily for children.  With the completion of the
acquisition of SAND in September 1996, the nature of the Company's business
changed significantly.  SAND is responsible for developing the Multipath Movie
suite of proprietary software tools, production process and first Multipath
Movie product.  The Company is focusing its efforts on the development of the
Multipath Movie tools and production process, as well as the commercialization
of the Multipath Movie genre, and has substantially completed the phase-out of
its traditional CD-ROM business.  As a result of this change in the Company's
business, the following discussion may not be representative of its future
operations.  The Company changed its fiscal year end from June 30 to December
31, effective December 31, 1996.

     The Company intends to generate a substantial majority of its future
revenue from the development, production, distribution, licensing and on-line
exhibition of Multipath Movies and other three-dimensional digitally created
entertainment.  The Company launched the first of its Multipath Movie series,
CYBERSWINE, its Multipath Movie for Kids series, POPEYE AND THE QUEST FOR THE
WOOLLY MAMMOTH, and the first two of its StoryTeller Series, NIGHT OF THE
WEREWOLF and THE HALLOWEEN PARTY, in the fourth quarter of 1997.  The Company's
annual and quarterly revenue will depend upon the successful development,
distribution, timing and market acceptance of its interactive products and upon
the costs to distribute and promote these products.  Specifically the revenues
derived from the production and distribution of the Company's Multipath Movies
will depend primarily on the acceptance by the market of the Multipath Movie
concept and the underlying content of the Multipath Movie, neither of which can
be predicted nor necessarily bear a direct correlation to the production or
distribution costs incurred.  See "Cautionary Statement and Risk Factors -
Acceptance of Multipath Movie Concept; Successful Development of Multipath
Movies and Appealing Creative Content" and "Cautionary Statements and Risk
Factors - Dependence on Development of Additional Multipath Movies."  The
commercial success of a Multipath Movie is also expected to depend upon
promotion and marketing, production costs, impact and competition and other
factors.  Accordingly, the Company's annual and quarterly revenues are and will
be extremely difficult to forecast.

     The Company incurred significant operating expenses and development costs
as it continued development of its proprietary software tools and its Multipath
Movies and as it continued to expand in anticipation of growth.  As a result,
the Company incurred a loss in the three months ended March 31, 1998.  The
Company expects that these expenses and development costs will result in losses
in the quarter ended June 30, 1998, and that the Company could incur quarterly
losses thereafter.  See "Cautionary Statements and Risk Factors - Limited
Operating History; Uncertain Profitability."

RESULTS OF OPERATIONS.

     REVENUES.

     The Company historically has derived its revenues from software sales and
development fees.  The Company licenses its traditional CD-ROM products to
publishers and distributors in exchange for non-refundable advances, and
royalties based on product sales.  Royalties based on product sales are due
only to the extent revenues exceed any associated non-refundable royalty
advance.  Royalties related to non-refundable advances are recognized when the
CD-ROM master is delivered to the licensees.  Royalty revenues in excess of non
refundable advances are recognized upon notification by the distributor that a
royalty has been earned by the Company.  Development fees are paid by customers
in exchange for the Company's development of software packages in accordance
with customer specifications.  The software development agreements generally
specify certain "milestones" which must be achieved throughout the development
process.  As these milestones are achieved, the Company recognizes the portion
of the development fee allocated to each milestone.  Software sales revenues
are recognized upon shipment of product.  Revenues decreased from $74,000 for
the three months ended March 31, 1997 to $31,000 for the three months ended
March 31, 1998.  This represents a decrease of $43,000 or 58%.  The decrease is
mainly attributable to the change in the Company's focus to the development of
Multipath(TM) Movies and the development of the associated software tools.

     As a result of delays in the commencement of the U.S. shipment of personal
computers upon which the Company's products are to be bundled, the first U.S.
Multipath Movie bundles are now expected to begin shipment during mid-1998.
Although this delay should not affect the number of units to be shipped
pursuant to the Company's bundling relationship with Packard Bell NEC, it will
impact the Company's 1998 revenues and earnings since users will not be
equipped to purchase on-line episodes over the Internet as early as expected.

     COST OF REVENUES.  Cost of revenues related to development fees consists
primarily of salaries, benefits and overhead associated with the development of
specific software products to customer specifications, as well as costs of

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outside contractors engaged from time to time in creating aspects of software
products such as animation, voice recording and music.  Cost of revenues
related to software sales consists primarily of amortized movie software costs,
royalties to third parties and the direct costs and manufacturing overhead
required to reproduce and package software products.  Cost of revenues
increased from $8,000 for the three months ended March 31, 1997 to $266,000 for
the three months ended March 31, 1998.  This represents an increase of
$258,000.  Cost of revenues in the 1997 period included costs associated with
software sales.  The increase in cost of revenues in the 1998 period is
primarily a result of the amortization ($89,000) and write down ($145,000) of
capitalized movie software costs for previously released titles.

