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, 2006





[ 
]
      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
                of other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                Number)800
                Tucker Lane, Walnut, CA
            91789(Address
                of principal executive
                offices)
            (Zip
                Code)




Issuer's
      telephone number: (909) 839-1989




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





Securities
      registered under 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, 2006 totaled
      $3,510,475.





The
      aggregate market value of registrant's Common Stock held by non-affiliates
      on
      June 9, 2006 was approximately $5,935,321 based upon the average closing bid
      and
      asked sales prices of the issuer’s common stock in the over-the-counter market
      on such date as reported by the OTC Bulletin Board. As of March 31, 2006,
      618,262,605 shares of the issuer’s Common Stock were outstanding. As of June 9,
      2006, 618,262,605 shares of the issuer’s Common Stock were
      outstanding.


1


Quick
      Links `





ITEM
      1. DESCRIPTION OF BUSINESS


ITEM
      2.
      DESCRIPTION OF PROPERTY.


ITEM
      3.
      LEGAL PROCEEDINGS.


ITEM
      4.
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.


ITEM
      5.
      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.


ITEM
      6.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.


ITEM
      7. FINANCIAL STATEMENTS


CONSOLIDATED
      FINANCIAL STATEMENTS


ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE


ITEM
      8A. CONTROLS AND PROCEDURES


ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
      PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.


ITEM
      10. EXECUTIVE COMPENSATION


ITEM
      11.
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED
      STOCKHOLDER MATTERS


ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS


ITEM
      13. EXHIBITS.


ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.











i


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," "intend," "will," "plan," "should," "seek"
      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





ITEM1.
      DESCRIPTION OF BUSINESS





GENERAL





Diamond
      Entertainment Corporation d/b/a e-DMEC (the "Company" or "DMEC") was formed
      under the laws of the State of New Jersey on April 3, 1986. In May 1999, the
      Company registered in the state of California to do business under the name
      “e-DMEC”. All references to the “Company”, “the Corporation”, “DMEC”, “we”,
“our”, or “us” refer to Diamond Entertainment Corporation doing business as
      e-DMEC and its subsidiaries unless the context otherwise requires. The Company's
      principal executive offices are located at 800 Tucker Lane, Walnut, California
      91789.





DMEC
      markets and sells a variety of DVD (Digital Video Disc) and videocassette titles
      to the budget home video and DVD market.





Our
      DVD
      and videocassette titles include 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 us from a third party for duplication and distribution, generally on a
      non-exclusive basis. We market our video programs to national and regional
      mass
      merchandisers, department stores, drug stores, supermarkets and other similar
      retail outlets. They generally sell our products to the public at retail prices
      ranging from $1.99 to $9.99 per videocassette and $3.99 to $12.99 per DVD
      program packs. Our video and DVD products are also offered by consignment
      arrangements through one large mail order catalog company and one retail chain.
      We are continuing to acquire new licensed DVD titles and upgrading the quality
      of its packaging and pre-printed materials in order to enhance its available
      products. In addition, we provide duplication and packaging and fulfillment
      services.




The
      Company’s wholly owned subsidiary Jewel Products International, Inc. ("JPI") is
      in the business of manufacturing and distributing general merchandise,
      children's toy products
      and other sundry items from U.S. based importers or directly from Asia for
      distribution, and distributing to mass merchandisers in the United States.
      During the year ended March 31, 2006 and 2005, JPI was dormant and did not
      record sales of its products.





VIDEO
      PROGRAM LINE





Our
      products consist of a total of approximately 1,098 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, wrestling and sports highlights. Public domain programs
      account for approximately 819 titles, licensed programs account for
      approximately 267 titles of our program inventory and we own **** 12
      titles.





·
            Motion
                Pictures - Public Domain. We offer a total of 239 feature motion
                picture
                titles including many film classics, biblical tales, and a large
                collection of favorite performers. Titles include “The Naked Kiss”, and
                “Second Woman”.






2


·
            Children's
                Programs - Licensed and Public Domain. Most of our cartoons are public
                domain programs, including 25 cartoon programs re-dubbed in Spanish.
                These
                programs are generally 125 minutes in length and consist of a series
                of
                cartoons that we select. We also market approximately 19 children's
                holiday features, and 49 titles in our Testaments and Children's
                Bible
                series.





·
            Educational
                Programs - Licensed. We license approximately 56 educational videos
                with
                titles on topics such as baby animals, nature series and nature's
                newborn.





·
            Educational
                Programs - Owned. We purchased all rights to the Learning Treehouse
                consisting of approximately****12
                educational videos which instruct preschoolers and school age children
                on
                topics such as learning numbers, telling time, simple mathematics,
                and
                color identification.





·
            Sports
                Programs - Licensed. We have licenses to market 18 sports programs
                of
                wrestling such as Wild Women of Wrestling and AJ Styles
                Matches





·
            Spanish
                Movies - Licensed. We license approximately 12 Spanish movies such
                as La
                Portere Ardiente and Conevion
                Criminal.





DVD
      PROGRAM LINE





The
      DVD
      program inventory currently consists of 370 titles, which are public domain
      feature films and television episodes.





·
            Motion
                Pictures - We offer 272 titles in DVD format covering many film classics
                in various categories including drama, horror, westerns, action,
                and
                comedy.




·
            Television
                Episodes - We offer 41 classic television program titles.




·
            Bible
                Series - 9 Testament, 1 Life of Christ and 1 Stories & Miracles of
                Jesus.




·
            Sports
                - Wild men of wrestling/Wild women of wrestling/A.J. Styles
                matches




·
            Children’s
                - 12 Learning Treehouse and 3 Baby
                Brightest




We
      continuously seek to expand our program inventory by identifying titles that
      appeal to children and those which include popular performers, characters or
      themes. We also identify video and DVD programs which are classic films,
      educational, instructional, or those which have been requested by
      distributors.


We
      enter
      into a licensing agreement with respect to those programs that are subject
      to
      copyright protection or obtain documentation confirming public domain status
      from various unaffiliated program suppliers.





During
      the years ended March 31, 2006 and March 31, 2005, we acquired approximately
      58
      and 69 new titles, respectively. As of March 31, 2006, the net book value of
      our
      film masters and artwork was approximately $410,000. We believe that our film
      masters and artwork are significant assets since we derive the majority of
      our
      revenue from their use.




FULFILLMENT
      AND DUPLICATION SERVICES





We
      are
      continuing to offer our duplication, fulfillment and packaging services to
      corporate customers through our sales representatives There can be no assurance
      that we will be able to market and distribute successfully our contract
      fulfillment, replication and duplication services to corporate customers or
      to
      our other customers. No revenues derived from our replicating and duplication
      services for the period ended March 31, 2006 and 2005.





3


GENERAL
      MERCHANDISE





JPI
      sells
      and manufactures one toy product called the Zoombie ®, its patented Double Wing
      Flier, a bi-wing aerodynamic flying toy a game of catch intended to compete
      directly with Frisbee(R), Aerobie(R) and Whoosh(TM). During the year ended
      March
      31, 2006 and 2005, there were no sales of the Zoombie product.





During
      the year ended March 31, 2005, JPI entered into a joint venture partnership
      with
      a company having the patent and manufacturing rights to a family back yard
      game
      called Flingball, a game similar to that of horseshoes. During the 3 rd fiscal
      quarter of fiscal 2005, JPI, together with its joint venture partner conducted
      a
      TV promotional sales test which was not successful and during fiscal year ended
      March 31, 2006, JPI dissolved the joint venture. As of June 15, 2006, we have
      no
      outstanding commitment from our customers to purchase our general merchandise
      product line.





SUPPLIERS





*VIDEO/DVD
      PRODUCTS*





For
      the
      year ended March 31, 2006, the Company purchased video and DVD products from
      four suppliers that accounted for approximately 71% of the Company's net
      purchases. During such period, the percentages of net video/DVD product
      purchases made from such suppliers were 29%, 16%, 15% and 11%, respectively.
      We
      believe that, if for any reason we could not rely on or retain the services
      of
      any of our current suppliers, duplicators or manufacturers, other suppliers
      would be readily available in the marketplace.





MARKETING





*VIDEO/DVD
      PRODUCTS*





We
      market
      our program inventory to large retail chain outlets and provide each retail
      chain operator with brochures, advertising materials and literature describing
      and promoting our program inventory. Our products are sold through


more
      than
      ten mass merchandisers such as, Walgreens, Musicland Group., NWL Holdings,
      LLC
      and Ross Stores Inc., primarily in the Northeast, the South and the East Coast.
      These outlets sell our products to the general public at retail prices ranging
      from approximately $1.99 to $9.99 per videocassette and **** $3.99
      to **** $12.99
      per DVD program pack. For the years ended March 31, 2006 and 2005, we derived
      revenue from our video and DVD products of approximately $3,510,000 **** and
      $6,867,000, respectively. For the year ended March 31, 2006, we had net sales
      to
      two major customers, Walgreens and Musicland Group. who accounted for
      approximately 32% and 13%, respectively, on revenues of approximately
      $1,571,000. For the year ended March 31, 2005, we had net sales to two major
      customers, Walgreens and Dolgen Corp. who accounted for approximately 41% and
      18%, respectively, on revenues of
      approximately $4,016,106.





CUSTOMERS





*VIDEO/DVD
      PRODUCTS*





Our
      marketing strategy of distributing directly to retail chain outlets has allowed
      us to market our products at all consumer levels. In particular, we seek to
      attract retail customers in department, drug, discount, electronic, music,
      toy
      and book stores as well as supermarkets and convenience stores. We are
      continuing to improve the name recognition of our company as a DVD distributor
      specializing in educational, children and film classics video, and DVD titles.
      In addition, through our sales program, we seek to place increased focus on
      the
      promotion of sales to major mass merchandising companies which would increase
      the delivery of high volume orders.





During
      the fiscal year ended March 31, 2006, we derived approximately 77% of our gross
      revenue from sales to mass merchandisers and other retail outlets and
      approximately 23% of gross revenue was derived from sales through consignment
      arrangements with a catalog company and a retail company. We only book sales
      from consignment sales after the catalog company delivers the actual funds
      from
      such sales. Less than one percent of revenues are derived from products sold
      on
      a retail basis directly to consumers via the internet.





4





*GENERAL
      MERCHANDISE*





We
      market
      our general merchandise and toy products using outside sales personnel and
      manufacturer’s representatives and utilize independent manufacturer's
      representatives to reach our customers. For the years ended March 31, 2006
      and
      2005, we had no revenues from our general merchandise products.





SEASONALITY





*VIDEO
      AND DVD PRODUCTS*





DMEC
      generally experiences higher sales from our video and DVD programs from
      September through January due to increased consumer spending around the year-end
      holidays. During the year ended March 31, 2006, the Company derived
      approximately 71%f its gross revenue from sales during those five months, with
      approximately 29% of revenue generated in the remaining seven months of the
      year.





*GENERAL
      MERCHANDISE*





Our
      revenues are very seasonal and are currently generated during the year-end
      holiday period from September through December.





LICENSE
      ARRANGEMENTS





*VIDEO
      AND DVD PRODUCTS*





We
      enter
      into various license agreements under which we acquire from licensors the right
      to duplicate and distribute a licensed video or video program. Licenses may
      be
      exclusive or non-exclusive, but typically are non-exclusive. Generally, licenses
      cover specific titles. In return for the grant of certain rights by the
      licensor, we pay certain advance payments or guarantees and also pay royalties.
      Advances, which have not been recovered through earned royalties, are recorded
      as an asset. Royalty payments under license agreements typically are credited
      against any advances paid. Generally, our licenses are for a term of between
      three and seven years. While our efforts to renegotiate and renew our 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 we
      have acquired under license contain limitations
      from the licensors regarding the geographic areas to which we can distribute
      our
      products and are usually restricted to distribution and sales in the United
      States and Canada.





The
      various licensing agreements that we have entered into with licensors provide
      for advance payments ranging from $1,500 to $100,000 and subsequent royalty
      payments based upon either a per video or DVD sold fee or a percentage of
      wholesale price fee. During the year ended March 31, 2006, and 2005 we incurred
      royalty expenses of approximately $80,000 and $47,000, respectively, under
      our
      licensing agreements.





COMPETITION





*VIDEO
      AND DVD PRODUCTS*





The
      videocassette and DVD distribution industry is intensely competitive and highly
      fragmented. Approximately 90% of our program inventory is public domain programs
      which are not licensed or our exclusive property. Any competitor may easily
      enter our business by reproducing and distributing public domain programs,
      including those marketed by us. DMEC competes with other distributors who sell
      budget priced videotapes and DVDs. We also compete with other video duplicators.
      We have been able to compete based on offering low pricing and superior
      packaging designs. Most of the companies with which we compete with, such as:
      Platinum Entertainment, Brentwood Entertainment and Madacy, are better
      established, have broader public and industry recognition, have financial
      resources substantially greater than us and have manufacturing and distribution
      facilities better than those which now, or in the foreseeable future, may become
      available to us.





5





*GENERAL
      MERCHANDISE*





DMEC
      competes with other distributors of toy products and general merchandise,
      including distributors of other flying toys such as "Frisbies". We concentrate
      on the most popular and new products available and offer these products for
      limited sales period and, as demand for products change. We can immediately
      switch to newer and more popular products. We compete primarily on uniqueness
      of
      product and lower prices. Most of the distributors with which we compete are
      better established, have broader product lines and industry recognition, and
      have financial resources substantially greater than ours. We also face intense
      competition from other distributors of toy products.





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
      50% of the issued and outstanding common stock of ATRE. Subsequent loan
      participation by the investors in ATRE reduced the Company’s shareholder
      interest to 7.67%. The Company’s 2003 operations include a write-down of its
      investment in ATRE, which reduced the Company’s investment in ATRE to zero, net
      of taxes. The write-down resulted from the operating results of ATRE which
      reduced the Company’s investment in ATRE to zero and, as a consequence, the
      Company’s future financial results will not be negatively affected by ATRE’s
      ongoing operations. The Company has no obligation to fund future operating
      losses of ATRE. Mr. Lu was President and director of ATRE until January 8,
      2004,
      when he resigned his position as President.





As
      of
      March 31, 2006 and 2005, we had outstanding loan balances of $582,874 and
      $278,374 respectively, owed to ATRE, bearing interest at the rate of 10% per
      annum, and due on demand. The Company does not anticipate a demand by ATRE
      for
      repayment of its loan to the Company in the near future.





INSURANCE





The
      Company has a commercial general liability policy including policies covering
      personal property and products for damages. These policies cover the Company
      in
      all of its facilities. Management believes the Company’s insurance coverage is
      adequate for most foreseeable problems, and is comparable with the coverage
      of
      other companies in the same business and of similar size.





EMPLOYEES
      AND CONTRACTED LABOR





As
      of
      March 31, 2006, the Company and its subsidiaries employed 22 full-time and
      no
      contracted labor personnel as compared to 16 full-time and 39 contracted
      labor personnel a year earlier. On October 1, 2004, the Company entered into
      an
      agreement with an outside independent service company to furnish the Company
      with its required hourly manufacturing labor personnel. The service company
      hired the Company’s hourly manufacturing personnel and contracted with the
      Company to furnish such manufacturing personnel as outside contract labor to
      the
      Company. All personnel, payroll and payroll related costs for the contract
      personnel are handled by the service company and such costs are billed to the
      Company each pay period. In October 2005, the Company terminated its agreement
      with the outside independent service company and re-hired the required full
      time
      employees. During the peak season the Company engages additional outside
      contracted labor, part-time or temporary personnel to help with the surge for
      Christmas season orders. The Company reduces its contracted 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 or
      contract labor force are unionized. Management believes that it has good working
      relations with its employees and contracted labor force.





COPYRIGHT,
      LICENSES AND OTHER PROPRIETARY RIGHTS





We
      rely
      on a combination of common law trademark, copyright and trade secret law to
      establish and protect our property rights and promote our reputation and the
      growth of our business. In addition, in the toys product line, the Woblong(R),
      subsequently renamed as the Zoombie(R), is protected by patent claims in the
      form of a utility patent registered with the U.S. Patent and Trademark Office.
      The U.S. Patent number is 5,131,879. In addition, design patent No. D344,989
      was
      issued on March 9, 1994.





6


We
      license approximately 275 videocassette titles from licensors for duplication
      and distribution, generally on a non-exclusive basis. Such licensors could
      become subject to third party infringement claims that could result in their
      inability or unwillingness to license these titles to us and would impair our
      ability to provide such titles to our customers.





ITEM
      2. DESCRIPTION OF PROPERTY.





We
      lease
      approximately 20,000 square feet of property located at 800 Tucker Lane, Walnut,
      California under a lease that commenced April 1, 2004 and expires on March
      31,
      2007, for use as manufacturing and warehouse facilities for a monthly rent
      of
      $12,500. The monthly rent increased to $13,000 per month on April 1, 2006.
      Our
      lease is with an unaffiliated third party.





During
      the period ended March 31, 2006 we lease approximately 995 square feet @ 18725
      E. Gale Avenue, Suite 100, City of Industry, California from a related party
      under a lease that commenced May 1, 2005 for use as executive offices for a
      monthly rent of $2,500. In May 2006, we terminated the lease and moved the
      executive offices back to 800 Tucker Lane, Walnut, California.




We
      believe that we have sufficient space for operations for the next twelve months.





ITEM
      3. LEGAL PROCEEDINGS.





We
      have
      in the past been named as defendant and co-defendant in various legal actions
      filed against us in the normal course of business. All past litigation have
      been
      resolved without material adverse impact on us.





ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS.





On
      March
      1, 2005, the Company held its annual meeting of shareholders and the following
      proposals were approved by majority vote: (i) the change in the Company’s
      Certificate of Incorporation to increase the total number of Common Shares
      authorized to be issued from 600,000,000 shares to 800,000,000 shares, (ii)
      Jeffrey I. Schillen and Fred U. Odaka were elected as Class 1 directors to
      the
      Board of Directors of the Company for terms of two years and James K. T. Lu,
      Murray T. Scott and Jerry Lan were elected as Class 2 directors of the Board
      of
      the Company for terms of three years, (iii) the authorization of a possible
      reverse stock split of the Company’s outstanding Common Stock in the range of
      10:1 to 30:1, as determined in the sole discretion of the Board of Directors.
      and (iv) the approval of the Company’s 2005 Equity Compensation
      Program.




1.  The
      results of the vote on the proposal to increase the authorized common stock
      of
      the Company from 600,000,000 shares to 800,000,000 shares were as follows:
      470,455,970 votes for the proposal, 9,744,715 votes against the proposal, and
      44,582 votes abstained. A majority of the votes cast were voted “FOR” the
      proposal.





2.  The
      results of the vote on the proposal for consent to a possible reverse stock
      split of the outstanding shares of Common Stock of the Corporation in the range
      of 10 to 1 to 30 to 1, as determined in the sole discretion of the Board of
      Directors were as follows: 454,765,249 votes for the proposal, 25,433,931 votes
      against the proposal, and 46,087 votes abstained. A majority of the votes cast
      were voted “FOR” the proposal.





3.  The
      results of the vote on the proposal to approve the Company’s 2005 Stock
      Incentive Plan were as follows: 389,071,509 votes for the proposal, 12,502,392
      votes against the proposal, 58,064 votes abstained and 78,613,302 not voted.
      A
      majority of the votes cast were voted “FOR” the proposal.








7





PART
      II





ITEM5.
      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS.





Our
      common stock is quoted on the NASD's OTC Bulletin Board under the symbol "DMEC."
      The following table sets forth the high and low bid prices for our Common Stock
      for each quarterly period during our last two fiscal years. The source of the
      quotes is NASD's OTC Bulletin Board quarterly quote summaries.





Common
                Stock
              Bid
                PriceLow
            High**Fiscal
                Year 2005**First
                Quarter
            0.0001
            0.0260Second
                Quarter
            0.0150
            0.0320Third
                Quarter
            0.0140
            0.0180Fourth
                Quarter
            0.0120
            0.0180**Fiscal
                Year 2006**First
                Quarter
            0.0070
            0.0170Second
                Quarter
            0.0070
            0.0130Third
                Quarter
            0.0070
            0.0230Fourth
                Quarter
            0.0070
            0.0100





On
      August
      22, 2003, our common stock ceased to be quoted on the OTC Bulletin Board as
      a
      result of our failure to comply with the eligibility requirements of the OTC
      Bulletin Board in that we did not timely file our Annual Report on Form 10KSB
      for the year ended March 31, 2003. Between August 22, 2003 and August 2, 2004,
      our common stock had been quoted in the Pink Sheets LLC’s “Pink Sheets” under
      the symbol “DMEC.” Generally, quotations for securities included in the Pink
      Sheets are not listed in newspapers and may be more difficult to obtain. The
      Pink Sheets’ service enables market makers to display real time prices of
      equities, ADRs and foreign securities and is a quotation medium available with
      regard to the securities of issues that are unable to list their securities
      on
      NASDAQ or an exchange or have their securities quoted on the OTC Bulletin Board.
      Upon meeting the eligibility requirements of the OTC Bulletin Board, our stock
      commenced trading on the OTC Bulletin Board on August 2, 2004. On June 15,
      2006,
      the closing sales price for our common stock as reported in the OTC Bulletin
      Board was $0.0095. The above quotations reflect inter-dealer prices, without
      retail markup, markdown, or commission and may not represent actual
      transactions.





As
      of
      June 15, 2006 there were 2,496 holders of record of our common stock, and 4
      holders of record of our Series A Convertible Preferred Stock. As of March
      31,
      2004, there were 7 holders of record of our Series B Convertible Preferred
      Stock
      and on April 15, 2004, the 7 holders of record of our Series B Convertible
      Preferred Stock converted all their shares into the common stock of the Company.





The
      transfer agent for our common stock is Continental Stock Transfer & Trust
      Company, New York, New York.





8


Dividend
      Policy





We
      have
      never paid a cash dividend on our common stock. We intend to retain all
      earnings, if any, for use in our business operations and do not anticipate
      paying cash dividends on our common stock in the future. Declaration and payment
      of future dividends will be at the discretion of our board of directors.





