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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 AMENDMENT NO. 2
                                  FORM 10-QSB/A

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

                  For the quarterly period ended June 30, 2002

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

  For the transition period from __________________ to ______________________.

                         Commission file number 0-21637

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

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

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

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

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

                                Yes [X]   No [ ]

         State the number of shares  outstanding of each of the issuer's classes
of common equity,  as of the latest  practicable  date:  Common Stock, par value
$0.001, 40,114,978 shares issued and outstanding as of June 25, 2003.

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



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                                 AMENDMENT NO. 2
                 TO THE QUARTERLY REPORT ON FORM 10-QSB FILED BY
            BRILLIANT DIGITAL ENTERTAINMENT, INC. ON AUGUST 14, 2002

         The following Items amend the Quarterly  Report on Form 10-QSB filed by
Brilliant  Digital  Entertainment,  Inc. (the "Company") on August 14, 2002 (the
"Form  10-QSB"),  as permitted by the rules and  regulations  promulgated by the
Securities and Exchange Commission.  The Form 10-QSB is hereby amended to insert
those  Items as set forth  herein.  All  capitalized  terms used  herein but not
defined shall have the meanings ascribed to them in the Form 10-QSB.

                                     PART I

                              FINANCIAL INFORMATION

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

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

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

OVERVIEW

         Brilliant Digital Entertainment, Inc. is a developer and distributor of
rich media advertising  technologies and through its Altnet  subsidiary,  secure
peer-to-peer computer networking solutions.

         In   February   2002,   we   formed   Altnet,   Inc.   to   operate   a
peer-to-peer-based  content  distribution network that allows Altnet to securely
and efficiently  distribute a content owner's music,  video,  software and other
digital  files to  computer  users.  Using  internally  developed  and  licensed
technology,  we intend to create a private,  or "closed"  peer-to-peer  network,
which allows us to centrally  control the  distribution of a digital file, which
has been  authorized  by its owner,  directly  from one computer  user (peer) to
another  (peer).  Our ability to control  which


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files are  distributed  over our private  network,  as well as our use of widely
available  digital  rights  management  (or  DRM)  technologies  from  Microsoft
Corporation, TryMedia and others to protect against copyright infringement, will
prevent  the  distribution  of  unauthorized  files over our network and help to
protect  against the  unauthorized  use of a digital file  distributed  over our
network once it resides on an end user's  computer.  We intend to exploit Altnet
by  partnering  with  third  party  operators  of web sites  and other  Internet
applications  to enable users of those web sites and  applications to search for
and  download  digital  files  from  the  Altnet  network.  We  own  51%  of the
outstanding capital stock of Altnet and manage all of its day-to-day operations,
and the remaining  49% is owned by Joltid,  Ltd.  (formally  known as Blastoise,
Ltd.),  the  company  from whom we license a  substantial  portion  of  Altnet's
peer-to-peer technology.

         Commencing in the second quarter of 2002 we began to supply  authorized
files from our secure  Altnet  peer-to-peer  system for display in, and download
from, the search results section inside the KaZaA Media Desktop. The KaZaA Media
Desktop,  owned and  operated  by Sharman  Networks,  currently  is the  leading
peer-to-peer  file sharing system,  with an average of approximately 3.5 million
users at any given time  sharing  media files.  We have entered into  agreements
with  owners  of  proprietary  media  content,  such as music,  movie  trailers,
computer  games,  and software  products,  that permit us to display  authorized
files to end users in  response to the end user's  search  request (we call this
TopSearch).  Pursuant to our agreement with Sharman Networks, we currently offer
our  customers  (the owners of media  files) the ability to display  their media
files to the millions of users of the KaZaA Media Desktop, and we facilitate the
secure delivery of these files from the Altnet peer-to-peer system to users upon
request in  accordance  with  parameters,  including  price,  set by the content
owner,  to the extent the  content  owner  desires to offer its media  files for
sale. We intend to further  exploit Altnet by partnering  with other third party
operators  of web sites and Internet  applications  to enable users of those web
sites and  applications to search for and download digital files from the Altnet
network.

         We  commercialize  our  advertising  technology in two primary ways. We
license our rich media  advertising  server  technologies to web sites to enable
the selling and serving of our proprietary rich media advertising format, and we
license our rich media  content  authoring  tools - "b3d Studio" and "b3d Studio
Pro" - to  production  studios and  content  developers  interested  in creating
content for the Internet.  We launched our rich media 3D  advertising  banners -
Brilliant  Banners - into the market  during the first  quarter of 2001 to offer
advertisers  and web sites an  alternative to the current  Graphics  Interchange
Format,  or GIF,  banners  that are  prevalent  on web sites  today.  Rich media
advertising  banners  are web site  banner  ads that have full  audio and motion
animation.  We believe that our animated 3D banner advertisements perform better
than GIF banners because they include motion animation and full audio,  which is
more  engaging to a viewer.  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.

