<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
                       [X] ANNUAL REPORT UNDER SECTION 13
                 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the Fiscal Year Ended March 31, 1998

                     [ ] TRANSITION REPORT UNDER SECTION 13
                 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


                           Commission File No. 0-17953

                       -----------------------------------
                        DIAMOND ENTERTAINMENT CORPORATION
                 (Name of small business issuer in its charter)

            New Jersey                                      22-2748019
(State or other jurisdiction of                  (I.R.S. Employer Identification
 incorporation or organization)                               Number)

16200 Carmenita Road, Cerritos CA                             90703
(Address of principal executive offices)                    (Zip Code)

                                 (562) 921-3999
                (Issuer's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:  None.

Securities registered under to Section 12(g) of the Exchange Act: Common Stock,
no par value.

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 the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

The issuer's revenue for the fiscal year ended March 31, 1998 totaled
$8,724,149.

The aggregate market value of registrant's Common Stock held by non-affiliates
based upon the closing bid price on December 7, 1998, as reported by the OTC
Bulletin Board, was approximately $584,400.

As of December 7, 1998, there were 33,314,299 shares of the registrant's Common
Stock outstanding.

Transitional Small Business Disclosure Format:     Yes  [  ]           No  [X]


<PAGE>




                           FORWARD LOOKING INFORMATION

         This annual report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.

                                     PART I

Item 1.  Description of Business.

General

         Diamond Entertainment Corporation (the "Company"), formerly known as
(i) ATI Mark V Products, Inc. and (ii) Trans-Atlantic Video, Inc., was formed
under the laws of the State of New Jersey on April 3, 1986. On July 15, 1991,
the Company completed the acquisition (the "Acquisition") of all of the issued
and outstanding shares of Diamond Entertainment Corporation, a California
corporation (the "California Subsidiary"), and concurrently therewith, the
parent company's name was changed to Diamond Entertainment Corporation. The
Company's principal executive offices are located at 16200 Carmenita Road,
Cerritos, California 90703.

         The Company, through the California Subsidiary, markets and sells a
variety of videocassette titles to the budget home video market, principally
through the Company's New Jersey sales office. In February 1997 the Company
acquired a company, now the wholly-owned subsidiary known as Jewel Products
International, Inc., which is in the business of manufacturing, purchasing and
distributing children's toy products.

         The Company distributes and sells videocassette titles including
certain public domain programs and certain licensed programs. Public domain
programs are video titles that are not subject to copyright protection. Licensed
programs are programs that have been licensed by the Company from a third party
for duplication and distribution, generally on a non-exclusive basis. The
Company markets its video programs to national and regional mass merchandisers,
department stores, drug stores, supermarkets and other similar retail outlets.
They generally sell the Company's products to the public at retail prices
ranging from $1.99 to $9.99 per videocassette. The Company's video products are
also offered by consignment arrangements through two large mail order catalog
companies.

         Management is committed to acquiring more licensed video titles and
upgrading the quality of its packaging and pre-printed materials in order to
enhance its available products. The Company's program inventory currently
consists of approximately 600 titles, including approximately 350 public domain
programs and 250 licensed programs, comprising motion pictures, cartoons,
educational, sports highlights, computer-literacy and exercise programs. The
Company is continually identifying new titles to add to its program inventory
and intends to expand its selection of licensed programs which have historically
shown a higher profit margin than public domain programs.

<PAGE>

         Until 1995, the Company was a full-service video product duplicating,
manufacturing, packaging and distribution company, and was engaged in several
distinct video production activities. In April 1995 the Company sold its Custom
Duplication Division, through which the Company duplicated and packaged
videocassettes on a custom-made basis. The Board believed that this transaction
was in the best interest of the Company since it could not compete effectively
in the manufacturing and duplicating of videotapes. The Company's focus had
changed to development, acquisition and distribution of video-related products
to mass merchandisers and retailers.

         Subsequent to the 1998 fiscal year end, the Company implemented a plan
to reduce its production costs in order to be more competitive in price. As a
consequence, the Company took over certain final-stage manufacturing processes
and implemented new quality control procedures to ensure its standards of
quality. The Company acquired two video loaders and a shrink-wrap packaging
machine, and intends to obtain two additional video loaders. Using this
equipment and these new procedures, the Company hopes to realize up to 20% in
production cost savings. The Company now contracts with a
manufacturer/duplicator to duplicate programs, using Company-supplied masters,
copying up to 250 copies of a single program onto a bulk reel of video tape
called a pancake. After duplication, the pancakes and master tapes are returned
to the Company and the Company uses the video loaders to automatically load, cut
and splice the video programs from the pancake into empty videocassette shells.
The videocassettes are then labeled, packaged, shrink wrapped and boxed for
shipment. At least one sample of each batch of any newly manufactured video
products are tested when delivered to the Company by the duplicator to insure
acceptable duplication quality. The Company has implemented three
work-in-process quality control procedures and one final finished goods
inspection procedure prior to all product shipments. Further, the Company
continues its efforts to acquire and license better quality titles and thus
improve the performance of the Company's products in retail stores.

Product Lines

         The Company's program inventory consists of a total of nearly 600
titles appealing to all age groups. The programs include cartoons, horror films,
science fiction, dramas, adventure stories, mysteries, musicals, comedies, fairy
tale adaptations, educational programs, sports highlights, instructional and
exercise programs. Public domain programs account for approximately 350 titles,
and licensed programs account for approximately 250 titles of the Company's
program inventory.

         Motion Pictures - Public Domain. The Company offers a total of 37
feature motion picture titles including many film classics, such as "Life With
Father," "Meet John Doe," "Pygmalion" and "The Little Princess," which generally
appeal to adult audiences. The Company also markets its own special collection
of favorite performers' "Festivals," including The Three Stooges, Shirley
Temple, Bob Hope, Jack Benny and Milton Berle. The Company has recently added
numerous episodes of various 1950s popular television programs and a science
fiction category.

         Children's Programs - Licensed and Public Domain. Most of the Company's
cartoons are in the public domain, including 21 cartoon programs redubbed in
Spanish. These programs are generally 30 minutes in length and consist of a
series of cartoons selected by the Company. The Company also markets
approximately 18 holiday children's features, and 40 titles in its Testaments
and Children's Bible series.

         Educational Programs - Licensed. The Company has licenses to market
approximately 60 educational videos in two categories. For adults, titles
include "Battle of Britain," "The Shores of Iwo


                                       2
<PAGE>

Jima," and "Guadalcanal," along with titles which instruct preschoolers and
school age children on topics such as learning numbers, telling time, simple
mathematics, color identification and other practical skills.

         Sports  Programs - Licensed.  The Company has licenses to market 16
sports videos including five volumes of "Great Sports Memories" and
"Basketball's Fabulous 50 Stars."

         Computer Software Learning Tutorial Programs - Licensed. The Company
has licensed approximately 40 titles of computer tutorial videos including
titles such as "Family Guide to the Computer," "Family Guide to the Internet,"
"Windows Literacy," "Word for Windows," "Mastering WordPerfect" and "Mastering
Excel for Windows."

         The Company continuously seeks to expand its program inventory by
identifying titles which appeal to children and those which include popular
performers, characters or themes. The Company also identifies videos which are
classic films, are educational or instructional videos or which have been
requested by distributors. The Company enters into a licensing agreement with
respect to those programs that are subject to copyright protection or obtains
documentation confirming public domain status from various unaffiliated program
suppliers.

         The costs associated with the Company's film masters (used for
duplicating) and artwork (for packaging and advertising) include the purchase
cost of masters, initial fee for rights to duplicate, shooting costs and
developing costs. During the year ended March 31, 1998, the Company acquired in
excess of 65 new titles. As of March 31, 1998, the net book value of Company's
film masters and artwork was in excess of approximately $361,000. The Company
believes that its film masters and artwork are significant assets since the
Company derives the majority of its revenue from their use.

Suppliers - Video Products

         The Company's programs are duplicated, and in some cases packaged, by
one CD-ROM and five videotape manufacturers/duplicators located in the United
States. Generally, the Company arranges with these firms to duplicate
Company-supplied masters, then label, package, shrink-wrap and carton the
videocassettes or CD-ROMs. Labels and packaging sleeves are supplied by the
Company. The Company submits its orders and instructions by purchase order with
terms payable within 90 days of delivery. For the year ended March 31, 1998, the
video products business of the Company had purchases from three suppliers that
amounted to approximately $2,180,000, or 80.6%, of net purchases. The suppliers
and the percentage of net video products purchases made from each are: Glory
Enterprises, Inc., 41.6%; National Media, Inc., 22.3%; and Skura
Intercontinental Trading, 16.7%. Management believes that, if for any reason it
could not rely on or retain the services of any of its current suppliers,
duplicators or manufacturers, other sufficient suppliers are available in the
marketplace.

Markets and Customers - Video Products

         The Company markets its program inventory to large retail chain outlets
and provides each retail chain operator with brochures, advertising materials
and literature describing and promoting the Company's program inventory. The
Company's products are sold through more than ten mass merchandisers such as
Sam's Club, Target, Costco and Best Buy, primarily in the Northeast, the South
and the East Coast. These outlets sell the Company's products to the general
public at retail prices ranging from approximately $1.99 to $9.99 per
videocassette. For the years ended March 31, 1998 and

                                       3

<PAGE>

1997, the Company derived revenue from its program inventory of approximately
$6,426,000 and $6,170,000, respectively. For the years ended March 31, 1998 and
1997, the Company had net sales to one customer, Sam's Club, of approximately
$1,012,000 and $1,154,000, respectively. The Company sells to Sam's Club on
terms of net sixty days. The loss of this single customer would have a material
adverse effect on the financial condition and results of operations of the
Company.

         The Company's marketing strategy of distributing directly to retail
chain outlets has allowed the Company to market its products at all consumer
levels. In particular, the Company seeks to attract retail customers in
department, drug, discount, electronic, music, toy and book stores as well as
supermarkets and convenience stores. The Company has implemented a new sales
method which seeks to improve the name recognition of the Company as a video
company specializing in educational, children and film classic video titles. In
addition, through its sales program, the Company seeks to place increased focus
on the promotion of sales to major mass merchandising companies which would
increase the delivery of high volume orders. The Company also uses independent
sales representatives in certain geographical marketing areas.

         The Company derives approximately 60% of its gross revenue from sales
to mass merchandisers and other retail outlets. Approximately 40% of gross
revenue is derived from sales through consignment arrangements with certain
catalog companies under which the Company delivers tapes to their facilities
pending receipt of orders by customers. The Company only books sales from
consignment sales after the catalog company delivers the actual funds from such
sales. Less than one percent of revenue comes from programs sold on a retail
basis directly to consumers.

         In 1997 the Company introduced its Audio Books product line, and is now
actively marketing 12 such titles. Also in 1997 the Company introduced its
CD-ROM product into the market place with only limited success, due largely to
shifting customer preferences, alternative entertainment sources and evolving
technologies. Beginning in 1999 the Company's marketing strategy and products
will include Digital Video Disk ("DVD") titles and a new product line using the
CineChrome-TM- process (see below). These plans will help the Company handle the
increasing competitiveness in the entertainment marketplace.

Seasonality

         The Company generally experiences higher sales of its programs from
September through January due to increased consumer spending around the year-end
holidays. The Company estimates that it derives approximately 55% of its gross
revenue from sales during those five months, with 45% of revenue generated in
the other seven months of the year.

License Arrangements

         The Company enters into license agreements whereby it acquires from
licensors the right to duplicate and distribute a licensed program. Licenses may
be exclusive or non-exclusive, but typically are non-exclusive. Generally
licenses cover specific titles. In return for the grant of rights, the Company
pays certain advance payments or guarantees and also royalties. Royalty payments
under license agreements typically are credited against any advances paid.
Generally, the Company's licenses are for a term of between three and seven
years. While the Company's efforts to renegotiate and renew its license
agreements have generally been successful, there can be no assurance that such
licenses will be renegotiated or renewed in the future. The programs that the
Company has acquired under license contain limitations from the licensors
regarding the geographic areas to which the Company can

                                       4

<PAGE>

distribute its products and are usually restricted to distribution and sales in
the United States and Canada.

         The various licensing agreements that the Company has entered into with
licensors provide for advance payments ranging from $1,500 to $15,000 and
subsequent royalty payments based upon either a per video sold fee or a
percentage of wholesale price fee. During the year ended March 31, 1998, the
Company incurred royalty expenses of approximately $128,000 under its licensing
agreements.

Competition

         The Company competes with other distributors of videotapes, including
major film studios and independent production companies. The Company also
competes with manufacturers and distributors of other video formats, including
laserdisc and DVD, as well as other forms of in-home entertainment such as
syndicated and pay/cable television and home satellite systems. Most of the
companies with which the Company competes are better established, have broader
public and industry recognition, have financial resources substantially greater
than those of the Company and have manufacturing and distribution facilities
better than those which now or in the foreseeable future will become available
to the Company.

Jewel Products International, Inc.

         In May 1997, the Company consummated an agreement and plan of merger
between BDC Acquisition, Inc. ("BDC Acquisition"), a subsidiary of the Company,
and Beyond Design Corporation (subsequently renamed Jewel Products
International, Inc. and referred to herein as "JPI"). JPI became the wholly
owned subsidiary of the Company via reverse merger when BDC Acquisition acquired
all of the issued and outstanding stock of JPI in consideration of the issuance
of an aggregate of 2,427,273 shares of the Company's common stock and the
assumption of certain obligations of JPI. The JPI acquisition was an arms-length
transaction. JPI is in the business of (i) manufacturing one toy product, (ii)
purchasing various other children's toy products from U.S.-based importers or
directly from Asia and (iii) distributing the toys to mass merchandisers in the
United States. In the fiscal year ended March 31, 1998, revenue realized from
JPI's business amounted to approximately $2,478,000.

Product Lines - Toy Products

         At the time of its acquisition, JPI's sole line of business was the 
manufacture and sale of its patented Woblong-Registered Trademark- Double 
Wing Flier, a bi-wing aerodynamic flying toy. The Woblong is a game of catch 
intended to compete directly with Frisbee-Registered Trademark-, 
Aerobie-Registered Trademark- and Whoosh-TM-. Since its acquisition in July 
1997, JPI has introduced approximately 30 new toy items and one non-toy item 
to its product line. Popular products include various plastic toy sets (for 
example, Fire Rescue set, Airport set and City Movers set) and handheld 
electronic games. JPI's products sell at retail prices ranging from 
approximately $2.00 to $12.00 per item.

Suppliers - Toy Products

         For the year ended March 31, 1998, 100% of JPI's supplier purchases
were from Progen Technology, Inc. Since March 31, 1998, the Company has
diversified its supplier base, and makes purchases from six U.S. suppliers and
three suppliers in China.

                                       5

<PAGE>

Markets and Customers - Toy Products

         JPI markets its products using outside sales personnel and manufacturer
representatives and provides them with color sales brochures and other sales
tools, but avoids the costs of excessive sales samples. The Company's marketing
plan uses independent manufacturer's representatives to reach a minimum of
approximately 125 retail outlets per week. At the Company's direction, the
manufacturers representatives have mainly, but not exclusively, focussed on
sales to Wal-Mart stores during the current calendar year; and the Company has
begun to pursue other major chain retailers and drug store chains, such as
Target, K-Mart, Toys R Us and Rite Aid.

Seasonality - Toy Products

         JPI's revenues are very seasonal, depending in large part on the
end-of-year holiday season which begins in September when retailers begin to
stock for Christmas.

American Top Real Estate

         American Top Real Estate, Inc. ("ATRE") was formed in March 1989 for
the purposes of acquiring, owning and holding real property for commercial
development. ATRE does not engage in any other business operations. The Company
paid $50,000 for a 50% interest in ATRE. The Company's arrangement with its
partners in ATRE requires that all parties contribute capital or loans pro rata
according to their interests whenever required by ATRE for land acquisition,
principal or interest payments, property taxes or other expenses.

         Upon sale or development of land, proceeds are used to repay all
related loans and other obligations, with the remaining balance distributed
among the shareholders of ATRE pro rata based on their interests. None of the
other investors in ATRE are otherwise associated or affiliated with the Company,
nor are any of ATRE's co-investors in its real estate holdings associated or
affiliated with the Company. ATRE has interests in two real estate parcels.