Securities
      authorized for issuance under equity compensation plans:





2005
      Equity Compensation Program





On
      March
      1, 2005, the shareholders of the Company adopted its 2005 Equity Compensation
      Program (the "Program"). The Program is intended to secure for the Company,
      its
      direct and indirect present and future subsidiaries, including without
      limitation any entity which the Company reasonably expects to become a
      subsidiary (the "Subsidiaries"), and its shareholders, the benefits arising
      from
      ownership of the Company's Common Stock, no par value per share ("Common
      Stock"), by those selected directors, officers, key employees and consultants
      of
      the Company and the Subsidiaries who are responsible for future growth. The
      Program is designed to help attract and retain superior individuals for
      positions of substantial responsibility with the Company and the Subsidiaries
      and to provide these persons with an additional incentive to contribute to
      the
      success of the Company and the Subsidiaries.





In
      order
      to maintain flexibility in the award of benefits, the Program is comprised
      of
      two parts -- the Incentive Stock Option Program ("Incentive Plan"), and the
      Supplemental Stock Option Program ("Supplemental Plan"). Each such plan is
      referred to herein as a "Plan" and all such plans are collectively referred
      to
      herein as the "Plans." The grant of an option under one of the Plans shall
      not
      be construed to prohibit the grant of an option under any of the other Plans.





Unless
      any Plan specifically indicates to the contrary, all Plans is subject to the
      general provisions of the Program set forth below under the heading "General
      Provisions of the Equity Compensation Program" (the "General Provisions").





The
      Program is administered by the Board of Directors of the Company (the "Board"
      or
      the "Board of Directors") or any duly created committee appointed by the Board
      and charged with the administration of the Program. To the extent required
      in
      order to satisfy the requirements of Section 162(m) of the Internal Revenue
      Code of 1986, as amended (the "Code"), such committee shall consist solely
      of
      "Outside Directors" (as defined herein). The Board, or any duly appointed
      committee, when acting to administer the Program, is referred to as the "Program
      Administrator". Any action of the Program Administrator shall be taken by
      majority vote at a meeting or by unanimous written consent of all members
      without a meeting. No Program Administrator or member of the Board of the
      Company shall be liable for any action or determination made in good faith
      with
      respect to the Program or with respect to any option granted pursuant to the
      Program. For purposes of the Program, the term "Outside Director" shall mean
      a
      director who (a) is not a current employee of the Company or the
      Subsidiaries; (b) is not a former employee of the Company or the
      Subsidiaries who receives compensation for prior services (other than benefits
      under a tax-qualified retirement plan) during the then current taxable year;
      (c) has not been an officer of the Company or the Subsidiaries; and
      (d) does not receive remuneration (which shall be deemed to include any
      payment in exchange for goods or services) from the Company or the Subsidiaries,
      either directly or indirectly, in any capacity other than as a director, except
      as otherwise permitted under Code Section 162(m) and the regulations
      thereunder.





Subject
      to the other provisions of this Program, and with a view to effecting its
      purpose, the Program Administrator shall have the authority: (a) to
      construe and interpret the Program; (b) to define the terms used herein;
      (c) to prescribe, amend and rescind rules and regulations relating to
      the Program; (d) to determine the persons to whom options shall be granted
      under the Program; (e) to determine the time or times at which options
      shall be granted under the Program; (f) to determine the number of shares
      subject to any option under the Program as well as the option price, and the
      duration of each option, and any other terms and conditions of options; and
      (g) to make any other determinations necessary or advisable for the
      administration of the Program and to do everything necessary or appropriate
      to
      administer the Program. All decisions, determinations and interpretations made
      by the Program Administrator shall be binding and conclusive on all participants
      in the Program and on their legal representatives, heirs and beneficiaries.




9


The
      maximum aggregate number of shares of Common Stock issuable pursuant to the
      Program is 65,000,000 shares. No one person participating in the Program may
      receive options for more than 25,000,000 shares of Common Stock in any calendar
      year. All such shares may be issued under any Plan, which is part of the
      Program. If any of the options (including incentive stock options) granted
      under
      the Program expire or terminate for any reason before they have been exercised
      in full, the unissued shares subject to those expired or terminated options
      shall again be available for purposes of the Program. Any shares of Common
      Stock
      delivered pursuant to the Program may consist, in whole or in part, of
      authorized and unissued shares or treasury shares.




All
      directors, officers, employees and consultants of the Company and the
      Subsidiaries are eligible to participate in the Program. The term "employee"
      shall include any person who has agreed to become an employee and the term
      "consultant" shall include any person who has agreed to become a consultant.





The
      Program became effective March 1, 2005, when approved by the shareholders of
      the
      Company. The Program shall continue in effect for a term of ten years from
      the
      date that the Program is adopted by the Board of Directors, unless sooner
      terminated by the Board of Directors of the Company.





On
      June
      16, 2005, the Board of Directors of the Company approved the granting of
      58,100,000 options to purchase the Company's common stock under the Incentive
      Plan of the 2005 Equity Compensation Program to the select employees, officers,
      directors and a consultant of the Company expiring no later than 10 years from
      the date the options were granted. The effective date of such options being
      granted was June 16, 2005, at an exercise price of $.007 per share. Such stock
      options granted vest in three annual installments commencing one year after
      the
      date of grant. Options were granted, James Lu, the President, Jeffrey Schillen
      the Executive Vice President and Fred Odaka, Chief Financial Officer of the
      Company to purchase 25,000,000, 12,150,000 and 5,000,000 shares, respectively,
      and 5,000,000 and 2,500,000 options were granted to Murray Scott and Jerry
      Lan,
      respectively, who are Directors of the Company. The remaining balance of
      7,450,000 options was granted to six employees and one consultant of the
      Company. In October 2005, one employee terminated employment with the Company
      and subsequently in January 2006, 600,000 shares of such option granted were
      canceled. The Company claims exemption from registration of such issuance based
      on Section 4(2) of the Securities Act of 1933, as amended, inasmuch as the
      transaction was a non-public offering and sale of securities.





Equity
      Compensation Plan Information


As
      of
      June 16, 2006





Plan
                category
            Number
                of securities to be
              issued
                upon exercise of
              outstanding
                options, warrants
              and
                rights
            Weighted
                average exercise
              price
                of outstanding options,
              warrants
                and rights
            Number
                of securities
              remaining
                available for future
              issuance.(a)
            (b)
            (c)Equity
                compensation plans
              approved
                by security holders
            65,000,000
            $0.007
            7,500,000Equity
                compensation plans
              not
                approved by security
              holders
            --
            --
            -0-Total
            65,000,000
            $0.007
            7,500,000








2001
      Stock Compensation Plan





On
      July
      24, 2001, the Board of Directors of the Company adopted the Company's 2001
      Stock
      Compensation Plan dated July 13, 2001 for the purpose of providing the Company
      with a means of compensating selected key employees (including officers), and
      directors of the Company and its subsidiaries for their services rendered in
      connection with the development of Company with shares of Common Stock of the
      Company. The plan authorized the Board of Directors of the Company to sell
      or
      award up to 50,000,000 shares and/or non-qualified options of the Company's
      common stock, no par value at a purchase price of $0.006, which represented
      the
      fair value of the common stock on that date. On July 13, 2001, 50,000,000
      options to purchase the Company's common stock were granted to the select key
      employees, officers and a director of the Company expiring on July 12, 2004.
      Of
      such options granted, James Lu, the President and Jeffrey Schillen the Executive
      Vice President of the Company were granted options to purchase 20,000,000 and
      10,000,000 shares, respectively, and 5,000,000 options were granted to Murray
      Scott, a Director of the Company. The remaining balance of 15,000,000 options
      was granted to eight other employees of the Company. As of March 31, 2004,
      none
      of the options granted under this plan had been exercised and on July 12, 2004,
      all 50,000,000 options expired and were canceled.





10


Recent
      Sales of Unregistered Securities





On
      July
      13, 2001, 50,000,000 options to purchase the Company's common stock were granted
      to the selected key employees, officers and a director of the Company expiring
      on July 12, 2004 pursuant to the 2001 Compensation Plan.
      As
      of March 31, 2004, none of the options granted under this plan had been
      exercised and on July 12, 2004, all 50,000,000 options expired and were
      canceled.





On
      July
      24, 2001, the Board of Directors of the Company authorized and approved, that
      it
      was in the best interest of the Company that the exercise rate ranging from
      $0.05 to $0.25 of outstanding options granted to the Company's key employees,
      officers and directors during the period from April 1996 through May 1999 in
      the
      aggregate amount of 11,675,000 shares be amended and lowered to $0.005. Such
      outstanding options to purchase the Company's common stock included options
      granted to James Lu, Jeffrey Schillen, Murray Scott and three key employees
      of
      the Company of 9,100,000, 2,150,000, 250,000, and 175,000 shares, respectively.
      The Board of Directors further authorized and approved the extension of such
      options granted to James Lu and Jeffrey Schillen in the amount 600,000 and
      400,000 shares, respectively, to April 22, 2004. On March 31, 2003, 2,000,000
      options granted to the Company’s President on July 24, 2001 expired and such
      options were canceled. All of the remaining options except for 250,000 options
      issued to Murray Scott expired during the year ended March 31, 2005 and were
      canceled. Murray Scott’s options for 250,000 shares were outstanding as of March
      31, 2005 and has an expiration date of August 24, 2005.





On
      November 16, 2001, the Company's Board of Directors approved and the Company
      granted the Company's President, options to purchase 14,500,000 shares of the
      Company's common stock for his waiving his exercise rights to 29,000,000 options
      that were previously granted and for his part in the successful sale of the
      Company's Series B Preferred Shares. The President waived his exercise rights
      to
      exercise options previously granted to meet the terms of the reserve requirement
      clause for the sale of the Company's Series B Preferred stock. The options
      granted to the President on November 16, 2001, are exercisable at $0.006 per
      share at such time permitted by the Company's Series B Preferred Shares reserve
      clause. The options expire 5 years from the date of grant.





On
      November 16, 2001, the Company amended its articles of incorporation to
      authorize the issuance of 87 shares of no par value, Series B Convertible
      Preferred Stock with a stated value of $10,000 per share. This new issuance
      was
      created out of the 5,000,000 shares of authorized, no par value, preferred
      stock. These shares are convertible at the lesser of $.02 or 70% of the average
      of the closing bid prices of our common stock on any five trading days during
      the conversion of the Series B Convertible Preferred Shares.





On
      November 16, 2001, the Company entered into a Securities Purchase Agreement
      ("Securities Purchase Agreement") with four investors. Pursuant to the
      Securities Purchase Agreement, the Company issued and sold 58 shares of its
      Series B Convertible Preferred Stock at the stated value of $10,000 per share
      for total consideration of $580,000.





On
      November 16, 2001, in connection with the sale of 58 shares of the Company's
      Series B Preferred Stock to four investors, the Company issued warrants to
      purchase an aggregate of 8,700,000 shares of the Company's Common Stock to
      such
      investors at an exercise price per share equal to $0.02, expiring on November
      15, 2006. The purchase rights represented by the warrants may be exercised
      in
      whole or in part at any time and from time to time during the term commencing
      on
      November 16, 2001.





On
      January 30, 2002, the Company entered into a Securities Purchase Agreement
      with
      three investors and a Securities Replacement Agreement with another investor
      who
      held a convertible debenture issued by the Company in the amount of $100,000
      plus interest of $30,000. Pursuant to such agreements the Company issued 29
      shares of its Series B Convertible Preferred Stock at the stated value of
      $10,000 per share for a total consideration of $290,000. The convertible
      debenture held by the investor was canceled on January 30, 2002. All of the
      18
      above shares were issued under the exemption from registration provided by
      Regulation D Rule 506.





11


On
      January 30, 2002, in connection with the sale of 15 shares of the Company's
      Series B Preferred Stock to one investor, the Company issued warrants to
      purchase an aggregate of 2,250,000 shares of the Company's Common Stock to
      the
      investor at an exercise price per share equal to $0.02, expiring on January
      30,
      2007. The purchase rights represented by the warrants may be exercised in whole
      or in part at any time and from time to time during the term commencing on
      January 30, 2002.





The
      Board
      of Directors on February 28, 2002, authorized and approved the extension of
      options previously granted to Messrs. Lu, Schillen and Scott to purchase
      3,000,000,750,000 and 250,000 shares, respectively, for an additional three
      years at $0.005 per share. Of such options, Messrs Lu's and Schillen's options
      were extended to March 31, 2005 and Mr. Scott's option was extended to August
      24, 2005. As of March 31, 2005, the options issued to Messrs Lu and Schillen
      expired on March 31, 2005 and were canceled.





On
      May 6,
      2002, one share of the Company's Series B Preferred Stock was converted into
      1,351,351 shares of the Company's common stock at the conversion price of
      $0.0074 per share.





On
      May
      23, 2002, two shares of the Company's Series B Preferred Stock were converted
      into 3,174,603 shares of the Company's common stock at the conversion price
      of
      $0.0063 per share.





On
      February 11, 2003, an investor converted one-half of a Series B Convertible
      Preferred Share into 4,204,955 shares of the Company’s common stock at a
      conversion price of $.00127 per share.





On
      June
      27, 2003, an investor converted one share of a Series B Convertible Preferred
      Share into 7,692,308 shares of the Company’s common stock at a conversion price
      of $.0013 per share.





On
      March
      26, 2004, the Company issued warrants to purchase 35,000,000 of the Company’s
      common stock at an exercise price of $0.012 per share pursuant to a Common
      Stock
      Purchase Warrant Agreement entered into with one of the investors of the
      Company. Such warrants will expire 5 years from the issue date and are
      exercisable any time through the expiration date and is subject to the Company’s
      shareholders having increased the number of authorized common shares.





On
      March
      29, 2004, three holders of record of the Company’s Series B Convertible
      Preferred Shares representing an aggregate of 25 Series B Convertible Preferred
      Shares entered into a Letter Agreement to Convert Preferred Shares, whereby
      such
      holders of the Series B Convertible Preferred Shares agreed to convert their
      respective shares and any liquidated damages and accrued interest in the
      aggregate amount of approximately $50,000 into shares of the Company’s common
      stock at $0.01 per share. The holders further agreed to exercise their portion
      of any liquidated damages and accrued interest such time the stockholders of
      the
      Company approved the increase in the authorized shares of the Company. As part
      of this letter agreement such holders canceled and returned to the Company
      warrants to purchase 2,250,000 shares the Company’s common stock at a price $.02
      per share issued to them in conjunction with the Series B Convertible Preferred
      Shares at the closing of such agreement on April 15, 2004.





On
      March
      31, 2004, four holders (the “Sellers”) of record of the Company’s Series B
      Convertible Preferred Shares representing an aggregate of 571⁄2 Series B
      Convertible Preferred Shares entered into a Securities Purchase Agreement to
      sell all of their respective portion of the Company’s Series B Convertible
      Preferred Shares to two accredited investors, (the “Buyers”). Under the terms of
      the Securities Purchase Agreement the Buyers converted their respective shares
      of the Company’s Series B Convertible Preferred Shares into the shares of the
      Company’s common stock at $0.01 per share. The Sellers canceled and returned to
      the Company 8,700,000 warrants to purchase the Company’s common stock at price
      of $0.02 shares in conjunction with their respective Series B Convertible
      Preferred Shares at the closing date of such purchase agreement on April 15,
      2004. The Sellers further agreed to convert liquidated damages and accrued
      interest in the aggregate amount of approximately $181,000 into shares of the
      Company’s common stock at $0.01 per share after such time the stockholders of
      the Company approved the increase in the authorized shares of the Company.





12


On
      April
      1, 2004, the Company sold an aggregate of 22,500,000 shares of the Company’s
      common stock at a price of $0.01 per share pursuant to subscription agreements
      dated April 1, 2004, entered into with Jeffrey I Schillen, James Lu and Longview
      Fund LP, to purchase 2,500,000, 2,500,000 and 17,500,000 shares,
      respectively.





On
      April
      15, 2004, all outstanding shares of the Company’s Series B Preferred Stock in
      the aggregate amount of eighty two and one half shares representing an aggregate
      face value of $825,000 less $1,474.87 which was owed to the Company by one
      of
      the Series B Preferred shareholder were converted into 82,352,513 shares of
      the
      Company’s common stock at a conversion price of $0.01 per share.





On
      April
      15, 2004, the Company sold an aggregate of 3,500,000 shares of the Company’s
      common stock at a price of $0.01 per share to two of the Company’s consultants
      for consulting fees owed to the consultants in the aggregate amount of $35,000
      pursuant to consulting agreements entered into on December 3, 2001.


On
      October 22, 2004, one of the Company’s stockholders sold 2,265,000 shares of the
      Company’s common stock to the Company at a price of $.02 per share. The
      Shareholder owed the Company a note totaling $45,300, which the Company
      subsequently retired as consideration for the purchase of such shares of common
      stock it purchased from the stockholder.





On
      May 9,
      2005 the Board of Directors of the Company approved the issuance of 23,117,733
      shares of the Company’s common stock upon conversion liquidated damages and
      interest by the five shareholders totaling an aggregate of $231,177 which
      accrued connection with the sale of the Company’s Series B preferred shares, at
      the agreed upon conversion price of $0.01 per share. The Company was previously
      unable to issue such shares of common stock until the shareholders of the
      Company approved the increase in the authorized number of shares of common
      stock
      on March 1, 2005.





On
      June
      16, 2005, the Board of Directors of the Company approved the granting of
      58,100,000 options to purchase the Company's common stock under the Incentive
      Plan of the 2005 Equity Compensation Program to the select employees, officers,
      directors and a consultant of the Company expiring no later than 10 years from
      the date the options were granted. The effective date of such options being
      granted was June 16, 2005, at an exercise price of $.007 per share. Such stock
      options granted vest in three annual installments commencing one year after
      the
      date of grant. Of
      such
      options granted, James Lu, the President, Jeffrey Schillen the Executive Vice
      President and Fred Odaka, Chief Financial Officer of the Company were granted
      options to purchase 25,000,000, 12,150,000 and 5,000,000 shares, respectively,
      and 5,000,000 and 2,500,000 options were granted to Murray Scott and Jerry
      Lan,
      respectively, who are Directors of the Company. The remaining balance of
      7,450,000 options was granted to six employees and one consultant of the
      Company. In January 2006, the Company canceled 600,000 of such options granted
      to one employee who terminated employment in October, 2005.





Conversion
      of debt





On
      July
      24, 2001, the Board of Directors of the Company authorized and
      approved:





·
            the
                issuance of 140,343,755 shares of the company's common stock to American
                Top Real Estate, Inc. ("ATRE") upon the conversion by ATRE of the
                entire
                unpaid principal amount of $809,500 of its note and all accrued interest
                thereon in the amount of $102,734 at the conversion price of $0.0065
                per
                share as of the close of business on July 23,
                2001;





·
            the
                issuance of 12,343,150 shares of the Company's common stock to Mr.
                Lu, the
                President of the Company, upon conversion of his $50,000 note and
                accrued
                interest thereon in the amount of $11,715 at the conversion price
                of
                $0.005 per share. The aggregate amount of these shares was issued
                on
                August 14, 2001; and





·
            the
                issuance of 180,928,097 shares of the Company's common stock to GJ
                Products Corporation upon the conversion of the entire unpaid principal
                amount of $1,037,775 of its note and all accrued interest thereon
                in the
                amount of $138,257 at the conversion price of $0.0065 per share as
                of the
                close of business on July 23, 2001. These shares were issued on August
                14,
                2001.




13


ITEM
      6. MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.





(a)
            PLAN
                OF OPERATION





Our
      primary goal is to increase our revenues to generate operating profits and
      to
      expand our general merchandise business by sourcing low cost, high quality
      consumer products, while continuing to establish the Company as a recognized
      DVD
      and related product company specializing in educational, children and film
      classic titles.




Our
      short-term objectives are the following:





·
            Continue
                to expand our associations with firms in China to source and handle
                quality assurance functions for our general merchandise line of
                products.






·
            Re-establish
                sales to club type stores with our new general merchandise line of
                products.





·
            Capitalize
                on our extensive network of mass merchandisers as a way of becoming
                a
                major distributor in the general merchandise
                business.





·
            Increase
                our market segment percentage in the distribution DVD titles by offering
                a
                higher quality priced product than the products offered by our larger
                competitors.





·
            Continue
                expanding the overall market share of our core business by acquiring
                new
                DVD titles.





·
            Continue
                expanding into contract, duplication and fulfillment packaging
                business.





·
            Maintain
                and improve our service through improved turnaround
                time.





·
            Improve
                communications with our customer base by frequently maintaining and
                updating our web-site to keep up with current
                products.




The
      intermediate and long-term objectives:





The
      Company is presently implementing the following strategies in its effort to
      reach profitability and meet the above goals:





A.
            Enhance
                Retailer and Mass Merchandiser Client
                Base





1.
            Improve
                pricing and packaging innovations,





2.
            Establish
                ties with firms in China through existing relationships to source
                and
                handle Quality Assurance (“QA”) functions for our general merchandise line
                of product.





3.
            Introduce
                a wide selection of high quality, low price general merchandise products
                such as consumer electronic products, small office equipment and
                furniture
                from China.





4.
            Focus
                on marketing our new general merchandise products by re-establishing
                relationships with our club stores and mass
                merchandisers.





5.
            Improve
                efficiency in quick turnaround of product shipments.





B.
            Increase
                our Internet e-Commerce Customer
                Base





1.
            Maintain
                our competitive pricing.





2.
            Improve
                customer service procedures.





14


3.
            Establish
                a cost effective method for marketing and promoting our web-site
                (www.e-dmec.com).





4.
            Continue
                to seek viable new products to be added to our
                web-site.





5.
            Continue
                to up-date and improve our
                web-site.





6.
            Continue
                to implement marketing and sales programs on our web-site products
                using
                our new promotional campaigns to increase our revenue and profit
                margins.





C.
            Expand
                Duplication, Replication and Packaging Service
                businesses.





1.
            Improve
                efficiency and speed in fulfillment and packaging services.





2.
            Continue
                to seek associations with Chinese firms to penetrate into the DVD
                replication market by communicating to our potential contract customers
                the unique capabilities, experience and consistency of production
                capabilities provided and to penetrate into the large corporate
                segment.





3.
            Continue
                to market our ability to utilize our Sony high-speed sprinters to
                offer
                low cost, fast turn around, high quality in-house duplication
                services.





D.
            Seek
                potential merger/acquisition candidates in different business segments
                that logically compliment the Company’s style and
                business.





Uncertainties
      in reaching these objectives: Although we believe these objectives are possible
      to achieve, there can be no assurance that the above strategies will drive
      the
      business as desired or that in the present market conditions that our business
      will continue in a favorable direction.