         We generate revenue from our Internet advertising business by licensing
our ad serving  technology,  which is used to display our Brilliant Banners,  to
third  party  operators  of web sites and other  Internet  applications,  and we
generate revenue from our software tools business by selling licenses to our b3d
software tools. We will generate revenue from our Altnet business by


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contracting  with content  owners to distribute  and sell their digital files to
computer users. We will charge the content owner a placement or distribution fee
based  on one or more of the  following:  (i) a  negotiated  fee for  each  file
downloaded,  (ii) a  negotiated  fee for each  license  issued once the end user
tries to play the file the first time after it has been downloaded,  and (iii) a
negotiated  percentage  of the sales  price a computer  user pays to  purchase a
digital file.

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

         We are a Delaware  corporation  that was incorporated in July 1996. Our
executive  offices  are located at 6355  Topanga  Canyon  Boulevard,  Suite 120,
Woodland Hills,  California  91367,  and our telephone number is (818) 615-1500.
Information  on  our  web  sites,   www.brilliantdigital.com,   www.b3d.com  and
www.altnet.com does not constitute part of this Form 10-QSB.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

         Our  critical  accounting  policies  are  described  in  Note  2 to the
consolidated  financial statements included in Item 7 of our Form 10-KSB for the
fiscal year ended  December 31, 2001.  We believe our most  critical  accounting
policies include revenue recognition,  the corresponding accounts receivable and
our use of the  consolidation  method when accounting for our  subsidiaries.  We
believe the following critical  accounting  policies affect our more significant
judgments  and  estimates  used in  preparation  of our  consolidated  financial
statements.

         Under SEC Staff  Accounting  Bulletin  No. 101 and AICPA  Statement  of
Position  97-2(SOP  97-2),  generally  we  recognize  revenue  when  all  of the
following  criteria are met: (1) persuasive  evidence of an arrangement  exists,
(2) delivery has occurred or services have been rendered, (3) the seller's price
to the buyer is fixed or  determinable,  and (4)  collectibility  is  reasonably
assured.  In the case of each of our product and  service  lines we  establish a
contract or insertion order with our customers with specifics for  requirements,
a fixed price, a delivery


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schedule, and terms for payment. Unless cash is paid in advance, our receivables
are recorded as revenue is earned. We regularly  evaluate the  collectibility of
our  receivables  based on a combination of factors.  When a customer's  account
becomes past due, we initiate dialogue with the customer to determine the cause.
If we  determine  that  the  customer  will  be  unable  to meet  its  financial
obligations to us, due to a bankruptcy  filing,  deterioration in the customer's
operating results or financial position or other material events impacting their
business,  we  record a  specific  reserve  for bad debt to reduce  the  related
receivable  to the amount we expect to recover given all  information  presently
available.  If circumstances related to specific customers change, our estimates
of the  recoverability  of receivables  could materially  change. We do not have
material exposure to any single customer or group of customers at this time.

         Commencing  in fiscal  2002,  we have  shifted  our  emphasis  from our
Internet  advertising  and  b3d  toolset  business  to our  Altnet  peer-to-peer
business.  This shift in  emphasis  has  occurred  primarily  due to our limited
financial resources which have been unable to support both businesses. With this
shift,  we  anticipate  that an increasing  percentage of future  revenues and a
substantial  majority  of our  operating  costs will be derived  from our Altnet
business.  We will generate revenue from our Altnet business by contracting with
content owners to distribute and sell their digital files to computer  users. We
will need to rely on estimates for bad debt reserves in those instances where we
charge a content owner a fee for each file downloaded or for each license issued
to an end user.

         We  have  significant  business  relationships  with  Sharman  Networks
Limited,  and piggyback on Sharman's  distribution of the KaZaA Media Desktop to
further  several of our  business  needs.  For  instance,  we bundle our Digital
Projector and Altnet  peer-to-peer  networking  software  with  downloads of the
KaZaA Media Desktop. In addition,  we distribute and sell digital files to users
of the KaZaA Media  Desktop,  who search for,  select and  download  these files
using KaZaA's graphic user interface.  We also generate revenue from the serving
of Brilliant Banner ads on the KaZaA Media Desktop.  Sharman Networks, the KaZaA
Media  Desktop,  and other  peer-to-peer  software  products,  are currently the
subject of a lawsuit,  METRO-GOLDWYN-MAYER  STUDIOS,  INC. ET. AL. V.  GROKSTER,
LTD. ET. AL., filed in the United States District Court for the Central District
of  California  (Western  Division)  by  twenty-eight   entertainment  companies
claiming  that,  among  other  things,  the  KaZaA  Media  Desktop  facilitates,
contributes  to and  encourages  copyright  infringement.  On November 18, 2001,
there was an additional  complaint filed, LIEBER ET. AL. V. CONSUMER EMPOWERMENT
B.V.  ET. AL. A disruption  in the  distribution  of the KaZaA Media  Desktop by
Sharman,  as a  result  of  this  litigation  or  otherwise,  would  necessarily
adversely impact (1) the future distribution of our Digital Projector and Altnet
software,  which would impact the growth of Altnet users and persons  enabled to
view our b3d content,  (2) revenues we derive from serving  Brilliant Banners on
the KaZaA Media Desktop,  and (3) the growth in users of the KaZaA Media Desktop
to whom Altnet can sell authorized digital files.