         Parcel 1 consists of approximately 20 undeveloped acres purchased in
two transactions, in 1989 and 1997. ATRE has a 70% interest in Parcel 1, located
in Clark County, Washington. The total cost of Parcel 1, including financing
expenses and taxes, was approximately $2,300,000 through 1997.

         Parcel 2 consists of 5.5 acres of undeveloped property, also in Clark
County, Washington. ATRE's interest in Parcel 2 is 25%. Parcel 2 was purchased
in 1989 for $717,000. Approximately 2.5 acres of Parcel 2 were sold in 1996. The
Company received net proceeds of $121,600 from ATRE during fiscal 1997 relating
to Parcel 2 sales. Approximately 3 acres remain unsold as of the date of this
report.

         During the year ended March 31, 1998, ATRE sold approximately 11 acres.
The Company advanced an additional $80,320 to ATRE and received $220,600 from
the proceeds of the parcel of 10 acres as repayment of the advances to ATRE in
fiscal 1998. The Company has subsequently received approximately $400,000 from
ATRE during the period April 1, 1998 through August of 1998 and anticipates
another $100,000 by March 31, 1999.

         At November 30, 1998, ATRE has no binding sales contracts for the
remaining parcels of real estate owned by ATRE as these parcels of land continue
to be developed for commercial use. Contracts that were pending have not closed
due to possible changes in interest rates or possible overall market

                                       6

<PAGE>

conditions. In addition, the Company was advised by ATRE that proceeds realized
by ATRE during fiscal 1998 were reinvested into other parcels to improve the
ability to sell the remaining parcels. In December of 1998, the Company received
from a real estate development specialist an aggregate approximate value of
$5,200,000 for the remaining ATRE parcels. Although the Company believes that
final sales contracts will be able to be consummated, at this time it is not
possible to predict with any certainty when the closing of such sales contracts
of commercial real estate may occur or whether the proceeds expected by the
Company for their share in this real estate could be significantly less than
anticipated. Therefore, the ultimate realizable value of the receivable for
advances from ATRE could be substantially less than the preadjusted carrying
value of $1,600,000. The Company setup a valuation allowance in March 1998 of
$1,117,788 and accordingly, charged operations for that amount so that the
amount due from ATRE at March 31, 1998 is presented at the amount of the 1998
subsequent receipts of approximately $500,000. Based upon the above
circumstances the likelihood is that $1,117,788 from future proceeds from the
sale of the ATRE parcels will not be realized by the Company with any certainty.

Employees of the Company

         As of March 31, 1998, the Company and its subsidiaries employed 30
full-time and two part-time employees, of which three are executives, 16 are
engaged in manufacturing and warehousing activities, and 13 are engaged in
administration, sales and related activities. During the peak season the Company
engages additional part-time or temporary employees to help with the surge for
Christmas season orders. The Company reduces its manufacturing force after the
peak season to improve the profitability of the operations when sales orders
decline. Neither the Company's nor the subsidiaries' employees are unionized.
Management believes that it has good working relations with its employees.

Item 2.  Description of Property.

         The Company leases 48,500 square feet at 16200 Carmenita Road in
Cerritos, California under a lease commencing October 1, 1998 and expiring in
June 2002, for use as executive offices and manufacturing and warehouse
facilities. It pays $21,500 per month. Also, the Company leases 1,200 square
feet in Freehold, New Jersey for its sales office for $1,950 per month. This
lease expires October 31, 2001. In addition, the Company leases approximately
22,080 square feet in Cerritos, California ("Cerritos Property") for $9,274 per
month which space was formerly used by the Company for executive offices and
warehousing. The Company has sublet the Cerritos Property beginning January 1,
1999 for a term that expires on March 31, 2001. The sublease requires the
subtenant to pay the Company $9,494 per month through February 2000, and $9,936
per month through the remaining term of the Sublease. All of the Company's lease
and sublease agreements are with unaffiliated parties. The Company believes that
it has sufficient space for operations for the next twelve months.

Item 3.  Legal Proceedings.

         In 1998, the Company was contacted by attorneys for a foreign
manufacturer claiming that a game distributed by JPI infringed on the
manufacturer's trademark and copyright. After internal investigation, the
Company and JPI voluntarily ceased all sales of its allegedly infringing
product, and has stored its inventory of the game pending a resolution of the
conflict. The Company places a book value of approximately $450,000 on the
stored inventory. JPI has subsequently agreed with the manufacturer in question
that JPI may sell the game to distributors in Eastern Europe or South America.
The Company is searching for a buyer in either or both of those markets, but to
date has not

                                       7

<PAGE>

located any such buyer. There has been no litigation threatened or begun, and
management believes that resolution of this matter will be amicable.

         The Company is involved in litigation relating to claims arising out of
its operations in the normal course of business. The Company believes that it
has adequate legal defenses and intends to vigorously defend itself in these
actions. The Company believes after consulting with counsel that an adverse
decision in any one lawsuit would not have a material adverse impact on the
Company, however, the aggregate affect of an adverse decision in a majority of
the lawsuits outstanding could have a material adverse impact on the Company.

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

         None.
                                       
                                   PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.

         The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol "DMEC." The Company's shares of Preferred Stock are not listed on any
exchange or quoted on the OTC Bulletin Board. The range of high and low bid
information for the Company's Common Stock for each full quarterly period during
the Company's last two fiscal years, is as follows:

<TABLE>
<CAPTION>
              Period                            High Bid                            Low Bid
              ------                            --------                            -------
<S>                                             <C>                                 <C>
Fiscal 1997
         1st quarter                              0.55                                0.22
         2nd quarter                              1.00                                0.25
         3rd quarter                              0.34                                0.15
         4th quarter                              0.24                                0.17
Fiscal 1998
         1st quarter                              0.22                                0.13
         2nd quarter                              0.25                                0.09
         3rd quarter                              0.19                                0.04
         4th quarter                              0.19                                0.03
Fiscal 1999
         1st quarter                              0.135                               0.041
         2nd quarter                              0.16                                0.055
</TABLE>

         These quotations were obtained from OTC Electronic Bulletin Board
quarterly quote summaries, and reflect interdealer prices, without retail
markup, markdown, or commission and may not represent actual transactions. On
December 7, 1998, the closing bid price for the Company's Common Stock was
$0.04. As of the same date, there were 1,600 holders of record of Common Stock.

         The Company has not paid any cash dividends and does not anticipate
paying any cash dividends in the foreseeable future. The Company intends to use
any earnings which it may generate to finance the growth of its business.

                                       8

<PAGE>

         The transfer agent for the Company's Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.

Sales of Unregistered Stock

         In June 1995 Mr. Lu  converted  approximately  $1,131,000  in
obligations of the Company, which he had assumed personally, into 8,212,785
shares of Common Stock. In August 1995 Jeffrey I. Schillen and Murray T. Scott,
each a director of the Company, agreed to assume $413,400 and $110,240,
respectively, of the obligations assumed by Mr. Lu. In consideration for the
assumption of such obligations, Mr. Lu agreed to assign 3,000,000 and 800,000 of
shares of Common Stock, respectively, to Messrs. Schillen and Scott.

         On April 23, 1996 the Board of Directors agreed to reserve 1,000,000
shares of common stock for distribution to Messrs. Lu (as to 600,000 shares) and
Schillen (as to 400,000 shares). Such shares can be purchased for $.25 per
share, in installment payments with a five year promissory note with interest at
6% per annum. As of March 31, 1998 such officers had not purchased any of such
shares.

         In April 1996 pursuant to a financing arrangement, three-year warrants
to purchase 1,000,000 shares of Common Stock for $.10 per share were issued to a
lender; such warrants were exercised in June 1996 and thereupon 1,000,000 shares
of Common Stock were issued.

         On June 21, 1996 the Company entered into consulting agreements with
three individuals and issued three-year warrants to purchase an aggregate of
1,000,000 shares of Common Stock as full consideration therefor. Such warrants
may be exercised for $0.25 per share for a period of three years from the date
of issuance.

         During the quarter ended June 30, 1996 the Company issued 10%
convertible debentures ("10% Debentures") in the original principal amount of
$1,257,988. The principal was convertible into shares of the Company's Common
Stock. Through March 31, 1998, 10% Debentures in the aggregate amount of
$519,848 (including $39,848 in accrued interest and $37,650 in extension
bonuses) had been converted into 7,487,668 shares of the Company's Common Stock.
Subsequent to March 31, 1998, an additional $91,750 in 10% Debentures had been
converted into 2,823,077 additional shares of Common Stock. See "Certain
Relationships and Related Transactions."

         In connection with the placement of the 10% Debentures, the Company
issued warrants, exercisable for $0.25 per share, for the purchase of 500,000
shares to each of Peter Benz and George Furla in consideration of their
providing financial consulting services to the Company. On April 9, 1997,
warrants to purchase 46,000 shares of Common Stock were exercised by Peter Benz
in consideration of the payment of $11,500.

         Effective May 14, 1997 the Company consummated the merger between a
subsidiary of the Company and Beyond Design Corporation (which has since changed
its name and is referred to herein as "JPI"), pursuant to which the Company
acquired all of the outstanding shares of JPI in exchange for the issuance of
2,427,273 shares of Common Stock and the assumption of certain obligations of
JPI; JPI then became a wholly-owned subsidiary of the Company.

         On August 25, 1997, as compensation pursuant to four consulting
agreements, the Company issued 250,000 shares of Common Stock, and warrants to
purchase an aggregate of 2,050,000 shares of Common Stock, exercisable at $0.10
per share. The warrants expire on August 24, 1999. Murray T.


                                       9
<PAGE>

Scott, a director of the Company, received the 250,000 shares of Common Stock
and 250,000 of such warrants. In July 1998 two individuals who received warrants
under the consulting agreements each exercised warrants to purchase 100,000
shares of Common Stock. All of the issued shares and all of the shares
underlying the warrants were subsequently registered pursuant to the Company's
Registration Statement on Form S-8 filed in September 1997.

         The Company executed nine employment agreements effective September 1,
1997, pursuant to which an aggregate of 550,000 shares of Common Stock were
issued, with a deemed value of $11,000, as payment for services. Such shares
were subsequently registered pursuant to the Company's Registration Statement on
Form S-8 filed in September 1997.

         On September 1, 1997 each of Messrs. Lu and Schillen were issued shares
of Common Stock and granted warrants as consideration for agreeing to defer
payment of their salaries. Mr. Lu was issued 3,000,000 shares of Common Stock
and granted warrants to purchase an additional 3,000,000 shares of Common Stock
at $0.10 per share through September 1, 2002. Mr. Schillen was issued 750,000
shares of Common Stock and granted warrants to purchase an additional 750,000
shares of Common Stock at $0.10 per share through September 1, 2002. All of such
shares and such warrants were subsequently registered pursuant to the Company's
Registration Statement on Form S-8 filed in September 1997.

         On September 24, 1997 the Company renegotiated and extended the 10%
Debentures. As an inducement to have the holders of the 10% Debentures agree to
extend the maturity dates of the 10% Debentures, the principal amount of the
outstanding 10% Debentures ($967,988) on such date was increased by 15%, and the
conversion terms of the 10% Debentures were revised. See "Certain Relationships
and Related Transactions."

         On  March  11,  1998,  the  Company  issued  347,368  shares  of
Common Stock to a salesman in lieu of commissions owed of $66,000.

         On July 9, 1998, options to be issued to each of Messrs. Lu and Peter
Benz were approved by the Board of Directors for the purchase of shares of
Common Stock for $0.10 per share, as follows: 4,000,000 options to be issued to
Mr. Lu contingent on certain events; 2,000,000 options to be issued to Mr. Benz
contingent on certain other events; and 2,000,000 options to be issued to each
of Messrs. Lu and Benz upon the first closing of a joint private offering of
securities of the Company and another issuer, which offering was subsequently
terminated without closing. To date, none of the other contingent events have
occurred. Such options, if issued, will expire July 9, 2003.

         On July 9, 1998 Mr. Lu was granted additional options (which were
issued in August 1998) to purchase 2,000,000 shares of Common Stock for $0.10
per share in consideration of his (i) personal guaranty of the Company's bank
line of credit and (ii) loans made to the Company. Such options expire July 9,
2003.

         On July 9, 1998, the Company granted options to purchase 1,000,000
shares of Common Stock to the chief executive officer of a potential customer
and in consideration of certain fulfillment orders submitted to the Company.
These options may be exercised for $0.10 per share.

         On October 24, 1998, the Company issued 1,499,523 shares of Common
Stock to Mr. Lu pursuant to a settlement agreement between the Company, Mr. Lu
and four consultants. See "Certain Relationships and Related Transactions."



                                       10
<PAGE>

         The Company believes that the transactions set forth above were exempt
from registration with the Commission pursuant to either Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering,
Section 3(a)(9) of the Securities Act as a transaction involving an exchange by
an issuer with existing security holders, or Regulation S under the Securities
Act as a transaction that occurred outside the United States. No broker-dealer
or underwriter was involved in the foregoing transactions. All certificates
representing such securities have been or will be appropriately legended.

Item 6.  Management's Discussion and Analysis or Plan of Operation.

Year Ended March 31, 1998 Compared with the Year Ended March 31, 1997

Results of Operations

         The Company's net loss for the year ended March 31, 1998 was
approximately $1,500,000, and arose primarily as a result of a valuation
adjustment of $1,100,000 for ATRE. The Company's net loss for the year ended
March 31, 1997 was approximately $1,300,000, primarily from a loss from
operations of approximately $1,200,000.

         The Company's operating loss for the year ended March 31, 1998 was
$192,940 as compared to an operating loss of $1,186,472 for the same period last
year. This decrease in operating loss of approximately $993,000 was primarily
attributable to an increase in gross profit from the prior year of approximately
$344,000 and a reduction in operating expenses of approximately $650,000.

         The Company's sales for the years ended March 31, 1998 and 1997 were
$8,724,149 and $6,444,586 respectively. The Company's sales increased as a
result of its acquisition of Beyond Design Corporation which accounted for
$2,477,792 in sales. On September 11, 1998, Beyond Design Corporation changed
its corporate name to Jewel Products International, Inc.

         Cost of sales for the years ended March 31, 1998 and 1997 were
$5,696,810 and $3,761,175 or 65% and 58% of sales, respectively.

         Gross profit for the years ended March 31, 1998 and 1997 were
$3,027,339 and $2,683,411, or 35% and 42% of sales, respectively. The decrease
in gross profit as a percentage of sales from the same period a year ago, was
primarily the result of an increase in product mix in total sales which produced
a lower gross profit percentage. Depreciation and amortization, included in the
cost of sales, for the years ended March 31, 1998 and 1997 were $322,440 and
$334,292, respectively.

         Operating expenses for the years ended March 31, 1998 and 1997 were
$3,220,279 and $3,869,883, respectively. The decrease in operating expenses of
approximately $650,000 from the period a year earlier was due to the reduction
of selling expenses, G&A expenses and factoring fees of $149,000, $395,000 and
$139,000, respectively, and offset by an increase in bad debt expense of
approximately $33,000. Selling expenses in the fourth quarter of fiscal 1998
increased over $300,000 as compared to the previous nine months due to an
increase in royalty expenses, sales commissions, and related travel costs.



                                       11
<PAGE>

         Interest expense for the years ended March 31, 1998 and 1997 were
$420,583 and $267,798, respectively. As of March 31, 1998, the outstanding debt
of the Company was approximately $2,500,000, primarily all of which is
classified as current.

         The Company's auditors issued a going concern report. There can be no
assurance that management's plans to reduce working capital deficiency or obtain
additional financing will be successful.

Liquidity and Capital Resources

         The Company's working capital (deficit) at March 31, 1998 was
$(2,537,031) as compared with a working capital (deficit) of $(2,722,958) at
March 31, 1997. This decrease in the working capital (deficit) of approximately
$186,000 is primarily the result of increased inventory levels partially offset
by higher accounts payable and lower accounts receivable.

Operations

         For the year ended March 31, 1998, cash generated from operations was
$641,937 as compared to $1,074,027 of cash utilized for operations for the year
ended March 31, 1997. The Company intends to utilize future debt or equity
financing or debt to equity conversions to help satisfy past due obligations and
to pay down its debt obligations.

         The Company has also been experiencing difficulties in paying its
vendors on a timely basis. These factors create uncertainty whether the Company
can continue as a going concern. The Company's plans to mitigate the effects of
the uncertainties are (i) to collect the sales proceeds from parcels of property
owned by ATRE (50% owned by the Company) located in Vancouver, Washington, (ii)
to continue to acquire new licensed titles to improve sales and profit margin,
(iii) to create new products with better gross profits, (iv) to continue to
negotiate with several reliable investors to provide the Company with debt and
equity financing for working capital purposes, (v) to convert debt to equity and
(vi) to continue to negotiate with major vendors for discounts.