     SALES AND MARKETING.  Sales and marketing expenses include primarily costs
for salaries, advertising, promotions, brochures, travel and trade shows.
Sales and marketing expenses increased from $63,000 for the three months ended
March 31, 1997 to $305,000 for the three months ended March 31, 1998.  The
increase is primarily attributable to increased costs associated with the
Company's advertising and promotional efforts.  Sales and marketing expenses
are expected to increase in future periods due to the continued expansion of
the Company's sales and marketing efforts.

     GENERAL AND ADMINISTRATIVE.  General and administrative expenses include
primarily salaries and benefits of management and administrative personnel,
rent, insurance costs and professional fees.  General and administrative
expenses decreased from $541,000 for the three months ended March 31, 1997 to
$524,000 for the three-months ended March 31, 1998.

     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 the Company's traditional CD-ROM software tools and
the software tools used to develop Multipath Movies.  Research and development
expenses decreased from $489,000 for the three months ended March 31, 1997 to
$317,000 for the three months ended March 31, 1998.  In accordance with
Statement of Financial Accounting Standards No. 86 ("SFAS No. 86"), the results
of operations for the three months ended March 31, 1997 include the Multipath
Movie software development costs in research and development expenses.  As
technological feasibility of the Multipath Movie was reached during the quarter
ended September 30, 1997, Multipath Movie software development costs incurred
during the three months ended March 31, 1998 were capitalized.  To the extent
those costs were attributable to titles which had begun to ship, they were
subject to amortization.  Amortized amounts have been included in costs of
revenues.

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

     DEPRECIATION.  Depreciation expense relates to depreciation of fixed
assets such as computer equipment and cabling, furniture and fixtures and
leasehold improvements.  These fixed assets are depreciated over their
estimated useful lives (up to five years) using the straight-line method.
Depreciation expense decreased from $51,000 for the three months ended March
31, 1997 to $18,000 for the three months ended March 31, 1998.  The decrease is
attributable to the capitalization of Multipath Movie software development
costs.

     OTHER INCOME AND EXPENSE.  Other income includes interest income and
expense, and gains and losses on foreign exchange transactions.  Interest
income increased from $92,000 for the three months ended March 31, 1997 to
$140,000 for the three months ended March 31, 1998.  These increases are due to
the higher cash balances as a result of the secondary offering in December
1997.

FLUCTUATING OPERATING RESULTS

     Historically, the Company has experienced significant fluctuations in its
operating results from quarter to quarter and expects these fluctuations to
continue in the future.  For instance the Company had anticipated completing
foreign distribution and licensing relationships in the fourth quarter of 1997,
which are now expected to be completed during 1998.  These relationships were
expected to generate substantial revenues in 1997.

     Also, as a result of delays in the commencement of U.S. shipments of
personal computers upon which the Company's products are bundled, the first
U.S. Multipath Movie bundles are now expected to begin shipment during mid-
1998.  Although this delay does not affect the number of units to be shipped
pursuant to the Company's building

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relationship with Packard Bell NEC, it will impact the Company's 1998 revenues
and earnings since users will not be equipped to purchase on-line episodes over
the Internet as early as expected.

     Factors that may influence the Company's quarterly operating results
include customer demand for the Company's products, shipping schedules for PC
hardware with which Multipath Movies are bundled, introduction or enhancement
of products by the Company and its competitors, the ability of the Company to
produce and distribute retail packaged versions of Multipath Movies in advance
of peak retail selling seasons, the timing of releases of new products or
product enhancements by the Company and its competitors, introduction or
availability of new hardware, market acceptance of the Multipath movies and
other new products, development and promotional expenses relating to the
introduction of new products or enhancements of existing products, reviews in
the industry press concerning the products of the Company or its competitors,
changes or anticipated changes in pricing by the Company or its competitors,
mix of distribution channels through which products are sold, mix of products
sold, product returns, the timing of orders from major customers, order
cancellations, delays in shipment and other developments and decisions
including the timing and extent of the development expenditures, management's
evaluation and judgment regarding a title's acceptance, other unanticipated
operating expenses and general economic conditions.

     Additionally, a majority of unit sales for a product typically occurs in
the quarter in which the product is introduced.  As a result, the Company's
revenues may increase significantly in a quarter in which a major product
introduction occurs and may decline in following quarters.  The Company's
revenues both domestically and internationally have varied significantly
between monthly and quarterly periods.  Therefore, in the future, the operating
results for any quarter should not be taken as indicative of the results for
any quarter in subsequent periods.