We
      believe we have adequate cash resources to sustain our operations through the
      third quarter of fiscal 2007. We are continuing to negotiate with several
      reliable investors to provide us with debt and equity financing for working
      capital purposes. We are seeking potential merger or acquisition candidates
      that
      will help increase our revenues and cash liquidity. Our principal objective
      is
      to implement the above strategy in the remaining quarters in fiscal 2007, which
      the Company expects will lead to a profitable operation if these tasks are
      successfully implemented, subject to market and other conditions. Although
      we
      believe that the outlook is favorable, there can be no assurance that market
      conditions will continue in a direction favorable to our Company or that we
      will
      be able to attain these objectives during fiscal 2007 or at all.







(b)
      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





Year
      Ended March 31, 2006 as Compared to Year Ended March 31, 2005





Revenues
      for the years ended March 31, 2006 and 2005 were approximately $3,510,000 and
      $6,867,000, respectively. Our sales decreased by approximately $3,356,000 from
      the prior year with decreased DVD product and video product sales of
      approximately $2,604,000 and $752,000, respectively. The lower DVD and video
      product sales for the year ended March 31, 2006, were primarily the result
      of
      decreased orders from our major customers and the higher than normal rate of
      product returns during the holiday season. One major customer filed bankruptcy
      in January 2006, which contributed towards our lower sales levels. Sales of
      our
      products are generally seasonal resulting in increased sales starting in the
      third quarter of the fiscal year.





Cost
      of
      goods sold for the years ended March 31, 2006 and 2005 were approximately
      $3,139,000 and $4,038,000 or 89% and 59% of sales, respectively. The decrease
      in
      cost of sales of approximately $899,000 was primarily due to decreased sales
      volume of the Company’s products. The increase in the cost of sales as a
      percentage to sales of approximately 30% when compared the same period a year
      earlier was primarily the result of sales price erosion and inventory write
      downs of obsolete and slow moving product.





15


Our
      net
      loss for the year ended March 31, 2006 of approximately $1,651,000 arose
      primarily from our operating loss, compared to a net profit of approximately
      $416,000 for the same period last year.




For
      the
      years ended March 31, 2006 and 2005, gross margin was impacted by activity
      recorded the Company’s inventory reserve balance of approximately $521,000 and
      $384,000, respectively or approximately 15% and 6% of sales, respectively.
      The
      following are the components of the Company’s inventory balance together with
      the applicable reserve for each of the respective categories and
      periods:





Inventory
                By Classification:
            
            3/31/06
            
            3/31/05DVD
                Inventory
            
            
            $1,121,477
            
            
            $
                835,282Reserve
            
            
            (470,874
            )
            
            (66,383
            )Net
                DVD Inventory
            
            
            650,603
            
            
            768,899Video
                Inventory
            
            
            375,691
            
            
            424,381Reserve
            
            
            (284,371
            )
            
            (368,631
            )Net
                Video Inventory
            
            
            91,320
            
            
            55,749General
                Merchandise
              (Toys,
                Greeting Cards, & Misc.)
            
            
            6,511
            
            
            6,542Reserve
            
            
            (6,511
            )
            
            (6,500
            )Net
                General Merchandise
            
            
            -
            
            
            42TOTAL
                INVENTORY
            
            
            1,503,679
            
            
            1,266,205TOTAL
                RESERVE
            
            
            (761,756
            )
            
            (441,514
            )NET
                INVENTORY
            
            
            $741,923
            
            
            $824,691





The
      following table sets forth the impact on gross profit margin of activity
      recorded in our inventory reserve balance for the applicable year:





Inventory
                Reserve Detail:
            
            Fiscal
                YearEnded
                3/31/06
            
            Fiscal
                YearEnded
                3/31/05Beginning
                Balance
            
            
            $(441,514
            )
            
            $(228,479
            )Provision
                to Cost of Goods Sold
            
            
            (691,805
            )
            
            (384,116
            )Inventory
                write-off
            
            
            371,563
            
            
            171,081Ending
                Reserve Balance
            
            
            $(761,756
            )
            
            $(441,514
            )Net
                Sales
            
            
            $3,510,475
            
            
            $6,866,624Total
                Charged to Cost of Goods
            
            
            691,805
            
            
            384,116Impact
                to Gross Margin as aPercentage
                of sales
            
            
            19.7
            %
            
            5.6
            %




The
      increase in inventory reserve provision to cost of goods sold of approximately
      $692,000 as of March 31, 2006 consisted of approximately $506,000, $136,000
      and
      $50,000 in additional reserves required for assorted video product sleeve and
      DVD displays, non-recoverable consignment inventory due to a customer filing
      bankruptcy and provision for sales lower than the inventory carrying cost,
      respectively. The increase in the provision to cost of goods sold of
      approximately $384,000 as of March 31, 2005 consisted of approximately $323,000,
      $54,000 and $7,000 in additional reserves required for assorted video product
      sleeve, DVD displays and for general merchandise, respectively.




During
      the period ended March 31, 2006, the Company had write-offs to inventory
      reserves of approximately $372,000. The write-offs of approximately $267,000
      and
      $105,000 consisted of sales lower than the carrying cost of inventory and
      write-offs of obsolete assorted video and DVD products, respectively. The
      inventory write-off of approximately $171,000 in fiscal 2005 resulted from
      the
      disposition of obsolete videocassette sleeves inventory consisting of various
      titles in the areas of education, religious, classical movies, Xmas favorites,
      nature series, TV series, children’s programs and sports.




16


Gross
      profit for the years ended March 31, 2006 and 2005 were approximately $371,000
      and $2,828,000. The decrease of approximately $2,457,000 was primarily the
      result of lower sales volume when compared to the previous year. Gross margins
      as a percentage to sales were 11% and 41% of sales, for the period ended March
      31, 2006 and 2005, respectively. The decrease in the gross profit as a
      percentage of sales of 30% was primarily the result of lower average sales
      price
      for product sold, increase in unabsorbed direct labor and overhead costs
      together with additional provisions for slow moving inventory.




Total
      operating expenses for the years ended March 31, 2006 and 2005 were
      approximately $1,967,000 and $2,175,000, respectively. The decrease in operating
      expenses of approximately $208,000 was the result of decreased selling and
      marketing expenses and administrative expenses of approximately $99,000 and
      $109,000, respectively.





Selling
      and marketing expenses for the years ended March 31, 2006 and 2005 were
      approximately $890,000 and $989,000, respectively. The decrease in selling
      expenses of approximately $99,000 was attributable mainly to lower expense
      levels in salaries, sales commission expense and freight expense, offset by
      higher royalty expenses and sales promotion expense.





Administrative
      expenses for the years ended March 31, 2006 and 2005 were approximately
      $1,077,000 and $1,186,000, respectively. The decrease in administrative expenses
      of approximately $109,000 was primarily the result of decreased expense levels
      in salaries and wages, travel expense, payroll taxes, and corporate expenses,
      offset by higher bad debt expense and miscellaneous office expenses.





Loss
      on
      joint venture investment for the year ended March 31, 2005 was approximately
      $28,000. The Company wrote off its investment in a toy product joint venture
      partnership that had no prospect of selling its products in the
      future.





Interest
      expense for the years ended March 31, 2006 and 2005 were approximately $84,000
      and $207,000, respectively. The decreased in interest expense in fiscal 2006
      over fiscal 2005 of approximately $123,000 was primarily the result of lower
      levels of borrowings during fiscal 2006. As of March 31, 2006 and 2005, our
      outstanding debt was approximately $694,000 and $643,000 respectively. The
      increase of $49,000 in outstanding debt was primarily the result of decreased
      factoring of our trade accounts receivables, offset by increase in amounts
      due
      to related parties notes payable.





Our
      auditors issued a going concern report for the year ended March 31, 2006 and
      March 31, 2005. There can be no assurance that we will be able to generate
      profits over the next fiscal quarters or be successful in our efforts to obtain
      additional financing.





LIQUIDITY
      AND CAPITAL RESOURCES





General .
      The
      Company at March 31, 2006, had four primary sources of capital which include
      cash provided by operations, a factoring arrangement with a financial
      institution to borrow against the Company’s trade accounts receivable, short
      term borrowings, and funds derived from private investors. During the year
      ended
      March 31, 2006 the company recorded a negative cash flow of $444,000 compared
      to
      a positive cash flow of approximately $355,000 a year earlier. The decrease
      in
      the net cash flow of approximately $799,000 over fiscal 2005 resulted primarily
      from decreased cash provided by operating activities totaling approximately
      $1,909,000 offset by increases in net cash used in investing and financing
      activities totaling $1,110,000. Decreases in net income resulting from lower
      sales was the primarily reason for our decrease in cash flow.





The
      Company on May 2, 2006 terminated its factoring arrangements with its financial
      institution and on June 30, 2006, entered into a new financing arrangement
      with
      another financing institution for an accounts receivable revolving line of
      credit up to $250,000. The Company commenced reducing its operating expense
      in
      November of 2005 and during the third and forth quarters of fiscal year 2006
      implemented further reductions primarily in salaries and wages and other
      operating costs. During the year ended March 31, 2006, one of our major
      consignment customer filed Chapter 11 under the bankruptcy code, together with
      our largest customer having a poor holiday season and the overall lower levels
      of sales orders, negatively impacted our cash flow by approximately $1,000,000.
      The Company is anticipating sales to increase starting August of 2006 and
      through the holiday season, however, there can be no assurances that funds
      generated from operations will be adequate to meet the Company’s cash
      requirements nor will funds be available from short term borrowings or from
      private investors.




17


On
      March
      31, 2006 the Company had assets of approximately $1,581,000 compared to
      $2,663,000 on March 31, 2005. The Company had a total stockholder's deficit
      of
      approximately $1,656,000 on March 31, 2006, compared to a deficiency
      of approximately $238,000 on March 31, 2005, an increase of approximately
      $1,418,000. The increase in stockholders' deficit for the year ended March
      31,
      2006 was primarily the result the Company’s increase in its accumulated
      deficit.





As
      of
      March 31, 2006 the Company's working capital deficit increased by approximately
      $1,216,000 from a working capital deficit of approximately $1,036,000 at March
      31, 2005, to a working capital deficit of approximately $2,251,000 at March
      31,
      2006. The increase in working capital deficit was attributable primarily to
      decrease in current assets totaling approximately $875,000 and increases in
      current liabilities of approximately $341,000.




Net
      cash
      flow used operating activities was approximately $469,000 during the year ended
      March 31, 2006, compared to approximately $1,440,000 net cash provided by
      operating activities for the same period a year earlier. The decrease of
      approximately $1,909,000 was primarily **** attributable
      to decreases in net income. Net cash used in investing activities were
      approximately $225,000 and $572,000 for fiscal 2006 and 2005, respectively.
      The
      decrease of approximately $347,000 resulted primarily from lower purchases
      of
      property and equipment, film masters and artwork.





The
      Company during the year ended March 31, 2006, realized cash flows provided
      by in
      financing activities of approximately $250,000 resulting primarily from the
      sales of common stock. During the year ended March 31, 2005, cash used by
      financing activities totaled approximately $513,000, primarily for the
      reductions in cash overdraft, repayment of notes payable and decrease in amount
      due factor, offset by the sale of common stock.





Factoring
      Agreements .
      On
      August 30, 1996, the Company entered into a financing agreement with a financial
      institution for a maximum borrowing of up to $2,500,000. The agreement calls
      for
      a factoring of the Company's accounts receivable, and an asset-based note
      related to the Company's inventories. Subsequently, on October 29, 1999, the
      financial institution sold its financing agreement covering the factoring of
      the
      Company's accounts receivable to a factoring institution located in Dallas,
      Texas. The original financial institution retained the asset-based note related
      to the Company's inventories which was subsequently retired by the Company.
      Substantially all assets of the Company were pledged as collateral for the
      borrowings.





The
      factoring company advances to the Company 80% of the total amount of accounts
      receivable factored, less a factoring discount and nominal handling fees. The
      factor retains 20% of the outstanding factored accounts receivable as a reserve,
      which is held by the factoring company until the customer pays the factored
      invoice to the factoring company. The cost of funds for the accounts receivable
      portion of the borrowings with the factor is a 1.5% discount from the stated
      pledged amount of each invoice for every 30 days the invoice is outstanding.
      Factored accounts receivable past due more than sixty day from the payment
      date
      are charged against the 20% reserve balance held by the factor.





The
      inventory portion of the borrowings was determined by the lesser of i) $800,000,
      ii) 25% of our finished toy inventory or iii) 55% of the clients finished
      videotape inventory. The cost of funds for the inventory portion of the
      borrowings was at 1.4% per month on the average loan balance each month. During
      the year ended March 31, 2003, the inventory portion of the borrowings of
      $103,777 together with all accrued interest was paid in full.





On
      May 2,
      2005, the Company terminated its financing agreement with the financial
      institution and all obligations owed under the financing agreement were
      satisfied and paid in full as of June 30, 2006.





Accounts
      Receivable Revolving Loan Agreement. On June
      30, 2006, the Company entered into an Accounts Receivable Revolving Loan
      Agreement (“Agreement”) with financial institution located in San Francisco, CA
      for a revolving accounts receivable line of credit up to $250,000 for a term
      expiring in twelve months from the date of inception. Under the terms of the
      Agreement, the Company can borrow up to $250,000 against the Company’s accounts
      receivable of irrevocable sales made to its customer, excluding any consignment
      sales or any non-irrevocable sales. The Company is advanced 75% of the face
      value of the accounts receivable presented for borrowing. The cost of funds
      borrowed under the Agreement is at 1.67% per month of the outstanding accounts
      receivable balance presented for borrowing calculated on a daily basis. Cost
      of
      Funds borrowed against any accounts receivable in amounts exceeding 75% of
      its
      face value is at 2% per month calculated on a daily basis. At the end of each
      month any excess funds available against the Company’s qualified accounts
      receivable net of cash receipts from the customer will be advanced to the
      Company. The loan Agreement may be terminated by the lender by giving the
      Company 30 days written notice.





18


As
      of
      March 31, 2006, the Company recorded on its balance sheet, accounts receivable
      of approximately $154,000 net of allowance for doubtful accounts of
      approximately $148,000. Approximately $45,000 represented factored accounts
      receivable. Additionally, at March 31, 2006, the Company recorded as a current
      liability approximately $33,000 in outstanding factored receivables due factor.
      This liability consisted of approximately $45,000 in factored receivables owed
      to the factor less the 20% reserve held by the factor of approximately $12,000.
      All of the accounts receivable as of March 31, 2006 and 2005 have been pledged
      as collateral under the factoring agreement. On May 2, 2006, the Company
      terminated its factory agreement with the factoring institution.




Related
      Party Loan .
      At year
      ended March 31, 2006, the Company owed its principal shareholder, American
      Top
      Real Estate Co., Inc. ("ATRE"), approximately $597,000. During the year ended
      March 31, 2005, ATRE advanced funds totaling approximately $403,000 and the
      Company paid back approximately $100,000 in principal and interest.
      Borrowed funds were utilized as working capital to primarily purchase inventory
      required to support the sales during peak periods. The balance owed to ATRE
      at
      March 31, 2005 was approximately $278,000.




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 50% of the issued and outstanding
      common stock of ATRE. Subsequent loan participation by the investors in ATRE
      reduced the Company's shareholder interest to 7.67%. The Company's 2003
      operations include a write-down of its investment in ATRE, which reduced the
      Company's investment in ATRE to zero, net of taxes. The Company’s equity
      investment in ATRE was written off due to the Company’s recognition of its share
      of operating losses experienced by ATRE from the real property owned by it,
      notwithstanding the potential value of the real property, in accordance with
      equity accounting. As a consequence, the Company's future financial results
      will
      not be negatively affected by ATRE's ongoing operations. The Company has no
      obligation to fund future operating losses of ATRE.





Although
      ATRE reported operating losses, it had cash available for investing, and agreed
      in 1996 to establish a $1,000,000 revolving line of credit for the Company
      at
      interest ranging from 10% to 14% per annum. The line of credit was provided
      in
      recognition of the services provided by the Company through Mr. James Lu in
      assisting to structure ATRE’s lucrative real estate projects. Mr. Lu, an officer
      and director of the Company, serves as a director of ATRE. The Company does
      not
      anticipate a demand by ATRE for repayment of its loan to the Company in the
      near
      future.





Funds
      Derived From Private Investors .
      For
      year ended March 31, 2006, the Company raised net cash proceeds for the sale
      of
      its common stock totaling approximately $238,000. During the year ended March
      31, 2005, the Company derived net cash proceeds from the sale of its common
      stock totaling approximately $130,000 which was offset by purchasing
      approximately $15,000 of it common stock from a shareholder.





During
      fiscal year 2004, the Company was in default under certain provisions of the
      Securities Purchase Agreements entered into during fiscal years 2001 and 2002
      in
      connection with the sale of 87 shares of its Series “B” Convertible Preferred
      Shares. To mitigate the potential impact of the default, the Company, on April
      15, 2004, concluded several transactions that converted all the outstanding
      shares of the Company’s Series B Convertible Preferred Shares, noted as
      follows:





Three
      holders of record of the Company’s Series B Convertible Preferred Shares
      representing an aggregate of 25 Series B Convertible Preferred Shares entered
      into a “Letter Agreement to Convert Preferred Shares”, whereby such holders of
      the Series B Convertible Preferred Shares agreed to convert their respective
      shares and any liquidated damages and accrued interest in the aggregate amount
      of approximately $50,000 into shares of the Company’s common stock at a
      conversion price of $0.01 per share. The holders further agreed to exercise
      their portion of any liquidated damages and accrued interest of $50,000 when
      the
      stockholders of the Company approved the increase in the authorized shares
      of
      the Company. As part of this letter agreement such holders canceled and returned
      to the Company warrants to purchase 2,250,000 shares the Company’s common stock
      at a price $.02 per share issued to them in conjunction with the Series B
      Convertible Preferred Shares.





19


Four
      holders (the “Sellers”) of record of the Company’s Series B Convertible
      Preferred Shares representing an aggregate of 571⁄2 Series B Convertible Preferred
      Shares entered into a “Securities Purchase Agreement” to sell all of their
      respective portion of the Company’s Series B Convertible Preferred Shares to two
      accredited investors, (the “Buyers”). Under the terms of the Securities Purchase
      Agreement the Buyers agreed to convert their respective shares of the Company’s
      Series B Convertible Preferred Shares into the shares of the Company’s common
      stock at $0.01 per share. The Sellers canceled and returned to the Company
      8,700,000 warrants to purchase the Company’s common stock at price of $0.02
      shares in conjunction with their respective Series B Convertible Preferred
      Shares at the closing date of such purchase agreement on April 15, 2004. The
      Sellers further agreed to convert liquidated damages and accrued interest in
      the
      aggregate amount of approximately $181,000 into shares of the Company’s common
      stock at $0.01 per share as soon as the stockholders of the Company approve
      the
      increase in the authorized shares of the Company.





On
      May 9,
      2005 the Board of Directors of the Company approved the issuance of 23,117,733
      shares of the Company’s common stock upon conversion liquidated damages and
      interest by the five shareholders totaling an aggregate of $231,177 which
      accrued connection with the sale of the Company’s Series B preferred shares, at
      the agreed upon conversion price of $0.01 per share. The Company was previously
      unable to issue such shares of common
      stock until the shareholders of the Company approved the increase in the
      authorized number of shares of common stock on March 1, 2005.In connection
      with
      the restructuring of the terms of the recent “Letter of Agreement to Convert
      Preferred Shares” and “Securities Purchase Agreement”, entered into by the
      previous holders of the 821⁄2 shares of the Company’s Series B Convertible, the
      Company has recorded as of March 31, 2005, an aggregate amount of approximately
      $231,000 of accrued interest and liquidated damages. In order to convert such
      accrued interest and liquidated damages.





Future
      Capital Requirements .
      Based
      on recent performance and estimates regarding product to be available in fiscal
      2007, management at the time of this report us uncertain as to the estimated
      cash to be generated from operations for fiscal year 2007. Based on this
      information the Company has reduced its operating cash expenditures to be in
      line with its current revenue levels. Future funds required is not certain,
      and
      the Company is currently developing its cash forecast based on a complete review
      of current active customers requirements for the balance of the current fiscal
      year. Other future cash requirement may arise such as potential cost of
      unforeseen litigation, additional working capital requirement for inventory
      purchase in the event of increased sales exceeding our proposed forecast and
      other unexpected expenditures. During peak cash requirement periods, the Company
      plans to borrow short term funds from private lenders and pay them back during
      periods when cash balances are adequate. In addition the Company is actively
      seeking a merger candidate to raise equity capital.





The
      Company may be unable to effectuate any equity financing until it has increased
      its authorized shares of common stock and/or effected a restructuring of its
      equity capital, such as by means of a stock split, combination or similar
      restructuring.








GOING
      CONCERN





During
      the years ended March 31, 2006 and 2005, our independent auditors’ reports
      contained a going concern qualification and we have included the following
      plan
      of operation to address such concerns. As reflected in the accompanying
      consolidated financial statements, the Company has incurred recurring losses
      from operations, negative cash flows from operations, a working capital deficit
      and is delinquent in payment of certain accounts payable. Moreover, the Company
      may have difficulty raising additional equity capital prior to increasing the
      number of authorized shares the reasons discussed above. These matters raise
      substantial doubt about the Company’s ability to continue as a going concern. In
      view of the matters described in the preceding paragraph, recoverability of
      a
      major portion of the recorded asset amounts shown in the accompanying
      consolidated balance sheet is dependent upon continued operations of the
      Company, which, in turn, is dependent upon the Company’s ability to continue to
      raise capital and generate positive cash flows from operations. The consolidated
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts or amounts and
      classifications of liabilities that might be necessary should the Company be
      unable to continue its existence.





20


CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES





Management's
      Discussion and Analysis or Plan of Operations of Financial Condition and Results
      of Operations discusses the Company's consolidated financial statements, which
      have been prepared in accordance with accounting principles generally accepted
      in the United States of America. The preparation of these financial statements
      requires management to make estimates and assumptions that affect the reported
      amounts of


assets
      and liabilities at the date of the financial statements and the reported amounts
      of revenues and expenses during the reporting period. On an on-going basis,
      management evaluates its estimates and judgments, including those related to
      revenue recognition, financing operations, and contingencies and
      litigation.





The
      Company’s most difficult, subjective or complex judgment evolves around the
      recognition of revenues, allowance for doubtful accounts and its inventory
      reserve for obsolescence.