         In 1991, two employment agreements were executed for two officers for
annual compensation totaling $240,000. These agreements terminate in the year
2001 and are adjusted annually in accordance with the Consumer Price Index. The
Board of Directors agreed on April 23, 1996 to reserve 1,000,000 shares of
common stock for distribution to two officers of the Company. The common stock
can be purchased in installment payments with a five year promissory note with
interest at 6% per annum. As of March 31, 1998, the officers had not purchased
these shares.

         On May 8, 1995, the Company closed a sales agreement with a Mexican
company, Central Video, for $750,000 by allowing credit to the Company for
future duplication services. The general manager of Central Video is the former
President of the Company. The Company received $750,000 of duplication services
and surrendered equipment having a book value of approximately $630,000. The
Company guaranteed Central Video's general manager a minimum of $2,500,000 a
year of production orders for three years and agreed to pay Central Video's
general manager a 3% commission on orders the Company places with Central Video.
The Company satisfied this obligation in fiscal 1996, however, in 1997, the
Company did not fulfill this obligation and was delinquent in payments to
Central Video. The Company settled this contract with Central Video in September
of 1997. The Company agreed to pay Central Video $12,500 a week until the total
obligation of $740,000 is paid. This settlement dissolved the production
contract and all outstanding payable obligation. As of March

                                       12
<PAGE>

31, 1998, the balance owed to Central Video was $288,701 and on September 9,
1998, the Company satisfied this obligation in full.

         In June of 1996, the Company engaged three consultants for a period of
two years. The Company will reimburse the consultants' business expenses not to
exceed $750 per month. The financial consultants received a total of 1,000,000
warrants with an exercise price of $0.25 per share in exchange for services to
be rendered. The Company recorded deferred consulting costs of $50,000 for the
fair value of the warrants to purchase the 1,000,000 shares of common stock and
expensed $14,858 and $35,142 for the years ended March 31, 1998 and 1997,
respectively. The fair value of the warrants was determined based upon the fair
value of services to be rendered by the consultant.

         In August of 1997, the Company engaged a consulting firm to provide
financial advice for a period of six months. The fee for services includes a
$7,500 cash payment, a two percent cash fee on refinancing commitments and a
five percent, non-dilutive equity interest in the Company. The consulting firm
will also be entitled to a five percent fee based on the transaction value of
any concluded merger or acquisition introduced by the consulting firm.

         In August of 1997, the Company engaged four consultants for a period of
two years to provide assistance in restructuring and designing the Company's
operations and long-term strategic plan. The consultants received warrants to
purchase an aggregate 2,050,000 shares of the Company's common stock at an
exercise price of $.10 per share. In addition, the Company issued 250,000 shares
of stock to one of the consultants in consideration of entering into a two year
consulting agreement and recorded $5,000 as a signing bonus. The warrants expire
at the end of the two year consulting period. The Company recorded deferred
consulting costs of $100,000 for the fair value of the warrants and expensed
approximately $31,000 for the year ended March 31, 1998.

         In May of 1997, the Company entered into an agreement and plan of
merger between BDC Acquisition, Inc., a newly formed wholly-owned subsidiary of
the Company, and Beyond Design Corporation ("BDC"). The Company's subsidiary has
acquired all of the issued and outstanding stock of BDC for the issuance of an
aggregate of 2,427,273 shares of the Company's common stock and the assumption
of certain outstanding obligations of BDC. The book value of the net assets
acquired approximates the fair value of the shares issued in connection with the
acquisition. This acquisition was deemed immaterial for accounting purposes. On
September 11, 1998, BDC changed its corporate name to Jewel Products
International, Inc., as it was not primarily engaged in the design business.

         In September 1997, the two officers agreed to defer 90% of their
salaries until further notice, but not beyond March 31, 1998. As consideration,
the Company granted a total of 3,750,000 shares of common stock and warrants to
purchase 3,750,000 shares of the Company's common stock at an exercise price of
$.10 per share. The Common Stock granted vested during fiscal 1997 and the
warrants are exercisable over a two year period beginning March 31, 1997. The
Company recorded $75,000 in deferred costs for the fair value of the shares
granted and amortized $50,000 in the year ended March 31, 1998. No deferred
costs were recorded for the warrants granted as the fair market value of the
underlying Common Stock was approximately equal to the exercise price.

         In September 1997, the Company entered into employment agreements with
nine employees holding key positions. The agreements provide for an aggregate of
550,000 shares of common stock with a fair value of $11,000 for past services
and semi-monthly compensation of approximately $14,000. The agreements will
continue for an indefinite period of time.


                                       13
<PAGE>

Investing

         Capital expenditures for the years ended March 31, 1998 and 1997 were
$184,645 and $47,638, respectively. For the years ended March 31, 1998 and 1997,
investments in masters and artwork were $137,059 and $531,277, respectively.
Management continues to seek to acquire new titles to enhance its product lines.

         American Top Real Estate, Inc. ("ATRE") was formed in March 1989 for
the purposes of acquiring, owning and holding real property for commercial
development. ATRE does not engage in any other business operations. The Company
paid $50,000 for a 50% interest in ATRE. The Company's arrangement with its
partners in ATRE requires that all parties contribute capital or loans pro rata
according to their interests whenever required by ATRE for land acquisition,
principal or interest payments, property taxes or other expenses.

         Upon sale or development of land, proceeds are used to repay all
related loans and other obligations, with the remaining balance distributed
among the shareholders of ATRE pro rata based on their interests. None of the
other investors in ATRE are otherwise associated or affiliated with the Company,
nor are any of ATRE's co-investors in its real estate holdings associated or
affiliated with the Company. ATRE has interests in two real estate parcels.

         Parcel 1 consists of approximately 20 undeveloped acres purchased in
two transactions, in 1989 and 1997. ATRE has a 70% interest in Parcel 1, located
in Clark County, Washington. The total cost of Parcel 1, including financing
expenses and taxes, was approximately $2,300,000 through 1997.

         Parcel 2 consists of 5.5 acres of undeveloped property, also in Clark
County, Washington. ATRE's interest in Parcel 2 is 25%. Parcel 2 was purchased
in 1989 for $717,000. Approximately 2.5 acres of Parcel 2 were sold in 1996. The
Company received net proceeds of $121,600 from ATRE during fiscal 1997 relating
to Parcel 2 sales. Approximately 3 acres remain unsold as of the date of this
report.

         During the year ended March 31, 1998, ATRE sold approximately 11 acres.
The Company advanced an additional $80,320 to ATRE and received $220,600 from
the proceeds of the parcel of 10 acres as repayment of the advances to ATRE in
fiscal 1998. The Company has subsequently received approximately $400,000 from
ATRE during the period April 1, 1998 through August of 1998 and anticipates
another $100,000 by March 31, 1999.

         At November 30, 1998, ATRE has no binding sales contracts for the
remaining parcels of real estate owned by ATRE as these parcels of land continue
to be developed for commercial use. Contracts that were pending have not closed
due to possible changes in interest rates or possible overall market conditions.
In addition, the Company was advised by ATRE that proceeds realized by ATRE
during fiscal 1998 were reinvested into other parcels to improve the ability to
sell the remaining parcels. In December of 1998, the Company received from a
real estate development specialist an aggregate approximate value of $5,200,000
for the remaining ATRE parcels. Although the Company believes that final sales
contracts will be able to be consummated, at this time it is not possible to
predict with any certainty when the closing of such sales contracts of
commercial real estate may occur or whether the proceeds expected by the Company
for their share in this real estate could be significantly less than
anticipated. Therefore, the ultimate realizable value of the receivable for
advances from ATRE could be substantially less than the preadjusted carrying
value of $1,600,000. The Company setup a valuation allowance in the quarter
ended March 31, 1998, of $1,117,788 and accordingly, charged operations for




                                       14
<PAGE>

that amount so that the amount due from ATRE at March 31, 1998 is presented at
the amount of the 1998 subsequent receipts of approximately $500,000. Based upon
the above circumstances the likelihood is that $1,117,788 from future proceeds
from the sale of the ATRE parcels will not be realized by the Company with any
certainty.

Financing

         On August 30, 1996, the Company established a line of credit up to
$2,500,000, whereby, $2,000,000 was backed by pledged receivables and inventory
and $500,000 was guaranteed by the Company's President. Interest was at a prime
rate plus 3%. Interest expense from April 1, 1997 through December 31, 1997 was
approximately $148,500. In December 1997, the Company repaid $469,221 on this
line of credit and engaged another financial institution for a $2,500,000 line
of credit. This line of credit is also backed by pledged receivables and
inventory. Cost is 1.5% discounted from pledged invoices for every 30 days for
the accounts receivable portion of the line of credit. Interest expense from
December 1997 through March 31, 1998 was approximately $27,500.

         In March 1993 a loan was renegotiated for the sum of $292,058 with
principal payments of $5,000 per month with an interest rate of 10% per annum
due November 14, 1999. This note was paid in full on July 15, 1998 for
approximately $60,000. As a result, the Company recorded forgiveness of debt of
approximately $66,000 in July 1998. During the year ended March 31, 1998,
interest expense of approximately $12,500 was recorded.

         On May 8, 1995, the Company closed a sales agreement with a Mexican
Company, for $750,000 by allowing credit to the Company for duplication services
and received $750,000 of duplication services in exchange for equipment having a
book value of approximately $630,000. The Company classifies the outstanding
obligation of $288,701 at March 31, 1998 as notes payable. This note was repaid
in weekly installments of $12,500 with the final payment made in September of
1998. Interest expense of approximately $40,000 was recorded for the year ended
March 31, 1998.

         During the quarter ended June 30, 1996, the Company issued convertible
debentures of $1,257,988 with 10% interest per annum and a 7% commission. The
principal amount is convertible in whole or in part into shares of the common
stock of the Company at a conversion price equal to 65% of the average closing
bid price for the common stock for five trading days immediately prior to the
conversion. In no event shall the conversion price be less than $.20 per share
or more than $.75 per share. In conjunction with the debentures, the Company
granted 1,000,000 warrants exercisable at $.25 per share to two consultants.
Warrants for 46,000 shares were exercised for $11,500 during the year ended
March 31, 1997. The Company recorded a financing expense of $25,000 for the fair
value of the warrants granted. The fair value of the warrants was determined
based upon the fair value of services received by the Company in May and June of
1996.

         As of March 31, 1997, convertible debentures of $290,000 were converted
into 1,450,000 shares of the Company's common stock by several off shore
companies under Regulation S and $967,988 of convertible promissory notes
payable were outstanding and in default by the Company. Interest expense of
$97,000 and $24,702 was recorded for the years ended March 31, 1998 and 1997.
Subsequent to September 30, 1997, the Company negotiated a one year extension
agreement and agreed to add 15% to the note as a deferred financing cost of
$110,724.

         During fiscal March of 1998, convertible debentures of $229,848 were
converted into 6,037,668 shares of the Company's common stock. This brought the
total conversion of $519,848 of



                                       15
<PAGE>

debentures into 7,487,668 shares as of March 31, 1998. For the five months ended
March 31, 1998, the Company amortized $46,134 as a non-cash financing cost,
which is classified as interest expense. The convertible notes are secured by
the Company's entitlement to any net cash proceeds derived from its interest in
ATRE property.

         In June of 1998, a convertible debenture holder converted a note
payable with a balance of $91,750 into 2,823,077 shares of the Company's common
stock.

         In August 1997, the Company issued 2,050,000 common stock warrants at
an exercise price of $.10 per share as part of a consulting agreement entered
into, whose term ends August 1999. Deferred consulting costs of $100,000
resulting from this transaction were recorded at the fair market value of the
services rendered and approximately $31,000 was expensed for the year ended
March 31, 1998.

         In October 1997, the Company borrowed $360,000 from an unaffiliated
entity with interest at 10% per year. At March 31, 1998, $185,208 is outstanding
on this obligation. This note was repaid in September of 1998 by weekly payments
of $7,500. Interest expense for the year ended March 31, 1998 was $12,708.

         The Company owed approximately $2,500,000 in short-tem debt financing
at March 31, 1998.

Year Ended March 31, 1997 Compared with the Year Ended March 31, 1996

Results of Operations

         The Company's operating loss for the year ended March 31, 1997 was
$1,186,472 as compared to an operating loss of $571,303 for the same period last
year. This increase in operating loss was primarily attributable to a 29%
reduction in sales that could not support the operating expenses of the Company.

         The Company's sales for the years ended March 31, 1997 and 1996 were
$6,444,586 and $9,117,113, respectively. The decrease in sales of approximately
$2,700,000 is primarily attributable to the Company's lack of working capital to
provide the Company the ability to deliver orders. Management believes its
customer base, has decreased over the prior year, however, it also believes it
could recover to previous levels based upon management's intent to expand its
product offerings into higher growth and higher margin products with licensed
title CD-ROM and DVD distribution, or through the acquisition of an existing
distribution company.

         Cost of sales for the years ended March 31, 1997 and 1996 were
$3,761,175 and $5,678,340 or 58% and 61% of sales, respectively.

         Gross profit for the years ended March 31, 1997 and 1996 were
$2,683,411 and $3,438,773, or 42% and 39% of sales, respectively. Depreciation
and amortization, included in the cost of sales, for the years ended March 31,
1997 and 1996 were $64,872 and $67,216, respectively.

         Operating expenses for the years ended March 31, 1997 and 1996 were
$3,869,883 and $4,010,076, respectively. The Company has instituted a plan to
reduce operating expenses by streamlining its operations and reducing personnel
from 32 to 22 employees.



                                       16
<PAGE>

         Interest expense for the years ended March 31, 1997 and 1996 was
$267,798 and $221,140, respectively. As of March 31, 1997, the outstanding debt
of the Company was approximately $7,000,000 primarily all of which is classified
as current.

         The Company's auditors have issued a going concern report. There can be
no assurance that management's plans to reduce operating losses or obtain
additional financing will be successful.

Operations

         For the year ended March 31, 1997, cash used for operations was
$1,074,027 as compared to $1,433,641 of cash generated from operations for the
year ended March 31, 1996. The Company intends to use future debt or equity
financing or debt to equity conversions to help satisfy past due obligations and
to pay down its debt obligations.

New Authoritative Pronouncements

         The FASB has issued SFAS No. 130, "Reporting  Comprehensive  
Income." SFAS No. 130 is effective for fiscal years beginning after December 
15, 1997. Earlier application is permitted. Reclassification of financial 
statements for earlier periods provided for comparative purposes is required. 
SFAS No. 130 is not expected to have a material impact on the Company.

         The FASB has issued SFAS No. 131, "Disclosures About Segments of an 
Enterprise and Related Information." SFAS No. 131 changes how operating 
segments are reported in annual financial statements and requires the 
reporting of selected information about operating segments in interim 
financial reports issued to shareholders. SFAS No. 131 is effective for 
periods beginning after December 15, 1997, and comparative information for 
earlier years is to be restated. SFAS No. 131 need not be applied to interim 
financial statements in the initial year of its application. SFAS No. 131 is 
not expected to have a material impact on the Company.

         In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it is designated; for
example, gains or losses related to changes in the fair value of a derivative
not designated as a hedging instrument is recognized in earnings in the period
of the change, while certain types of hedges may be initially reported as a
component of other comprehensive income (outside earnings) until the
consummation of the underlying transaction. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Initial
application of SFAS No. 133 should be as of the beginning of a fiscal quarter;
on that date, hedging relationships must be designated anew and documented
pursuant to the provisions of SFAS No. 133. Earlier application of all of the
provisions of SFAS No. 133 is encouraged, but it is permitted only as of the
beginning of any fiscal quarter. SFAS No. 133 is not to be applied retroactively
to financial statements of prior periods. The Company does not currently have
any derivative instruments and is not currently engaged in any hedging
activities.

                                       17
<PAGE>

Year 2000 Issue

         The Company has attempted to evaluate the impact of the year 2000 issue
on its business and does not expect the amounts to be expensed over the next 12
months to be material. No such costs have been expensed to date, since the
Company utilizes an off the shelf software package.