RESULTS OF OPERATIONS

         REVENUES

         ADVERTISING  REVENUE:  We derive  advertising  revenue by  serving  our
Brilliant Banner  advertisements on web sites and other Internet applications on
behalf of our advertiser  clients.  Our


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clients pay us a fee based on a cost per thousand impressions (CPM) or specified
conversions  delivered  (CPA).  In  accordance  with SOP 97-2 we recognize  this
revenue when the impressions are made or conversions delivered, and reflect this
revenue in the Operating Statement as Development fees and other revenue.

         DISTRIBUTION FEES: We have granted distribution rights to our Multipath
Movie products and b3d Toolset to distributors in exchange for a  non-refundable
minimum  fixed fee and a  percentage  of sales of the  products  within  certain
territories.

         In  accordance  with SOP 97-2,  revenue  related to the  non-refundable
minimum  fixed  fee is  recognized  when the  master  file is  delivered  to the
customer,  the terms of the sale are considered  fixed,  and  collectibility  is
probable. Additional revenue, based on a percentage of sales, is recognized upon
notification  by the  distributor  that a royalty  has been  earned  by us.  For
distribution agreements,  which cover a period of time in excess of one year and
are  exclusive  for  a  geographic   territory,   we  recognize   revenue  on  a
straight-line  basis  over  the  life  of  the  agreement.  In the  case  of our
distribution  agreement with e-New Media,  e-New Media paid us a  non-refundable
advance  for   distribution   rights  to  our  Multipath   Movies  in  specified
territories.  This  advance is being  recognized  as revenue on a  straight-line
basis over the six-year  term of the  agreement.  We reflect this revenue in the
Operating Statement as Distribution and technology revenue from a related party.

         PRODUCTION  FEES:  We have  received  revenue for the  development  and
creation  of  Music  Videos  for  Digital  Hip Hop and for 3D  Brilliant  Banner
advertisements.  We receive  production fees in exchange for the development and
creation of animated content including banner ads and animated music web videos,
in accordance with customer specifications. The development agreements generally
specify certain "milestones",  such as completion of the script or incorporation
of the music, 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.  In the case of music videos, the production period
is 6 to 12 weeks and the customer  signs off on the  milestones as they are met,
and the customer is invoiced for that stage of production. In the case of banner
ads, the  production  period is much shorter,  perhaps two weeks,  so we usually
require 50% payment up front and 50% upon  completion.  We recognize the revenue
upon  delivery  of the  file to the  client.  We  reflect  this  revenue  in the
Operating Statement as Development fees and other revenue.

         DEVELOPMENT  FEES: We have received  revenue for the development of new
animated content for viewing in short segments,  or Webisodes,  on the Internet.
We  are no  longer  developing  Webisodes.  We  have  entered  into  development
contracts for series of Webisodes developed over a period of time under which we
are entitled to fixed minimum guaranteed payments.  In accordance with SOP 97-2,
the minimum  guaranteed  payments are recognized as revenue when the master file
is delivered for each Webisiode to the publisher for use on their web sites, the
terms of the sale are  considered  fixed  (upon  signing of the  contract),  and
collectibility  is  probable.  We develop or create the  Webisodes  based on the
publishers' scripted storyboards. The publishers have approval rights and review
the Webisodes as they are developed. The publisher reviews the content, look and
feel or style of the Webisode, script, music, voice-overs,  and all other facets
of the  Webisode.  We recognize  revenue  from these sales upon  delivery of the
master  file.  Additionally,  we receive an agreed  upon  percentage  of revenue


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received by the publisher from advertising  attached to the Webisodes,  which we
recognize  when the  publisher  notifies us that a royalty has been  earned.  We
reflect this revenue in the Operating  Statement as  Development  fees and other
revenue.

         SOFTWARE  SALES:  We receive or have received  revenue from the sale or
license of our software as follows:

                  b3d tools, our software products which enable a user to create
3D animation,  are downloaded over the internet.  We recognize  revenue once the
product is delivered and paid for by the end user.  Upon  payment,  the end user
receives  a key to  unlock  the  toolset,  which  the  end  user  can use for an
unlimited period. We reflect this revenue in the Operating Statement as Software
sales.

                  Multipath  Movies are 3D animated movies developed by us using
of b3d  tooset.  We no longer  produce  copies of existing  Multipath  Movies or
develop  new  Multipath  Movies.  All  Multipath  Movie  development  costs were
capitalized  and have since been  expensed.  The master  file for each movie was
delivered to our Woodland  Hills  office and CD-ROMs were  duplicated,  boxed in
jewel cases and shipped to wholesalers.  We recognized  revenue upon delivery of
the CD-ROMs to the wholesaler.  The wholesalers  delivered the product to retail
stores for sale to end users.  We  provided a reserve for returns and bad debts.
We reflected  Multipath  Movie  revenues in the Operating  Statement as Software
sales.