     The Company's expense levels are, to a large extent, fixed.  The Company
may be unable to adjust spending in a timely manner to compensate for any
revenue shortfall.  As a result, any significant shortfall in revenue from the
Company's Multipath Movies would have an immediate material adverse effect on
the Company's business, operating results and financial condition.  The Company
has increased its operating expenses to fund greater levels of Multipath Movie
production and research and development, increased marketing operations and
expanded distribution channels.  As was the case during 1997 and in the first
quarter of 1998 and as is expected to be the case in at least the second and
third quarters of 1998, to the extent that such expenses precede or are not
subsequently followed by increased revenues, the Company's business, operating
results and financial condition will be materially adversely affected.

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

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

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 1998, the Company's principal source of liquidity was
approximately $10,064,000 in cash.  In November 1996, the Company's initial
public offering (the "Initial Public Offering") of 2,000,000 shares of Common
Stock at $5 per share provided approximately $8,500,000 in cash after
underwriters' discounts and commissions and offering expenses.  On December 10,
1997, the Company closed a secondary offering (the "Secondary Offering") of
2,500,000 shares of Common Stock at $5 per share, 2,200,000 of which were sold
by the Company.  The Secondary Offering resulted in gross proceeds of
approximately $9,800,000 in cash after underwriters' discounts and commissions
and offering expenses.  Approximately $264,000 of the net proceeds of the
Initial Public Offering and all of the proceeds of the Secondary Offering
remain available for product development and working capital and general
corporate purposes.

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     Net cash used in operating activities during the three months ended March
31, 1998 was primarily attributable to a net loss of $(1,267,000) and an
increase in movie software costs of $841,000.  Net cash used in investing
activities in the three months ended March 31, 1998 was due primarily to the
acquisition of computer equipment.

     The Company has an obligation under its agreement with Morgan Creek to
fund entirely the development of two Multipath Movies, the first of which, ACE
VENTURA, is currently under development.  The Company has an obligation under
its joint venture agreement with Crawfords to jointly fund two Multipath
Movies.  To date no projects have been identified for development by the
parties.  The Company also is required to make minimum payments of $198,000
under various licensing agreements.  At March 31, 1998, the Company had rental
commitment for its offices and production facilities of $1,011,000 payable over
the next 5 years.

     The Company believes that current funds and cash generated from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next year but will not be sufficient to
permit completion of the entire slate of Multipath Movie episodes estimated to
be completed in 1998.  The Company intends to raise additional funds to permit
completion of all 20 titles scheduled for completion during 1998 through debt
or equity financings or other means. The Company is currently exploring
alternatives to fulfill these requirements.  No assurance can be given that
additional financing will be available or that, if available, it can be
obtained on terms favorable to the Company and its stockholders. If the Company
is unable to obtain additional financing sufficient to fund the completion of
all 20 titles scheduled for completion in 1998, the Company anticipates that it
may defer completion of several titles. See "Cautionary Statements and Risk
Factors - Future Capital Needs; Uncertainty of Additional Funding."

CAUTIONARY STATEMENTS AND RISK FACTORS

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

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

     Each Multipath Movie will be an individual artistic work, and its
commercial success primarily will be determined by user reaction, which is
unpredictable.  The Company introduced CYBERSWINE, its first Multipath Movie,
at the end of the fourth quarter of 1997.  The commercial success of the
Company's Multipath Movies will depend on its ability to predict the type of
content that will appeal to a broad audience and to develop stories and
characters that capture the attention and imagination of the market.  In
addition, the success of the Company's Multipath Movies will depend upon the
Company's ability to develop popular characters and to license recognized
characters and properties from third parties for its software titles.  There
can be no assurance that the Company will be able to develop or license popular
stories or characters.  The success of a Multipath Movie also depends upon the
effectiveness of the Company's marketing and successful introduction of the
first Multipath Movie through the Company's bundling relationship with Packard
Bell NEC and the retail channel, as well as the quality and acceptance of other
competing programs released into the market at or near the same time, critical
reviews, the availability of alternative forms of entertainment and leisure
time activities, general economic conditions and other tangible and intangible
factors, all of which can change and cannot be predicted with certainty.  There
can be no assurance that the Company will be able to successfully introduce the
Multipath Movie through its bundling relationship with Packard Bell NEC, in the
retail channel or otherwise.  Accordingly, there exists substantial risk that
some or all of the Company's Multipath Movies will not be commercially
successful, resulting in certain costs not being recouped or anticipated
profits not being realized.  Further, the success of the Multipath Movie