         Currently, the Company anticipates commencing communication with its
significant vendors and customers to determine the extent that year 2000
compliance issues of such parties may affect the Company. At this time, the
Company believes that there will be no disruption in business due to its
customers' or vendors' year 2000 readiness. The Company has not established a
contingency plan. There can be no guarantee that the systems of such other
companies will be timely converted without a material adverse effect on the
Company's business, financial condition or results of operations.

Impact of Inflation

The Company does not believe that inflation had an impact on sales or income
during the past several years. Increase in supplies or other operating costs
could adversely affect the Company's operations; however, the Company believes
it could increase prices to offset increases in costs of goods sold or other
operating costs.

Item 7.  Financial Statements.

         See Index to Consolidated Financial Statements on page F-1.

Item 8.  Changes in and Disagreements With Accountants on Accounting and
         Financial Disclosure.

         None.

                                    PART III

Item 9.  Directors,  Executive  Officers,  Promoters  and Control  Persons;
         Compliance  With Section  16(a) of the Exchange Act.

         The Company's directors and officers are as follows:


<TABLE>
<CAPTION>

Name                                              Age     Title
---------------------------------------------     ---     -------------------------------------------------
<S>                                               <C>     <C>
James K.T. Lu................................     51      Chairman of the Board, President, Chief Executive
                                                          Officer, Secretary and Director
Jeffrey I. Schillen..........................     52      Executive Vice President, Sales and Marketing and
                                                          Director
Murray T. Scott..............................     76      Director
</TABLE>


Background of Executive Officers and Directors

         Set forth below is a description of the backgrounds of the executive
officers and directors of the Company.


                                       18
<PAGE>

         James K.T. Lu (Class 2  Director).  Mr. Lu has been a director of the
Company since February 1989. Mr. Lu was elected as Chairman of the Board, Chief
Executive Officer and Secretary of the Company as of March 1, 1990. In July
1991, Mr. Lu was appointed to the additional position of President. In order to
involve other executives in the management of the Company, Mr. Lu resigned as
President and Chief Executive Officer in September 1991. Mr. Lu was President
and Chief Executive Officer of the California Subsidiary from 1985 to 1990. In
May 1995, Mr. Lu was reappointed as President of the Company. Mr. Lu received
his B.S.I.E. degree from Chung Yuen University Taiwan in 1969, his M.S.I.E.
degree from the Illinois Institute of Technology in 1972 and a Master of
Business Administration (MBA) from California State University in 1981.

         Jeffrey I. Schillen (Class 1 Director). Mr. Schillen was appointed
Executive Vice President of Sales and Marketing of the Company in 1993 and has
been a Director of the Company since its inception in April 1986. From April
1986 to July 1991 Mr. Schillen was the President and Treasurer of the Company.
From May 1984 to April 1986, Mr. Schillen was President and Chief Operating
Officer of Music Corner Inc., a retail record, tape and video chain he
co-founded. From 1974 to April 1984, Mr. Schillen founded and served as Vice
President in charge of purchasing, store openings and acquisitions of Platter
Puss Records, Inc., a retail record, tape and video chain.

         Murray T. Scott  (Class 2  Director).  Mr.  Scott  became a director in
November 1993. Mr. Scott was the President and Chief Executive Officer of
Gregg's Furniture, a custom furniture building business in Victoria, Canada,
from 1958 to 1995. Scott remains involved with Gregg's Furniture in a consulting
and advisory capacity.

         All directors hold office for terms of three (3) years and until the
next annual meeting of stockholders scheduled to vote on such class of Directors
and the election and qualification of their respective successors. Directors
receive no compensation for serving on the Board, except for reimbursement of
reasonable expenses incurred in attending meetings. Officers are elected
annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.

         Under the certificate of incorporation of the Company ("Certificate of
Incorporation"), the Board of Directors of the Company is divided into three (3)
classes, with each class to be elected by the shareholders every three years.
The Company's Board presently consists of three (3) directors: one (1) Class 1
director whose term expires in 1998, two (2) Class 2 directors whose terms
expire in 1998, which directors were elected for such terms at the Company's
annual meeting of shareholders held August 23, 1996. No director of the Company
has resigned or declined to stand for re-election due to a disagreement on any
matter relating to the Company's operations, policies or practices.

Committees of the Board of Directors

         The Company has no standing audit, nominating or compensation
committee, or any committee performing similar functions.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in



                                       19
<PAGE>

ownership of equity securities of the Company with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than ten percent
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms that they file.

         Except as set forth  below,  based  solely upon a review of Forms 3 and
Forms 4 furnished to the Company pursuant to Rule 16a-3 under the Exchange Act
during its most recent fiscal year and Forms 5 with respect to its most recent
fiscal year, the number of (i) late reports, (ii) transactions that were not
reported on a timely basis during the fiscal year ended March 31, 1998, and
(iii) any known failure to file a required report by officers, directors and
beneficial owners of more than 10% of the Company's common stock is as follows:
James K.T. Lu: one late report and two transactions not reported on a timely
basis; Murray T. Scott: one late report and two transactions not reported on a
timely basis; Jeffrey I. Schillen: one late report and two transactions not
reported on a timely basis. Such late reports have subsequently been filed to
report the transactions not timely reported.

Item 10.  Executive Compensation.

         The following table sets forth aggregate compensation paid for services
rendered to the Company during the last three fiscal years by the Company to its
Chief Executive Officer ("CEO") and its one most highly compensated executive
officer other than the CEO who served as such at the end of the last fiscal
year.

Summary Compensation Table
<TABLE>
<CAPTION>

                                                     Annual Compensation               Long Term Compensation
                                             -------------------------- --------------------------------------------
                                                                           Awards                Payouts
                                                                        ------------ -------------------------------
                                                                        Securities   LTIP Payouts      All Other
                                                                        Underlying        ($)        Compensation
Name and Principal Position        Year       Salary ($)    Bonus ($)   Options (#)                       ($)
------------------------------- ------------ ----------- -------------- ------------ -------------- ----------------
<S>                             <C>          <C>         <C>            <C>          <C>            <C>
James K.T. Lu (1)                  1998        78,350          0             0             0            31,572
  President, Chief Executive       1997       130,500          0             0             0            33,742
  Officer and Secretary            1996       167,885          0             0             0            37,920
------------------------------- ------------ ----------- -------------- ------------ -------------- ----------------
Jeffrey I. Schillen (2)            1998        51,500          0             0             0            20,792
  Executive Vice President of      1997        93,000          0             0             0            12,547
  Sales and Marketing              1996       122,308          0             0             0            19,631
------------------------------- ------------ ----------- -------------- ------------ -------------- ----------------
</TABLE>
(1)    Mr. Lu's annual salary is $150,000; during the fiscal year ended March
       31, 1998 Mr. Lu elected to defer $71,650 in salary payments. Through
       March 31, 1998 the total of accrued payments Mr. Lu has deferred, and
       which are owed to him, equal $106,250. As of the date of this report, Mr.
       Lu continues to defer a portion of his salary.
(2)    Mr. Schillen's annual salary is $120,000; during the fiscal year ended
       March 31, 1998 Mr. Schillen elected to defer $68,500 in salary payments.
       Through March 31, 1998 the total of accrued payments Mr. Schillen has
       deferred, and which are owed to him, equal $95,500. As of the date of
       this report, Mr. Schillen continues to defer a substantial portion of his
       salary.

Option/SAR Grants in Last Fiscal Year

         The following table sets forth certain information with respect to the
options granted during the year ended March 31, 1998, for the persons named in
the Summary Compensation Table (the "Named Executive Officers"):

                                       20
<PAGE>

<TABLE>
<CAPTION>

                                Number of Securities  Percent of Total
                                     Underlying         Options/SARs
                                    Options/SARs      Granted to Employees Exercise or Base Price Expiration Date
       Name                          Granted (#)         in Fiscal Year        ($/Sh)
------------------------------- --------------------- -------------------- ---------------------- ---------------------
<S>                             <C>                   <C>                  <C>                    <C>
James K.T. Lu                        3,000,000                80%                 0.10                3/31/99
------------------------------- --------------------- -------------------- ---------------------- ---------------------
Jeffrey I. Schillen                   750,000                 20%                 0/10                3/31/99
------------------------------- --------------------- -------------------- ---------------------- ---------------------
</TABLE>

Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values

         The following table sets forth certain information with respect to
options exercised during 1998 by the Named Executive Officers and with respect
to unexercised options held by such persons at the end of 1998.
<TABLE>
<CAPTION>

                                                    Number of Securities Underlying Value of Unexercised In-the-
                                                        Unexercised Options/SARs       Money Options/SARs
                         Shares                             at FY-End ($)                  At FY-End (#)
                       Acquired On       Value     -------------------------------- -----------------------------
            Name       Exercise (#)    Realized ($)  Exercisable    Unexercisable   Exercisable   Unexercisable
--------------------- -------------- ------------- -------------- ----------------- ------------- ---------------
<S>                   <C>            <C>           <C>            <C>               <C>           <C>
James K.T. Lu               0             0          5,600,000      4,000,000          0              0
--------------------- -------------- ------------- -------------- ----------------- ------------- ---------------
Jeffrey I. Schillen         0             0          1,150,000          0              0              0
--------------------- -------------- ------------- -------------- ----------------- ------------- ---------------
</TABLE>

Employment Agreements

         In 1991 the Company entered into employment agreement with each of
Messrs. Lu and Schillen for annual compensation of $150,000 and $90,000,
respectively; both provide for annual adjustments in accordance with the
consumer price index, however, no price index adjustments have ever been made.
Consequently, contracted salary levels remain at $150,000 for Mr. Lu and $90,000
for Mr. Schillen. Both employment agreements terminate December 31, 2001. See
"Summary Compensation Table" above, and the notes thereto.

         On April 23, 1996 the Board of Directors agreed to reserve 1,000,000
shares of common stock for distribution to Messrs. Lu and Schillen. Such shares
can be purchased for $.25 per share, in installment payments with a five year
promissory note with interest at 6% per annum. As of March 31, 1998 such
officers had not purchased any of such shares.

         In September 1997 as consideration for each of Messrs. Lu and Schillen
agreeing to defer up to 90% of their salaries through March 31, 1998, the
Company issued 3,000,000 shares of Common Stock and warrants to purchase
3,000,000 shares of Common Stock to Mr. Lu, and issued 750,000 shares of Common
Stock and warrants to purchase 750,000 shares of Common Stock to Mr. Schillen.
All of such warrants have an exercise price of $.10 per share. The warrants are
fully vested and are exercisable until March 31, 1999.

         The Company maintains two life insurance policies on Mr. Lu, one for
the benefit of the Company in the amount of $1,000,000 and one for the benefit
of Mr. Lu's designated beneficiary in the amount of $500,000. The Company
maintains a life insurance policy on Mr. Schillen, for the benefit of Mr.
Schillen's designated beneficiary, in the amount of $500,000.

         On September 1, 1997 the Company entered into employment agreements
with nine other employees holding key positions. The agreements provided for the
issuance of an aggregate of 550,000 shares of Common Stock with a fair value of
$11,000, as payment for services. The semi-monthly compensation under the eight
agreements still in effect is approximately $12,700 in the aggregate. The
agreements continue for an indefinite period of time.

                                       21
<PAGE>

         None of the employment agreements which the Company has with any of the
executives, indicated above provides for any specific compensation to such
individuals should their respective employment agreements be terminated prior to
expiration of their respective terms.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

         The following table sets forth information as of December 7, 1998, with
respect to the beneficial ownership of the outstanding shares of the Company's
Common Stock and Preferred Stock by (i) each person known by the Company to be
the beneficial owner of more than 5% of the Common Stock or Preferred Stock,
(ii) each director of the Company, (iii) each executive officer of the Company;
and (iv) all directors and executive officers as a group. Unless otherwise
indicated below, such individuals have the sole power to control the vote and
dispose of such shares of capital stock.

<TABLE>
<CAPTION>
                                                                                              Percentage of Common
                                                                                                 Stock Assuming
                                        Common Stock       Percentage of       Preferred          Conversion of
  Name                                      Owned          Common Stock     Stock Owned (1)    Preferred Stock (2)
  ----------------------------------- ------------------ ------------------ ----------------- ----------------------
<S>                                   <C>                <C>                <C>               <C>
  James K.T. Lu (3)                          13,012,785              33.4%           209,287          34.1%
  Diamond Entertainment Corporation
  16200 Carmenita Road
  Cerritos CA 90703

  Jeffrey I. Schillen (4)                     4,920,750              14.3%            36,282          14.5%
  Diamond Entertainment Corporation
  4400 Route 9 South
  Freehold, NJ 07728

  Murray T. Scott (5)                         1,300,000               3.9%            75,796          4.3%
  Diamond Entertainment Corporation
  16200 Carmenita Road
  Cerritos, CA 90703

  Pacesetter International                    2,538,446               7.6%                 0          7.6%
  Corporation
  301 E. Colorado Blvd., Suite 514
  Pasadena, CA  91101

  UC Financial, Ltd.                          3,933,440              11.8%                 0          11.8%
  c/o Universal Finanz Holding A.G.
  Drescheweg 2, Postfach 828
  FL-9490 Vaduz, Liechtenstein

  All directors and officers as a            19,233,535              47.7%           321,365          48.5%
  group (3 persons) (6)
</TABLE>

(1)  The Preferred Stock entitles the holder to 1.95 votes for each share owned
     and each share may be converted into 1.95 shares of Common Stock.

(2)  Assumes conversion of shares of Preferred Stock beneficially owned. 

(3)  Mr. Lu is President, Chief Executive Officer, Secretary and a director 
     of the Company. Includes 5,600,000 shares of Common Stock issuable upon 
     exercise of warrants or options. Does not include 3,800,000 shares of 
     Common Stock owned of record by Mr. Lu for the benefit of other 
     directors of the Company; Mr. Lu disclaims any ownership of such shares. 
     See footnotes below and "Certain Relationships and Related Transactions."

(4)  Mr. Schillen is the Executive Vice President and a director of the Company.
     Mr. Schillen may be deemed a "parent" or "promoter" of the Company as such
     terms are defined in the Exchange Act.



                                       22
<PAGE>

     Includes 3,000,000 shares owned of record by Mr. Lu and 1,150,000 shares of
     Common Stock issuable upon exercise of warrants or options. See "Certain
     Relationships and Related Transactions."

(5)  Mr. Scott is a director of the Company. Includes 800,000 shares owned of
     record by Mr. Lu and 250,000 shares issuable upon exercise of warrants or
     options. See "Certain Relationships and Related Transactions."

(6)  Represents 12,233,535 shares of Common Stock outstanding and 7,000,000
     shares of Common Stock issuable upon exercise of warrants or options.

Item 12.  Certain Relationships and Related Transactions

         At March 31, 1998, the Company was owed approximately $69,200 from the
President of the Company for advances and loans. Simple interest is accrued
monthly at an annual rate of 10% on the outstanding balance. For the years ended
March 31, 1998 and 1997, the Company recorded interest income of $6,607 and
$3,403, respectively. This loan amount is due in December 2001. For the year
ended March 31, 1998, the Company borrowed $607,687 and repaid $545,100 to the
President of the Company.

         In May 1995, James Lu, the Company's Chairman, Chief Executive Officer
and President, personally assumed obligations of the Company to three services
providers in the aggregate amount of approximately $1,131,000. The obligations
are secured by all shares of the Company's Common Stock owned or to be owned by
Mr. Lu. In June 1995, Mr. Lu converted such obligations into 8,212,785 shares of
Common Stock. In September 1995 Jeffrey I. Schillen and Murray T. Scott, each a
director of the Company, agreed to assume $413,400 and $110,240, respectively,
of the obligations assumed by Mr. Lu. In consideration for the reassignment of
such obligations, Mr. Lu agreed to assign 3,000,000 and 800,000 of shares of
Common Stock, respectively, to Messrs. Schillen and Scott. To date, all of such
shares of Common Stock remain beneficially owned by the respective directors.

         During the quarter ended June 30, 1996 the Company issued 10%
convertible debentures ("10% Debentures") in the original principal amount of
$1,257,988. The principal was convertible into shares of the Company's Common
Stock at a conversion price equal to 65% of the average closing bid price for
the Common Stock for five trading days immediately prior to the conversion.
Through March 31, 1998, 10% Debentures in the aggregate amount of $519,848
(including $39,848 in accrued interest and $37,650 in extension bonuses) had
been converted into 7,487,668 shares of the Company's Common Stock at conversion
prices ranging from $0.026 to $0.20 per share. One of the purchasers of 10%
Debentures was UC Financial, Ltd., which, upon purchasing 10% Debentures, became
the beneficial holder of more than 5% of the Company's Common Stock. Subsequent
to March 31, 1998, an additional $91,750 in 10% Debentures had been converted
into 2,823,077 additional shares of Common Stock.