                  We have  entered  into  licensing  agreements  with  web  site
publishers for the display of Webisodes and Multipath  Movies on the publishers'
web sites.  We  received an agreed upon  percentage  of revenue  received by the
publisher from advertising attached to the Webisodes and Multipath Movies. Under
some agreements,  we received a fixed non-refundable minimum guaranteed payment.
In accordance withSOP 97-2, the minimum  guaranteed  payments were recognized as
revenue when the master file was  delivered to the  publisher,  the terms of the
sale  were   considered   fixed  (upon  the  signing  of  the   contract),   and
collectibility  was probable.  We recognized  revenues for advertising  when the
publisher  notified us that a royalty had been earned. We reflect these revenues
in the Operating  Statement as Development fees and other revenue.  We no longer
license Multipath Movies to publishers, and only license Webisodes to publishers
on a very limited basis.

                  We have entered into licensing  agreements  with  distributors
for conversion of our Multipath Movies to the DVD format and for distribution to
retailers.   We  entered  into   contracts   under  which  we  received   fixed,
non-refundable  minimum  guaranteed  payments.  In accordance with SOP 97-2, the
minimum guaranteed  payments were recognized as revenue when the master file was
delivered to the distributor,  the terms of the sale were considered fixed (upon
signing of the  contract),  and  collectibility  was probable.  We reflect these
revenues in the Operating  Statement as Development  fees and other revenue.  We
are no longer selling our Multipath Movies in the DVD format.

                  In the case of our  software  licensing  agreement  with e-New
Media,  e-New  Media  paid us a  non-refundable  advance  for  rights to our b3d
toolset to produce its own  Multipath  Movies and to resell the  toolset  within
specified  territories.  We  are  recognizing  this  advance  as


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revenue on a  straight-line  basis over the five-year term of the agreement.  We
reflect this revenue in the Operating  Statement as Distribution  and technology
revenue from a related party.

         We intend to derive  revenue  from our Altnet  business by charging the
content  owner a  placement  or  distribution  fee  based  on one or more of the
following: (i) a negotiated fee for each file downloaded,  (ii) a negotiated fee
for each license  issued once the end user tries to play the file the first time
after it has been  downloaded,  and (iii) a negotiated  percentage  of the sales
price a computer user pays to purchase a digital file. Revenues earned from fees
charged for file downloads and licenses  issued to end users,  which are paid by
the content owner, will be recognized as each download occurs or license issues.
With  respect to revenues  earned from  purchases of digital  files  pursuant to
revenue  share  agreements  with content  owners,  we will  recognize  only that
portion of the purchase  price to which we are entitled  under our  agreement at
the time of payment by the end user.

         Revenues  decreased 36% from  $1,042,000  for the six months ended June
30,  2001 to $668,000  for the six months  ended June 30,  2002.  During the six
months  ended June 30,  2002,  our  primary  sources  of  revenue  were from our
distribution  and  technology  agreements  with  e-New  Media,  which  generated
$458,000 in  revenue,  and from  advertising  activities.  In 2001,  e-New Media
generated  $458,000,  while  Island Def Jam  produced  $226,000 and Warner Bros.
Online generated $136,000. We also earned $100,000 from an advertising agreement
with Infogrames. The decrease in revenues in the 2002 period is due primarily to
a reduction in revenues from the production of animated  music videos  following
our closure of Digital Hip Hop in November, 2001.

         COST  OF  REVENUES.   Cost  of  revenues  consists   primarily  of  the
amortization  of  licensing  royalties  payable to third  parties and the direct
costs  associated  with  content   productions.   Cost  of  revenues   decreased
significantly  from  $417,000  for the six months ended June 30, 2001 to $91,000
for the six months ended June 30, 2002.  This represents a decrease of $326,000,
or 78%,  which is primarily due to the  termination of production of content for
Warner Bros. Online and the closure of Digital Hip Hop. Additionally there was a
decrease in royalty expense,  from $53,000 in 2001 to $39,000 in 2002, as two of
our licensing agreements were fully amortized during 2001.

         SALES AND MARKETING.  Sales and marketing  expenses were reduced by 76%
from  $520,000  for the six months  ended June 30, 2001 to $125,000  for the six
months ended June 30, 2002. In the first half of 2001,  we incurred  $426,000 in
expense for warrants issued in connection with our agreement with Yahoo!,  which
was fully  amortized  during  2001.  The  decrease is also  attributable  to the
reduction in our use of outside  sales and marketing  consultants.  The $125,000
incurred in the six months ended June 30, 2002 is primarily attributable to fees
to sales consultants and our initial marketing efforts for Altnet, Inc.

         GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses
primarily  include  salaries  and  benefits  of  management  and  administrative
personnel,   rent,   insurance  costs  and   professional   fees.   General  and
administrative  expenses  decreased  $615,000 or 25% from $2,423,000 for the six
months ended June 30, 2001 to $1,808,000 for the six months ended June 30, 2002.
This decrease is primarily  attributable  to a decrease in salaries and employee
benefits of $277,000 due to a reduction  in headcount in the Los Angeles  office
and a decrease in


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insurance costs, plus a reduction of $30,000 in travel costs. Additionally, rent
expense was reduced by $42,000 due to the partial closing of office space in Los
Angeles.  In  Australia,  a cut in the  production  space and a reduction in the
headcount  caused a decrease in general and  administrative  costs of  $175,000.
Expenses were  additionally  decreased by $234,000 by the closure of the Digital
Hip Hop office.  With the commencement of operations at our Altnet  peer-to-peer
subsidiary,  other consulting and professional fees remained  consistent for the
2001 and 2002 periods. The decreases in general and administrative expenses were
partially  offset  by a  one-time  expense  of  $135,000  that  we  incurred  in
connection with warrants issued for consulting services during the 2002 period.