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

     PRODUCT DELAYS.  The Company's current production schedules contemplate
that it will release a number of Multipath Movies in the fourth quarter of 1998
and 1999.  As with any software product, however, until all aspects of the
development and initial distribution of a product are completed, there can be
no assurance of its release date.  Release dates will vary depending on quality
assurance testing and other development factors.  If the Company were unable to
commence volume shipments of a significant new product during the scheduled
quarter, its revenue and earnings would likely be materially and adversely
affected in that quarter.  In the past, the Company has experienced significant
delays in the introduction of certain new products.  For instance, delays in
duplication, packaging and distribution caused the Company's first Multipath
Movies, CYBERSWINE, POPEYE AND THE QUEST FOR THE WOOLLY MAMMOTH, NIGHT OF THE
WEREWOLF and THE HALLOWEEN PARTY to begin arriving at retailers at the end of
December 1997, after the holiday selling season.   It is likely in the future
that such delays will continue to occur and that certain new products will not
be released in accordance with the Company's internal development schedule or
the expectations of public market analysts and investors.  A significant delay
in the introduction of, or the presence of a defect in, one or more new
products could have a material adverse affect on the ultimate success of such
products and on the Company's business, operating results and financial
condition, particularly in the quarter in which such products are scheduled to
be completed.

     LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY.  The Company was
founded in September 1993, and shipped its initial traditional CD-ROM product
in November 1994 and substantially curtailed this aspect of its business in
1996.  The Company acquired the software tools necessary to produce Multipath
Movies in August 1996 and has only recently introduced its first Multipath
Movie.  The Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based.

     In the third quarter of 1997 the Company was profitable due to revenues
associated with its Packard Bell NEC bundling agreement.  However, revenues in
the fourth quarter of 1997 were adversely affected by delays in duplication,
packaging and distribution which caused the Company's first Multipath Movies to
begin arriving at retailers at the end of December, after the holiday selling
season.  In addition, as a result of delays in the commencement of the U.S.
shipment of personal computers upon which the Company's products are bundled,
the first U.S. Multipath Movie bundles are now expected to begin shipment
during mid-1998.  Although this delay should not affect the number of units to
be shipped pursuant to the Company's bundling relationship with Packard Bell
NEC, it will impact the Company's 1998 revenues and earnings since users will
not be equipped to purchase on-line episodes over the Internet as early as
expected.  In order for the Company to achieve sustained profitability, the
Company must continue to enter into a variety of distribution and revenue
generating arrangements of this type, as well as arrangements with Internet
service providers, traditional CD-ROM publishers and retailers.  There can be
no assurance that the Company will enter into any such arrangements, or that
the Company will be able to sustain quarterly profitability.

     FLUCTUATING OPERATING RESULTS.  The Company intends to generate a
substantial majority of its future revenue from the development and production
of Multipath Movies and other three-dimensional digitally created
entertainment.  The Company commenced the launch of the first of its Multipath
Movies, CYBERSWINE, at the end of the fourth quarter of 1997.  The Company also
released the first products in the Storyteller Series and Multipath Movies for
Kids series at that time.  The Company's annual and quarterly revenue will
depend upon the successful development, timing and market acceptance of its
interactive products and upon the costs to distribute and promote these
products.  Specifically, the revenues derived from the production and
distribution of the Company's Multipath Movies will depend primarily on the
acceptance by the market of the Multipath Movie concept and the underlying
content of the Multipath Movie, neither of which can be predicted nor
necessarily bear a direct correlation to the production or distribution costs
incurred.  See "- Acceptance of Multipath Movie Concept; Successful Development
of Multipath Movies with Appealing Creative Content," and "- Dependence on
Development of Additional Multipath Movies." The commercial success of a film
also depends upon promotion and marketing, production costs, the impact of
competition and other factors.  Accordingly, the Company's annual and quarterly
revenues are and will continue to be extremely difficult to forecast.

     Historically, the Company has experienced significant fluctuations in its
operating results from quarter to quarter

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

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

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

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

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

     FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING.  The Company's
future capital requirements will depend on many factors, including but not
limited to, the number of Multipath Movies developed, the cost of content
development, marketing and distribution, the size and timing of future
acquisitions, if any, and the availability of additional financing.  The
Company anticipates that its existing funds will not be sufficient to fund
completion of the entire slate of 20 Multipath Movie episodes estimated to be
completed in 1998, and intends to attempt to raise additional funds to permit
completion of all titles through debt or equity financing.  No assurance can be
given that such additional financing will be available or that, if available,
it can be obtained on terms favorable to the Company and its stockholders.  If
the Company is unable to obtain additional financing sufficient to fund the
completion of all titles scheduled for completion in 1998, the Company
anticipates that it may defer completion of several titles.  In addition, any
equity financing could result in dilution to the Company's stockholders.  The
Company's inability to obtain adequate

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<PAGE>

funds would adversely affect the Company's operations and ability to implement
its strategy.