In
      most
      cases, the Company recognizes sales when its products are shipped to customers.
      In all other instances, the Company sells its products on consignment. Upon
      historical reviews of customer product returns, sales are shown net of estimated
      returns and allowances. Consignment sales are recognized at the time the
      consignee sells and delivers consignment goods to end customers. The
      Company receives from its consignment customers each month, a report showing
      the
      unit quantities and prices by part number of its beginning consignment inventory
      balance, together with the monthly inventory sold, inventory returned, inventory
      purchased and the month end inventory balance. The Company reviews such reports
      for correctness each month.





Generally,
      all accounts receivables that meet the credit requirements and terms of our
      factoring agreement are factored and the Company independently approves credit
      limits for those accounts receivables that are not factored. The Company
      establishes an allowance for uncollectible accounts based on historical write
      offs rates for uncollectible accounts and product return for both factored
      and
      non-factored accounts receivables. The allowance for uncollectible accounts
      is
      adjusted on a monthly basis to reflect current trends and any outstanding
      product return authorizations issued to our customers.





The
      Company periodically examines the contents of its physical inventory and
      conducts an analysis of past and current sales activity in each of its inventory
      categories. Management from marketing and operations review such examinations
      of
      the inventory contents and approves the reserving and/or disposition of idle
      inventory, based on one or more of the following reasons:





·
            Idle
                or slow moving inventory


·
            Reduced
                sales activity


·
            No
                assurance of future sales


·
            Obsolete
                inventory.


·
            Damaged
                inventory.




Management
      bases its estimates and judgments on historical experience and on various other
      factors that are believed to be reasonable under the circumstances, the results
      of which form the basis for making judgments about the
      carrying value of assets and liabilities that are not readily apparent from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. The most significant accounting estimates inherent
      in
      the preparation of the Company's financial statements include estimates as
      to
      the appropriate carrying value of certain assets and liabilities which are
      not
      readily apparent from other sources, primarily allowance for doubtful accounts,
      and inventory valuation allowance. These accounting policies are in the notes
      to
      the consolidated financial statements included in this Annual Report on Form
      10-KSB.








21


ITEM
      7. FINANCIAL
      STATEMENTS





The
      report of independent auditors and financial statements are set forth in this
      report beginning on Page F-1.








22





**Diamond
      Entertainment Corporation and Subsidiaries**


**Consolidated
      Financial Statements**


**March
      31, 2006 and 2005**







**C
      O N T E N T S**





Independent
                  Auditors' Report
              F-2Consolidated
                  Balance Sheets
              F-3
                  to F-4Consolidated
                  Statements of Operations
              F-5Consolidated
                  Statements of Stockholders' Equity
              F-6Consolidated
                  Statements of Cash Flows
              F-7
                  to F-8Notes
                  to Consolidated Financial Statements
              F-9
                  to F-38





F-1




**INDEPENDENT
      AUDITORS' REPORT**





**To
      the stockholders and Board of Directors of**


**Diamond
      Entertainment Corporation**





We
      have
      audited the accompanying consolidated balance sheets of Diamond Entertainment
      Corporation and Subsidiaries as of March 31, 2006 and 2005, and the related
      consolidated statements of operations, stockholders' equity and cash flows
      for
      the years then ended. 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 the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits include consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for expressing an opinion on the
      effectiveness of the Company's internal control over financial reporting.
      Accordingly, we express no such opinion. An audit includes examining, on a
      test
      basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      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, 2006 and 2005, and
      the consolidated results of their operations and their cash flows for the years
      then ended, in conformity with accounting principles generally accepted in
      the
      United States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 2 to the
      consolidated financial statements, the Company has incurred substantial losses
      and negative cash flows from operations during the year ended March 31,
      2006. These matters, as well as the capital deficit incurred, raise
      substantial doubt about its ability to continue as a going concern. Management's
      plans concerning these matters are also discussed in Note 2. These consolidated
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.








/s/
      Pohl,
      McNabola, Berg and Company, LLP


Irvine,
      California


June
      30,
      2006





F-2


**DIAMOND
      ENTERTAINMENT CORPORATION AND SUBSIDIARIES**


**Consolidated
      Balance Sheets**


**as
      of March 31, 2006 and 2005**




2006
            
            2005**Assets**Current
                AssetsCash
                and cash equivalents
            
            $
            20,578
            
            $
            464,425Accounts
                receivable, net of allowance for doubtful accounts of$148,028
                and $32,114 in 2006 and 2005, respectively
            
            
            154,139
            
            
            481,450Inventory,
                  net of valuation allowance of $761,756 and $441,514 in 2006 and
                  2005,respectively
            
            
            741,923
            
            
            824,691Due
                from related parties
            
            
            4,845
            
            
            10,392Prepaid
                expenses and other current assets
            
            
            58,317
            
            
            73,643Total
                Current Assets
            
            
            979,802
            
            
            1,854,601Property
                and Equipment, net of accumulateddepreciation
                of $914,528 and $835,095 in 2006 and 2005, respectively
            
            
            163,421
            
            
            177,854Film
                Masters and Artwork , net of accumulatedamortization
                of $4,893,503 and $4,541,679 in 2006 and 2005,
                respectively.
            
            
            409,540
            
            
            556,013Other
                Assets
            
            
            28,483
            
            
            74,124Total
                Assets
            
            $
            1,581,246
            
            $
            2,662,592








**The
      accompanying notes are an integral part of these financial
      statements.**





F-3


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Consolidated
        Balance Sheets (Continued)**
 **as
        of March 31, 2006 and 2005**






2006
            
            2005**Liabilities
                and Stockholders' Deficit**Current
                LiabilitiesBank
                overdraft
            
            $
            34,781
            
            $
            61,498Accounts
                payable
            
            
            991,996
            
            
            260,457Related
                party - deferred compensation
            
            
            997,051
            
            
            874,546Other
                accrued expense
            
            
            351,155
            
            
            576,101Provision
                for estimated sales returns
            
            
            152,000
            
            
            461,785Due
                to factor
            
            
            32,929
            
            
            304,110Notes
                payable - current portion
            
            
            3,789
            
            
            6,946Due
                to related parties - notes payable
            
            
            650,874
            
            
            328,374Customer
                deposits
            
            
            16,300
            
            
            16,300Total
                Current Liabilities
            
            
            3,230,875
            
            
            2,890,117Notes
                payable, less current portion
            
            
            6,315
            
            
            10,734Total
                Liabilities
            
            
            3,237,190
            
            
            2,900,851Stockholders'
                DeficitConvertible
                preferred stock, no par value; 4,999,863shares
                authorized in 2006 and 2005, respectively; 483,251issued
                (of which 172,923 are held in treasury)
            
            
            376,593
            
            
            376,593Treasury
                stock
            
            
            (48,803
            )
            
            (48,803
            )Series
                A convertible preferred stock, $10,000 per sharestated
                value; 50 shares authorized; 40 issued and outstanding
            
            
            471,400
            
            
            471,400Common
                stock, no par value; 800,000,000, and 600,000,000 sharesauthorized;
                618,262,605 and 595,144,872 issued and outstandingin
                2006 and 2005, respectively
            
            
            18,807,939
            
            
            18,569,762Deferred
                Compensation - stock option
            
            
            (5,060
            )
            
            -Accumulated
                deficit
            
            
            (21,258,013
            )
            
            (19,607,211
            )Total
                Stockholders' Deficit
            
            
            (1,655,944
            )
            
            (238,259
            )Total
                Liabilities and Stockholders' Deficit
            
            $
            1,581,246
            
            $
            2,662,592





**The
      accompanying notes are an integral part of these financial
      statements.**





F-4


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Consolidated
        Statements of Operations**
 **For
        the Years Ending March 31, 2006 and 2005**




2006
            
            
            2005IncomeRevenues
            
            $
            3,510,475
            
            $
            6,866,624Cost
                of goods sold
            
            
            3,139,461
            
            
            4,038,419Gross
                Profit
            
            
            371,014
            
            
            2,828,205Operating
                ExpensesSelling
                and marketing expenses
            
            
            889,999
            
            
            988,527Administrative
                expenses
            
            
            1,076,749
            
            
            1,186,189Total
                Operating Expenses
            
            
            1,966,748
            
            
            2,174,716Income
                (Loss) from Operations
            
            
            (1,595,734
            )
            
            653,489Other
                Income and ExpenseLoss
                on joint venture investment
            
            
            -
            
            
            (28,158
            )Other
                income (expense)
            
            
            31,916
            
            
            2,311Interest
                income
            
            
            942
            
            
            8,723Interest
                expense
            
            
            (83,926
            )
            
            (207,251
            )Total
                Other Income and Expense
            
            
            (51,068
            )
            
            (224,375
            )Income
                (Loss) Before Provision for Income Taxes
            
            
            (1,646,802
            )
            
            429,114Provision
                for Income Taxes
            
            
            (4,000
            )
            
            (13,170
            )Net
                Income (Loss)
            
            $
            (1,650,802
            )
            $
            415,944Earning
                Per ShareBasic
            
            $
            (0.00
            )
            $
            0.00Diluted
            
            $
            (0.00
            )
            $
            0.00Number
                of shares used in calculation of earnings per shareBasic
            
            
            615,855,827
            
            
            593,789,050Diluted
            
            
            615,855,827
            
            
            639,016,907







**The
      accompanying notes are an integral part of these financial
      statements.**





F-5


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Consolidated
        Statements Of Stockholders’ Equity**
 **For
        the Years Ending March 31, 2006 and 2005**




Convertible
                Preferred Stock
            
            Series
                A Convertible Preferred Stock
            
            Series
                B Convertible Preferred Stock
            
            Common
                Stock
            
            Accumulated
                Deficit
            
            Treasury
                Stock and Deferred Compensation
            
            Total
                Stockholders' DeficitBalance
                at March
              31,
                2004
            
            
            483,251
            
            $
            376,593
            
            
            40
            
            $
            471,400
            
            
            83
            
            $
            1,101,837
            
            
            489,057,359
            
            $
            17,319,122
            
            $
            (19,992,577
            )
            $
            (48,803
            )
            $
            (772,428
            )Issuance
                of common stock for:Consulting
                services
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,500,000
            
            
            35,000
            
            
            -
            
            
            -
            
            
            35,000Cash
                subscription
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            22,500,000
            
            
            225,000
            
            
            -
            
            
            -
            
            
            225,000Conversion
                of Series B Preferred shares
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (83
            )
            
            (1,101,837
            )
            
            82,352,513
            
            
            1,100,363
            
            
            -
            
            
            -
            
            
            (1,474
            )Financing
                Fees in Connection with Series B Preferred shares
                conversion
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (95,000
            )
            
            -
            
            
            -
            
            
            (95,000
            )Retirement
                of Common Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,265,000
            )
            
            (14,723
            )
            
            (30,578
            )
            
            -
            
            
            (45,301
            )Net
                Profit
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            415,944
            
            
            -
            
            
            415,944Balance
                at March
              31,
                2005
            
            
            483,251
            
            $
            376,593
            
            
            40
            
            $
            471,400
            
            
            -
            
            $
            -
            
            
            595,144,872
            
            $
            18,569,762
            
            $
            (19,607,211
            )
            $
            (48,803
            )
            $
            (238,259
            )Issuance
                of common stock for:Conversion
                of dividends and penalties of Series B Preferred shares
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            23,117,733
            
            
            231,177
            
            
            -
            
            
            -
            
            
            231,177Stock
                Options for Consultant
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            7,000
            
            
            -
            
            
            -
            
            
            7,000Deferred
                compensation Stock Option - Consultant
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            
            
            
            -
            
            
            (6,806
            )
            
            (6,806
            )Amortization
                of Deferred compensation Stock Option
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            1,746
            
            
            1,746Net
                Loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            
            
            
            (1,650,802
            )
            
            -
            
            
            (1,650,802
            )Balance
                at March
              31,
                2006
            
            
            483,251
            
            $
            376,593
            
            
            40
            
            $
            471,400
            
            
            -
            
            $
            -
            
            
            618,262,605
            
            $
            18,807,939
            
            $
            (21,258,013
            )
            $
            (53,863
            )
            $
            (1,655,944
            )





**The
      accompanying notes are an integral part of these financial
      statements.**





F-6


**DIAMOND
      ENTERTAINMENT CORPORATION AND SUBSIDIARIES**


**Consolidated
      Statements Of Cash Flows**


**For
      the Years Ending March 31, 2006 and 2005**




2006
            
            
            2005Cash
                Flows from Operating Activities:Net
                income
            
            $
            (1,650,802
            )
            $
            415,944Adjustments
                to reconcile net income to net cashprovided
                by operating activitiesDepreciation
                and amortization
            
            
            431,257
            
            
            292,439Provision
                for doubtful accounts
            
            
            115,914
            
            
            (47,348
            )Inventory
                reserve
            
            
            320,242
            
            
            213,035Issuance
                of warrants for consulting serviceChanges
                in certain assets and liabilitiesDue
                from related party
            
            
            5,548
            
            
            161,111Accounts
                receivable
            
            
            211,397
            
            
            444,486Inventory
            
            
            (237,475
            )
            
            (90,801
            )Prepaid
                expenses and other current assets
            
            
            15,326
            
            
            (18,102
            )Accounts
                payable
            
            
            731,539
            
            
            (320,589
            )Related
                party deferred compensation
            
            
            122,505
            
            
            54,576Other
                accrued expense
            
            
            (224,946
            )
            
            32,421Provision
                for estimated sales returns
            
            
            (309,785
            )
            
            419,780Customer
                deposits
            
            
            -
            
            
            (117,030
            )Net
                Cash Provided by (Used in) Operating Activities
            
            
            (469,280
            )
            
            1,439,922Cash
                Flows from Investing Activities:Purchase
                of property and equipment
            
            
            (65,000
            )
            
            (108,555
            )Other
                assets
            
            
            45,641
            
            
            (34,668
            )Purchase
                of film masters and artwork
            
            
            (205,351
            )
            
            (428,850
            )Net
                Cash Used in Investing Activities
            
            
            (224,710
            )
            
            (572,073
            )Cash
                Flows from Financing Activities:Decrease
                in bank overdraft
            
            
            (26,717
            )
            
            (172,867
            )Advance
                from factor
            
            
            1,092,000
            
            
            2,782,191Payments
                to factor
            
            
            (1,363,181
            )
            
            (3,185,598
            )Payments
                of notes payable
            
            
            (7,576
            )
            
            (10,670
            )Payments
                of notes payable (related party)
            
            
            322,500
            
            
            (44,000
            )Deferred
                compensation - stock option
            
            
            (5,060
            )
            
            -Proceeds
                from the sale of common stock
            
            
            238,177
            
            
            148,803Premium
                paid for retirement of common stock
            
            
            -
            
            
            (30,577
            )Net
                Cash Provided by (Used in) Financing Activities
            
            
            250,143
            
            
            (512,718
            )








**The
      accompanying notes are an integral part of these financial
      statements.**


F-7


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Consolidated
        Statements Of Cash Flows (CONTINUED)**
 **For
        the Years Ending March 31, 2006 and 2005**






2006
            
            
            2005Net
                Increase (Decrease) in Cash and Cash Equivalents
            
            $
            (443,847
            )
            $
            355,130Cash
                and Cash Equivalents - Beginning of Year
            
            
            464,425
            
            
            109,295Cash
                and Cash Equivalents - End of Year
            
            $
            20,578
            
            $
            464,425Supplemental
                Information:Cash
                Paid for:Interest
                expense
            
            $
            101,974
            
            $
            121,720Income
                taxes
            
            $
            -
            
            $
            21,523








**SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:**




2006
            
            
            2005Conversion
                of series B preferred stock into common stock
            
            $
            -
            
            $
            1,100,363Issuance
                of common stock for consulting services
            
            $
            7,000
            
            $
            35,000Issuance
              of common stock for series B preferred-liquidated damages
            
            $
            231,177
            
            $
            -Settlement
                of note receivable for common stock
            
            $
            -
            
            $
            45,300










**The
      accompanying notes are an integral part of these financial
      statements.**





F-8


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006 and 2005**


**1.**
            **Summary
                of Significant Accounting Policies**





Basis
      of Presentation





The
      accompanying consolidated financial statements include the accounts of Diamond
      Entertainment Corporation (the "Company"), organized under the laws of the
      State
      of New Jersey on April 3, 1986 and its wholly owned subsidiaries:





1)
            Jewel
                Products International, Inc. ("JPI") incorporated under the laws
                of the
                state of California on November 25, 1991;





2)
            Saledirect123.com
                ("Sales Direct") formerly known as Grand Duplication ("Grand"),
                incorporated under the laws of the state of California on August
                13, 1996;
                and





3)
            Galaxy
                Net ("Galaxy"), incorporated under the laws of the state of Delaware
                on
                July 15, 1998.





All
      intercompany transactions and balances have been eliminated in consolidation.







Nature
      of Business





The
      Company is in the business of distributing and selling videocassettes and DVD
      programs, general merchandise, patented toys, and furniture, through normal
      distribution channels throughout the United States and through a web site.
      As of
      March 31, 2006 and 2005, the Company's management evaluated its operations
      by
      two separate product lines to assess performance and the allocation of resources
      as follows:




*Video
      Programs and Other Licensed Products*





The
      Company distributes and sells videocassette titles, including certain public
      domain programs and certain licensed programs. The Company markets its video
      programs to national and regional mass merchandisers, department stores, drug
      stores, supermarkets and other similar retail outlets.




*General
      Merchandise*





The
      Company, through its wholly owned subsidiary, JPI, purchases and distributes
      toy
      products to mass merchandisers in the U.S. The Company offers its products
      for
      limited sale periods and as demand for products change, the Company switches
      to
      newer and more popular products. The Company did not record any sales of its
      general merchandise during the periods ending March 31, 2006 and 2005.





F-9


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006 and 2005**





**1.**
            **Summary
                of Significant Accounting Policies
                (continued)**




Use
      of
      Estimates




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America 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 revenue and expenses during
      the periods presented. Actual results could differ from those estimates.




Revenue
      Recognition




The
      Company records sales when products are shipped to customers. Revenues are
      shown net of estimated returns and allowances. Customer deposits and credits
      are
      deferred until such time products are shipped to customers. The Company grants
      certain distributors limited rights of return and price protection on unsold
      products. Product revenue on shipments to distributors that have rights of
      return and price protection is recognized upon shipment by the distributor.
      Revenue from the sale of films is recognized upon meeting all recognition
      requirements of SOP 00-2, “Accounting by Producers or Distributors of Films.”





Consignment
      sales are recognized at the time the consignee sells and ships consignment
      goods
      to end customers.




Cash
      and Cash Equivalents





The
      Company considers all highly liquid investments purchased with original
      maturities of three months or less to be cash equivalents.




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
      Company's 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 with high quality
      financial institutions and at times may exceed the FDIC $100,000 insurance
      limit. The Company had no deposits as of March 31, 2006, with financial
      institutions subject to a credit risk beyond the insured amount.




Inventory





Inventory
      is stated at the lower of cost or market utilizing the first-in, first-out
      method. Inventory consists primarily of videocassettes, DVD products and general
      merchandise.





F-10


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006 and 2005**


**1.**
            **Summary
                of Significant Accounting Policies
                (continued)**




Property
        and Equipment
 
 Property
        and equipment is presented at historical cost less accumulated depreciation.
        Depreciation is computed utilizing the straight-line method for all furniture,
        fixtures and equipment over a five-year period, which represents the estimated
        useful lives of the respective assets. Leasehold improvements are being
        amortized over the lesser of their estimated useful lives or the term of
        the
        lease.
 
 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. Film masters consist of original
        "masters", which are purchased for the purpose of reproducing DVD’s and/or
        videocassettes that are sold to customers and consist of primarily public
        domain
        titles, often thirty or more years old. In t he
        Company’s experience sales of old films are not likely to be substantially
        greater in the early years than when the Company first includes such films
        in
        its catalogue. Consequently, the Company has elected to allocate its costs
        for
        the film masters and artwork over a period of three years using the
        straight-line method.
 
 Impairment
        of Long-Lived Assets
 
 In
        accordance with Statement of Financial Accounting Standard ("SFAS") No. 121,
        "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
        to
        Be Disposed Of," long-lived assets to be held and used are analyzed for
        impairment whenever events or changes in circumstances indicate that the
        related
        carrying amounts may not be recoverable. The Company evaluates at each balance
        sheet date whether events and circumstances have occurred that indicate possible
        impairment. If there are indications of impairment, the Company uses future
        undiscounted cash flows of the related asset or asset grouping over the
        remaining life in measuring whether the assets are recoverable. In the event
        such cash flows are not expected to be sufficient to recover the recorded
        asset
        values, the assets are written down to their estimated fair value. Long-lived
        assets to be disposed of are reported at the lower of carrying amount or
        fair
        value of asset less cost to sell.
 
 Factored
        Accounts Receivable
 
 The
        Company is obligated to repurchase transferred receivables under its agreement
        with its factor, and therefore the transaction does not qualify as a sale
        under
        the terms of Financial Accounting Standards Board Statement No. 140, Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities. FASB 140 requires that a transfer of financial assets in which
        the
        transferor surrenders control over those assets is accounted for as a sale.
        The
        following conditions must be met in order for FASB 140 to be applicable:
        a) the
        assets must be isolated from the transferor, b) the transferee has the right
        to
        pledge or exchange the assets, and c) the transferor does not maintain effective
        control over the assets.
 
 The
        Company’s obligations to the factor are collateralized by all of the Company’s
        accounts receivable inventories, equipment, investment property, deposit
        accounts and financial instruments.
 
  F-11
 **DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006 and 2005**
  **1.**  **Summary
        of Significant Accounting Policies (continued)**
 
 Royalty
        Advances
 
 The
        Company’s agreements with licensors generally provide it with exclusive
        publishing rights and require it to make advance royalty payments that are
        recouped against royalties due to the licensor based on contractual amounts
        on
        product sales adjusted for certain related costs. Advances which have not
        been
        recovered through earned royalties are recorded as an asset. The Company
        continually evaluates the recoverability of advance royalty payments and
        charges
        to cost of sales the amount that management determines is probable that will
        not
        be recouped at the contractual royalty rate.
 
 Bank
        Overdraft
 
 The
        Company has overdraft positions at certain banks. Such overdraft positions
        are
        included in current liabilities.
 
 Advertising
        Costs
 
 Advertising
        costs are expensed as incurred. Advertising costs were approximately $82,000
        and
        $90,000 for the years ended March 31, 2006 and 2005, respectively.
 