         RESEARCH AND  DEVELOPMENT.  Research and development  expenses  include
salaries and  benefits of  personnel  conducting  research  and  development  of
software products.  Research and development costs also include costs associated
with creating our software tools used to develop MultipathTM Movies, 3D animated
content for banner ads and  Internet  web site  development  costs.  These costs
decreased  85% from  $909,000 for the six months ended June 30, 2001 to $136,000
for the six months ended June 30, 2002  primarily  due to a decrease in web site
development  costs,  research  and  development  personnel  and  overhead  costs
associated  with  research and  development.  We decreased  the headcount of our
research and development  personnel in our Sydney,  Australia office during 2001
from 53 employees to 7 employees at June 30, 2002.

         DEPRECIATION  AND   AMORTIZATION.   Depreciation   expense  relates  to
depreciation of fixed assets such as computer  equipment and cabling,  furniture
and fixtures and leasehold improvements. These fixed assets are depreciated over
their estimated useful lives (up to five years) using the straight-line  method.
Depreciation  expense  decreased 83% from $178,000 for the six months ended June
30,  2001 to $31,000 for the six months  ended June 30,  2002.  The  decrease is
attributable  to the full  amortization of certain fixed assets prior to the six
months ended June 30, 2002 and the disposal of other fixed assets in  connection
with the closing of office space in Los Angeles and Sydney.

         OTHER INCOME AND EXPENSE.  Other income and expense  includes  interest
income and interest  expense and debt discount on capital  financing,  gains and
losses on foreign exchange  transactions,  and export development grants paid to
our subsidiary,  Brilliant  Interactive Ideas Pty. Ltd., by the Australian Trade
Commission for its participation in certain export activities.  Other income and
expense decreased from income of $115,000 for the six months ended June 30, 2001
to a loss of $1,775,000  for the six months ended June 30, 2002. The loss is due
to a non-cash debt discount  expense of $1,596,000 and accrued  interest expense
of $149,000  incurred in  connection  with our sale of  $3,014,150  in principal
amount of convertible  promissory notes in 2001. During the remaining two fiscal
quarters  of 2002,  we will incur an  additional  $1,301,000  in  non-cash  debt
discount expense in connection with this financing transaction. We have incurred
an  additional  $30,000 in  interest  expense  pertaining  to several  licensing
agreements and a note.  During the first half of 2001, we earned $31,000 for the
trade  export  grant,  recognized  a gain of  $25,000  on the  sale  of  assets,
recognized a $44,000 gain on foreign exchange transactions and earned $15,000 of
interest income, net of expense.

         NET LOSS ON  DISCONTINUED  OPERATIONS.  The  Auction  Channel  has been
accounted  for as a  discontinued  operation  pursuant  to  Management's  formal
adoption on December  31, 2000 of a


                                       9


<PAGE>


plan to dissolve the business unit. A net gain of $23,000 was recognized for the
six months ended June 30, 2001. The net assets of The Auction  Channel were sold
in the second quarter of 2001 and the company was subsequently dissolved.

LIQUIDITY, CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

         As  of  June  30,  2002,   our  cash  and  cash   equivalents   totaled
approximately  $330,000, of which $75,000 is restricted and held in escrow. This
is a net increase of $145,000 as compared to December 31, 2001.  The increase is
due to debt and equity financing transactions  consummated during January, March
and April in which we raised an aggregate of $1,629,000, offset by a net loss of
$3,395,000.

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

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

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

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

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

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

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

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

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

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


                                       10


<PAGE>


for aggregate  proceeds to us of $450,000.  See Note 2 to Notes to  Consolidated
Financial Statements.

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

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

NEW ACCOUNTING PRONOUNCEMENTS

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

         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


                                       11


<PAGE>


should be tested for  impairment  in  accordance  with the guidance in SFAS 142.
SFAS 142 is required to be applied in fiscal years  beginning after December 15,
2001 to all  goodwill  and other  intangible  assets  recognized  at that  date,
regardless of when those assets were initially recognized.  SFAS 142 requires us
to complete a transitional goodwill impairment test nine months from the date of
adoption.  We are also required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of SFAS 142.

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

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

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

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


                                       12


<PAGE>


recorded  at fair  value.  Accordingly,  SFAS No.  146 may  affect the timing of
recognizing  future  restructuring  costs  as  well  as the  amount  recognized.