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

     DEPENDENCE UPON STRATEGIC RELATIONSHIPS.  The Company has entered into
strategic relationships with Packard Bell NEC, Morgan Creek and CompuServe, as
well as licensing arrangements with numerous additional companies that own the
stories underlying and/or characters in many of the Company's current and
planned products.  The Company's business strategy is based largely on its
strategic and licensing relationships with these and other companies and its
ability to continue to enter into similar strategic and licensing relationships
in the future.  In these relationships, mutual agreement of the parties is
generally required for significant matters, or approval of the strategic
partner or both parties is required to release products or to commence
distribution of products.  For example, the Company will be dependent on
Packard Bell NEC and other OEMs to bundle Multipath Movies with their hardware
products as a significant element of the Company's launch of the Multipath
Movie genre.  Packard Bell NEC's obligation to distribute such Multipath Movies
will depend upon Packard Bell NEC's acceptance of master CD-ROMs complying with
the Company's specifications.  Consequently, Packard Bell NEC may, in the
exercise of its approval rights, delay the introduction of the Company's first
Multipath Movie.  The Company is also unable to control, manage or accurately
predict the shipping schedules of Packard Bell NEC and other OEM distributors.
Delays in such shipping schedules or other distribution problems affecting OEM
distributors may materially adversely affect the Company's ability to release
its products.  For instance, the Company expected Packard Bell NEC to commence
U.S. shipment of personal computers bundled with CYBERSWINE in January 1998.
As a result of delays in Packard Bell NEC's shipping schedules, the Company now
does not expect Packard Bell NEC to begin U.S. shipment of the Company's first
Multipath Movie bundles until mid-1998 and the Company can give no assurance
that Packard Bell NEC will achieve this schedule.  Also, Morgan Creek and many
other content licensers have various creative controls and approval rights
pursuant to their joint venture agreements with the Company.  These creative
controls and approval rights allow Morgan Creek as well as content licensers to
arbitrarily reject or delay the Multipath Movie productions of the respective
joint ventures.  There can be no assurance that the Company will not be subject
to delays resulting from disagreements with or an inability to obtain approvals
from its strategic partners or that the Company will achieve its objectives in
respect of any or all of its strategic relationships or continue to maintain
and develop these or other strategic relationships, or that licenses between
the Company and any such third party will be renewed or extended at their
expiration dates.  Many content licensers are also reluctant to grant broad
licenses covering multiple formats (e.g., a license covering both Internet and
television distribution rights) to companies without proven track records in
the television production business, and, where rights are available, there is
often significant competition for licenses.  As a result of such competition,
and the reluctance by owners of content to grant broad licenses, there can be
no assurance that licensed content will be available to the Company at prices,
or upon terms or conditions acceptable to the Company or which permit the
Company to implement its strategy of producing Multipath Movies for multiple
formats.  Delays resulting from disagreements with licensers or joint venture
partners or the Company's failure to renew or extend a key license, maintain
any of its strategic relationships or enter into new licenses and strategic
relationships on sound financial terms could materially adversely affect the
Company's business, operating results and financial condition.

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

     DEPENDENCE ON DEVELOPMENT OF ADDITIONAL MULTIPATH MOVIES.  The Company's
success will depend largely upon its ability in the future to continuously
develop new, commercially-successful Multipath Movie titles and to replace
revenues from Multipath Movie titles in the later stages of their life cycles.
If revenues from new products or other activities fail to replace declining
revenues from existing products, the Company's business, operations and
financial condition could be materially adversely affected.  In addition, the
Company's success will depend upon its ability to

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<PAGE>

develop popular characters and to license recognized characters and properties
from third parties for its digital entertainment products.  If the Company is
unable to develop popular characters or if the cost of licensing characters and
properties from third parties becomes prohibitive, the Company's business,
operating results and financial condition could be adversely affected.  Also,
the Company may from time to time, enter into agreements with licensers of
intellectual property that involve advance payments of royalties and guaranteed
minimum royalty payments.  If the sales volumes of products subject to such
arrangements are not sufficient to recover such advances and guarantees, the
Company will be required to write off unrecovered portions of such payments.
If the Company is required to write off a material portion of any advances, or
ultimately accrue for the guarantees, its business, operating results and
financial condition could be materially adversely affected.

     RISKS ASSOCIATED WITH INTERNET DELIVERY.  The Company also intends to
distribute certain of its Multipath Movies through its Internet site and
through a site on the CompuServe on-line service.  Accordingly, any system
failure that causes interruption or an increase in response time on the
Company's Internet site or the CompuServe site, could result in less traffic to
and distribution of Multipath Movies via the Internet and, if sustained or
repeated, could reduce the attractiveness of the Company's products.  The
Company is also dependent upon Web browsers and Internet and on-line service
providers to ensure user access to its products.  User acceptance with respect
to payment methods over the Internet may also create barriers to distribution
of the Company's products through the Internet.  Any disruption in the Internet
access provided to the Company's Internet site or any failure by the Company's
Internet site to handle higher volumes of transactions could have a material
adverse effect on the Company's business, operating results and financial
condition.