 Shipping
        Costs
 
 Shipping
        costs are included in Selling and marketing expenses in the amounts of
        approximately $271,000 and $298,000 for 2006 and 2005,
        respectively.
 
 Reclassifications
 
 Certain
        reclassifications were made to the 2005 financial statements in order to
        conform
        to the 2006 financial statement presentation.
 
 Fair
        Value of Financial Instruments
 
 For
        certain of the Company's financial instruments, including accounts receivable,
        bank overdraft and accounts payable and accrued expenses. The carrying amounts
        approximate fair value due to their relatively short maturities. The amounts
        owed for long-term debt also approximate fair value because current interest
        rates and terms offered to the Company are at current market rates.
 
 Stock-Based
        Compensation
 
 The
        Company accounts for employee stock options in accordance with Accounting
        Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
        Employees". Under APB 25, the Company does not recognize compensation expense
        related to options issued under the Company's employee stock option plans,
        unless the option is granted at a price below market price on the date of
        grant.
 
  F-12
 **DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006 and 2005**
  **1.**  **Summary
        of Significant Accounting Policies (continued)**
 
 Stock-Based
        Compensation (Continued)
 
 In
        1996,
        SFAS No. 123 "Accounting for Stock-Based Compensation” became effective for the
        Company. SFAS No. 123, which prescribes the recognition of compensation expense
        based on the fair value of options on the grant date, allows companies to
        continue applying APB 25 if certain pro forma disclosures are made assuming
        hypothetical fair value method. The Company uses the Black-Scholes
        option-pricing model to calculate disclosures under APB 25.
 
 The
        FASB
        issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and
        Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based
        Compensation,” to provide alternative methods of transition for a voluntary
        change to the fair value-based method of accounting for stock-based employee
        compensation. Pursuant to SFAS No. 123, the Company would expense the fair
        market value of stock options newly granted to third parties and disclose
        the
        pro forma results based on the fair value of options/warrants granted to
        employees.”
 
 For
        non-employee stock based compensation, the Company recognizes an expense
        in
        accordance with SFAS No. 123 and values the equity securities based on the
        fair
        value of the security on the date of grant. For stock-based awards, the value
        is
        based on the market value for the stock on the date of grant and if the stock
        has restrictions as to transferability, a discount is provided for lack of
        marketability. Stock option awards are valued using the Black-Scholes
        option-pricing model.
 
 Stock
        Options
 
 The
        Company accounts for its stock-based compensation plan based on Accounting
        Principles Board ("APB") Opinion No. 25, Financial Interpretation No. 44,
        and
        SFAS 123, "Accounting for Stock-Based Compensation.” For the year ended March
        31, 2006, the Company has not changed to the fair value method and continued
        to
        use APB Opinion No. 25 for measurement and recognition of any expense related
        to
        employee stock based transactions. All non-employee stock option and warrant
        grants are accounted for under the fair value method. As such, compensation
        expense for employee stock option and warrant grants would be recorded on
        the
        date of grant only if the current market price of the underlying stock exceeds
        the exercise price.
 
 The
        FASB
        issued SFAS No.148, "Accounting for Stock-Based Compensation - Transition
        and
        Disclosure." This statement amends SFAS No.123, "Accounting for Stock-Based
        Compensation," to provide alternative methods of transition for a voluntary
        change to the fair value-based method of accounting for stock-based employee
        compensation. Pursuant to SFAS No.123, the Company would expense the fair
        market
        value of stock options newly granted to third parties and disclose the pro
        forma
        results based on the fair value of options/warrants granted to employees.
  No
        stock-based employee compensation cost is reflected in net income, as all
        options granted to employeess had an exercise price equal to the market value
        of
        the underlying common stock on the date of grant. The following table
        illustrates the effect on net income and earnings per share if the Company
        had
        applied the fair value recognition provisions of FASB Statement No. 123, *Accounting
        for Stock-Based Compensation,* to
        stock-based employee compensation.
  F-13
 **DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**
 
 **1.**  **Summary
        of Significant Accounting Policies (continued)**
 
 Stock-Based
        Compensation (Continued)
  *2006*Net
                  loss, as reported
              
              $
              (1,650,802
              )Add:
                  total stock-based compensation included
                in
                  net income as determined under fair value based method.
              
              $
              1,940Pro
                  forma net income
              
              
              (1,648,862
              )Deduct:
                  total stock-based compensation as determined
                under
                  fair value based method.
              
              
              (1,940
              )Add:
                  total stock-based compensation included in net
                income
                  as determined under FASB 123.
              
              
              (135,500
              )Total
                proforma net income
              
              $
              (1,786,302
              )Basic
                  earnings per share:As
                  reported
              
              $
              (0.00
              )Pro
                  forma
              
              $
              (0.00
              )Diluted
                  earnings per share:As
                  reported
              
              $
              (0.00
              )Pro
                  forma
              
              $
              (0.00
              )
 
 During
        the three months ended June 30, 2005, the Company’s Board of Directors approved
        the grant of stock options to employees, directors and independent consultants
        to purchase an aggregate of 58,100,000 shares of its common stock. These
        options
        have an exercise price of $0.007 and as of June 30, 2005, none of these option
        shares were vested. As a result, the Company has recorded $7,000 in “Deferred
        Compensation,” which will be amortized on a straight-line basis to expense over
        the three-year vesting period of the options. At March 31, 2006, the value
        of
        these options was $9,600, based on the Black Scholes calculation with a risk
        free rate of 3.5%, a volatility factor of 465% and a remaining 9.21 years
        remaining. For the year ended March 31, 2006, an amount of $1,940 has been
        amortized to expense. At March 31, 2006, the value of the employee based
        options
        were $542,400, which is based on a Black Scholes calculation with a risk
        free
        rate of 3.5%, a volatility factor of 465% and a remaining 9.21 years.
 
 Income
        Taxes
 
 Income
        taxes are provided for based on the liability method of accounting pursuant
        to
        SFAS No. 109, "Accounting for Income Taxes.” The liability method requires the
        recognition of deferred tax assets and liabilities for the expected future
        tax
        consequences of temporary differences between the reported amount of assets
        and
        liabilities and their tax basis.
 
 Comprehensive
        Income
 
 The
        Company adopted SFAS No. 130, "Reporting Comprehensive Income.” SFAS No. 130
        establishes standards for reporting and presentation of comprehensive income
        and
        its components in a full set of financial statements. Comprehensive income
        consists of net income and unrealized gains (losses) on available for sale
        marketable securities and is presented in the consolidated statements of
        shareholders' equity and comprehensive income. The Statement requires only
        additional disclosures in the consolidated financial statements and does
        not
        affect the Company's financial position or results of operations.
 
 F-14
 **DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**
 **1.** 
        **Summary of Significant Accounting Policies
        (continued)**
  Earnings
        (Loss) per Share
 
 The
        Company follows SFAS No. 128, “Earnings per Share,” which establishes standards
        for computing and presenting earnings per share (“EPS”) and applies to entities
        with publicly held common stock or potential common stock.
 
 The
        following table provides the basic and diluted income (loss) per share
        computations:
  Twelve
                  Months Ended March 31,2006
              
              2005Net
                  Income (Loss)
              
              
              (1,650,802
              )
              
              415,944Weighted-average
                  basic shares outstanding
              
              
              615,855,827
              
              
              593,789,050Dilutive
                  effect of:Warrants
                  and option to purchase common stock
              
              
              -
              
              
              31,147,571Note
                  payable convertible into common stock
              
              
              -
              
              
              13,475,146Preferred
                  stock convertible into common stock
              
              
              -
              
              
              605,140Weighted
                  average diluted shares outstanding
              
              
              615,855,827
              
              
              639,016,907Basic
                  earnings (loss) per share
              
              
              (0.00
              )
              
              0.00Diluted
                  earnings (loss) per share
              
              
              (0.00
              )
              
              0.00
  Dilutive
        potential common shares are calculated in accordance with the treasury stock
        method, which assumes that proceeds from the exercise of all warrants an
        doptions are used to repurchase common stock at market value. The amount
        of
        shares remaining after the proceeds are exhausted represents the potentially
        dilutive effect of the securities.
 
 The
        following potentially dilutive shares were excluded from the diluted loss
        per
        share for the year ended March 31, 2006, as their effects would have been
        anti-dilutive to the loss incurred by the Company:
 
 Options
                  to purchase common stock
              
              
              72,600,000Warrants
                  to purchase common stock
              
              
              35,000,000Convertible
                  preferred stock
              
              
              51,110,190Dilutive
                  potential common shares
              
              
              158,710,190
 
 Recent
        Accounting Pronouncements
 
 In
        March
        2004, the FASB approved the consensus reached on the Emerging Issues Task
        Force
        (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
        Its
        Application to Certain Investments.” The objective of this Issue is to provide
        guidance for identifying impaired investments. EITF 03-1 also provides new
        disclosure requirements for investments that are deemed to be temporarily
        impaired. In September 2004, the FASB issued a FASB Staff Position (FSP)
        EITF
        03-1-1 that delays the effective date of the measurement and recognition
        guidance in EITF 03-1 until after further deliberations by the FASB. The
        disclosure requirements are effective only for annual periods ending after
        June
        15, 2004.
        The
        Company has evaluated the impact of the adoption of the disclosure requirements
        of EITF 03-1 and does not believe it will have an impact to the Company's
        overall consolidated results of operations or consolidated financial position.
        Once the FASB reaches a final decision on the measurement and recognition
        provisions, the Company will evaluate the impact of the adoption of EITF
        03-1.
  F-15
 **DIAMOND
            ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements**
 **March
            31, 2006 and 2005**
 **1.** **Summary of Significant Accounting Policies
        (continued)**
 
 Recent
        Accounting Pronouncements (Continued)
 
 Effective
        April 1, 2004, the SEC adopted Staff Accounting Bulletin No. 105, "Application
        of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105 clarifies
        the
        requirements for the valuation of loan commitments that are accounted for
        as
        derivatives in accordance with SFAS 133. Management does not expect the
        implementation of this new bulletin to have any impact on our financial
        position, results of operations and cash flows. The Company does not have
        any
        loan commitments.
 
 In
        July
        2004, the EITF issued a draft abstract for EITF Issue No. 04-08, "The Effect
        of
        Contingently Convertible Debt on Diluted Earnings per Share" ("EITF 04-08").
        EITF 04-08 reflects the Task Force's tentative
        conclusion that contingently convertible debt should be included in diluted
        earnings per share computations regardless of whether the market price trigger
        has been met. If adopted, the consensus reached by the Task Force in this
        Issue
        will be effective for reporting periods ending after December 15, 2004. Prior
        period earnings per share amounts presented for comparative purposes would
        be
        required to be restated to conform to this consensus and the Company would
        be
        required to include the shares issuable upon the conversion of the Notes
        in the
        diluted earnings per share computation for all periods during which the Notes
        are outstanding Management does not expect the implementation of this new
        standard to have a material impact on its computation of diluted earnings
        per
        share.
 
 In
        September 2004, the EITF delayed the effective date for the recognition and
        measurement guidance previously discussed under EITF Issue No. 03-1, "The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments" ("EITF 03-1") as included in paragraphs 10-20 of the proposed
        statement. The proposed statement will clarify the meaning of
        other-than-temporary impairment and its application to investments in debt
        and
        equity securities, in particular investments within the scope of FASB Statement
        No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
        and
        investments accounted for under the cost method. The Company is currently
        evaluating the effect of this proposed statement on its financial position
        and
        results of operations.
 
 In
        November 2004, the Financial Accounting Standards Board Statement issued
        SFAS
        No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4", which
        clarifies the accounting for abnormal amounts of idle facility expense, freight,
        handling costs, and charges regardless of whether they meet the criterion
        of "so
        abnormal" that was originally stated in Accounting Research Bulletin No.
        43,
        chapter 4. In addition, SFAS No. 151 requires that the allocation of fixed
        production overheads to conversion costs be based on the normal capacity
        of the
        production facilities. SFAS No. 151 is effective for inventory costs incurred
        during fiscal years beginning after June 15, 2005. Management does not expect
        the implementation of this new standard to have a material impact on its
        financial position, results of operations and cash flows.
 
    F-16
 **DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**
 
 **1.** **Summary
          of Significant Accounting Policies (continued)**
 
 Recent
        Accounting Pronouncements (continued)
 
 In
        December 2004, the FASB issued a revision to SFAS
        123, "Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95,"
        that addresses the accounting for share-based payment transactions in
        which
        a Company receives employee services in exchange for either equity instruments
        of the Company or liabilities that are based on the fair value of the Company's
        equity instruments or that may be settled by the issuance of such equity
        instruments. This statement would eliminate the ability to account for
        share-based compensation transactions using the intrinsic method that the
        Company currently uses and generally would require that such transactions
        be
        accounted for using a fair-value-based method and recognized as expense in
        the
        consolidated statement of operations. The Company has determined that the
        adoption of SFAS 123R will result in the Company having to recognize additional
        compensation expense related
        to the options or warrants granted to employees, and it will have an impact
        on
        the Company’s net earnings in the future. This standard requires expensing the
        fair value of stock option grants and stock purchases under employee stock
        purchase plan. The Company will implement SFAS 123R beginning April 1,
        2006.
 
 In
        December 2004, the Financial Accounting Standards Board Statement issued
        SFAS
        No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No.
        29",
        which amends Opinion 29 by eliminating the exception for nonmonetary exchanges
        of similar productive assets and replaces it with a general exception for
        exchanges of nonmonetary assets that do not have commercial substance. A
        nonmonetary exchange has commercial substance if the future cash flows of
        the
        entity are expected to change significantly as a result of the exchange.
        SFAS
        No. 151 is effective for a fiscal year beginning after June 15, 2005, and
        implementation is done prospectively. Management does not expect the
        implementation of this new standard to have a material impact on its financial
        position, results of operations and cash flows.
 
 In
        May
        2005, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error
        Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
        3. SFAS
        No. 154 requires retrospective application to prior periods' financial
        statements of changes in accounting principle, unless it is impracticable
        to
        determine either the period-specific effects or the cumulative effect of
        the
        change. SFAS No. 154 also requires that retrospective application of a change
        in
        accounting principle be limited to the direct effects of the change. Indirect
        effects of a change in accounting principle, such as a change in
        nondiscretionary profit-sharing payments resulting from an accounting change,
        should be recognized in the period of the accounting change. SFAS No. 154
        also
        requires that a change in depreciation, amortization, or depletion method
        for
        long-lived, non-financial assets be accounted for as a change in accounting
        estimate effected by a change in accounting principle. SFAS No. 154 is effective
        for accounting changes and corrections of errors made in fiscal years beginning
        after December 15, 2005. Early adoption is permitted for accounting changes
        and
        corrections of errors made in fiscal years beginning after the date this
        Statement is issued. Management does not expect the implementation of this
        new
        standard to have a material impact on our financial position, results of
        operations and cash flows.
  F-17
 **DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**
  **1.** **Summary
        of Significant Accounting Policies (continued)**
 
 Recent
        Accounting Pronouncements (continued)
 
 In
        March
        2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based
        Payment"("SAB 107"), which provides interpretive guidance related to the
        interaction between SFAS 123(R) and certain SEC rules and regulations. It
        also
        provides the SEC staff's views regarding valuation of share-based payment
        arrangements. In April 2005, the SEC amended the compliance dates for SFAS
        123(R), to allow companies to implement the standard at the beginning of
        their
        next fiscal year, instead of the next reporting period beginning after June
        15,
        2005. Management is currently evaluating the impact SAB 107 will have on
        our
        consolidated financial statements.
 
 In
        February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
        financial instrument that contains an embedded derivative that otherwise
        would
        require bifurcation, clarifies which interest-only strips and principal-only
        strips are not subject to the requirements of SFAS No. 133, establishes a
        requirement to evaluate interest in securitized financial assets to identify
        interests that are freestanding derivatives or that are hybrid financial
        instruments that contain an embedded derivative requiring bifurcation, clarifies
        that concentrations of credit risk in the form of subordination are not embedded
        derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
        qualifying special-purpose entity from holding a derivative financial instrument
        that pertains to a beneficial interest other than another derivative financial
        instrument. This statement is effective for all financial instruments acquired
        or issued after the beginning of the Company's first fiscal year that begins
        after September 15, 2006. The Company does not believe adoption of SFAS No.
        155
        will have any material effect on its unaudited condensed consolidated financial
        position, results of operations or cash flows.
 
 In
        March
        2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL
        ASSETS—AN AMENDMENT OF FASB STATEMENT NO. 140. Companies are required to apply
        SFAS No. 156 as of the first annual reporting period that begins after September
        15, 2006. The Company does not believe adoption of SFAS No. 156 will have
        a
        material effect on its unaudited condensed consolidated financial position,
        results of operations or cash flows.
   F-18
 **DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**
   2.Going
          Concern
 
 As
          reflected in the accompanying consolidated financial statements, the Company
          historically has incurred recurring losses from operations, negative cash
          flows
          from operations, a working capital deficit and is delinquent in payment
          of
          certain accounts payable. These matters raise substantial doubt about the
          Company's ability to continue as a going concern.
 
 In
          view
          of the matters described in the preceding paragraph, recoverability of
          a major
          portion of the recorded asset amounts shown in the accompanying consolidated
          balance sheet is dependent upon continued operations of the Company, which,
          in
          turn, is dependent upon the Company's ability to continue to raise capital
          and
          generate positive cash flows from operations. The consolidated financial
          statements do not include any adjustments relating to the recoverability
          and
          classification of recorded asset amounts or amounts and classifications
          of
          liabilities that might be necessary should the Company be unable to continue
          its
          existence.
 
 Management
          plans to take, or has taken, the following steps that it believes will
          be
          sufficient to provide the Company with the ability to continue in existence
          and
          mitigate the effects of the uncertainties.
 
 The
          Company has implemented a plan to increase its overall market share of
          core
          business and its general merchandise line products, and to expand into
          the
          contract replication, duplication and packaging business. The Company has
          implemented the following goals and strategies to achieve its plan:  ·
                  Attain
                      leadership in the market segment of high quality budget priced
                      distribution of videocassettes and DVD titles.
 
 ·
                  Re-establish
                      sales to club type stores with the Company’s new general merchandise line
                      of products.
 
 ·
                  Continue
                      to seek out additional financing sources to support the expected
                      growth in
                      the Company’s general merchandise line of products.
 
 ·
                  Avoid
                      direct competition with larger competitors who sell in the
                      same product
                      categories as the Company, by offering higher quality budgeted
                      price
                      products.
 
 ·
                  Continue
                      to acquire new videocassette and DVD titles in HD format (high
                      definition)
                      for distribution.
 ·
                  Test
                      marketing our products with new
                      customers.
 ·
                  Seeking
                      merger candidate




The
        Company believes it has adequate cash resources to sustain its operations
        through the third quarter of fiscal 2007. The Company is continuing to negotiate
        with several reliable investors to provide the Company with debt and equity
        financing for working capital purposes. Although the Company believes that
        the
        outlook is favorable, there can be no assurance that market conditions will
        continue in a direction favorable to the Company.






F-19


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006 and 2005**





**3.**  **Accounts
      Receivable**





Accounts
      receivable as of March 31, 2006 and 2005, net of allowance for doubtful accounts
      were $154,139 and $481,450, respectively. Substantially all of the accounts
      receivable as of March 31, 2006 and 2005 have been factored and pledged as
      collateral under a factoring agreement (see Note 10).





The
      Company reviews accounts receivable periodically during the year for
      collectability. An allowance for bad debt expense and sales returns is
      established for any receivables whose collection is in doubt or for estimated
      returns.




As
      of
      March 31, 2006 and 2005, the Company had an allowance for doubtful accounts
      of
      $148,028 and $32,114, respectively.








**4.**  **Inventory**





Inventory
      consisted of the following as of:




March
                  31,2006
              
              2005Raw
                  materials
              
              $
              563,820
              
              $
              612,783Finished
                  goods
              
              
              939,859
              
              
              653,4221,503,679
              
              
              1,266,205Less:
                  valuation allowance
              
              
              (761,756
              )
              
              (441,514
              )Inventory,
                  net
              
              $
              741,923
              
              $
              824,691




Allowance





An
      allowance has been established for inventory totaling $761,756 and $441,514
      as
      of March 31, 2006 and 2005, respectively.





(a)
            During
                the year ended March 31, 2006, as a result of a consignment customer
                filing bankruptcy in January 2006, an inventory valuation allowance
                of
                $136,235 was established. The balance of the reserve allowance of
                $625,521
                was established for Video and DVD inventory deemed to be
                obsolete.





(b)
            During
                the year ended March 31, 2005, pursuant to a legal settlement an
                inventory
                valuation allowance of $49,945 was established and the balance of
                the
                reserve allowance of $381,569 was established for Video and DVD inventory
                deemed to be non-salable.








F-20


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**5.**  **Related
      Party Transactions**





The
      Company has related party transactions with several officers, directors and
      other related parties. The following summarizes related party transactions.





Due
      from related parties:




March
                  31,2006
              
              2005a)
                  Interest due from Officer
              
              $
              -
              
              $
              10,392b)
                  GJ Products
              
              
              4,613
              
              
              -c)
                  Due from Other related parties
              
              
              231
              
              
              -$
              4,844
              
              $
              10,392




a)
            As
                of March 31, 2005, the Company had $10,392, due from an officer of
                the
                Company representing simple interest at an annual rate of 10% on
                a
                previously outstanding loan owed in 2004.This amount was offset against accrued compensation owed to the
                officer.




b)
            As
                of March 31, 2006, the Company had a miscellaneous receivable due
                from GJ
                Products (a shareholder) of $4,613. During 2005, GJ Products exchanged
                22,500,000 shares of the Company’s common stock for an outstanding note of
                $45,300. The Company retired the shares.





Due
      to
      related parties - current notes payable




March
                31,2006
            
            2005a)
                Note payable - American Top Real Estate, Inc. (“ATRE”)
            
            $
            582,874
            
            $
            278,374b)
                Notes payable GJ Products
            
            
            20,000
            
            
            -b)
                Convertible note payable - Jeffrey Schillen
            
            
            48,000
            
            
            50,000$
            650,874
            
            $
            328,374





Due
      to
      related parties - deferred compensation




Related
      party deferred compensation consists of deferred accrued salaries and vacations
      due to officers and key employees of $997,041 and $874,546 as of March 31,
      2006
      and 2005, respectively.