CAUTIONARY STATEMENTS AND RISK FACTORS

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

         IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DELAY
IMPLEMENTATION  OF OUR BUSINESS PLAN,  REDUCE OVERHEAD  SIGNIFICANTLY OR SUSPEND
OPERATIONS. We currently have a number of obligations that we are unable to meet
without  generating  additional  revenues or raising additional  capital.  If we
cannot  generate  additional  revenues or raise  additional  capital in the near
future,  we may become  insolvent.  As of June 30,  2002,  our cash  balance was
approximately  $330,000 and our outstanding  accounts payable,  accrued expenses
and current notes payable totaled $952,000,  not including the capital financing
notes,  which  have a  convertible  feature.  Historically,  we have  funded our
capital  requirements  with debt and  equity  financing.  Our  ability to obtain
additional equity or debt financing depends on a number of factors including our
financial  performance and the overall conditions in our industry. If we are not
able to raise  additional  financing or if such  financing  is not  available on
acceptable  terms, we may liquidate  assets,  seek or be forced into bankruptcy,
and/or  continue  operations  but suffer  material  harm to our  operations  and
financial condition.  These measures could have a material adverse affect on our
ability to continue as a going concern.

         WE HAVE A HISTORY OF LOSSES,  A NEGATIVE NET WORTH AND MAY NEVER ATTAIN
PROFITABILITY.  We have a  limited  operating  history  and  have  not  attained
profitability. Since inception, we have incurred significant losses and negative
cash  flow,  and as of June  30,  2002 we had an  accumulated  deficit  of $58.0
million.  Additionally,  as of the date of this report, our current  liabilities
exceed our current  assets.  We have not  achieved  profitability  and expect to
continue  to  incur  operating  losses  for the  foreseeable  future  as we fund
operating and capital  expenditures in the areas of software tools  development,
brand promotion, sales and marketing,  administration,  deployment of our Altnet
peer-to-peer  network and operating  infrastructure.  Our business model assumes
that consumers and advertisers  will be attracted to our rich media  advertising
formats  (Brilliant  Banners),  and that  animators and those who produce banner
advertisements will use our b3d tools and technology in the development of other
b3d-produced content. Our business model also assumes that a significant portion
of our future  revenues will be derived from our Altnet  peer-to-peer  business,
which is not fully  operational.  This  business  model is not yet proven and we
cannot assure you that we will ever achieve or sustain profitability or that our
operating  losses will not  increase in the future or be  inconsistent  with the
expectations  of the  public  market.  Primarily  as a result  of our  continued
losses, our independent public accountants  modified the opinion on our December
31, 2001 financial  statements to include an explanatory  paragraph wherein they
expressed substantial doubt about our ability to continue as a going concern.


                                       13


<PAGE>


         OUR  RECENT  CAPITAL  RAISING  EFFORTS  HAVE  RESULTED  IN  SUBSTANTIAL
DILUTION TO OUR  STOCKHOLDERS  AND OUR FUTURE  CAPITAL NEEDS WOULD INCREASE THIS
DILUTION.  During 2001, we raised $3.0 million  through the sale of  convertible
promissory notes and common stock purchase warrants. The promissory notes, which
mature on November  10,  2002,  and accrued  interest  may be  converted  by the
holders at any time into a number of shares of our common  stock  determined  by
dividing the amount due under the notes, including interest, by a price equal to
the  lesser of $.20 and the lowest 5 day volume  weighted  average  price of our
common stock as reported by the American  Stock  Exchange at any time during the
term of the notes.  At August 2, 2002,  the principal  and interest  outstanding
under the Notes could be  converted  by the holders  into  27,549,846  shares of
common  stock,  which would  represent  52.5% of our  outstanding  common  stock
immediately following the conversion. The warrants attached to the Notes have an
expiration  date of May 23,  2004 and  entitle  the holders to purchase up to an
aggregate  of  44,542,717shares  of our  Common  Stock at an  exercise  price of
$0.1203 per share.  The  exercise of the warrants  would  increase the number of
shares  outstanding  and result in further  dilution to our other  stockholders.
Additionally,  during  the  first  and  second  quarters  of 2002,  we raised an
additional $1,250,000 through the sale of 8,327,482 shares of common stock at an
average price per share of $0.15, and in connection therewith issued warrants to
purchase  up to an  additional  14,904,031  shares of common  stock at  exercise
prices ranging from $0.148725 to $0.28125 per share.  We anticipate  that during
the remainder of 2002, we will need to raise additional  capital, as our current
operations do not generate  positive cash flow. As such, any additional  capital
raising efforts would cause further dilution to stockholders.