         On August 30, 1996, the Company established a line of credit up to
$2,500,000, whereby, $2,000,000 was backed by pledged receivables and inventory
and $500,000 was guaranteed by the Company's President. In December 1997, the
Company repaid its borrowings under this line of credit and terminated it.

         On August 25, 1997 the Company executed a consulting agreement with
Murray T. Scott, a director of the Company, for long term strategic planning
including development of marketing strategies and development and acquisition of
new products. Mr. Scott's consulting agreement has a term of two years. As
compensation under the agreement, Mr. Scott was issued 250,000 shares of



                                       23
<PAGE>

Common Stock, and warrants to purchase an additional 250,000 shares of Common
Stock at an exercise price of $0.10 per share. Such warrants expire on August
25, 1999.

         On September 1, 1997 each of Messrs. Lu and Schillen were issued shares
and granted warrants as consideration for agreeing to defer payment of their
salaries. Mr. Lu was issued 3,000,000 shares of Common Stock and granted
warrants to purchase an additional 3,000,000 shares of Common Stock at $0.10 per
share through September 1, 2002, Mr. Schillen was issued 750,000 shares of
Common Stock and granted warrants to purchase an additional 750,000 shares of
Common Stock at $0.10 per share through September 1, 2002.

         On September 24, 1997 the Company renegotiated and extended the
outstanding 10% Debentures. UC Financial, Ltd., one of the 10% Note holders, is
deemed to be a greater-than-five-percent shareholder of the Company. As an
inducement to agreeing to the amended terms of the 10% Debentures, the principal
amount of UC Financial, Ltd.'s 10% Note was increased by 15% from $245,000 to
$281,750, and the conversion terms of the 10% Note were revised. All other
holders of 10% Debentures agreed to similar amendments made to their respective
debentures.

         In November and December 1997 Messrs. Lu and Schillen each guaranteed
the obligations of the Company under a new line of credit established with a
financial institution.

         On July 9, 1998, options to be issued to each of Messrs. Lu and Benz
were approved by the Board of Directors for the purchase of shares of Common
Stock for $0.10 per share, as follows: (i) 4,000,000 options to be issued to Mr.
Lu contingent on certain events; (ii) 2,000,000 options to be issued to Mr.
Schillen contingent on certain other events; and (iii) 2,000,000 options to be
issued to each of Messrs. Lu and Schillen upon the first closing of a joint
private offering of securities of the Company and another issuer, which offering
was subsequently terminated without closing. To date, none of the contingent
events have occurred. Such options, if issued, will expire July 9, 2003.

         On July 9, 1998 Mr. Lu was granted additional options to purchase
2,000,000 shares of Common Stock for $0.10 per share in consideration of (i) his
personal guaranty of the Company's bank line of credit and (ii) his loan to the
Company of $607,687. Such options expire July 9, 2003.

         On July 30, 1998, the Company and Mr. Lu, President of the Company, on
the one hand, and The EMCO/Hanover Group, Inc. and three individuals
(collectively, the "Consultants") on the other hand, entered into a settlement
agreement ("Settlement Agreement"). The parties were in dispute arising out of
the Company's August 1997 engagement letter ("Engagement Letter") with
Consultants and the agreed-upon payments to Consultants thereunder of cash fees
and a right ("Right") to receive a five percent non-dilutive equity interest in
the Company. In September 1997 an accounting firm issued a valuation letter
stating that the Right entitled the Consultants to purchase 1,499,523 shares of
Common Stock for $0.01 per share. On October 6, 1997 pursuant to an assignment
agreement, 1,499,523 shares of Common Stock owned of record by Mr. Lu (the
"Assigned Shares") were assigned and transferred to the Consultants and the
Consultants agreed to remit all of the Assigned Shares to Mr. Lu and to exercise
the Right no later than October 15, 1997, whereupon Mr. Lu would tender the
Assigned Shares back to the Consultants. Consultants never remitted the Assigned
Shares to Mr. Lu nor did they exercise their Right. Pursuant to the Settlement
Agreement the parties terminated the Engagement Letter and the Right, and
Consultants agreed they would have no further right or claim to receive any
shares of Common Stock pursuant either to the Right or the Engagement Letter, or
to receive any further fee or compensation under the Engagement Letter. Further,
the Company agreed to issue to Mr. Lu 1,499,523 shares of Common Stock, for no
consideration, in order to reimburse him



                                       24
<PAGE>

for his assignment and transfer of the Assigned Shares to Consultants. The
Settlement Agreement contained releases of the Consultants and Mr. Lu.

Item 13.  Exhibits and Reports on Form 8-K.

(a)      Exhibits

         The following is a list of exhibits filed as part of this filing. Where
so indicated by footnote, the exhibits have been previously filed and are hereby
incorporated by reference.

Exhibit No.

3.1 (3)        Certificate of Incorporation, as amended.
3.2 (3)        By-laws, as amended.
4.1 (3)        Certificate for shares of Common Stock.
10.1 (1)(2)    Employment  Agreement  effective  as of January 1, 1991  between
               the Company and James K.T.  Lu, and Amendment No. 1 to Employment
               Agreement, dated September 1, 1997.
10.2 (1)(2)    Employment  Agreement  effective as of August 16, 1991 between
               the Company and Jeffrey I.  Schillen, and Amendment No. 1 to
               Employment Agreement, dated September 1, 1997.
10.3 (4)       Agreement  of  Merger  dated  May  13,  1997,  between  BDC
               Acquisition  Corp.  and  Beyond  Design Corporation.
10.4 (5)       Consulting Agreement dated August 25, 1997 between the Company
               and Peter Benz.
10.5 (5)       Consulting Agreement dated August 25, 1997 between the Company
               and George Furla.
10.6 (5)       Consulting Agreement dated August 25, 1997 between the Company
               and Al Davis.
10.7 (2)(5)    Consulting Agreement dated August 25, 1997 between the Company
               and Murray T. Scott.
10.8 (5)       Consulting  Agreement  dated  August  25,  1997  among  the
               Company  and  Bruce W.  Barren  and the EMCO/Hanover Group.
10.9 (5)       Employment Agreements dated as of September 1, 1997, between the
               Company and various employees.
10.10 (1)      Standard Sublease  Agreement,  dated as of July 30, 1998, between
               the Company and Shinho Electronics & Communication, Inc., for
               executive offices on Carmenita Road, Cerritos, California.
10.11 (1)      Standard  Industrial/Commercial  Multi-Tenant Lease Agreement,
               dated as of November 1, 1995, between the Company and Marquardt
               Associates, for offices on Marquardt Avenue, Cerritos,
               California.
10.12 (1)      Office  Lease  Agreement  dated  October 31,  1997,  between the
               Company  and  Freehold-Craig  Road Partnership, for offices in
               Freehold, New Jersey.
10.13 (1)      Form of Sublease  Agreement  between the Company as sublessor and
               Vigor Sports,  Inc. as subtenant, for offices on Marquardt
               Avenue, Cerritos, California.
21 (1)         Subsidiaries of the registrant.
27 (1)         Financial data schedule.
--------------
(1)  Filed herewith.
(2)  Indicates a management contract or compensatory plan or arrangement
     required to be filed.
(3)  Incorporated by reference to Registrant's Registration Statement on Form
     S-18, File No. 33-33997.
(4)  Incorporated by reference to the Registrant's Current Report on Form 8-K
     filed May 16, 1997, File No. 0-17953.



                                       25
<PAGE>

(5)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-8, filed September 15, 1997, File No. 333-35623.

(b)      Reports on Form 8-K

         The Company filed no reports on Form 8-K in the last quarter of the
fiscal year ended March 31, 1998. Subsequent to year end, the Company filed a
report on Form 8-K on July 15, 1998. Such report covered the Company's
incorporation of GalaxyNet International, Inc., a Delaware corporation to engage
in the business of Internet gaming in certain Asian countries. Also, on July 23,
1998, the Company filed a report on Form 8-K reporting the commencement of a
joint private placement of securities of the Company and GalaxyNet
International, Inc.



                                       26
<PAGE>


DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Financials Statements

The following consolidated financial statements are included in Item 7:

<TABLE>
   <S>                                                                                                       <C>
   Independent Auditor's Report..............................................................................F-2

   Consolidated Balance Sheet as of March 31, 1998 .................................................F-3......F-4

   Consolidated Statements of Operations for the years ended
   March 31, 1998 and 1997...................................................................................F-5

   Consolidated Statements of Stockholders' Equity [Deficit] for the
   years ended March 31, 1998 and 1997.......................................................................F-6

   Consolidated Statements of Cash Flows for years ended
   March 31, 1998 and 1997..........................................................................F-7......F-9

   Notes to Consolidated Financial Statements...................................................... F-10.....F-24
</TABLE>


                                     F-1
<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Stockholders of
   Diamond Entertainment Corporation and Subsidiaries



                  We have audited the accompanying consolidated balance sheet of
Diamond Entertainment Corporation and subsidiaries as of March 31, 1998, and the
related consolidated statements of operations, stockholders' equity [deficit],
and cash flows for each of the two fiscal years in the period ended March 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

                  We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

                  In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Diamond Entertainment Corporation and subsidiaries as of March 31,
1998, and the results of their operations and their cash flows for each of the
two fiscal years in the period ended March 31, 1998, in conformity with
generally accepted accounting principles.

                  The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 15 to the consolidated financial statements, the Company has
suffered recurring losses from operations, has a significant working capital
deficiency and has encountered difficulties in paying its creditors on a timely
basis. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 15. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.





                                                   MOORE STEPHENS, P.C.
                                                   Certified Public Accountants.

Cranford, New Jersey
August 7, 1998

                                     F-2
<PAGE>



Item 7:   Financials

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998


<TABLE>
<S>                                                      <C>
Assets:
Current Assets:
   Cash                                                  $       5,530
   Accounts Receivable - Net                                 1,181,508
   Inventory                                                 3,783,672
   Prepaid Expenses                                             37,491
   Other Receivable                                            105,774
                                                         -------------

   Total Current Assets                                      5,113,975
                                                         -------------
Property and Equipment:
   Leasehold Improvements                                       28,258
   Furniture, Fixtures and Equipment                           945,925
                                                         -------------

   Total - At Cost                                             974,183
   Less:  Accumulated Depreciation                             672,677
                                                         -------------

   Property and Equipment - Net                                301,506
                                                         -------------

Film Masters and Artwork                                     3,790,308

Less:  Accumulated Amortization                              3,428,958
                                                         -------------

   Total Film Masters and Artwork - Net                        361,350
                                                         -------------

Other Assets:
   Due from ATRE - Net                                         500,000
   Related Party Receivable                                     69,194
   Other Assets                                                 90,420
   Note Receivable - Other                                      30,701
                                                         -------------

   Total Other Assets                                          690,315
                                                         -------------

   Total Assets                                          $   6,467,146
                                                         -------------
                                                         -------------
</TABLE>


The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

                                     F-3
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998

<TABLE>
<S>                                                                                 <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
   Accounts Payable                                                                 $     4,589,752
   Notes Payable                                                                          1,684,090
   Convertible Debentures - Net                                                             848,861
   Lease Obligations Payable                                                                  4,398
   Accrued Expenses                                                                         523,905
                                                                                    ---------------

   Total Current Liabilities                                                              7,651,006

Long-Term Liabilities:
   Lease Obligations Payable                                                                  9,957
                                                                                    ---------------
   Total Liabilities                                                                      7,660,963
                                                                                    ---------------
Commitments and Contingencies [5] [6]                                                            --
                                                                                    ---------------
Stockholders' Equity [Deficit]:
   Convertible Preferred Stock - No Par Value, 5,000,000 Shares Authorized,
     483,251 Issued [of which 172,923 are held in Treasury]                                 376,593

   Common Stock - No Par Value, 100,000,000 Shares
     Authorized; 28,753,250 Shares Issued and Outstanding                                10,417,647

   Additional Paid-in Capital                                                            (1,210,231)

   Retained Deficit                                                                     (10,634,843)
                                                                                    ---------------
   Sub-Total                                                                             (1,050,834)
   Less:   Treasury Stock [Preferred] - At Cost                                             (48,803)
           Deferred Costs [5D] [5G]                                                         (94,180)
                                                                                    ---------------
   Total Stockholders' Equity [Deficit]                                                  (1,193,817)
                                                                                    ---------------
   Total Liabilities and Stockholders' Equity [Deficit]                             $     6,467,146
                                                                                    ---------------
                                                                                    ---------------
</TABLE>


The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.



                                     F-4
<PAGE>


DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                         Years ended
                                                                          March 31,
                                                           -----------------------------------
                                                                 1998                1997
                                                           ---------------     ---------------

<S>                                                        <C>                 <C>
Sales - Net                                                $     8,724,149     $     6,444,586
Cost of Sales                                                    5,696,810           3,761,175
                                                           ---------------     ---------------

   Gross Profit                                                  3,027,339           2,683,411
                                                           ---------------     ---------------

Operating Expenses:
   Selling Expenses                                              1,527,856           1,676,506
   General and Administrative Expenses                           1,443,033           1,837,450
   Factoring Fees                                                   96,950             236,119
   Bad Debt Expense                                                152,440             119,808
                                                           ---------------     ---------------

   Total Operating Expenses                                      3,220,279           3,869,883
                                                           ---------------     ---------------

   Operating Loss                                                 (192,940)         (1,186,472)
                                                           ---------------     ---------------

Other Expenses [Income]:
   Interest Expense                                                420,583             267,798
   Interest Income - Related Party                                (129,047)           (106,391)
   Other Income                                                    (96,822)            (44,333)
   Valuation Adjustment for ATRE [4B]                            1,117,788                  --
                                                           ---------------     ---------------

   Other Expenses - Net                                          1,312,502             117,074
                                                           ---------------     ---------------

   Net Loss                                                $    (1,505,442)    $    (1,303,546)
                                                           ---------------     ---------------
                                                           ---------------     ---------------

   Net Loss Per Share                                      $          (.08)    $          (.08)
                                                           ---------------     ---------------
                                                           ---------------     ---------------

   Weighted Average Number of Shares Outstanding                20,028,914          16,287,280
                                                           ---------------     ---------------
                                                           ---------------     ---------------
</TABLE>


The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

                                     F-5
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]

<TABLE>
<CAPTION>
                                                  Convertible
                                                 Preferred Stock              Common Stock       
                                             -----------------------     ------------------------   Additional    Retained
                                              Number of                   Number of                  Paid-in      Earnings
                                                Shares      Amount          Shares       Amount      Capital      [Deficit]
                                             -----------  ----------     -----------   ----------  ------------  -----------
<S>                                          <C>          <C>           <C>           <C>          <C>            <C>
   Balance - April 1, 1996                      483,251   $   376,593    12,894,941   $ 9,611,834   $(1,410,231)   $ (7,825,855)

Stock Options Issued [5G][7D][13B][13C]              --            --            --            --       100,000              --

Stock Options Exercised [13D]                        --            --     1,000,000       100,000            --              --

Financing Expense [7D][13C]                          --            --            --            --            --              --

Consulting Expense [5G]                              --            --            --            --            --              --

Stock Subscription Canceled                          --            --            --            --            --              --

Exercise of Options [7D][13C]                        --            --        46,000        11,500            --              --

Debt Converted to Shares of
   Common Stock [7D]                                 --            --     1,450,000       290,000            --              --

Net [Loss] for the year ended
   March 31, 1997                                    --            --            --            --            --       (1,303,546)
                                            -----------   -----------   -----------   -----------    -----------  ---------------

   Balance - April 1, 1997 -                    483,251       376,593    15,390,941    10,013,334    (1,310,231)     (9,129,401)

Stock Issued for Acquisition of BDC                  --            --     2,427,273        17,465          --               --


Stock Warrants Issued [5G][13F]                      --            --            --            --         100,000           --

Shares Issued to Two Officers for
   Deferral of Salary [5D]                           --            --     3,750,000        75,000          --               --

Shares Issued to Employees for Past
   Services [5D]                                     --            --       550,000        11,000          --               --

Shares Issued to Consultant - Signing
   Bonus [5G]                                        --            --       250,000         5,000          --               --

Shares Issued in Lieu of Commission [10I]            --            --       347,368        66,000          --               --