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

     The Company presently serves its Multipath Movies delivered over the
Internet through a single vendor.  Any significant interruption in service
provided by this vendor could interrupt sales and delivery of Multipath Movies
and materially adversely affect the Company's ability to conduct its business
and maintain customer satisfaction, and thereby materially adversely affect the
Company's business, operating results and financial condition.

     RISKS ASSOCIATED WITH RETAIL DISTRIBUTION.  The Company anticipates that a
significant proportion of sales of Multipath Movies will be made through
distributors and to retailers.  The Company is currently expending significant
resources developing a retail sales channel.  The expenditures associated with
this development are likely to precede the realization of significant sales
through this channel.  Moreover, the Company has no prior experience in the
development or management of the retail channel or sales through such channel.
The competition for shelf space in retail stores is intense.  To the extent
that the number of consumer software products and computer platforms increases,
this competition for shelf space may further intensify.  The Company's products
are expected to constitute a small percentage of a retailer's sales volume, and
there can be no assurance that retailers will provide the Company's products
with adequate levels of shelf space and promotional support.  Due to the
increased competition for limited retail shelf space and promotional resources,
retailers and distributors are increasingly in a better position to negotiate
favorable terms of sale, including price discounts and product return policies,
as well as cooperative market development funds.  Increased competition could
result in loss of shelf space for, and reduction in sell-through of, the
Company's products at retail stores, as well as significant price competition,
any of which could adversely affect the Company's business, operating results
and financial condition.

     Retailers often require software publishers to pay fees in exchange for
preferred shelf space.  The amounts paid to retailers by software publishers
and distributors for preferred shelf space are generally determined on a case
by case

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basis and there is, as of yet, no industry standard for determining such fees,
although larger publishers and distributors will likely have a competitive
advantage in this regard to the extent they have greater financial resources
and negotiating leverage.

     At the time of retail product shipment, the Company will establish
reserves, including reserves which estimate the potential for future returns
based on seasonal terms of sale and distributor and retailer inventories of the
Company's products, as well as other factors.  The Company intends to recognize
revenue from the sale of its products upon shipment except for sales made to
certain distributors where the right of ownership does not pass at delivery.
Product returns or price protection concessions that exceed the Company's
reserves could materially adversely affect the Company's business, operating
results and financial condition and could increase the magnitude of quarterly
fluctuations in the Company's operating and financial results.  Furthermore, if
the Company's assessment of the creditworthiness of its customers receiving
product on credit proves incorrect, the Company could be required to
significantly increase the reserves previously established.  There can be no
assurance that such future write-offs will not occur or that amounts written
off will not have a material adverse effect on the Company's business, results
of operations and financial condition.

     MANUFACTURING RISKS.  The production of the Company's Multipath Movies for
the retail distribution channel consists of pressing CD-ROM disks, assembling
purchased product components, printing product packaging and user manuals and
packaging finished products, all of which will be performed for the Company by
third party vendors in accordance with the Company's specifications and
forecasts.  Currently, the Company will use primarily one vendor for each of
these services.  While these services are available from multiple vendors and
at multiple sites, there can be no assurance that an interruption in the
manufacture of the Company's products could be remedied without undue delay and
without materially adversely affecting the Company's results of operations.
The Company does not have contractual agreements with any of its third party
vendors, which may result in an inability to secure adequate services in a
timely manner.  Demand for the services of these vendors is also seasonal, with
peak demand, and service and production backlogs and delays occurring in
September, October and November of each year.  The Company's retail Multipath
Movies must be manufactured, assembled, printed, packaged and shipped in this
environment of strained capacity and must compete for capacity and priority
with the CD-ROM products of many substantially larger competitors of the
Company which are able to wield substantially greater influence with the
Company's vendors than can currently be exerted by the Company.  If the Company
is unable to secure adequate services to timely produce and deliver its
products for fourth quarter sales, the Company's business, operating results
and financial condition would be materially adversely effected.

     SOFTWARE TOOLS AND PRODUCT DEVELOPMENT.  The suite of software tools that
will enable the Company to create its Multipath Movie has been developed over
the past three years and additional refinement of these tools may be necessary
in order continue to enhance the Multipath Movie format.  The Company believes
that its future success depends in large part upon the continuous enhancement
of the software tools used to create the Multipath Movie.  If problems in the
development of the Company's software tools arise, no assurance can be given
that the Company will be able successfully remedy these problems.  Also,
entertainment products as complex as those offered by the Company may contain
undetected errors or defects when first introduced or as new versions are
released.  The Company has in the past discovered software errors in certain of
its new products and enhancements after their introduction.  Although the
Company has not experienced material adverse effects resulting from any such
errors to date, there can be no assurance that errors or defects will not be
found in new products or releases after commencement of commercial shipments,
resulting in adverse product reviews and a loss of or delay in market
acceptance, which would have a material adverse effect upon the Company's
business, operating results and financial condition.