         The following  table  illustrates  our  capitalization  as of August 2,
2002,  and  identifies  the number of shares issued and  outstanding  as of such
date,  as well as the  number of shares  that may be issued in the  future  upon
conversion  of  outstanding   convertible   promissory  notes  and  exercise  of
outstanding options and warrants:

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

Outstanding Common Stock               24,891,142                  33.5%
Convertible Promissory Notes           33,755,181                  45.4%
Outstanding Warrants(1)                10,368,874                  13.9%
Outstanding Options                     5,324,000                   7.2%
                                      -----------            -------------------
  Fully Diluted Shares of
     Common Stock(2)                   74,339,197                 100.0%
------------------
1     For  purposes  of this  table,  we have only  included  warrants  that are
      "in-the-money"  (the exercise  price of the warrants is below the price of
      our common stock), and the number of shares of common stock underlying the
      outstanding  warrants has been calculated on a "cashless"  exercise basis,
      whereby  the holder of each  warrant  receives  upon  exercise a number of
      shares of common  stock with a value  equal to (i) the total  value of the
      shares  underlying the warrants less (ii) the aggregate  exercise price of
      the warrants,  and is  calculated  based on the closing sales price of our
      common stock on the American Stock  Exchange on August 2, 2002,  which was
      $0.17.
2     This number  excludes (i)  14,530,375  shares that have been  reserved for
      issuance  under our 1996 Stock Option Plan that were not the subject of an
      outstanding  stock  option  or other  award at August  2,  2002,  and (ii)
      49,897,160  shares  underlying  warrants that have exercise prices ranging
      from $0.195 to $0.75 per share, and thus not "in-the-money."


                                       14


<PAGE>


         IF WE  BECOME  INSOLVENT,  WE  WILL BE IN  DEFAULT  UNDER  OUR  SECURED
CONVERTIBLE  PROMISSORY  NOTES,  WHICH  COULD  RESULT IN OUR  OBLIGATION  TO PAY
IMMEDIATELY ALL AMOUNTS THEN OUTSTANDING UNDER THE NOTES. If we generally do not
pay,  or become  unable to pay,  our debts as such  debts  become  due,  we will
default under our  outstanding  Secured  Convertible  Promissory  Notes,  in the
aggregate  principal  amount of $3.0 million.  If a default occurs,  all amounts
owed to the holders of the notes would  immediately  become due and payable.  If
the debt becomes due before its stated maturity in November 2002, we likely will
not have  sufficient  funds to repay the  indebtedness,  which will  entitle the
holders of the notes to exercise  all of their  rights and  remedies,  including
foreclosure  on all of our  assets  which we  pledged  as  collateral  to secure
repayment of the debt.

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

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

         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


                                       15


<PAGE>


companies like Unicast and  Viewpoint.  Other factors that influence our ability
to generate revenues from our Brilliant Banners include:

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

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

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

         OUR  FAILURE TO  MAINTAIN  STRATEGIC  RELATIONSHIPS  WITH  DISTRIBUTION
PARTNERS  COULD  REDUCE  THE  NUMBER  OF  DIGITAL  PROJECTORS  WE  ARE  ABLE  TO
DISSEMINATE  TO CONSUMERS,  WHICH WOULD REDUCE THE NUMBER OF USERS THAT ARE ABLE
TO VIEW OUR MEDIA  CONTENT,  DECREASE  THE  VALUE OF OUR  BRILLIANT  BANNERS  TO
ADVERTISERS AND LIMIT THE NUMBER OF USERS FOR OUR ALTNET PEER-TO-PEER  BUSINESS.
We distribute our Digital Projector and the software necessary to create and run
our Altnet peer-to-peer business primarily by bundling it with Sharman Networks'
KaZaA  Media  Desktop.  We rely on  computer  users'  demand for the KaZaA Media
Desktop to increase the installed  base of our (1) Digital  Projector,  which is
necessary to view b3d-produced  content such as our Brilliant  Banners,  and (2)
Altnet software, which is necessary to connect users to our private peer-to-peer
network.  Our business,  results of operations and financial  condition could be
materially   adversely   affected  if  we  do  not  maintain  our   distribution
relationship  with Sharman Networks on acceptable terms or if this  relationship
does not achieve the projected  distribution of our Digital Projector and Altnet
software.  Additionally,  a disruption  in the  distribution  of the KaZaA Media
Desktop or a  decrease  in demand for the  product  by users  would  necessarily
impact the future  distribution of our technology.  Sharman Networks,  the KaZaA
Media  Desktop,  and other  peer-to-peer  software  products,  are currently the
subject of a lawsuit,  METRO-GOLDWYN-MAYER  STUDIOS,  INC. ET. AL. V.  GROKSTER,
LTD. ET. AL., filed in the United States District Court for the Central District
of  California  (Western  Division)  by  twenty-eight   entertainment  companies
claiming  that,  among  other  things,  the  KaZaA  Media  Desktop  facilitates,
contributes  to and  encourages  copyright  infringement.  On November 18, 2001,
there was an additional  complaint filed, LIEBER ET. AL. V. CONSUMER EMPOWERMENT
B.V. ET. AL. To the extent that Sharman Networks is precluded from  distributing
the KaZaA Media  Desktop as a result of this  litigation,  it would  prevent the
further  distribution of the Digital Projector and Altnet peer-to-peer  software
with the  KaZaA  product  which  could  have a  material  adverse  affect on our
business and financial condition.