Consulting Expense [5G][13F]                         --            --            --            --            --             --

Compensation Expense [5D]                            --            --            --            --            --             --

Debt Converted [7D]                                  --            --     6,037,668       229,848          --               --

Net [Loss] for the year ended
   March 31, 1998                                    --            --            --            --            --       (1,505,442)
                                            -----------   -----------   -----------   -----------    -----------    -------------

   Balance - March 31, 1998                     483,251   $   376,593    28,753,250   $10,417,647   $(1,210,231)    $(10,634,843)
                                            -----------   -----------   -----------   -----------    -----------    -------------
                                            -----------   -----------   -----------   -----------    -----------    -------------

<CAPTION>
                                                          Treasury                          Total
                                               Stock        Stock                       Stockholders'
                                           Subscription  [Preferred]    Deferred           Equity
                                           Receivable     At Cost        Costs            [Deficit]
                                           ------------  ------------   --------        -------------


<S>                                         <C>          <C>            <C>             <C>
   Balance - April 1, 1996                  $  (86,636)  $ (48,803)     $         --    $      616,902

Stock Options Issued [5G][7D][13B][13C]             --             --      (100,000)                --

Stock Options Exercised [13D]                       --             --             --           100,000

Financing Expense [7D][13C]                         --             --         50,000            50,000

Consulting Expense [5G]                             --             --         35,142            35,142

Stock Subscription Canceled                     86,636             --             --            86,636

Exercise of Options [7D][13C]                       --             --             --            11,500

Debt Converted to Shares of
   Common Stock [7D]                                --             --             --           290,000

Net [Loss] for the year ended
   March 31, 1997                                   --             --             --        (1,303,546)
                                            ----------    -----------    -----------    ---------------

   Balance - April 1, 1997 -                        --       (48,803)        (14,858)         (113,366)

Stock Issued for Acquisition of BDC                 --             --             --
                                                                                                17,465

Stock Warrants Issued [5G][13F]                     --             --       (100,000)               --

Shares Issued to Two Officers for
   Deferral of Salary [5D]                          --             --        (75,000)               --

Shares Issued to Employees for Past
   Services [5D]                                    --             --              --           11,000

Shares Issued to Consultant - Signing
   Bonus [5G]                                       --             --              --            5,000

Shares Issued in Lieu of Commission [10I]           --             --              --           66,000

Consulting Expense [5G][13F]                        --             --          45,678           45,678

Compensation Expense [5D]                           --             --          50,000           50,000

Debt Converted [7D]                                 --             --              --          229,848

Net [Loss] for the year ended
   March 31, 1998                                   --             --              --       (1,505,442)
                                           -----------    -----------     -----------    --------------

   Balance - March 31, 1998                   $     --    $  (48,803)     $  (94,180)     $ (1,193,817)
                                           -----------    -----------     -----------    --------------
                                           -----------    -----------     -----------    --------------
</TABLE>


The Accompanying Notes are an  Integral Part of These Consolidated Financial
Statements.



                                     F-6

<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                        Years ended
                                                                                          March 31,
                                                                            -----------------------------------
                                                                                 1998                 1997
                                                                            ---------------     ---------------
<S>                                                                         <C>                 <C>
Operating Activities:
   Net Loss                                                                 $    (1,505,442)    $    (1,303,546)
                                                                            ---------------     ---------------
   Net Cash Adjustments to Reconcile Net [Loss] to Net Cash
     [Used for] Provided by Operating Activities:
     Depreciation                                                                   105,029              64,872
     Amortization of Film Masters and Artwork                                       274,762             269,420
     Provision for Doubtful Accounts                                                 68,440             119,808
     Losses Resulting from Write-off of Fixed Assets,
       Film Masters and Artwork and Security Deposits                               328,416                  --
     Cancellation of Stock Subscription Receivable                                       --              86,636
     Increase in Inventory Valuation Allowance                                           --              90,931
     Amortization of Deferred Compensation                                           95,678              85,142
     Amortization of Extension Cost for Convertible Debentures                       46,134                  --
     Fair Value of Shares Issued for Acquisition of BDC                              17,465                  --
     Fair Value of Shares Issued to Employees                                        11,000                  --
     Fair Value of Shares Issued to Consultant                                        5,000                  --
     Fair Value of Shares Issued for Commissions                                     66,000                  --
     Interest Income Accrual - ATRE                                                (120,000)                 --
     Write-down of ATRE Investment                                                1,117,788

   Changes in Assets and Liabilities:
     [Increase] Decrease in:
       Accounts Receivable - Trade                                                  871,631            (661,654)
       Inventory                                                                 (1,925,252)           (505,807)
       Prepaid Expenses and Deposits                                                (28,935)              6,190
       Other Assets                                                                      --             (24,217)
       Accounts Receivable - Related Party                                               --             (18,801)
       Other Receivables                                                                                     --

     Increase [Decrease] in:
       Accounts Payable                                                           1,481,090             648,328
       Related Party Payable                                                        (20,688)             20,688
       Deposits                                                                    (322,450)            258,054
       Accrued Expenses                                                              76,271            (210,071)
                                                                            ---------------     ---------------

     Total Adjustments                                                            2,147,379             229,519
                                                                            ---------------     ---------------

   Net Cash - Operating Activities - Forward                                        641,937          (1,074,027)
                                                                            ---------------     ---------------

Investing Activities:
   Advances to ATRE                                                                 (80,320)           (189,830)
   Repayments by ATRE                                                               220,600             121,600
   Payment of Officers' Loans Receivable                                           (607,687)            (48,426)
   Repayments of Officers' Loan Receivable                                          538,493                  --
   Payment of Employee Loans Receivable                                             (11,137)                 --
   Payment of Entertainmax Receivable                                               (19,564)                 --
   Capital Expenditures                                                            (184,645)            (47,638)
   Masters and Artwork                                                             (137,059)           (531,277)
                                                                            ---------------     ---------------

   Net Cash - Investing Activities - Forward                                $      (281,319)    $      (695,571)
</TABLE>


The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

                                     F-7
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                       Years ended
                                                                         March 31,
                                                           -----------------------------------
                                                                1998                 1997
                                                           ---------------     ---------------
   <S>                                                     <C>                 <C>
   Net Cash - Operating Activities - Forwarded             $       641,937     $    (1,074,027)
                                                           ---------------     ---------------

   Net Cash - Investing Activities - Forwarded                    (281,319)           (695,571)
                                                           ---------------     ---------------

Financing Activities:
   Proceeds from Notes Payable                                   7,590,459           6,204,232
   Payments of Notes Payable                                    (8,039,541)         (4,695,401)
   Payments of Lease Payable                                       (14,770)             (8,479)
   Cash Overdraft                                                  108,764             157,746
   Exercise of Options and Warrants                                     --             111,500
                                                           ---------------     ---------------

   Net Cash - Financing Activities                                (355,088)          1,769,598
                                                           ---------------     ---------------

   Net Increase in Cash                                              5,530                  --

Cash - Beginning of Years                                               --                  --
                                                           ---------------     ---------------

   Cash - End of Years                                     $         5,530     $            --
                                                           ---------------     ---------------
                                                           ---------------     ---------------

Supplemental Disclosures of Cash Flow Information:
    Cash paid during the years for:
       Interest                                            $       477,105     $       259,247
       Income Taxes                                        $            --     $         1,900
</TABLE>

Supplemental Schedule of Non-Cash Investing and Financing Activities:

   On April 13, 1995, the Company's former President surrendered his employment
contract and returned 146,654 shares of the Company's preferred stock back to
the Company as treasury stock. Equipment with a carrying value of approximately
$170,000 was transferred from the Company and the Company's former President
assumed all remaining obligations on these assets of approximately $75,000.

   On May 8, 1995, the Company closed the sales agreement with an unaffiliated
company for $750,000 by allowing credit to the Company for future duplication
services. The Company received $750,000 of duplication services and surrendered
equipment having a book value of approximately $630,000.

   In May of 1995, three debt obligations totaling $1,131,434 were assigned to
the Company's Chief Executive Officer. In July of 1995, 8,212,785 shares of the
Company's common stock were issued to the officer for this obligation.

   Pursuant to the June 15, 1995 assignment of debt agreement, the Company's
$658,750 obligation to its former underwriter was purchased by an unaffiliated
Company. On July 19, 1995, an agreement was reached to issue 2,538,446 shares of
the Company's common stock to the underwriter for this obligation.

   In December 1995, the Company settled a debt with a creditor for $390,000
less than the carrying amount.

   During the year ended March 31, 1997, the Company entered into a capital
lease agreements for equipment totaling $25,900.


The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

                                     F-8
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


Supplemental Schedule of Non-Cash Investing and Financing Activities
[Continued]:

   During fiscal 1997,  $290,000 in convertible  debentures were converted into
1,450,000 shares of common stock.  During fiscal 1998,  $229,848 of convertible
debentures were converted into 6,037,668 shares of common stock.

   In August 1997, the Company granted warrants in connection with consulting
agreements and recorded $100,000 in deferred consulting costs and expensed
$30,820 for the year ended March 31, 1998.

   In September 1997, the two officers agreed to defer 90% of their salaries
until further notice, but not beyond March 31, 1998. As consideration, the
Company granted a total of 3,750,000 shares of common stock and warrants to
purchase 3,750,000 shares of the Company's common stock at an exercise price of
$.10 per share. The common shares granted will be fully vested on December 31,
1997 and the warrants are exercisable over a two year period beginning March 31,
1997. The Company recorded $75,000 in deferred costs for the fair value of the
shares granted and amortized $50,000 for the year ended March 31, 1998. No
deferred costs were recorded for the warrants granted as the fair market value
of the underlying common shares was approximately equal to the exercise price.

   In September of 1997, the Company negotiated a one year extension agreement
for the convertible debentures and agreed to add 15% to the debentures as a
deferred financing cost of $110,721, which will be amortized over one year as
interest expense [See Note 20D]

   During fiscal 1998, there were retirements of film masters and artwork for
approximately $625,000.





The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

                                     F-9
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


[1] Summary of Significant Accounting Policies

Nature of Business - On April 13, 1995, the Board of Directors approved the
spin-off of its custom duplication business. The Company is engaged in the
distribution of video tapes and CD-ROMS for the home market including children's
cartoons, educational programs, motion picture, television programs,
instructional computer videos, as well as computer software and principally
markets its products to national and regional chain stores, department stores,
drug stores, supermarkets and similar types of retail outlets. Its products are
sold through national retail chains primarily in the northeast, the south and
the east coast. The Company has licensing agreements with numerous entities and
in addition maintains products without licensing agreements. The licensing
agreements grant the Company the right to manufacture, duplicate, distribute and
advertise the video or computer software. As a result of its merger with Beyond
Design Corporation ["BDC"] in 1997, the Company is also engaged in the marketing
and distribution of children's toys to mass merchandisers through sales
representatives and distributors.

Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries all of which are
wholly-owned. Intercompany transactions and balances have been eliminated in
consolidation.

Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.

Revenue Recognition - Sales are recorded by the Company when products are
shipped to customers and  are shown net of returns and allowances.

Inventories - Inventories are stated at the lower of cost [under the first-in,
first-out method] or market.

Depreciation - Property and equipment are presented at cost less accumulated
depreciation. Depreciation is computed by the straight-line method for all
furniture, fixtures, and equipment over 5-10 years, which represents the
estimated useful lives of the respective asset.

Leasehold improvements are being amortized over the lesser of their estimated
useful lives or the remaining term of the lease.

Depreciation expense for the years ended March 31, 1998 and 1997 is $105,029 and
$64,872, respectively.

On sale or retirement, the asset cost and related accumulated depreciation are
removed from the respective accounts, and any related gain or loss is reflected
in income. Repairs and maintenance are charged to expense when incurred.

Film Masters and Artwork - The cost of film masters and related artwork is
capitalized and amortized using the straight-line method over a three year
period. The Company periodically reviews its estimates of future revenues for
each master and if necessary a revision is made to amortization rates and a
writedown to net realizable value may occur. The net film masters and artwork
are presented on the balance sheet at the net realizable value for each master.
Film masters consist of original "masters" which are purchased for the purpose
of reproduction and sale.

Amortization expense for the years ended March 31, 1998 and 1997 is $274,762 and
$269,420, respectively.

                                     F-10
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2


[1] Summary of Significant Accounting Policies [Continued]

Advertising Costs - Adverting cost are expensed as incurred. Advertising costs
of $108,904 and $65,000 were expensed for the years ended March 31, 1998 and
1997, respectively.

Bad Debts - An allowance for doubtful accounts is computed based on a review of
each individual account receivable and its respective collectibility. The
allowance for doubtful accounts is $467,146 at March 31, 1998.

Net [Loss] Per Share -The FASB issued SFAS No. 128, "Earnings Per Share," in
February 1997. SFAS No. 128 simplifies the earnings per share ["EPS"]
calculations required by Accounting Principles Board ["APB"] Opinion No. 15, and
related interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. The Company has adopted SFAS No. 128, prior period EPS data have been
restated. Basic EPS is based on average common shares outstanding and diluted
EPS include the effects of potential common stock, such as, options and
warrants, if dilutive. The Company has potentially dilutive securities that were
not included in the computation of diluted earnings per share because to do so
would have been anti-dilutive for the periods presented. Such securities may
dilute EPS in future years.

Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Stock Options Issued to Employees - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation"
on April 1, 1996 for financial note disclosure purposes and will continue to
apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion
No. 25, "Accounting for Stock Issued to Employees" for financial reporting
purposes.

Deferred Taxes - There are no material temporary differences that will result in
taxable amounts in future years. The Company has sustained losses in recent
years and has a large net operating loss carryforward. No deferred taxes are
reflected in these financial statements [See Note 9].

Concentrations of Credit Risk - Financial instruments that potentially subject
the Company to concentrations of credit risk are cash and cash equivalents and
accounts receivable arising from its normal business activities. The Company
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowance is limited. The Company places its cash and
cash equivalents with high credit quality financial institutions. The amount on
deposit in any one institution that exceeds federally insured limits is subject
to credit risk. The Company had no deposits as of March 31, 1998, with financial
institutions subject to a credit risk beyond the insured amount.

[2] Accounts Receivable

Accounts receivable at March 31, 1998 net of allowance for doubtful accounts
were $1,181,508. Substantially all of the accounts receivable at March 31, 1998,
have been pledged as collateral for the line of credit [See Note 7A].

                                     F-11
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3


[3] Inventory

Inventory as of March 31, 1998 consists of:

<TABLE>
<S>                                                           <C>
Raw Materials                                                 $      756,733
Finished Goods                                                     3,026,939
                                                              --------------

   Totals                                                     $    3,783,672
   ------                                                     --------------
                                                              --------------
</TABLE>

An allowance has been established for idle inventory of approximately $280,577.

[4A] Related Parties Receivables

At March 31, 1998, the Company was owed $69,194 from the President of the
Company for advances and loans. Simple interest is accrued monthly at an annual
rate of 10% on the outstanding balance. For the years ended March 31, 1998 and
1997, the Company recorded interest income of $6,607 and $3,430, respectively.
This loan amount is due in December 2001. For the year ended March 31, 1998, the
Company borrowed $607,687 and repaid $545,100 to the President of the Company.

[4B] American Top Real Estate ["ATRE"]

The Company paid $50,000 for a 50% interest in ATRE. This investment is
accounted for on the equity method.

In September 1996, a parcel of land was sold and proceeds were retained for
future sewage construction needed for a 20 acre property. The Company received
$121,600 from ATRE for this parcel of land in fiscal 1997.

During the year ended March 31, 1998, ATRE sold approximately 11 acres. The
Company advanced an additional $80,320 to ATRE and received $220,600 from the
proceeds of the parcel of 10 acres as repayment of the advances to ATRE in
fiscal 1998. The Company also received approximately $400,000 from ATRE during
the period April 1, 1998 through August of 1998 and anticipates another $100,000
by March 31, 1999.