     RAPID EXPANSION AND MANAGEMENT OF GROWTH.  Implementation of the Company's
business plan, including introduction and marketing of the Company's Multipath
Movies, management of the Company's joint venture with Morgan Creek, management
of the Company's strategic relationship with Packard Bell NEC, negotiation of
additional content licensing and distribution agreements, management of
Internet service providers, the expansion of the Company's studio in Australia,
and the general strains of the Company's role as a public company have resulted
in a significant expansion of the Company and will require that the Company
continue to significantly expand its operations in all areas.  This growth in
the Company's operations and activities has placed and will continue to place a
significant strain on the Company's management, operational, financial and
accounting resources.  Successful management of the Company's operations will
require the Company to continue to implement and improve its financial and
management information systems.  In addition, the restructuring of the Company
and resulting management and reporting of Australian operations

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and financial results from the United States have placed and will continue to
place an additional strain on the Company's accounting and information systems
resources.  The Company's ability to manage its future growth, if any, and to
increase production levels and commence marketing and distribution of its
products will also require it to hire and train new employees, including
management and technical personnel, and motivate and manage its new employees
and integrate them into its overall operations and culture.  The Company
recently has made additions to its management team and is in the process of
expanding its marketing and production staff, a process which is expected to
continue.  The Company's failure to manage implementation of its business plan
would have a material adverse effect on the Company's business, operating
results and financial condition.

     RISKS ASSOCIATED WITH ACQUISITIONS.  In the future, the Company may
acquire complementary companies, products or technologies, and from time to
time engages in discussions relating to possible acquisitions.  Acquisitions
involve numerous risks, including adverse short-term effects on the combined
business' reported operating results, impairments of goodwill and other
intangible assets, the diversion of management's attention, the dependence on
retention, hiring and training of key personnel, the amortization of intangible
assets and risks associated with unanticipated problems or legal liabilities.

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

     The Company has designed its Multipath Movies for use with the
IBM-compatible PC.  The Company intends to design future products for use with
new platforms which will require substantial investments in research and
development.  Generally, such research and development efforts must occur one
to two years in advance of the widespread release or use of the platforms in
order to introduce products on a timely basis following the release of such
platforms.  The research and development efforts in connection with games for
certain advanced and emerging platforms may require greater financial and
technical resources than currently possessed by the Company.  In addition,
there can be no assurance that the new platforms for which the Company develops
products will achieve market acceptance and, as a result, there can be no
assurance that the Company's development efforts with respect to such new
platforms will lead to marketable products or products that generate sufficient
revenues to offset the research and development costs incurred in connection
with their development.  Failure to develop products for new platforms that
achieve significant market acceptance would have a material adverse effect on
the Company's business, operating results and financial condition.  There can
be no assurance that technological developments will not render certain of the
Company's existing products obsolete, that the Company will be able to adapt
its products or technologies to emerging hardware platforms, that the Company
has chosen to support platforms that ultimately will be successful or that the
Company will be able successfully to create software titles for such platforms
in a timely manner, or at all.  See "-Software Tools and Product Development."

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

     SHARED RESPONSIBILITIES AND OTHER EMPLOYMENT COMMITMENTS OF CHIEF
EXECUTIVE OFFICER AND PRESIDENT.  The Company's Chief Executive Officer and
Chairman, Mark Dyne, and its President, Kevin Bermeister, also serve as joint
managing directors of Sega Ozisoft Pty., Limited ("Sega Ozisoft") and other
businesses.  Mark Dyne also serves as Chairman of the Board of Tag-It Pacific,
Inc. Kevin Bermeister also serves as managing director of Sega Enterprises
(Australia) Pty., Ltd.  Although Messrs. Dyne and Bermeister are active in the
management of the Company, they are not required to spend a certain amount of
time at the Company nor are they able to devote their full time and resources
to the Company.  Further, the Company does not have employment agreements with
either of Messrs. Dyne or Bermeister.  There can be no assurance that the
inability of Messrs. Dyne and Bermeister to devote their full time and
resources to the Company will not adversely affect the Company's business,
operating results or financial condition.