F-21





**DIAMOND
            ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements**
 **March
            31, 2006 and 2005**





**5. 
      Related Party Transactions (continued)**





a)
            Note
                Payable - ATRE: As of March 31, 2006 and 2005, the Company owed to
                ATRE
                (see Note 8) advances of $582,874 and $278,374., from ATRE bearing
                interest at the rate of 10% per annum, and due on
                demand.





b)
            Convertible
                Debenture - Related Party: The debenture bears interest at 10% per
                year
                with principal and interest due on the first anniversary of the date
                of
                issuance. The note is due on demand. The note had a common stock
                conversion feature which expired. Accrued interest as of March 31,
                2006
                and 2005 was $47,115 and $47,188 respectively.








Issuance
      of stock options





During
      the years ending March 31, 2006 and 2005, the Company issued various stock
      options to certain related parties. (See note 16).








**6.** **Property
      and Equipment**





Property
      and equipment consisted of the following as of:





March
                31,2006
            
            2005Furniture
                and equipment
            
            $
            1,034,204
            
            $
            970,604Automobile
            
            
            24,487
            
            
            24,487Leasehold
                improvements
            
            
            19,258
            
            
            17,8581,077,949
            
            
            1,012,949Less:
                accumulated depreciation
            
            
            (914,528
            )
            
            (835,095
            )Furniture
                and equipment, net
            
            $
            163,421
            
            $
            177,854





Depreciation
      expense for the years ended 2006 and 2005 was $79,400 and
      $72,720, respectively.







F-22


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006 and 2005**


**7.** **Film
      Masters and Artwork**





Film
      Masters and Artwork consisted of the following as of:





March
                31,2006
            
            2005Intellectual
                property
            
            $
            3,370,003
            
            $
            3,370,003Other
                film masters and artwork
            
            
            1,933,041
            
            
            1,727,6895,303,044
            
            
            5,097,692Less:
                accumulated amortization
            
            
            (4,893,503
            )
            
            (4,541,679
            )Film
                Masters and Artwork, net
            
            $
            409,540
            
            $
            556,013





Amortization
      expense for the years ended March 31, 2006 and 2005 was $351,800 and $219,728,
      respectively.





The
      cost
      of film masters and related artwork is capitalized and amortized using the
      straight-line method over a three-year period. Film masters consist of original
      "masters", which are purchased for the purpose of reproducing videocassettes
      that are sold to customers. In accordance with SFAS No. 121, film masters and
      related artwork are analyzed for impairment whenever events or changes in
      circumstances indicate that the related carrying amounts may not be recoverable.
      The Company evaluates at each balance sheet date whether events and
      circumstances have occurred that indicate possible impairment. If there are
      indications of impairment, the Company uses future undiscounted cash flows
      of
      the related asset or asset grouping over the remaining life in measuring whether
      the assets are recoverable. As of March 31, 2006 and 2005, no such events have
      occurred.






**8.** **Investment
      in Equity Subsidiary**





The
      Company owns 7.67% interest in a related party, American Top Real Estate
      (“ATRE”). The Company reduced its interest in ATRE to zero in 2003 to reflect
      its share of the net operating losses net of taxes of ATRE.








**9.**  **Loss
      on Investment in Joint Venture**





During
      the period ended March 31, 2005, the Company entered into a partnership with
      an
      individual to produce toy products. The Company recorded a loss on joint venture
      investment of $28,158 as of March 31, 2005.








F-23


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006 and 2005**





**10.** **Due
      to Factor/Financing Agreement Payable**





On
      August
      30, 1996, the Company entered into a financing agreement with a financial
      institution for a maximum borrowing of up to $2,500,000. The agreement called
      for a factoring of the Company's accounts receivable. Substantially all assets
      of the Company have been pledged as collateral for the borrowings.





The
      cost
      of funds for the accounts receivable portion of the borrowings with the new
      factor is a 1.5% discount from the stated pledged amount of each invoice for
      every 30 days the invoice is outstanding.





The
      Company paid interest of approximately $61,412 and $127,490 for the years ended
      March 31, 2006 and 2005, respectively. Amounts due under this factoring
      agreement are:





March
                31,2006
            
            2005Due
                to factor payable
            
            $
            32,929
            
            $
            304,110








**11.** **Notes
      Payable**





Notes
      payable represent the following as of:





March
                31,2006
            
            2005Production
                Equipment
            
            $
            10,104
            
            $
            17,680Less
                current
            
            
            (3,789
            )
            
            (6,946
            )Long
                term
            
            $
            6,315
            
            $
            10,734





During
      the year ended March 31, 2002, the Company incurred a three-year note in the
      amount of $113,400, bearing interest at 10% to purchase a Sony sprinter for
      in
      house video duplication. The balance of such was paid in full during the fiscal
      year ended March 31, 2005.





On
      August
      15, 2004, the Company incurred an additional note in the amount of $22,733,
      bearing interest at 7.5% to purchase an additional Sony sprinter for $22,733.
      The balance of this note was $10,104 on March 31, 1006.





**12.**  **Provision
      for Estimated Sales Returns**





Provision
      for estimated sales returns relates to sales to customers for which return
      rights or price protection are established.










F-24


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006 and 2005**


**13.**  **Commitments
      and Contingencies**





Royalty
      Commitments





The
      Company has entered into various royalty agreements for licensing of titles
      with
      terms of one to seven years. The Company licenses titles of films not yet
      covered by public domain. The Company produces duplicate videos and DVDs for
      sale. Certain agreements include minimum guaranteed payments. Such advances
      are
      recouped against royalties due to the licensor based on contractual amounts
      of
      product sales, adjusted for certain related costs. Advances, which have not
      been
      recovered through earned royalties, are recorded as an asset. For the years
      ended March 31, 2006 and 2005, royalty expense was $80,155 and $47,328,
      respectively, pursuant to these agreements. The Company paid advances of $4,000
      during 2006.




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.




Lease
      Commitments





The
      Company leases office and storage facilities under an operating lease commencing
      April 1, 2004 ending March 31, 2007. The monthly rent expense is
      $12,500.





The
      Company leased executive office space under an operating lease commencing May
      1,
      2005 and ending September 30, 2009. The monthly rent was $2,500. The lease
      was
      canceled on May 1, 2006.





The
      Company leases an automobile under an operating lease terminating September
      2008. The monthly rent is $1,196.





Future
      lease obligations under these leases are as follows:





Year Ended March
              31,2007
            
            $
            170,3522008
            
            
            14,3522009
            
            
            7,176$
            191,880





Rent
      expense for the years ended March 31, 2006 and 2005 was approximately $150,000,
      and $144,000, respectively.




F-25


**DIAMOND
      ENTERTAINMENT CORPORATION AND SUBSIDIARIES**


**Notes
            to Consolidated Financial Statements**
 **March
            31, 2006 and 2005**


**14.**
            **Stockholders'
                Deficit**





Common
      Stock





As
      of
      March 31, 2006, the aggregate number of shares of common stock that the Company
      has authority to issue is 800,000,000 shares with no par value. As of March
      31,
      2006 and 2005, 618,262,605 and 595,144,872 shares were issued and outstanding.





During,
      the years ended March 31, 2006 and 2005, the Company had the following
      significant issuances of its common stock:





Common
      stock issued





During
      the year ended March 31, 2005, the Company sold an aggregate of 22,500,000
      shares of the Company’s common stock at a price of $0.01 per share pursuant to
      subscription agreements dated April 1, 2004, entered into with the President
      and
      Executive Vice President of the Company and a consultant of the Company to
      purchase 2,500,000, 2,500,000 and 17,500,000 shares, respectively.





During
      the year ended March 31, 2005, the Company issued an aggregate of 3,500,000
      shares of the Company’s common stock at a price of $0.01 per share to two of the
      Company’s consultants for consulting fees owed to the consultants in the
      aggregate amount of $35,000 pursuant to consulting agreements entered into
      on
      December 3, 2001.





Common
      stock retirement





During
      the year ended March 31, 2005, the Company returned 2,265,000 shares of the
      Company’s common stock to the Company at a price of $.02 per share in exchange
      for payment on a related party note of $45,300.




Conversion
      of Series B convertible preferred stock





During
      the year ended March 31, 2004, 7,692,308 shares of common stock were issued
      for
      the conversion of 1 series B convertible preferred share (see Series B
      convertible preferred stock).





During
      the year ended March 31, 2005, 82,352,513 shares of common stock were issued
      for
      the conversion of 83 series B convertible preferred shares (see Series B
      convertible preferred stock).




During
        the year ended March 31, 2006, 23,117,733 shares of common stock were issued .upon
        conversion of liquidated damages and interest by the five shareholders totaling
        an aggregate of $231,177. (see
        Series B convertible preferred stock) .


Convertible
      Preferred Stock





As
      of
      March 31, 2006 and 2005, the Company had authorized 4,999,863 shares of no
      par
      value, convertible preferred stock. The Company had issued 483,251 shares (of
      which 172,923 valued at $48,803 are held in treasury). The preferred stock
      has:





i.)
            voting
                rights upon all matters upon which common stockholders have at a
                1.95 vote
                for each share of preferred stock,





ii.)
            conversion
                rights at 1.95 shares of common stock for each share of preferred,




F-26


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**14.**
            **Stockholders'
                Deficit (continued)**





Convertible
      Preferred Stock (continued)





iii.)
            no
                rights of redemption and





iv.)
            no
                dividend preferences, but entitled to a preference of $0.01 per share
                in
                the event of liquidation.





Series
      A Convertible Preferred Stock





As
      of
      March 31, 2006 and 2005, the Company had authorized 50 shares of convertible
      Series A preferred stock (the “Series A Stock”) with a stated value of $10,000
      per share. The Company had issued 40 shares.





The
      Series A Stock has no par value and a stated value of $10,000 per share, and
      does not bear any dividends. Holders have the right to convert the Series A
      Stock at their option into shares of the Company’s common stock at any time at
      least 90 days after the issuance of the Series A Stock; provided, however,
      that
      in no event other than upon a mandatory conversion as described below or a
      triggering event as described below, no holder is entitled to convert Series
      A
      Stock to the extent such conversion would cause the holder to beneficially
      own
      more than 4.9% of the then outstanding common stock following such conversion.
      The conversion price is the lesser of 120% of the closing bid price for the
      common stock on the date the Series A Stock was issued, or a price determined
      by
      multiplying the specified conversion percentage times the average market price
      for the common stock for any five trading days during the ten trading days
      immediately preceding the conversion. The conversion price is subject to
      adjustment to take into account subdivisions of combinations of the common
      stock, reorganization, reclassifications, consolidations, mergers or sales
      of
      substantially all of the Company’s assets, and the issuance of purchase rights
      to the holders of the common stock. If the Company fails to convert Series
      A
      Stock into common stock within seven business days after receipt of the notice
      of conversion, a late payment is assessed per share of Series A Stock being
      converted of $100 per day for the first 10 days and $200 per day thereafter.





Notwithstanding
      anything to the contrary in the Certificate of Designation for the Series A
      Stock, in no event is the Company obligated to issue more than 11,875,000 shares
      of Common Stock upon conversion of the Series A Stock.





If
      a
      registration statement is not declared effective by the SEC within 150 days
      after the issuance of the Series A Stock, the Company is obligated to pay as
      liquidated damages a cash amount equal to 1.5% of the liquidation value of
      the
      Series A Stock (the liquidation value is $10,000 per share plus 6% interest
      thereon from the date of issuance).





The
      Company has the right, at any time after 120 days after the date of issuance
      of
      the Series A Stock, and provided the Company has complied with the terms of
      the
      Series A Stock and gives at least 30 days advance written notice, to redeem
      any
      or all of the Series A Stock (provided that at least $100,000 stated value
      of
      Series A Stock is redeemed) at a price equal to 120% of the liquidation value
      of
      the Series A Stock being redeemed.




F-27


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**14.**
            **Stockholders'
                Deficit (continued)**





Series
      A Convertible Preferred Stock (continued)





At
      the
      election of holders of 2/3 of the Series A Stock then outstanding, the holders
      of the Series A Stock can require the Company to redeem all of the Series A
      Stock then outstanding at a price per Series A share equal to the greater of
      (i)
      100% of the liquidation value of the Series A Stock in the event of a “major
      transaction” or 125% of the liquidation value in the event of a “triggering
      event”, or (ii) a redemption rate price calculated in accordance with the terms
      of the Series A Stock. A “major transaction” includes certain mergers,
      reorganizations, restructurings, consolidations, or similar transactions, or
      sale of substantially all of the assets of the Company. A “triggering event”
includes the failure of effectiveness of the registration statement for the
      underlying common stock or failure of the Company to comply with any key term
      of
      the Series A Stock.





Holders
      of Series A Stock have no voting rights except as required by law or as
      specifically provided in the terms of the Series A Stock.





Without
      the prior written consent of holders of at least 2/3 of the then outstanding
      shares of Series A Stock, the Company generally may not declare and pay
      dividends on its common stock or redeem any of the Company’s or a subsidiary’s
      capital stock or other equity securities (including warrants and options to
      acquire such capital stock or other equity securities).





There
      are
      still 40 shares of Series A Stock outstanding because the number of shares
      of
      common stock issuable upon their conversion, using the formula set forth in
      the
      Certificate of Determination, would result in issuing more than 11,875,000
      shares of common stock upon conversion of Series A Stock. The Company currently
      is seeking to reach an agreement with the four persons holding these shares
      regarding the retirement of such shares. In the meantime, the Company continues
      to accrue a dividend on the outstanding shares at the rate of 6% per annum.
      The
      6% rate is provided for in the Certificate of Determination in determining
      the
      conversion rate, (.06)(n/365)(10,000) + 10,000 ÷ Conversion Price. The value of
      the missed dividend as of March 31, 2004 was calculated using this formula.
      The
      aggregate value of the interest dividend as of March 31, 2005 as thus calculated
      was $24,000 payable in additional shares of the Company’s common stock as
      provided in the Certificate of Determination. The maximum number of shares
      of
      common stock that the Company is required to issue upon conversion of the Series
      A Stock (11,875,000 shares) includes the shares to be issued in payment of
      dividends.







F-28


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**14.**
            **Stockholders'
                Deficit (continued)**





Series
      B Convertible Preferred Stock





As
      of
      March 31, 2006 and 2005, the Company had authorized 87 shares of convertible
      Series B preferred stock (the “Series B Stock”) with a stated value of $10,000
      per share. The Company had no shares issued and outstanding at March 31, 2006
      and 2005, respectively.





The
      Series B Stock has no par value and a stated value of $10,000 per share, and
      does not bear any dividends. Holders have the right to convert the Series B
      Stock at their option into shares of the Company’s common stock at any time at
      least 90 days after the issuance of the Series B Stock; provided, however,
      that
      in no event other than upon a mandatory conversion as described below or a
      triggering event as described below, no holder is entitled to convert Series
      B
      Stock to the extent such conversion would cause the holder to beneficially
      own
      more than 4.9% of the then outstanding common stock following such conversion.
      The conversion price is the lesser of 120% of the closing bid price for the
      common stock on the date the Series B Stock was issued, or a price determined
      by
      multiplying the specified conversion percentage times the average market price
      for the common stock for any five trading days during the ten trading days
      immediately preceding the conversion. The conversion price is subject to
      adjustment to take into account subdivisions of combinations of the common
      stock, reorganization, reclassifications, consolidations, mergers or sales
      of
      substantially all of the Company’s assets, and the issuance of purchase rights
      to the holders of the common stock. If the Company fails to convert Series
      B
      Stock into common stock within seven business days after receipt of the notice
      of conversion, a late payment is assessed per share of Series B Stock being
      converted of $100 per day for the first 10 days and $200 per day
      thereafter.





If
      a
      registration statement is not declared effective by the SEC within 150 days
      after the issuance of the Series B Stock, the Company is obligated to pay as
      liquidated damages a cash amount equal to 1.5% of the liquidation value of
      the
      Series B Stock (the liquidation value is $10,000 per share plus 6% interest
      thereon from the date of issuance).





The
      Company has the right, at any time after 120 days after the date of issuance
      of
      the Series B Stock, and provided the Company has complied with the terms of
      the
      Series B Stock and gives at least 30 days advance written notice, to redeem
      any
      or all of the Series B Stock (provided that at least $100,000 stated value
      of
      Series B Stock is redeemed) at a price equal to 120% of the liquidation value
      of
      the Series B Stock being redeemed.





At
      the
      election of holders of 2/3 of the Series B Stock then outstanding, the holders
      of the Series B Stock can require the Company to redeem all of the Series B
      Stock then outstanding at a price per Series B share equal to the greater of
      (i)
      100% of the liquidation value of the Series B Stock in the event of a “major
      transaction” or 125% of the liquidation value in the event of a “triggering
      event”, or (ii) a redemption rate price calculated in accordance with the terms
      of the Series B Stock. A “major transaction” includes certain mergers,
      reorganizations, restructurings, consolidations, or similar transactions, or
      sale of substantially all of the assets of the Company. A “triggering event”
includes the failure of effectiveness of the registration statement for the
      underlying common stock or failure of the Company to comply with any key term
      of
      the Series B Stock.




F-29


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**14.**
            **Stockholders'
                Deficit (continued)**





Series
      B Convertible Preferred Stock (continued)





Holders
      of Series B Stock have no voting rights except as required by law or as
      specifically provided in the terms of the Series B Stock.





Without
      the prior written consent of holders of at least 2/3 of the then outstanding
      shares of Series B Stock, the Company generally may not declare and pay
      dividends on its common stock or redeem any of the Company’s or a subsidiary’s
      capital stock or other equity securities (including warrants and options to
      acquire such capital stock or other equity securities).





No
      shares
      of Series B Stock currently are outstanding. All shares were not converted
      on
      November 16, 2003 because the Company did not have sufficient authorized but
      unissued shares of common stock at that time. However, in April 2004 the Company
      concluded transactions whereby all outstanding shares of Series B Stock were
      exchanged for shares of common stock. In addition, certain additional shares
      of
      common stock are being issued in consideration for a portion of the liquidated
      damages and accrued interest, and the balance of liquidated damages and accrued
      interest was waived by the holders.





Three
      holders of record of the Company’s Series B Convertible Preferred Shares
      representing an aggregate of 25 Series B Convertible Preferred Shares entered
      into a Letter Agreement to Convert Preferred
      Shares, whereby such holders of the Series B Convertible Preferred Shares agreed
      to convert their respective shares and any liquidated damages and accrued
      interest in the aggregate amount of approximately $50,000 into shares of the
      Company’s common stock at $0.01 per share. The holders further agreed to
      exercise their portion of any liquidated damages and accrued interest of $50,000
      when the stockholders of the Company approve the increase in the authorized
      shares of the Company. As part of this letter agreement such holders canceled
      and returned to the Company warrants to purchase 2,250,000 shares the Company’s
      common stock at a price $.02 per share issued to them in conjunction with the
      Series B Convertible Preferred Shares.





Four
      holders (the “Sellers”) of record of the Company’s Series B Convertible
      Preferred Shares representing an aggregate of 571⁄2 Series B Convertible Preferred
      Shares entered into a Securities Purchase Agreement to sell all of their
      respective portion of the Company’s Series B Convertible Preferred Shares to two
      accredited investors, (the “Buyers”). Under the terms of the Securities Purchase
      Agreement the Buyers agreed to convert their respective shares of the Company’s
      Series B Convertible Preferred Shares into the shares of the Company’s common
      stock at $0.01 per share. The Sellers canceled and returned to the Company
      8,700,000 warrants to purchase the Company’s common stock at price of $0.02
      shares in conjunction with their respective Series B Convertible Preferred
      Shares at the closing date of such purchase agreement on April 15, 2004. The
      Sellers further agreed to convert liquidated damages and accrued interest in
      the
      aggregate amount of approximately $181,000 into shares of the Company’s common
      stock at $0.01 per share as soon as the stockholders of the Company approve
      the
      increase in the authorized shares of the Company.





Concurrent
      with these transactions, during the year ended March 31, 2005, all outstanding
      shares of the Company’s Series B Preferred Stock in the aggregate amount of
      eighty two and one half shares representing an aggregate face value of $825,000
      less $1,474.87 which was owed to the Company by one of the Series B Preferred
      shareholder were converted into 82,352,513 shares of the Company’s common stock
      at a conversion price of $0.01 per share.




On
        May 9,
        2005 the Board of Directors of the Company approved the issuance of 23,117,733
        shares of the Company’s common stock upon conversion of liquidated damages and
        interest by the five shareholders totaling an aggregate of $231,177 which
        accrued in connection with the sale of the Company’s Series B preferred shares,
        at the agreed upon conversion price of $0.01 per share. The Company was
        previously unable to issue such shares of common stock until the shareholders
        of
        the Company approved the increase in the authorized number of shares of common
        stock on March 1, 2005. The Company claims exemption from registration of
        such
        issuance based on Section 4(2) of the Securities Act of 1933, as amended,
        inasmuch as the transaction was a non-public offering and sale of
        securities.




F-30


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**15.**
            **Warrants**





The
      following schedules summarize warrants for the years ended :





Warrants
                Outstanding
            
            Warrants
                ExercisableRange
                of
              Exercise
              Prices
            
            Number
              Outstanding
              as
                of
              March31,
                2006
            
            Weighted
              Average
              Remaining
              Contractual
              Life
            
            Weighted
              Average
              Exercise
              Price
            
            Number
              Exercisable
                as
              of
              March31,
                2006
            
            Weighted
              Average
              Exercise
              Price0.012
            
            35,000,000
            
            2.98
            
            $
            0.012
            
            35,000,000
            
            $
            0.0120.070
            
            1,525,000
            
            1.11
            
            
            0.020
            
            1,525,000
            
            
            0.02036,525,000
            
            3.87
            
            $
            0.016
            
            36,525,000
            
            $
            0.016







Warrants
                Outstanding
            
            Warrants
                ExercisableRange
                of
              Exercise
              Prices
            
            Number
              Outstanding
              as
                of
              March31,
                2005
            
            Weighted
              Average
              Remaining
              Contractual
              Life
            
            Weighted
              Average
              Exercise
              Price
            
            Number
              Exercisable
              asof
              March
                31,2005
            
            Weighted
              Average
              Exercise
              Price0.012
            
            35,000,000
            
            3.98
            
            $
            0.012
            
            35,000,000
            
            $
            0.0120.070
            
            1,525,000
            
            1.11
            
            
            0.020
            
            1,525,000
            
            
            0.02036,525,000
            
            3.87
            
            $
            0.016
            
            36,525,000
            
            $
            0.016








F-31
 
 **DIAMOND
            ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements**
 **March
            31, 2006 and 2005**


**15.**
            **Warrants
                (continued)**





Warrants
      Granted to Independent Consultant




During
        the year ended March 31, 2004, the Company’s board of directors approved the
        grant of stock warrants to an independent consultant to purchase an aggregate
        of
        35,000,000 shares of its common stock. These options have an exercise price
        of
        $0.012 and as of March 31, 2004 all of these option shares were vested. As
        a
        result, the Company has recorded $70,000 in consulting expense. These warrants
        were not issued as part of any of the Company’s registered Stock Option
        Plans.