At March 31, 1998, ATRE had binding sales contracts for the remaining parcels of
commercial real estate owned by ATRE as these parcels of land were under
development. In addition, the Company was advised by ATRE that proceeds realized
by ATRE during fiscal 1998 were reinvested into other parcels to improve the
ability to list and sell the remaining parcels. ATRE continues to list these
properties. Management of the Company received communication from a real estate
development specialist advising the Company that an aggregate approximate value
of $5,200,000 is calculated for the remaining ATRE parcels. Although the Company
believes that final sales contracts will be able to be consummated, at this time
it is not possible to predict with any certainty when the closing of these sales
contracts of real estate may occur or whether the proceeds expected by the
Company for their share in this real estate could be significantly less than
anticipated. Therefore, the ultimate realizable value of the receivable for
advances from ATRE could be substantially less than the preadjusted carrying
value of $1,600,000. At March 31, 1998, the Company setup a valuation allowance
of $1,117,788 and accordingly, charged operations for that amount so that the
amount due from ATRE at March 31, 1998 is presented at the amount of the 1998
subsequent receipts of approximately $500,000. Based upon the above
circumstances at March 31, 1998 the likelihood is that $1,117,788 from future
proceeds from the sale of the ATRE parcels will not be realized with any
certainty.

                                     F-12
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4


[5] Commitments

[A] Royalty Commitments - The Company has entered into various royalty
agreements for licensing of titles for terms of one to seven years. Certain
agreements include minimum guaranteed payments. For the years ended March 31,
1998 and 1997, royalty expense was $79,631 and $135,141, respectively, pursuant
to these agreements.

[B] Video Agreements - The Company has entered into various agreements to
manufacture, duplicate and distribute videos. Commissions are paid based upon
the number of videos sold.

[C] Accounts Payable - The Company is currently delinquent on a significant
amount of its accounts payable.

[D] Employment Agreements - In 1991, two employment agreements were executed for
two officers for annual compensation totaling $240,000. These agreements
terminate in the year 2001 and are adjusted annually in accordance with the
Consumer Price Index. The Board of Directors agreed on April 23, 1996 to reserve
1,000,000 shares of common stock for distribution to two officers of the
Company. The common stock can be purchased in installment payments with a five
year promissory note with interest at 6% per annum. As of March 31, 1998, the
officers did not purchase these shares.

In September 1997, the two officers agreed to defer 90% of their salaries until
further notice, but not beyond March 31, 1998. As consideration, the Company
granted a total of 3,750,000 shares of common stock and warrants to purchase
3,750,000 shares of the Company's common stock at an exercise price of $.10 per
share. The common shares granted vested during fiscal 1997 and the warrants are
exercisable over a two year period beginning March 31, 1997. The Company
recorded $75,000 in deferred costs for the fair value of the shares granted and
amortized $50,000 in the year ended March 31, 1998. No deferred costs were
recorded for the warrants granted as the fair market value of the underlying
common shares was approximately equal to the exercise price [See Note 10F].

In September 1997, the Company entered into employment agreements with nine
employees holding key positions. The agreements provide for an aggregate of
550,000 shares of common stock with a fair value of $11,000 for past services
and semi-monthly compensation of approximately $14,000. The agreements will
continue for an indefinite period of time.

[E] Sale of Multi Media Assets - On May 8, 1995, the Company closed a sales
agreement with a Mexican company, Central Video, for $750,000 by allowing credit
to the Company for future duplication services. The general manager of Central
Video is the former President of the Company. The Company received $750,000 of
duplication services and surrendered equipment having a book value of
approximately $630,000. The Company guaranteed Central Video's general manager a
minimum of $2,500,000 a year of production orders for three years and agreed to
pay Central Video's general manager a 3% commission on orders the Company places
with Central Video. The Company satisfied this obligation in fiscal 1996,
however, in 1997, the Company did not fulfill this obligation and was delinquent
in payments to Central Video. The Company settled this contract with Central
Video in September of 1997. The Company agreed to pay Central Video $12,500 a
week until the total obligation of $740,000 is paid. This settlement dissolved
the production contract and all outstanding payable obligation. As of March 31,
1998, the balance owed to Central Video was $288,701.

[F] Termination of Employment - On December 21, 1995, an officer and director of
the Company resigned and terminated his employment agreement with the Company as
part of a settlement agreement. Effective January 1, 1996 and ending December
31, 1996, the Company entered into a monthly $10,000 consulting agreement with
this individual. The individual agreed to surrender 30,769 shares of preferred
stock and 10,000 shares of common stock upon execution of the settlement
agreement in consideration for 5% of the net profits of the Company for the
fiscal years ended March 31, 1997 and 1996.

                                     F-13
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5


[5] Commitments [Continued]

[G] Financial Consultant Commitments - In June of 1996, the Company engaged
three consultants for a period of two years. The Company will reimburse the
consultants' business expenses not to exceed $750 per month. The financial
consultants received a total of 1,000,000 warrants with an exercise price of
$.25 per share in exchange for services to be rendered. The Company recorded
deferred consulting costs of $50,000 for the fair value of the warrants to
purchase the 1,000,000 shares of common stock and expensed $14,858 and $35,142
for the years ended March 31, 1998 and 1997, respectively. The fair value of the
warrants was determined based upon the fair value of services to be rendered by
the consultant [See Note 13B].

In August of 1997, the Company engaged a consulting firm to provide financial
advice for a period of six months. The fee for services included a $7,500 cash
payment, a two percent cash fee on refinancing commitments and a five percent,
non-dilutive equity interest in the Company. The consulting firm was also
entitled to a five percent fee based on the transaction value of any concluded
merger or acquisition introduced by the consulting firm. As of March 31, 1998,
the consulting firm had not concluded any merger or refinancing commitment and
received only the $7,500 cash payment from the Company.

In August of 1997, the Company engaged four consultants for a period of two
years to provide assistance in restructuring and designing the Company's
operations and long-term strategic plan. The consultants received warrants to
purchase an aggregate 2,050,000 shares of the Company's common stock at an
exercise price of $.10 per share. The warrants expire at the end of the two year
consulting period. The Company recorded deferred consulting costs of $100,000
for the fair value of the warrants and expensed approximately $31,000 for the
year ended March 31, 1998. The fair value of the warrants was determined based
upon the fair value of services to be rendered by the consultant [See Note 13F].
In addition, the Company also issued 250,000 shares of stock to one of the
consultants in consideration of entering into a two year consulting agreement
and recorded $5,000 as a signing bonus [See Notes 10H and 19E].

[H] Transfer of Custom Duplication Business - On April 13, 1995, the Board of
Directors approved the transfer of its custom duplication business. Pursuant to
this transaction, the Company's former President surrendered his employment
contract and returned 146,654 shares of the Company's preferred stock back to
the Company as treasury stock. Equipment with a carrying value of approximately
$170,000 was transferred from the Company and the Company's former President
assumed all remaining obligations on these assets of approximately $75,000. The
Company agreed to a non competition agreement with this new custom duplication
venture by the Company's former President.

[I] Joint Venture Agreement - In October 1996, the Company entered into a joint
venture agreement with an unrelated party whereby the parties distribute each
others' catalogues of products and share in the profits of any such distribution
equally. The agreement expired in October 1997.

In connection with the joint venture agreement, the Company loaned $18,000 at a
6% interest rate. The loan receivable was due in January 1997 and remains unpaid
as of March 31, 1998. This amount is included in other receivables on the
balance sheet. The joint venture partner has never performed on the agreement.
In January of 1998, the Company commenced collection procedures to collect the
outstanding obligation owed to the Company.

                                     F-14
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6


[6] Lease Commitments

[A] Operating Leases - The Company leases various office and storage facilities,
automobiles and equipment under operating leases expiring between 1998 and 2002.

The Company leases sales office space for $1,950 monthly which expires in
October 2001. It also leases for $9,274 per month office and warehousing space
which expires March 2001. [See Note 20E]

The following schedules shows the composition of total rental expense for all
operating leases except those with terms of a month or less that were not
renewed:

<TABLE>
<CAPTION>

                                               Years ended
                                                 March 31,
                                     --------------------------------
                                          1998              1997
                                     --------------    --------------

<S>                                  <C>               <C>           
Minimum Rentals                      $      200,005    $      151,983
Less: Sublease Rentals                       15,000            15,000
                                     --------------    --------------

   Totals                            $      215,005    $      136,983
   ------                            --------------    --------------
                                     --------------    --------------
</TABLE>

The following is the approximate aggregate future minimum rentals for the next
five years for operating leases:

<TABLE>
<CAPTION>

March 31,
---------
<S>                                                 <C>
1999                                                  $      222,813
2000                                                         221,227
2001                                                         142,702
2002                                                          11,700
2003                                                              --
                                                      --------------
Total Future Minimum Lease Payments                   $      598,442
-----------------------------------                   --------------
                                                      --------------
</TABLE>

The operating leases also provide for cost escalation payments.

[B] The Company leases office space in Freehold, New Jersey for $1,950 per
month. This lease expires on October 31, 2001.

[7] Debt Obligations

Notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                       March 31, 1998
                                               -----------------------------------------------------------------
   Type of Loan                                  Amount       Current      Long-Term     Rate          Due Date
   ------------                                  ------       -------      ---------     ----          --------
<S>                                            <C>           <C>           <C>          <C>       <C>
Installment Loan (B)                           $   125,970   $   125,970   $       --       10%   November 14, 1999
Notes Payable (C)                                  288,701       288,701           --        8%   September 30, 1998
Lines of Credit (A)                              1,044,211     1,044,211           --   Various   Revolving Line of Credit
Convertible Debenture (D)                          848,861       848,861           --       10%   September 1998
Acquired Debt                                       40,000        40,000           --             Demand
Loan Payable (E)                                   185,208       185,208           --       10%   September 30, 1998
                                               -----------   -----------   ----------

   Totals                                      $ 2,532,951   $ 2,532,951   $       --
   ------                                      -----------   -----------   ----------
                                               -----------   -----------   ----------
</TABLE>

                                     F-15

<PAGE>


DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7


[7] Notes Payable [Continued]

[A] Lines of Credit - On August 30, 1996, the Company established a line of
credit up to $2,500,000, whereby, $2,000,000 was backed by pledged receivables
and inventory and $500,000 was guaranteed by the Company's President. Interest
was at a prime rate plus 3%. Interest expense from April 1, 1997 through
December 31, 1997 was approximately $148,500. In December 1997, the Company
repaid $469,221 on this line of credit and engaged another financial institution
for a $2,500,000 financing arrangement. This arrangement is also backed by
pledged receivables and inventory. Cost is 1.5% discounted from pledged invoices
for every 30 days for the accounts receivable portion of the line of credit. The
portion of the line of credit backed by inventory is determined by the lesser of
$800,000, 25% of the clients finished toy inventory or 55% of the clients
finished videotape inventory. Interest is charged at 16.l8% per annum on this
portion of the debt. This was formalized with the Company in June of 1998.
Interest expense from December 1997 through March 31, 1998 was approximately
$27,500.

[B] Installment Loan - In March 1993 a loan was renegotiated for the sum of
$292,058 with principal payments of $5,000 per month with an interest rate of
10% per annum due November 14, 1999. This note was paid in full on July 15,1998
for approximately $60,000. As a result, the Company recorded forgiveness of debt
of approximately $66,000 in July 1998. During the year ended March 31, 1998,
interest expense of approximately $12,500 was recorded.

[C] Note Payable for Equipment - On May 8, 1995, the Company closed a sales
agreement with a Mexican Company, for $750,000 by allowing credit to the Company
for duplication services and received $750,000 of duplication services in
exchange for equipment having a book value of approximately $630,000 [See Note
5E]. The Company classifies the outstanding obligation of $288,701 at March 31,
1998 as notes payable. This note was repaid in weekly installments of $12,500
with the final payment made in September of 1998. Interest expense of
approximately $40,000 was recorded for the year ended March 31, 1998.

[D] Convertible Debentures Payable - During the quarter ended June 30, 1996, the
Company issued convertible debentures of $1,257,988 with 10% interest per annum
and a 7% commission. The principle amount is convertible in whole or in part
into shares of the common stock of the Company at a conversion price equal to
65% of the average closing bid price for the common stock for five trading days
immediately prior to the conversion. In no event shall the conversion price be
less than $.20 per share or more than $.75 per share. In conjunction with the
debentures, the Company granted 1,000,000 warrants exercisable at $.25 per share
to two consultants [See Note 13C]. Warrants for 46,000 shares were exercised for
$11,500 during the year ended March 31, 1997 [See Note 10E]. The Company
recorded a financing expense of $25,000 for the fair value of the warrants
granted. The fair value of the warrants was determined based upon the fair value
of services received by the Company in May and June of 1996.

As of March 31, 1997, convertible debentures of $290,000 were converted into
1,450,000 shares of the Company's common stock by several off shore companies
under Regulation S and $967,988 of convertible promissory notes payable were
outstanding and in default by the Company. Interest expense of $97,000 and
$24,702 was recorded for the years ended March 31, 1998 and 1997 [See Note 10E].
Subsequent to September 30, 1997, the Company negotiated a one year extension
agreement and agreed to add 15% to the note as a deferred financing cost of
$110,724.

During fiscal March of 1998, convertible debentures of $229,848 were converted
into 6,037,668 shares of the Company's common stock [See Notes 9B, 10E and 20C].
This brought the total conversion of $519,848 of debentures into 7,487,668
shares as of March 31, 1998. For the five months ended March 31, 1998, the
Company amortized $46,134 as a non-cash financing cost, which is classified as
interest expense. The convertible notes are secured by the Company's entitlement
to any net cash proceeds derived from its interest in ATRE property [See Note
4B].

                                     F-16
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8


[7] Notes Payable [Continued]

[E] Loan Payable - In October 1997, the Company borrowed $360,000 from an
unaffiliated entity with interest at 10% per year. At March 31, 1998, $185,208
is outstanding on this obligation. This note was repaid in September of 1998 by
weekly payments of $7,500. Interest expense for the year ended March 31, 1998
was $12,708.

[8] Capital Leases

The Company is the lessee of equipment under capital leases expiring in various
years through 2002. The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the assets. The assets are depreciated over the lower of their related
lease terms or their estimated productive lives. Depreciation of assets under
capital leases is included in depreciation expense for 1997 and 1998.

Following is a summary of property held under capital leases as of March 31,
1998:

<TABLE>
<CAPTION>
                  <S>                                       <C>
                  Furniture, Fixtures and Equipment         $60,150
                  Less:  Accumulated Depreciation            41,831
                                                            -------

                  Totals                                    $18,319
                                                            -------
                                                            -------
</TABLE>

Minimum future lease payments under capital leases as of March 31,1998 for each
of the next five years and in the aggregate are:

<TABLE>
<CAPTION>
Year Ending March 31,

<S>                                                <C>
        1999                                      $   3,875
        2000                                          3,598
        2001                                          3,837
        2002                                          3,044
        2003                                           --
                                                  ----------

Total Minimum Lease Payments                         14,354
Less:  Amount Representing Interest                   1,876

   Present Value of Net Minimum Lease Payments    $  12,478
   -------------------------------------------    ----------
                                                  ----------
</TABLE>

[9] Income Taxes

The Company has net operating loss carryforwards of approximately $7,763,000
which expire through the year 2012. As a result of these carryforwards, the
Company has a deferred tax asset of approximately $2,701,800, which has been
offset by a valuation allowance of $2,701,800 resulting in a deferred asset of
$-0-. Future tax benefits related to this loss have not been recognized because
its realization is not assured. No current or deferred federal or state income
taxes have been provided for.


                                     F-17
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9


[9] Income Taxes [Continued]

As of March 31, 1998, the approximate amount of the net operating loss income
tax carryforwards and their expiration dates are as follows:

<TABLE>
<CAPTION>
             Expiration
           in Years ending                         Net Operating Loss
              March 31,                               Carryforwards
              ---------                               -------------
                <S>                                  <C>
                2007                                 $    1,317,000
                2008                                      2,693,000
                2009                                      2,015,000
                2010                                        288,000
                2011                                      1,300,000
                2012                                        150,000
                                                     --------------

                Total                                $    7,763,000
                -----                                --------------
                                                     --------------
</TABLE>

[10] Capital Stock

[A] Stock Subscription Receivable - On April 23, 1996, the Board of Directors
agreed to cancel the existing $86,636 stock subscription receivable from
officers of the Company. The Company accepted services performed by the officers
of the Company in lieu of cash in collection of the stock subscription and,
therefore, recorded the $86,636 as compensation expense for the year ended March
31, 1997.

[B] Authorized Shares - The Board of Directors agreed on April 23, 1996 to
increase its authorized shares to 100,000,000 shares of common stock and
5,000,000 shares of preferred stock, which was approved at the August 23, 1996
annual shareholders meeting.