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

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

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

     VOLATILITY OF STOCK PRICE.  The Company's Common Stock is traded on the
American Stock Exchange, and there has been substantial volatility in the
market price of the Common Stock.  The trading price of the Common Stock has
been and is likely to continue to be subject to significant fluctuations in
response to variations in quarterly operating results, the gain or loss of
significant contracts, changes in management, announcements of technological
innovations or new products by the Company or its competitors, legislative or
regulatory changes, general trends in the industry, recommendations by
securities industry analysts and other events or factors.  In addition, the
stock market has experienced extreme price and trading volume fluctuations
which have affected the market price of the common stock of many technology
companies in particular and which have at times been unrelated to operating
performance of the specific companies whose stock is affected.  In addition, in
the past the Company has not experienced significant trading volume in its
Common Stock, has not been actively followed by stock market analysts and has
had limited market-making support from broker-dealers.  If market-making
support does not continue at present or greater levels and/or the Company does
not continue to receive analyst coverage, the average trading volume in the
Common Stock may not increase or even sustain its current levels, in which
case, there can be no assurance that an adequate trading market will exist to
sell large positions in the Common Stock.

     CONTROL BY EXISTING STOCKHOLDERS.  As of March 31, 1998, the Company's
officers and directors and Sega Ozisoft, of which Messrs. Dyne and Bermeister
are directors and stockholders, owned approximately 30.6% of the Company's
outstanding shares.  As a result, these stockholders are able to control the
Company and its operations, including the election of at least a majority of
the Company's Board of Directors and thus, the policies of the Company.  The
voting power of these stockholders could also discourage potential acquirers
from seeking to acquire control of the Company through the purchase of the
Common Stock, which might have a depressive effect on the price of the Common
Stock.

     EFFECT OF CERTAIN CHARTER PROVISIONS; STOCKHOLDER'S RIGHTS PLAN; ANTI-
TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW.  The
Company's Board of Directors has the authority to issue up to 1,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders.  The Preferred Stock could be issued with
voting, liquidation, dividend and other rights superior to those of the Common
Stock.  In March 1998, the Company adopted a stockholder's rights plan (the
"Rights Agreement") and, in connection therewith, distributed one preferred
share purchase right for each outstanding share of the Company's Common Stock
outstanding on April 2, 1998.  Pursuant to the Rights Agreement, upon the
occurrence of certain triggering events related to an unsolicited takeover
attempt of the Company, each purchase right not owned by certain hostile
acquirers will entitle its holder to purchase shares of the Company's Series A
Preferred Stock, which is convertible into Common Stock, at a value below the
then current market value of the preferred stock.  The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the 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 have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company.  Further, certain provisions of the Company's Certificate of
Incorporation and Bylaws and of Delaware law could delay or make more difficult
a merger, tender offer or proxy contest involving the Company.

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<PAGE>

                                   PART II
      
                              OTHER INFORMATION

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

     The Company's Registration Statement on Form SB-2 (File No. 333-12163)
relating to the public offering (the "Offering") of an aggregate of 2,000,000
shares (the "Shares") of Common Stock, par value $0.001 per share (the "Common
Stock"), was declared effective by the Securities and Exchange Commission on
November 22, 1996.  Credit Suisse First Boston and Cruttendon Roth Incorporated
acted as co-managing underwriters for the Offering.

     All of the Shares were offered and sold by the Company for $5.00 per
share, for an aggregate offering price of $10,000,000.  The Company's expenses
in connection with the Offering included underwriting discounts and commissions
of $875,000, and other expenses of approximately $625,000, for total expenses
of approximately $1,500,000, resulting in net proceeds ("Net Proceeds") to the
Company of approximately $8,500,000.

     As of March 31, 1998, the Company had applied an aggregate of
approximately $8,236,000 of the Net Proceeds as follows: (i) $1,400,000 to
establish a production studio in New South Wales, Australia, (ii) $890,000 for
software tool development, (iii) $275,000 to acquire content licenses, (iv)
$1,225,000 to repay certain indebtedness (of which approximately $1,145,000 was
paid to stockholders and other affiliates of the Company), and (v) $4,446,000
for working capital.  As of March 31, 1998, the Company had invested the
remaining $264,000 of the Net Proceeds in short-term, investment grade,
interest bearing securities.

     As required by Rule 463 of the Securities Act, the Company will disclose
the application of the remaining Net Proceeds in the Company's periodic report
for the quarter ending June 30, 1998 and, to the extent necessary, in
subsequent periodic reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act.

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

     (a)  Exhibits.

          27.1      Financial Data Schedule

     (b)  Reports on Form 8-K.

               Current Report on Form 8-K filed on February 24, 1998 reporting
          under Item 5 a press release of the Company, and a Current Report on
          Form 8-K filed on April 6, 1998 reporting under Item 5 the adoption
          by the Company of its Stockholders' Rights Plan.

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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, 1998           
                              ---------------------------------------------
                              By:  Michael Ozen
                              Its: Chief Financial Officer (Principal Financial
                                   and Accounting Officer) and Secretary

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<PAGE>

                            EXHIBIT INDEX


EXHIBIT   
NUMBER    EXHIBIT DESCRIPTION
------    -------------------
27.1      Financial Data Schedule.

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