**16.**
            **Common
                Stock Options**





The
      following summarizes the common stock option transactions for the years ended :





Options
      issued and outstanding not under a stock option plan:





Officers/
              Directors
            
            Consultants
            
            Weighted
              Average
              Exercise
              PriceOptions
                exercisable, March 31, 2004
            
            
            24,000,000
            
            
            -
            
            $
            0.006Granted
            
            
            -Expired
            
            
            (9,250,000
            )Options
                exercisable, March 31, 2005
            
            
            14,750,000
            
            
            -
            
            $
            0.006Granted
            
            
            -Expired
            
            
            -Options
              exercisable, March 31, 2006
            
            
            14,500,000
            
            
            -
            
            $
            0.006




Officers/directors





The
      options of 14,500,000 expire on November 15, 2006.





F-32


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**16.**
            **Common
                Stock Options
                (continued)**





2005
      Equity Compensation Program





On
      March
      1, 2005, the shareholders of the Company adopted its 2005 Equity Compensation
      Program (the "Program"). The Program is intended to secure for the Company,
      its
      direct and indirect present and future subsidiaries, including without
      limitation any entity which the Company reasonably expects to become a
      subsidiary (the "Subsidiaries"), and its shareholders, the benefits arising from
      ownership of the Company's Common Stock, no par value per share ("Common
      Stock"), by those selected directors, officers, key employees and consultants
      of
      the Company and the Subsidiaries who are responsible for future growth. The
      Program is designed to help attract and retain superior individuals for
      positions of substantial responsibility with the Company and the Subsidiaries
      and to provide these persons with an additional incentive to contribute to
      the
      success of the Company and the Subsidiaries.




In
        order
        to maintain flexibility in the award of benefits, the Program is comprised
        of
        two parts -- the Incentive Stock Option Program ("Incentive Plan"), and the
        Supplemental Stock Option Program ("Supplemental Plan"). Each such plan is
        referred to herein as a "Plan" and all such plans are collectively referred
        to
        herein as the "Plans." The grant of an option under one of the Plans shall
        not
        be construed to prohibit the grant of an option under any of the other Plans.
 
 Unless
        any Plan specifically indicates to the contrary, all Plans shall be subject
        to
        the general provisions of the Program set forth below under the heading "General
        Provisions of the Equity Compensation Program" (the "General Provisions").
 
 The
        Program is administered by the Board of Directors of the Company (the "Board"
        or
        the "Board of Directors") or any duly created committee appointed by the
        Board
        and charged with the administration of the Program. To the extent required
        in
        order to satisfy the requirements of Section 162(m) of the Internal Revenue
        Code of 1986, as amended (the "Code"), such committee shall consist solely
        of
        "Outside Directors" (as defined herein). The Board, or any duly appointed
        committee, when acting to administer the Program, is referred to as the "Program
        Administrator". Any action of the Program Administrator shall be taken by
        majority vote at a meeting or by unanimous written consent of all members
        without a meeting. No Program Administrator or member of the Board of the
        Company shall be liable for any action or determination made in good faith
        with
        respect to the Program or with respect to any option granted pursuant to
        the
        Program. For purposes of the Program, the term "Outside Director" shall mean
        a
        director who (a) is not a current employee of the Company or the
        Subsidiaries; (b) is not a former employee of the Company or the
        Subsidiaries who receives compensation for prior services (other than benefits
        under a tax-qualified retirement plan) during the then current taxable year;
        (c) has not been an officer of the Company or the Subsidiaries; and
        (d) does not receive remuneration (which shall be deemed to include any
        payment in exchange for goods or services) from the Company or the Subsidiaries,
        either directly or indirectly, in any capacity other than as a director,
        except
        as otherwise permitted under Code Section 162(m) and the regulations
        thereunder.
   F-33
 **DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**
 **16.**  **Common
          Stock Options (continued)**
 
 2005
          Equity Compensation Program (continued)
 
 Subject
          to the other provisions of this Program, and with a view to effecting its
          purpose, the Program Administrator shall have the authority: (a) to
          construe and interpret the Program; (b) to define the terms used herein;
          (c) to prescribe, amend and rescind rules and regulations relating to
          the Program; (d) to determine the persons to whom options shall be granted
          under the Program; (e) to determine the time or times at which options
          shall be granted under the Program; (f) to determine the number of shares
          subject to any option under the Program as well as the option price, and
          the
          duration of each option, and any other terms and conditions of options;
          and
          (g) to make any other determinations necessary or advisable for the
          administration of the Program and to do everything necessary or appropriate
          to
          administer the Program. All decisions, determinations and interpretations
          made
          by the Program Administrator shall be binding and conclusive on all participants
          in the Program and on their legal representatives, heirs and beneficiaries.
 
 The
          maximum aggregate number of shares of Common Stock issuable pursuant to
          the
          Program is 65,000,000 shares. No one person participating in the Program
          may
          receive options for more than 25,000,000 shares of Common Stock in any
          calendar
          year. All such shares may be issued under any Plan, which is part of the
          Program. If any of the options (including incentive stock options) granted
          under
          the Program expire or terminate for any reason before they have been exercised
          in full, the unissued shares subject to those expired or terminated options
          shall again be available for purposes of the Program. Any shares of Common
          Stock
          delivered pursuant to the Program may consist, in whole or in part, of
          authorized and unissued shares or treasury shares.
 
 All
          directors, officers, employees and consultants of the Company and the
          Subsidiaries are eligible to participate in the Program. The term "employee"
          shall include any person who has agreed to become an employee and the term
          "consultant" shall include any person who has agreed to become a consultant.
 
 The
          Program became effective March 1, 2005, when approved by the shareholders
          of the
          Company. The Program shall continue in effect for a term of ten years from
          the
          date that the Program is adopted by the Board of Directors, unless sooner
          terminated by the Board of Directors of the Company. As of March 31, 2005
          no
          options were granted under the Program.
 
 The
          following summarizes the common stock option transactions for the year
          ended March
          31, 2006.
 
 Options
          issued and outstanding:
 
 Officers/
                  Directors
                
                
                Consultants
                
                
                Weighted
                  Average
                  Exercise
                  PriceOptions
                    exercisable, March 1, 2004
                
                
                -
                
                
                -
                
                $
                -Granted
                
                
                -Expired
                
                
                -Options
                    exercisable, March 31, 2005
                
                
                -
                
                
                -
                
                $
                -Granted
                
                
                57,100,000
                
                
                1,000,000
                
                $
                0.007Exercised
                
                
                (600,000
                )
                
                -
                
                $
                0.007Expired
                
                
                -
                
                
                -Options
                    exercisable, March 31, 2006
                
                
                56,500,000
                
                
                1,000,000
                
                $
                0.007




F-34


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**16.**
            **Common
                Stock Options
                (continued)**





2001
      Stock Compensation Plan (continued)





The
        Company's 2001 Stock Compensation Plan was established for the purpose of
        providing the Company with a means of compensating selected key employees
        (including officers), and directors of the Company and its subsidiaries for
        their services rendered in connection with the development of Company with
        shares of Common Stock of the Company. The plan authorized the Board of
        Directors of the Company to sell or award up to 50,000,000 shares and/or
        options
        of the Company's common stock, no par value at a purchase price of $0.006,
        which
        represented the fair value of the common stock on that date. On July 24,
        2001,
        50,000,000 options to purchase the Company's common stock were granted to
        the
        select key employees, officers and a director of the Company which expired
        on
        July 24, 2004. Of such options granted, James Lu, the President and Jeffrey
        Schillen, the Executive Vice President of the Company were granted options
        to
        purchase 20,000,000 and 10,000,000 shares, respectively, and 5,000,000 options
        to purchase were granted to Murray Scott, a Director of the Company. The
        remaining balance of 15,000,000 options was granted to eight other key employees
        of the Company. As of March 31, 2006 and 2005, none of the options that were
        granted under this plan were exercised.







2000
      Stock Compensation Plan





The
      following summarizes the 2000 stock compensation plan transactions for the
      years
      ended :





Stock
                Options Outstanding
            
            Weighted
                Average Exercise
              PriceOptions,
                Exercisable and Outstanding, March 31, 2003
            
            
            600,000
            
            $
            0.050GrantedExpired
            
            
            (600,000
            )
            
            0.050Options,
                Exercisable and Outstanding, March 31, 2005
            
            
            -
            
            
            -Granted
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Options,
              Exercisable
              and Outstanding, March 31, 2005
            
            
            -Granted
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Options,
                Exercisable and Outstanding, March 31, 2006
            
            
            -
            
            
            -





The
      Company's 2000 Stock Compensation Plan ("Plan") was established for the purpose
      of providing the Company with a means of compensating selected key employees
      (including officers), directors and consultants to the Company and its
      subsidiaries for their services rendered in connection with the development
      of
      Diamond Entertainment Corporation with shares of common stock of the Company.
      The Plan authorized the Board of Directors of the Company to sell or award
      up to
      13,000,000 shares and/or options of the Company's common stock, no par value.
      The Plan expired on May 31, 2001, and the unissued outstanding balance of
      options of 5,100,000 shares to be awarded or sold in accordance with this plan
      was canceled. These options were not exercised as of March 31,
      2004.





During
      the period ended March 31, 2004, 600,000 of outstanding options
      expired.




F-35


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**16.**
            **Common
                Stock Options
                (continued)**





The
      following schedules summarize options for the years ended March 2005 and
      2004





Options
                Outstanding
            
            Options
                ExercisableRange
                of
              Exercise
              Prices
            
            Number
              Outstanding
              as
                of March
              31,
                2006
            
            Weighted
              Average
              Remaining
              Contractual
              Life
            
            Weighted
              Average
              Exercise
              Price
            
            Number
              Exercisable
              as
                of March
              31,
                2006
            
            Weighted
              Average
              Exercise
              Price0.006
            
            14,500,000
            
            0.61
            
            $
            0.006
            
            14,500,000
            
            $
            0.0060.007
            
            56,500,000
            
            9.21
            
            
            0.007
            
            -
            
            
            0.0071,000,000
            
            
            
            $
            0.007
            
            14,500,000
            
            $
            0.006











Options
                Outstanding
            
            Options
                ExercisableRange
                of
              Exercise
              Prices
            
            Number
              Outstanding
              as
                of March
              31,
                2005
            
            Weighted
              Average
              Remaining
              Contractual
              Life
            
            Weighted
              Average
              Exercise
              Price
            
            Number
              Exercisable
              as
                of March
              31,
                2005
            
            Weighted
              Average
              Exercise
              Price0.006
            
            14,750,000
            
            1.61
            
            $
            0.006
            
            14,750,000
            
            $
            0.00614,750,000
            
            1.61
            
            $
            0.006
            
            14,750,000







F-36


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**17.**
            **Major
                Customers/Suppliers**





Customers


For
        the year ended March 31, 2006, the Company had net sales to two customers
        that
        accounted for approximately 32% and 13%, respectively.
  For
        the year ended March 31, 2005, the Company had net sales to two customers
        that
        accounted for approximately 41% and 18%, respectively.
 
 For
        the year ended March 31, 2006, the Company had accounts receivable from five
        customers that accounted for approximately 66%.
 
 For
        the year ended March 31, 2005, the Company had accounts receivable from five
        customers that accounted for approximately 98%.
 
 Suppliers
 
 For
        the year ended March 31, 2006, the Company purchased video and DVD products
        from
        four suppliers that accounted for approximately 71% of the Company's net
        purchases. During such period, the percentages of net video/DVD product
        purchases made from such suppliers were 29%, 16%, 15% and 11%,
        respectively.
 
 For
        the
        year ended March
        31, 2005, the
        Company purchased video and DVD products from three suppliers that accounted
        for
        approximately 79% of the Company's net purchases. During such period, the
        percentage of net video/DVD product purchases made from such suppliers were
        31%,
        28% and 20%, respectively.





**18.**
            **Income
                Taxes**




The
        components of the provision for income taxes are as follows:
  For
                  The Years Ended
                March
                  31,2006
              
              2005Current
                  Tax ExpenseU.S.
                  federal
              
              $
              10,636
              
              $
              6,896State
                  and local
              
              
              7,148
              
              
              6,274Total
                  Current
              
              
              17,784
              
              
              13,170Deferred
                  Tax ExpenseU.S.
                  federal
              
              
              -
              
              
              -State
                  and local
              
              
              -
              
              
              -Total
                  deferred
              
              
              -
              
              
              -Total
                  tax provision from continuing operations
              
              $
              17,794
              
              $
              13,170




F-37


**DIAMOND
          ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **March
          31, 2006 and 2005**


**18.**
            **Income
                Taxes (continued)**





The
      reconciliation of the effective income tax rate to the Federal statutory rate
      is
      as follows for the year ended 2006 :





Federal
                income tax rate
            34.0%Effect
                of valuation allowance
            33.9%Permanent
                timing differences
            2.2%States
                taxes
            1.7%Effective
                income tax rate
            4.0%





At
      March
      31, 2006, the Company had federal and state net carryforward losses of
      approximately $13,378,814 and $3,238,041, respectively. Because of the current
      uncertainty of realizing the benefit of the tax carryforwards, a valuation
      allowance equal to the tax benefit for deferred taxes has been established.
      The
      full realization of the tax benefit associated with the carryforwards depends
      predominantly upon the Company's ability to generate taxable income during
      the
      carryforward period. The net change in the valuation allowance for the years
      ended March 31, 2006 and 2005, decreased by approximately $304,472 and decreased
      by approximately $102,614, respectively.




Deferred
      tax assets and liabilities reflect the net tax effect of temporary differences
      between the carrying amount of assets and liabilities for financial reporting
      purposes and amounts used for income tax purposes. Significant components of
      the
      Company's deferred tax assets and liabilities are as follows:




March
                31,2005
            
            2005Deferred
                Tax AssetsLoss
                carryforwards
            
            $
            4,784,324,
            
            $
            4,839,004Depreciation
            
            
            27,521
            
            
            (81,090
            )Reserves
            
            
            -
            
            
            202,903Other
            
            
            90,242
            
            
            10,215Less:
                valuation allowance
            
            
            (4,666,560
            )
            
            (4,971,032
            )Net
                Deferred Tax Assets
            
            $
            -
            
            $
            -





Net
      operating loss carry forwards expire starting in 2013 through 2019. Per year
      availability is subject to change of ownership limitations under Internal
      Revenue Code Section 382.






F-38


**DIAMOND
        ENTERTAINMENT CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006 and 2005**


**19.**
            **Subsequent
                Events**





On
      May 2,
      2006, the Company terminated its factoring agreement with Greystone Commercial
      Services L.P. located in Dallas, Texas, who was the financial institution that
      factored the Company’s accounts receivables. All obligations owed under the
      financing agreement were satisfied and paid in full as of June 30,
      2006.





On
      June
      30, 2006, the Company entered into an Accounts Receivable Revolving Loan
      Agreement (“Agreement”) with financial institution located in San Francisco, CA
      for a revolving accounts receivable line of credit up to $250,000 for a term
      expiring in twelve months from the date of inception. Under the terms of the
      Agreement, the Company can borrow up to $250,000 against the Company’s accounts
      receivable of irrevocable sales made to its customer, excluding any consignment
      sales or any non-irrevocable sales. The Company is advanced 75% of the face
      value of the accounts receivable presented for borrowing. The cost of funds
      borrowed under the Agreement is at 1.67% per month of the outstanding accounts
      receivable balance presented for borrowing calculated on a daily basis. Cost
      of
      Funds borrowed against any accounts receivable in amounts exceeding 75% of
      its
      face value is at 2% per month calculated on a daily basis. At the end of each
      month any excess funds available against the Company’s qualified accounts
      receivable net of cash receipts from the customer will be advanced to the
      Company. The loan Agreement may be terminated by the lender by giving the
      Company 30 days written notice.








F-39


ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL
      DISCLOSURE





Effective
      July 16, 2003, Diamond Entertainment Corporation’s (the “Company”) principal
      independent accountants, Stonefield Josephson, Inc., resigned as the Company’s
      principal independent accountant. Stonefield Josephson, Inc., had been engaged,
      on August 8, 2002, by the Company as the principal independent accountant to
      audit the financial statements of the Company for the fiscal year ended March
      31, 2003, replacing the firm of Merdinger, Fruchter, Rosen & Company, P.C.
      Stonefield Josephson, Inc., was subsequently engaged, on May 19, 2003, to audit
      the financial statements of the Company for the year ended March 31, 2003.
      Stonefield Josephson, Inc., has not rendered any report on the financial
      statements of the Company filed with the Securities and Exchange Commission
      (the
“Commission”).





A
      letter
      of resignation from Stonefield Josephson, Inc., has been furnished to and
      accepted by the board of directors of the Company.





Stonefield
      Josephson, Inc., has orally advised counsel for the Company that there were
      no
      disagreements, whether or not resolved, between Stonefield Josephson, Inc.
      and
      the Company on any matter of accounting principles or practices, financial
      statement disclosure, or auditing scope or procedure which, if not resolved
      to
      the satisfaction of Stonefield Josephson, Inc., would have caused it to make
      reference to the subject matter of the disagreement in connection with its
      report on the financial statements of the Company. Furthermore, Stonefield
      Josephson, Inc. has not advised the Company with respect to any of the matters
      referred to in Item 304(a)(1)(iv)(B) of Regulation S-B.





The
      Company has requested and has received from Stonefield Josephson, Inc. a letter
      addressed to the Commission stating whether it agrees with the above statements,
      and, if not, stating the respects in which it does not agree. A copy of such
      letter is attached to the Company’s current Report on Form 8-K/A as an exhibit
      thereto which was filed with the Securities and Exchange Commission on August
      26, 2003.





On
      September 2, 2003 the Board of Directors of Diamond Entertainment Corporation
      (the “Company”) approved the engagement of Pohl, McNabola, Berg & Company
      LLP to serve as the Company's independent public accountants and to be the
      principal accountants to conduct the audit of the Company's financial statements
      for the fiscal year ended March 31, 2003,





During
      the Registrant's two most recent fiscal years ended March 31, 2002 and 2003,
      and
      up to the date of engagement, the Registrant did not consult with Pohl,
      McNabola, Berg & Company LLP regarding any of the matters or events set
      forth in Item 304 (a)(2)(i) and (ii) of Regulation S-K. The engagement of Pohl,
      McNabola, Berg & Company was reported on Form 8-K filed on September 8,
      2003.








ITEM8A .
      CONTROLS AND PROCEDURES





The
      President/Co-CEO and the Chief Financial Officer of the Company have established
      and are currently maintaining disclosure controls and procedures for the
      Company. The disclosure controls and procedures have been designed to ensure
      that material information relating to the Company is made known to them as
      soon
      as it is know by others within the Company.





Our
      President/Co-CEO and our Chief Financial Officer conduct updates and review
      and
      evaluate the effectiveness the Company’s disclosure controls and procedures and
      have concluded, based on their evaluation as of March 31, 2005, that our
      disclosure controls and procedures are effective for gathering, analyzing and
      disclosing the information we are required to disclose in our reports filed
      under the Securities Exchange Act of 1934. There have been no significant
      changes in our internal controls or in other factors that could significantly
      affect these controls subsequent to the date of the previously mentioned
      evaluation.




23


PART
      III





ITEM9.
      DIRECTORS AND EXECUTIVE OFFICERS OF
      REGISTRANT





The
      Company's current officers and directors consist of the following
      persons:


Name
              Age
              Position
                  with CompanyJames
                  K.T. Lu.
              58
              Chairman
                  of the Board, President, Co-Chief Executive Officer,Co-Chairman,
                  Secretary and DirectorJeffrey
                  I. Schillen.
              59
              Executive
                  Vice President, Sales and Marketing, Co-Chief Executive
                  Officer,Co-Chairman
                  and DirectorMurray
                  T. Scott.
              83
              DirectorFred
                  U. Odaka.
              69
              Chief
                  Financial Officer





JAMES
      K.T. LU (Class 2 Director). Mr.
      Lu
      has been a director since February 1989, Chairman of the Board, Chief Executive
      Officer and Secretary since March 1, 1990, and President since July 1991. As
      of
      April 1, 2002, Mr. Lu became Co-Chairman and Co-Chief Executive Officer. In
      a
      matter which had no relationship to our business or his activities as an officer
      of the Company or any subsidiaries thereof, Mr. Lu pled guilty in 2002 to one
      count of conspiracy to launder money and one count of violation of the Travel
      Act. Mr. Lu entered into a cooperation agreement with the authorities and was
      granted an early termination of his supervised release.





JEFFREY
      I. SCHILLEN (Class 1 Director). Mr. Schillen has been our Executive Vice
      President of Sales and Marketing since 1993 and has been a director since our
      inception in April 1986. As of April 1, 2002, Mr. Schillen became Co-Chairman
      and Co-Chief Executive Officer.





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.
      Mr.
      Scott remains involved with Gregg's Furniture in a consulting and advisory
      capacity.





FRED
      U.
      ODAKA (Class 1 Director). Mr. Odaka has been our Chief Financial Officer since
      September 2000. From December 1998 to September 2000 Mr. Odaka was a consultant
      to Diamond Entertainment Corporation and was our "acting" Chief Financial
      Officer. Mr. Odaka received his Bachelor of Science degree in finance from
      Fresno State College, Fresno, California.





JERRY
      LAN
      (Class 2 Director). Mr. Lan became a director in March 2005, has been a
      principal and a tax management consultant since 1973 with Lan, Liu & Co.
      LLP, a public accounting firm based in Artesia, California. In addition, Mr.
      Lan
      has been an investment advisor and life insurance agent with John Hancock
      Financial Co. in Irvine, California since 1999.





Under
      our
      certificate of incorporation, our board of directors is divided into three
      (3)
      classes, with each class to be elected by the shareholders every three years.