[C] Preferred Stock - The preferred stock has no (i) dividend rights, (ii)
sinking fund provisions, (iii) rights of redemption, (iv) classification
provisions for voting, (vi) preemptive rights, (vi) liability to further calls
or to assessments by the Company, or (vii) any provision discriminating against
any existing or prospective holder. Holders of shares of preferred stock are not
entitled to any dividend preference. In the event of liquidation, holders of
shares of preferred stock shall be entitled to a preference of $.01 per share,
and any other remaining proceeds of liquidation shall be distributed shares and
shares alike to holders of all capital stock. The issued and outstanding
preferred stock are restricted and have not been registered.

[D] Shares Issued for BDC Acquisition - In May of 1997, the Company entered into
an agreement and plan of merger between BDC Acquisition, Inc., a newly formed
wholly-owned subsidiary of the Company, and Beyond Design Corporation ["BDC"].
The Company's subsidiary has acquired all of the issued and outstanding stock of
BDC for the issuance of an aggregate of 2,427,273 shares of the Company's common
stock and the assumption of certain outstanding obligations of BDC. The book
value of the net assets acquired approximates the fair value of the shares
issued in connection with the acquisition. This acquisition was deemed
immaterial for accounting purposes.


                                     F-18
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10


[10] Capital Stock [Continued]

[E] Conversion of Debentures Payable - During the quarter ended June 30, 1996,
the Company issued convertible debentures of $1,257,988 with 10% interest per
annum and a 7% commission. The principal amount is convertible in whole or in
part into shares of the common stock of the Company at a conversion formula
based upon average closing bid prices. In conjunction with the debentures, the
Company granted 1,000,000 warrants exercisable at $.25 per share to two
consultants. Warrants for 46,000 shares were exercised for $11,500 during the
year ended March 31, 1997 [See Notes 7D and 13C]. The Company recorded a
financing cost of $25,000 for the fair value of the warrants granted. The fair
value of the warrants was determined based upon the fair value of services
received by the Company in May and June of 1996.

As of March 31, 1997, convertible debentures of $290,000 were converted into
1,450,000 shares of the Company's common stock by several off shore companies
under Regulation S and $967,988 of convertible promissory notes payable were
outstanding and in default by the Company. Interest expense of $97,000 and
$24,702 was recorded for the years ended March 31, 1998 and 1997 [See Note 7D].
Subsequent to September 30, 1997, the Company negotiated a one year extension
agreement and agreed to add 15% to the note as a deferred financing cost of
approximately $110,000.

During fiscal March of 1998, convertible debentures of $229,848 were converted
into 6,037,668 shares of the Company's common stock. For the five months ended
March 31, 1998, the Company amortized $46,134 as a non-cash financing cost,
which is classified as interest expense [See Notes 7D and 20C].

[F] Employment Agreements - In September 1997, two officers agreed to defer 90%
of their salaries until further notice, but not beyond March 31, 1998. As
consideration, the Company granted a total of 3,750,000 shares of common stock
and warrants to purchase 3,750,000 shares of the Company's common stock at an
exercise price of $.10 per share. The common shares granted vested during fiscal
1997 and the warrants are exercisable over a two year period beginning March 31,
1997. The Company recorded $75,000 in deferred costs for the fair value of the
shares granted and amortized $50,000 in the year ended March 31, 1998. No
deferred costs were recorded for the warrants granted as the fair market value
of the underlying common shares was approximately equal to the exercise price
[See Note 5D].

In September 1997, the Company entered into employment agreements with nine
employees holding key positions. The agreements provide for an aggregate of
550,000 shares of common stock with a fair value of $11,000 for past services
and semi-monthly compensation of approximately $14,000. The agreements will
continue for an indefinite period of time.

[G] Consulting Agreement - Fiscal 1997 - On April 23, 1996, the Company engaged
an entity to arrange either debt or equity financing for the Company and agreed
to grant a total of 1,000,000 options exercisable within three years of grant at
$.10 per share. The Company recorded a financing cost of $25,000 in June of 1996
for the fair value of the options granted. The fair value of the options was
determined based upon the fair value of services received by the Company in May
and June of 1996.

These options were exercised in June of 1996 for a total of 1,000,000 shares of
common stock as a result of consulting services performed in 1996 by the
consultant [See Note 13D].

[H] Financial Consultants - The Company issued 250,000 shares of stock to one of
its consultants in consideration of entering into a two year consulting
agreement [See Note 5G].

[J] Stock in Lieu of Commissions - On March 11, 1998, the Company issued 347,368
shares of common stock to a salesman in lieu of commissions owed of $66,000.

                                     F-19
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11


[11] Earnings Per Share

Earnings per share is based on the weighted average number of common shares
outstanding as restated to include the number of shares issued in the business
combination with TAV reflecting conversion for a preferred share of stock into
1.95 shares of common stock. The effect of warrants and options is included when
dilutive. Exercise of the options and warrants could potentially dilute basic
EPS in the future.

[12] Major Supplier

For the year ended March 31, 1998, the Company had purchases from three
suppliers that amounted to approximately $4,622,849 or 83% of net purchases.
These suppliers accounted for 52%, 20% and 11% of net purchases. For the year
ended March 31, 1997, the Company had purchases from three suppliers that
amounted to approximately $2,940,211 or 83% of net purchases.

Loss of these suppliers would not significantly adversely affect the company
because sufficient replacement vendors exist in the open market.

[13] Stock Options and Warrants

[A] 1988 Stock Option Plan Approved - On October 12, 1988, the Company's
directors and stockholders approved the Company's 1988 Stock Option Plan [the
"Option Plan"] authorizing the granting of incentive options and non-qualified
options. The incentive options are intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended. Pursuant to the Option Plan, options
to purchase up to 10,000 shares of common stock may be granted to officers,
directors and key employees of the Company. The Stock Option Committee,
consisting of Messrs. Lu and Schillen, is responsible for determining the
individuals who will be granted options, the number of shares to be subject to
each option, the option price per share, and the exercise period of each option.
The option price will not be less than the fair market value of the Company's
common stock on the date the option is granted. Options may be exercised by
payment of cash. No option will have a term in excess of ten years.

[B] Consulting Agreement - Fiscal 1997 - In June 1996, the Company issued
1,000,000 common stock warrants at an exercise price of $.25 per share as part
of a consulting agreement entered into, which term ends June 1998. As of March
31, 1997, 925,000 of those warrants are vested. Deferred compensation of $50,000
resulting from this transaction was recorded at the fair market value of the
services rendered [See Note 5G].

[C] Convertible Debentures - Fiscal 1997 and 1998 - In April 1996, in connection
with the convertible debentures, the Company entered into two separate
consulting agreements. As per the terms of both contracts, the Company issued
1,000,000 common stock warrants [500,000 warrants per contract] at an exercise
price of $.25 per share of which 46,000 shares were issued as a result of the
exercise of warrants during the year ended March 31, 1997 [See Notes 7D, 10E and
20C].

[D] Consulting Agreement - Fiscal 1997 - On April 23, 1996, the Company engaged
an entity to arrange either debt or equity financing for the Company and agreed
to grant a total of 1,000,000 options exercisable within three years of grant at
$.10 per share. The Company recorded a financing cost of $25,000 in June of 1996
for the fair value of the options granted. The fair value of the options was
determined based upon the fair value of services received by the Company in May
and June of 1996.

These options were exercised in June of 1996 for a total of 1,000,000 shares of
common stock as a result of consulting services performed in 1996 by the
consultant [See Note 10G].

                                     F-20
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12


[13] Stock Options and Warrants [Continued]

[E] Fiscal 1997 Summary - During fiscal year ended March 31, 1997, the Company
issued 3,000,000 stock warrants to nonemployees at exercise prices below market
prices at the date of grant, ranging from $.10 to $.25, and having a weighted
average exercise price of $.20. Of these options, 1,000,000 options have a 2
year vesting period and 2,000,000 options vested at date of grant. The total
cost of issuing these stock options to nonemployees during 1997 was
approximately $100,000. The entire amount is being amortized over the
aforementioned respective vesting periods, resulting in a $85,142 and $14,858
charge to operations for the years ended March 31, 1998 and 1997. The weighted
average fair value of stock options granted to consultants during 1997 was
estimated at $.04 using the fair value of services at date of grant.

[F] Consulting Agreement - Fiscal 1998 - In August 1997, the Company issued
2,050,000 common stock warrants at an exercise price of $.10 per share as part
of a consulting agreement entered into, whose term ends August 1999. Deferred
consulting costs of $100,000 resulting from this transaction was recorded at the
fair market value of the services rendered and approximately $31,000 was
expensed for the year ended March 31, 1998 [See Notes 5G and 19E].

[14] Litigation

The Company has been named as defendant and co-defendant in various legal
actions filed against the Company in the normal course of business. The Company
believes that it has adequate legal defenses and intends to vigorously defend
itself in these actions. The Company believes after consulting with counsel that
an adverse decision in any one lawsuit would not have a material adverse impact
on the Company, however, the aggregate affect of an adverse decision in a
majority of the lawsuits outstanding could have a material adverse impact on the
Company.

[15] Going Concern

The Company's financial statements are prepared in conformity with generally
accepted accounting principles, which contemplates the realization of assets and
settlements of liabilities in the normal course of business and continuation of
the Company as a going concern. The Company has incurred net losses of
$1,505,442 and $1,303,546 for the years ended March 31, 1998 and 1997,
respectively, and has a working capital deficit at March 31, 1998 of $2,486,662.
The Company has also been experiencing difficulties in paying its vendors on a
timely basis. These factors create uncertainty whether the Company can continue
as a going concern. The Company's plans to mitigate the effects of the
uncertainties are (i) to collect the sales proceeds from parcels of property
owned by ATRE [50% owned by the Co.] located in Vancouver, WA, (ii) to continue
to acquire new licensed titles to improve sales and profit margin , (iii) to
create new products with better gross profits, (iv) to continue to negotiate
with several reliable investors to provide the Company with debt and equity
financing for working capital purposes, (v) to convert debt to equity and (vi)
to continue to negotiate with major vendors for discounts.

Management believes that these plans can be effectively implemented in the next
twelve months. The Company will continue to seek additional financing from
private sources to supplement its cash needs for the next twelve months during
the implementation of these plans to achieve profitability. The Company's
ability to continue as a going concern is dependent on the implementation and
success of these plans. The financial statements do not include any adjustments
in the event the Company is unable to continue as a going concern. There can be
no assurance that management's plans to reduce operating losses or obtain
additional financing to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.

                                     F-21
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13


[16] Major Customers

For the years ended March 31, 1998 and 1997, the Company had net sales to one
customer that amounted to approximately $3,140,000 or 36.0% and $2,477,797 or
30.5% of net sales, respectively.

[17] New Authoritative Pronouncements

The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.

The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.

SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.

[18] Financial Instruments

The following table summarizes the carrying amount and estimated fair value of
the company's significant financial instruments all of which are held for
nontrading purposes:

<TABLE>
<CAPTION>
                                                  March 31, 1998
                                           -----------------------------
                                            Carrying         Estimated
                                             Amount         Fair Value
                                           -----------     -------------
                  <S>                   <C>              <C>           
                  Other Receivable      $       500,000  $      500,000
                  Long-Term Debt        $         9,957  $        9,957
</TABLE>


                                     F-22
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14

[18] Financial Instruments [Continued]

In assessing the fair value of other receivables, it was estimated that the
carrying amount approximated fair value because of the interest rate and risk
factor. The fair value of long-term debt is based on current rates at which the
Company could borrow funds with similar remaining maturities.

[19] Subsequent Events

[A] Exclusive Distribution Agreement - In April of 1998, the Company entered
into an agreement with S4C Corporation for the exclusive rights to distribute a
home video tape through December 31, 2003 with total advance payments
aggregating approximately $200,000 and additional royalties due as a percentage
of wholesale prices.

[B] Conversion of Debt to Equity - In June of 1998, a convertible debenture
holder converted a note payable with a balance of $91,750 into 2,823,077 shares
of the Company's common stock [See Note 7D].

[C] New Subsidiary - On July 15,1998, the Company incorporated Galaxynet
International, Inc. ["Galaxy Net"] in the State of Delaware, as a majority-owned
subsidiary of the Company. GalaxyNet is in the business of developing and
selling internet gaming software and intends to offer its software to internet
gaming companies and provide internet gaming web sites to solicit gambling
wagers from primarily, Asian players. The Company also issued 4,000,000 options
exercisable at $.10 per share to an investor and 6,000,000 options to the Chief
Executive Officer exercisable at $.10 in connection with this project. Such
options will expire July 9, 2003.

[D] Potential Additional Equity Financing - On July 17, 1998, the Company, along
with GalaxyNet, entered into a memorandum of understanding regarding the raising
of capital in a private offering to raise gross proceeds in the aggregate of
between and $3,000,000 and $10,000,000 with an enterprise who will be paid the
sum of 15% of the aggregate proceeds and receive finders options for up to
3,750,000 shares of common stock at exercise prices of between $.10 and $.20 per
share [See Note 20A].

[E] Exercise of Warrants - In July of 1998, the Company raised $20,000 from the
exercise of warrants for 200,000 shares of the Company's common stock [See Note
13F].

[F] Additional Options Issued - On July 9, 1998, the Company granted options to
purchase 1,000,000 shares of common stock to the chief executive officer of a
potential customer and in consideration of certain fulfillment orders submitted
to the Company. These options may be exercised for $0.10 per share.

[20] Subsequent Events - Unaudited

[A] Refunding of Potential Equity Financing - The private offering period ended
September 30, 1998, and was extended until October 31, 1998. The private
offering resulted in raising funding proceeds of only $250,000. The Company
subsequently refunded the $250,000 to the investor [See Note 19D].

[B] Additional Options Issued - In August of 1998, the Company issued 2,000,000
options to the Chief Executive Officer at an exercise price of $.10 per share
for his personal guarantee on the Company's loan agreements and loans made to
the Company.

[C] Convertible Debentures - On November 2, 1998, convertible debentures with a
balance of $848,861 were reinvested into a new note for approximately $925,000
for a new two year term expiring October 31, 2000 with interest of 10%. The
repayment term is a weekly amount of $6,250 in 1998 and $12,500 in the years
1999 and 2000. In addition, there is an acceleration clause of repayments for
certain events and a 5% late charge for any delinquent payments. The notes
contain an option to convert the principal and interest balance into the common
stock of the Company subject to certain pricing calculations. Collateral
security includes all the assets of the Company and a personal collection
guarantee as additional security to holder after subordination to primary lender
[See Notes 7D and 10E].

                                     F-23
<PAGE>



DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15


[20] Subsequent Events - Unaudited [Continued]

[D] Additional Stock Issuances - On October 24, 1998, the Company issued
1,499,523 shares of common stock to the Company's president pursuant to a
settlement agreement.

[E] Lease - Beginning in October 1998, the Company entered into a four-year
lease expiring in June 2002, for use as executive offices and manufacturing and
warehouse facilities for $21,500 monthly. In addition, the Company has entered
into a sublease with a subtenant beginning January 1, 1999 which requires the
subtenant to pay approximately $9,494 per month from March 1, 1999 through
February 2000, and $9,936 per month from March 1, 2000 through March 31, 2001,
for an existing lease which requires the Company to make monthly payments of
$9,274.





                           . . . . . . . . . . . . . .

                                     F-24
<PAGE>





                                   SIGNATURES

         In  accordance  with Section 13 of the Exchange Act, the  registrant  
has caused this report to be signed on its behalf by the  undersigned,  hereunto
duly authorized.

                                   DIAMOND ENTERTAINMENT CORPORATION


Dated:  December 23, 1998       By:/s/ James K.T. Lu
                                   -----------------
                                   James K.T. Lu
                                   President, Chief Executive Officer, Principal
                                   Executive Officer and Director


Dated:  December 23, 1998       By:/s/ Fred U. Odaka
                                   -----------------
                                   Fred U. Odaka
                                   Chief Financial Officer, Principal Financial
                                   Officer and Principal Accounting Officer


         In accordance  with the Exchange Act, this report has been signed by 
the following  persons on behalf of the  registrant  and in the capacities and 
on the dates indicated.

         Signature                  Title                      Date
       ------------                -------                    -------


/s/ James K.T. Lu         President, Chief Executive          December 23, 1998
-------------------------   Officer, Secretary 
James K.T. Lu               and Director


/s/ Jeffrey I. Schillen   Executive Vice President            December 23, 1998
-------------------------   and Director
Jeffrey I. Schillen       


/s/ Murray T. Scott       Director                            December 23, 1998
-------------------------
Murray T. Scott