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


                                       16


<PAGE>


         o        Section  1003  (a)(i) with  shareholders'  equity of less than
                  $2,000,000 and losses from  continuing  operations  and/or net
                  losses in two of our three most recent fiscal years;

         o        Section 1003 (a)(ii)  with  shareholders'  equity of less than
                  $4,000,000 and losses from  continuing  operations  and/or net
                  losses in three of our four most recent fiscal years;

         o        Section 1003 (a)(iii) with  shareholders'  equity of less than
                  $6,000,000 and losses from  continuing  operations  and/or net
                  losses in our five most recent fiscal years; and

         o        Section  1003 (a)(iv) in that we have  sustained  losses which
                  are so  substantial  in relation to our overall  operations or
                  our existing financial  resources,  or our financial condition
                  has become so impaired  that it appears  questionable,  in the
                  opinion  of the  exchange,  as to  whether  we will be able to
                  continue  operations  and/or  meet  our  obligations  as  they
                  mature.

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

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

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

         WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH MICROSOFT,  REAL NETWORKS
AND OTHER  COMPANIES IN THE MEDIA DELIVERY  MARKET.  The market for software and
services for the delivery of media over the Internet is constantly  changing and
highly competitive.  Companies 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


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<PAGE>


services. We expect that competition will continue to intensify. Because our b3d
content,  such as our  Brilliant  Banners,  can only be viewed using our Digital
Projector,  if we do not achieve a widespread  distribution of our media player,
there will not be substantial  demand for  b3d-produced  content or our software
tools.

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

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

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

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

         o        variations in quarterly operating results;

         o        the gain or loss of significant contracts;

         o        changes in management;

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

         o        recommendations by securities industry analysts;


                                       18


<PAGE>


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

         o        short sales and hedging of our common stock.

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

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

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

         o        the  introduction  or  enhancement  of software  products  and
                  technology by us and our competitors;

         o        the use by animators  of our  toolsets to create  b3d-produced
                  content;

         o        the market's acceptance of our 3D Brilliant Banner advertising
                  format; and

         o        our  ability  to operate  and  expand our Altnet  peer-to-peer
                  business.

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

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


                                       19


<PAGE>


errors,  may be  incompatible  with other  software or hardware  products in the
market,  may face slow adoption in the marketplace and may face competition from
other toolmakers.  Other factors that influence our ability to generate revenues
from our b3d toolset include:

         o        our marketing strategies;

         o        the quality of our products and competing products;

         o        critical reviews;

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

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

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

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

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

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

         OUR  PROPRIETARY  TECHNOLOGY  MAY  NOT  BE  ADEQUATELY  PROTECTED  FROM
UNAUTHORIZED  USE BY OTHERS,  WHICH  COULD  INCREASE  OUR  LITIGATION  COSTS AND
ADVERSELY  AFFECT OUR SALES.  Our  ability to compete  with other  entertainment
software companies depends in part upon our proprietary technology. Unauthorized
use by others of our  proprietary  technology  could  result in an  increase  in
competing  products and a reduction in our sales. We rely on trademark,  patent,
trade  secret and  copyright  laws to protect  our  technology,  and require all
employees and third-party developers to sign nondisclosure agreements. We cannot
be certain,  however,  that these precautions will provide meaningful protection
from unauthorized use by others. We do not copy-protect our software,  so it may
be possible for  unauthorized  third  parties to copy our products or to reverse
engineer or otherwise  obtain and use information that we regard as proprietary.
Our  customers  may take  inadequate  precautions  to  protect  our  proprietary
information.  If we  must  pursue  litigation  in  the  future  to  enforce  our
intellectual  property rights,  to protect our trade secrets or to determine the
validity and scope of the proprietary  rights of others,  we may not prevail and
will likely make  substantial  expenditures  and divert valuable  resources.  In
addition,  many foreign  countries' laws may not protect us from improper use of
our proprietary  technologies overseas. We may not have adequate remedies if our
proprietary rights are breached or our trade secrets are disclosed.

         IF OUR PRODUCTS  INFRINGE ANY PROPRIETARY  RIGHTS OF OTHERS,  A LAWSUIT
MAY BE BROUGHT  AGAINST US THAT COULD REQUIRE US TO PAY LARGE LEGAL EXPENSES AND
JUDGMENTS AND REDESIGN OR DISCONTINUE  SELLING OUR PRODUCT.  We believe that our
products,  including  our software  tools,  do not  infringe any valid  existing
proprietary rights of third parties. Any infringement claims,  however,  whether
or not  meritorious,  could result in costly  litigation  or require us to enter
into  royalty or licensing  agreements.  If we are found to have  infringed  the
proprietary rights of 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.


                                       20


<PAGE>


         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 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

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

         *  Previously reported on Form 10-QSB.

         (b)      Reports on Form 8-K:

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


                                       22


<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: July 3, 2003                    /s/ Tyler Tarr
                                    ------------------------------
                                    By:    Tyler Tarr
                                    Its:   Chief Financial Officer
                                           (Principal Financial
                                           and Accounting Officer)


                                       23


<PAGE>


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

I, Kevin Bermeister, certify that:

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

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

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

Date:    July 3, 2003

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


                                       24


<PAGE>


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

I, Tyler Tarr, certify that:

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

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

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

Date:    July 3, 2003

                                                      /s/ Tyler Tarr
                                                     -----------------------
                                                     Tyler Tarr
                                                     Chief Financial Officer


                                       25