All
      directors hold office for terms up to 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. Our board presently
      consists of five directors and our directors were elected at the March 2005
      annual meeting of stockholders for up to three-year terms. None of our directors
      have resigned or declined to stand for re-election due to a disagreement on
      any
      matter relating to our operations, policies or practices. Officers are elected
      annually by our board of directors and, subject to existing employment
      agreements, serve at the discretion of our board.





24





**Committees
      of the Board of Directors**





The
      Company has no standing audit, nominating or compensation committee, or any
      committee performing similar functions. All such functions are performed by
      the
      board of directors. The Company is currently in the process of selecting
      qualified outside independent directors to serve on such committees.





**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 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 submitted
      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, 2003, 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: three late reports
      and four transaction not reported on a timely basis. Such late reports have
      subsequently been filed to report the transactions not timely reported.





**Code
      of Ethics for Chief Executive Officer and Senior Financial
      Officers**





On
      August
      29, 2003, the Board of Directors of the Company adopted the Code of Ethics
      for
      Chief Executive Officer and Senior Financial Officers which is included in
      Item
      13 as Exhibit 14 and may be accessed on the Company’s website,  e-DMEC.com .





ITEM10.
      EXECUTIVE COMPENSATION





The
      following table sets forth aggregate compensation earned by each Executive
      Officer for services rendered in all capacities during the year ended March
      31,
      2006, 2005 and 2004.





Summary
      Compensation Table


AnnualCompensation
              
              Long
                  TermCompensationAwards
              
              PayoutsSecurities
              
              
              
              All
                  OtherUnderlying
              
              LTIP
                  Payouts
              
              CompensationName
                    and Principal Position
              
              Year
              
              Salary
                  ($)
              
              Bonus
                  ($)
              
              Options
                  (#)
              
              ($)
              
              ($)James
                    K.T. Lu (1) President,
              
              
              2006
              
              
              150,000
              
              
              0
              
              
              0
              
              
              0
              
              
              45,366Co-Chief
                    Executive Officer and Secretary
              
              
              2005
              
              
              150,000
              
              
              17,308
              
              
              0
              
              
              0
              
              
              41,2282004
              
              
              150,000
              
              
              
              
              
              0
              
              
              0
              
              
              21,731Jeffrey
                  I. Schillen (2)
              
              
              2006
              
              
              150,000
              
              
              0
              
              
              0
              
              
              0
              
              
              23,462Co-CEO,
                  Executive Vice
              
              
              2005
              
              
              150,000
              
              
              13,846
              
              
              0
              
              
              0
              
              
              26,001President
                  of Sales and Marketing
              
              
              2004
              
              
              150,000
              
              
              0
              
              
              0
              
              
              0
              
              
              11,486





(1)
      Mr.
      Lu’s annual salary was $150,000 during the fiscal year ended March 31, 2006,
      2005 and 2004. During the fiscal years ended March 31, 2006, 2005 and 2004,
      Mr.
      Lu was paid salaries totaling $112,500, $150,000, and $140,625, respectively.
      He
      elected to defer a portion of his salary for the years ended March 31, 2006
      and
      2004





(2)
      Mr.
      Schillen's annual salary was $150,000 during the fiscal years ended March 31,
      2006, 2005 and 2004. He elected to defer a portion of his salary for the years
      ended March 31, 2006, 2005 and 2004. During the fiscal years ended March 31,
      2006, 2005 and 2004, Mr. Schillen was paid salaries totaling $112,500, $120,000
      and $82,500, respectively.





25





OPTION/SAR
      GRANTS





The
      following table sets forth certain information with respect to the options
      granted and canceled during the year ended March 31, 2006, 2005 and 2004, for
      the persons named in the Summary Compensation Table (the "Named Executive
      Officers"):


Percent
                  of TotalOptions/SARsNumber
                  of Securities
              Granted
                  toUnderlying
                  Options/SARs
              Employees
                  in
              Exercise
                  or BaseName
              Year
              Granted
                  (Canceled)
              Fiscal
                  Year
              Price
                  ($/Sh)
              Expiration
                  DateJames
                  K.T. Lu
              2006
              25,000,000
              43%
              $0.0007
              6/15/15Jeffrey
                  I. Schillen
              2006
              12,150,000
              21%
              $0.0007
              6/15/15James
                  K.T. Lu
              2005
              (600,000)
              n/a
              $0.005
              4/22/04James
                  K.T. Lu
              2005
              (3,500,000)
              n/a
              $0.005
              5/24/04James
                  K.T. Lu
              2005
              (20,000,000)
              n/a
              $0.006
              7/23/04James
                  K.T. Lu
              2005
              (3,000,000)
              n/a
              $0.005
              3/31/05Jeffrey
                  I. Schillen
              2005
              (400,000)
              n/a
              $0.005
              4/22/04Jeffrey
                  I. Schillen
              2005
              (1,000,000)
              n/a
              $0.005
              5/24/04Jeffrey
                  I. Schillen
              2005
              (10,000,000)
              n/a
              $0.006
              7/23/04Jeffrey
                  I. Schillen
              2005
              (750,000)
              n/a
              $0.005
              3/31/05James
                  K.T. Lu
              2004
              --
              --
              --
              --Jeffrey
                  I. Schillen
              2004
              --
              --
              --
              --





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 the fiscal year ended March 31, 2005 by the Named Executive Officers
      and
      with respect to unexercised options held by such persons at March 31,
      2005


Number
                  of SecuritiesUnderlying
              Value
                  ofUnexercisedShares
              
              UnexercisedOptions/SARs
              In-the-MoneyOptions/SARsAcquired
                  On
              Value
              At
                  FY-End (#)
              at
                  FY-End ($)Name
              Exercise
                  (#)
              Realized
                  ($)
              Exercisable
              Unexercisable
              Exercisable
              UnexercisableJames
                  K.T. Lu
              0
              0
              14,500,000
              --
              $139,200
              --Jeffrey
                  I. Schillen
              0
              0
              --
              --
              --
              --





Employment
      Agreements





In
      1991,
      we 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,
      effective fiscal years 1996 and 2003, Mr. Schillen's annual compensation was
      increased to $120,000 and $150,000, respectively. Consequently, contracted
      salary levels are at $150,000 for Mr. Lu and Mr. Schillen. Both employment
      agreements were extended in July 2000 for a period of five years and such
      agreements terminated on December 31, 2005. See "Summary Compensation Table"
      above, and the notes thereto.





On
      April
      23, 1996 we agreed to reserve 1,000,000 shares of common stock for distribution
      to Messrs. Lu and Schillen. Such shares could be purchased for $.25 per share,
      in installment payments with a five year promissory note with interest at 6%
      per
      annum. On July 24, 2001, our Board of Directors approved the lowering of the
      exercise rate per share to $.005 to purchase such shares and extended the
      expiration date of such options to April 22, 2004. As of March 31, 2004 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, we 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 were
      exercisable until March
      31,
      1999. On July 24, 2001, we lowered the exercise price of such warrants to $.005
      per share. In February 2002, we extended the term of the warrants until March
      31, 2005.





26


We
      maintain a life insurance policy on Mr. Lu, for our benefit in the amount of
      $1,000,000.





None
      of
      the employment agreements which we have with any of our 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.





Employee
      and Director Stock Option Plan





In
      July
      24, 2001, we adopted the 2001 Stock Compensation Plan dated July 13, 2001 in
      order to attract and retain qualified personnel. The Plan authorized our Board
      of Directors to sell or award up to 50,000,000 shares and/or options of the
      Company's common stock, no par value at a purchase price of $0.006. On July
      13,
      2001, our Board of Directors granted an aggregate of 50,000,000 options to
      purchase shares of our Common Stock to our officers, directors, and employees.
      As of  July
      23,
      2004 the options granted under the plan expired and none of the options that
      were granted under this plan were exercised.





On
      June
      16, 2005, the Board of Directors of the Company approved the granting of
      58,100,000 options to purchase the Company's common stock under the Incentive
      Plan of the 2005 Equity Compensation Program to the select employees, officers,
      directors and a consultant of the Company expiring no later than 10 years from
      the date the options were granted. The effective date of such options being
      granted was June 16, 2005, at an exercise price of $.007 per share. Such stock
      options granted vest in three annual installments commencing one year after
      the
      date of grant. Of
      such
      options granted, James Lu, the President, Jeffrey Schillen the Executive Vice
      President and Fred Odaka, Chief Financial Officer of the Company were granted
      options to purchase 25,000,000, 12,150,000 and 5,000,000 shares, respectively,
      and 5,000,000 and 2,500,000 options were granted to Murray Scott and Jerry
      Lan,
      respectively, who are Directors of the Company. The remaining balance of
      7,450,000 options was granted to six employees and one consultant of the
      Company. In January 2006, the Company canceled 600,000 of such options granted
      to one employee who terminated employment in October, 2005.





Consulting
      Agreement with Director





On
      August
      25, 1997 we executed a consulting agreement with Murray T. Scott, one of our
      directors, for long term strategic planning including development of marketing
      strategies and development and acquisition of new products. Mr. Scott's
      consulting agreement had a term of two years. As compensation under the
      agreement, Mr. Scott was issued 250,000 shares of common stock, and warrants
      to
      purchase an additional 250,000 shares of common stock at an exercise price
      of
      $0.10 per share. On July 24, 2001 we lowered the exercise price of the warrants
      from $0.10 to $0.005 per share. Such warrants expire on August 24,
      2005.





Compensation
      of Directors





To
      date,
      directors who are not also our employees have received no compensation for
      attending meetings of our board of directors. All directors are entitled to
      reimbursement of reasonable travel and lodging expenses related to attending
      meetings of our directors. There are no standard arrangements or agreements
      to
      provide compensation to directors for attending meetings of our board of
      directors.








27




ITEM11.
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT





The
      following table sets forth current information as of June 15, 2006, relating
      to
      the beneficial ownership of the outstanding shares of our common stock and
      preferred stock by (i) each person owning beneficially more than 5% of our
      common stock, (ii) each Director of the Company, (iii) each Named Executive
      Officer; and (iv) all Executive Officers and directors of the Company 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.


Percentage
                  ofCommon
                  StockAssumingCommon
                  Stock
              Percentage
                  of
              Preferred
              Conversion
                  ofName
                  (1)
              Owned
              Common
                  Stock
              Stock
                  Owned (2)
              Preferred
                  Stock (3)James
                  K. T. Lu (4)
              35,688,110
              5.64%
              209,287
              5.45%Diamond
                  Entertainment Corporation800
                  Tucker LaneWalnut,
                  CA 91789Jeffrey
                  I. Schillen
              5,355,750
              .85%
              36,282
              .82%Diamond
                  Entertainment Corporation48
                  St. Lawrence WayMarlboro,
                  NJ 07746Murray
                  T. Scott
              1,050,000
              .17%
              75,796
              .18%Diamond
                  Entertainment Corporation800
                  Tucker LaneWalnut,
                  CA 91789Jerry
                  Lan
              1,600,000
              .25%
              0
              .24%6
                  Via AvoriaNewport
                  Coast, CA 92657American
                  Top Real Estate Inc.
              140,343,755
              22.18%
              0
              21.18%313
                  S.E. 199th Ave.Camas,
                  WA 98607Stacey
                  Stogner
              60,000,000
              9.48%
              0
              9.06%437
                  Mountain Ave.Westfield,
                  NJ 07090Lu
                  Li Chiu
              60,000,000
              9.48%
              0
              9.06%6th
                  Floor, No. 6, Alley 1Chung-An
                  St., San Chung CityTaipei,
                  TaiwanAll
                  directors and executive officers
              43,693,860
              6.91%
              321,365
              6.69%as
                  a group(4 persons) (5)


(1)
              Beneficial
                  ownership is determined in accordance with Rule 13d-3 under the
                  Securities
                  Exchange Act of 1934, and is generally determined by voting and/or
                  investment power with respect to securities. Unless otherwise noted,
                  all
                  shares of common stock listed above are owned of record by each
                  individual
                  named as beneficial owner and such individual has sole voting and
                  dispositive power with respect to the shares of common stock owned
                  by each
                  of them. Such person or entity's percentage of ownership is determined
                  by
                  assuming that any options or convertible securities held by such
                  person or
                  entity which are exercisable within 60 days from the date thereof
                  exercised or converted as the case any
                  be.
 
 (2)
              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.
 
 (3)
              Assumes
                  conversion of shares of preferred stock beneficially
                  owned.
 (4)
                Mr.
                    Lu is President, Co-Chief Executive Officer, Secretary and a
                    director.
                    Includes 14,500,000 shares of common stockissuable
                    upon exercise of warrants andoptions.
  (5)
                Represents29,193,860 shares of common stock outstanding and14,500,000shares of common stock issuable uponexercise
                    of warrants, options or convertible notes and
                    interest.
 28


ITEM12.
      CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS





On
      August
      25, 1997 we executed a consulting agreement with Murray T. Scott, one of our
      directors, for long term strategic planning including development of marketing
      strategies and development and acquisition of new products. Mr. Scott's
      consulting agreement had a term of two years. As compensation under the
      agreement, Mr. Scott was issued 250,000 shares of common stock, and warrants
      to
      purchase an additional 250,000 shares of common stock at an exercise price
      of
      $0.10 per share. On July 24, 2001 we lowered the exercise price of the warrants
      from $0.10 to $0.005 per share. Such warrants expire on August 24,
      2005.





On
      September 1, 1997, we issued to each of Messrs. Lu and Schillen 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 March 31, 1999. 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 March of 1999. The warrants are fully vested
      and were exercisable until March 31, 1999. In July of 2001, we extended the
      exercise periods of the warrants until March 31, 2005 and lowered the exercise
      price of the warrants from $0.10 to $0.005 per share.





During
      the quarter ended December 31, 1999, our Board of Directors authorized the
      conversion of approximately $1,880,725 in related party payables into one year
      7% convertible promissory notes of $1,071,225 and $809,500 to GJ Products
      Corporation and American Top Real estate, Inc. ("ATRE"), respectively. The
      due
      dates of both notes were extended to September 30, 2001. The terms of the new
      convertible notes allowed us to make partial principal and interest payments
      from time to time and the holders of the convertible notes had the option to
      request such payments of the indebtedness evidenced by the notes either in
      lawful money of the United States or in an equivalent value consisting of our
      common stock, the number of shares to be determined by dividing the payment
      amount by the average twenty day bid price for our common stock during the
      twenty trading days prior to the date of such payment. Also, during the quarter
      ended December 31, 1999, GJ Products Corporation to which $1,071,225 in related
      parties note was owed by us, sold all of its common stock in which 100% of
      its
      outstanding shares of common stock was sold to a non-related party. On July
      24,
      2001, we authorized and approved the issuance of 140,343,755 shares of the
      company's common stock to ATRE upon the conversion by ATRE of the entire unpaid
      principal amount of $809,500 of its note and all accrued interest thereon in
      the
      amount of $102,734.41 as of July 23, 2001 at the conversion price of $0.0065
      per
      share as of the close of business on July 23, 2001, and we also authorized
      and
      approved the issuance of 180,928,097 shares of our common stock to GJ Products
      Corporation upon the conversion of the entire unpaid principal amount of
      $1,037,775.00 of its note and all accrued interest thereon in the amount of
      $138,257.63 as of July 23, 2001 at the conversion price of $0.0065 per share
      as
      of the close of business on July 23, 2001. As of March 31, 2004, we own 39.5%
      of
      ATRE. Mr. Lu was President and a Director of ATRE until January 8, 2004, when
      he
      resigned his position as President of ATRE.





In
      March
      and June 1999, we issued callable convertible notes for $50,000 and $100,000
      to
      James Lu and Jeffrey I. Schillen, respectively. The notes bear interest at
      10%
      per year with principal and interest due on the first anniversary of the date
      of
      issuance. Each note was extended for an additional year. The notes also call
      for
      any amount of the outstanding principal to be converted into restricted shares
      of our common stock at the option of the lenders at a conversion rate of $0.05
      per share. The notes contain certain demand and piggyback registration rights.
      On July 24, 2001, we authorized and approved an amendment of the foregoing
      callable convertible whereby we reduced the conversion rate from. $0.05 to
      $0.005 and allowed the note holders to also convert any accrued interest against
      such notes. Also on July 24, 2001, we approved the issuance of 12,343,150 shares
      of our common stock to Mr. Lu upon conversion of his $50,000.00 note and accrued
      interest thereon in the amount of $11,715.75 as of July 23, 2001. As of March
      31, 2004, the balance of Mr. Schillen’s note was $50,000 and was not
      converted.





29





On
      May
      25, 1999, we issued to Mr. Lu, as a bonus, options to purchase 2,500,000 shares
      of our common stock at $0.05 and options to purchase 1,000,000 shares of our
      common stock at $0.10 per share. The options expired on May 24, 2004. On July
      24, 2001 we lowered the exercise price of the warrants from $0.10 to $0.005
      per
      share.





On
      May
      25, 1999, we issued to Mr. Schillen, as a bonus, options to purchase 500,000
      shares of common stock at $0.05 and options to purchase 500,000 shares of our
      common stock at $0.10 per share. The options expired on May 24, 2004. On July
      24, 2001 we lowered the exercise price of the warrants from $0.10 to $0.005
      per
      share.





On
      July
      24, 2001, the Board of Directors of the Company approved the Company's 2001
      Stock Compensation Plan dated July 13, 2001 for the purpose of providing the
      Company with a means of compensating selected key employees (including
      officers), and directors of the Company and its subsidiaries for their services
      rendered in connection with the development of Company with shares of Common
      Stock of the Company. The plan authorized the Board of Directors of the Company
      to sell or award up to 50,000,000 shares and/or options of the Company's common
      stock, no par value at a purchase price of $0.006. On July 13, 2001, 50,000,000
      options to purchase the Company's common stock were granted to the selected
      key
      employees, officers and a director of the Company expiring on July 12, 2004.
      Of
      such options granted, James Lu, the President and Jeffrey Schillen the Executive
      Vice President of the Company were granted options to purchase 20,000,000 and
      10,000,000 shares, respectively, and 5,000,000 options to purchase were granted
      to Murray Scott, a Director of the Company. The remaining balance of 15,000,000
      options was granted to eight other key employees of the Company. As of March
      31,
      2004, none of the options granted under this plan were exercised.





On
      July
      24, 2001, the Board of Directors of the Company authorized and approved, that
      it
      was in the best interest of the Company that the exercise rate ranging from
      $0.05 to $0.25 of outstanding options granted to the Company's key employees,
      officers and directors during the period from April 1996 through May 1999 in
      the
      aggregate amount of 11,675,000 shares be amended and lowered to $0.005. Such
      outstanding options to purchase the Company's common stock included options
      granted to James Lu, Jeffrey Schillen, Murray Scott and three key employees
      of
      the Company of 9,100,000, 2,150,000, 250,000, and 175,000 shares, respectively.
      Of such aggregate amount of option shares granted totaling 11,675,000, the
      balance remaining at June 1, 2004 totals 3,750,000 consisting of 3,000,000
      and
      750,000 shares granted to Mr. Lu and Mr. Schillen, respectively, which expire
      on
      March 31, 2005. The balance of 7,925,000 options expired and was canceled.





On
      November 16, 2001, Mr. Lu, the Company's president waived his right to exercise
      29,000,000 of his outstanding stock options to provide for the company to meet
      the stock reserve requirement of it's convertible series B preferred stock
      and
      in consideration of waiving his aforementioned exercise rights and for his
      part
      in completing the sale of the company's convertible Series B preferred shares,
      Mr. Lu was awarded an option to purchase 14,500,000 shares of the company's
      common stock . The option expiring on November 15, 2006, will be exercisable
      at
      $0.006 per share.





During
      the years ended March 31, 2003, 2002 and 2001, the Company advanced $135,030,
      $222,520 and $101,366, respectively to an officer of the Company. Simple
      interest is accrued monthly at an annual rate of 10% on the outstanding balance
      and totals $71,792 as of March 31, 2004. The loan is due on demand.





As
      of
      March 31, 2004 and 2003, the Company had a miscellaneous receivable due from
      GJ
      Products, a shareholder of the Company, totaling $43,800.





During
      the years ended March 31, 2004, 2002 and 2001, the Company had note payable
      of
      $322,374, $263,718 and $549,558 respectively from ATRE bearing interest at
      the
      rate of 10% per annum, and due on demand. Mr. Lu was the President and a
      Director of ATRE and on January 8, 2004, Mr. Lu resigned from his position
      as
      the President. of ATRE.





On
      April
      1, 2004, the Company sold an aggregate of 5,000,000 shares of the Company’s
      common stock at a price of $0.01 per share pursuant to subscription agreements
      dated April 1, 2004, entered into with Jeffrey I. Schillen and James Lu, each
      purchasing 2,500,000 shares.





On
      June
      16, 2005, the Board of Directors of the Company approved the granting of
      58,100,000 options to purchase the Company's common stock under the Incentive
      Plan of the 2005 Equity Compensation Program to the select employees, officers,
      directors and a consultant of the Company expiring no later than 10 years from
      the date the options were granted. The effective date of such options being
      granted was June 16, 2005, at an exercise price of $.007 per share. Such stock
      options granted vest in three annual installments commencing one year after
      the
      date of grant. Of
      such
      options granted, James Lu, the President, Jeffrey Schillen the Executive Vice
      President and Fred Odaka, Chief Financial Officer of the Company were granted
      options to purchase 25,000,000, 12,150,000 and 5,000,000 shares, respectively,
      and 5,000,000 and 2,500,000 options were granted to Murray Scott and Jerry
      Lan,
      respectively, who are Directors of the Company. The remaining balance of
      7,450,000 options was granted to six employees and one consultant of the
      Company.




30


ITEM13.
      EXHIBITS.





(a)
            Exhibits





Exhibit


Number
            Description




3.1.1
              (6)
            Certificate
                of Incorporation of Trans-Atlantic Video, Inc. filed April 3,
                1986.


3.1.2
              (6)
            Certificate
                of Amendment to Certificate of Incorporation of Trans-Atlantic Video
                filed
                October 12, 1988.


3.1.3
              (6)
            Certificate
                of Amendment to Certificate of Incorporation of Trans-Atlantic Video
                filed
                March 10, 1989.


3.1.4
              (6)
            Certificate
                of Amendment to Certificate of Incorporation of Trans-Atlantic Video
                filed
                June 9, 1989.


3.1.5
              (6)
            Certificate
                of Amendment to Certificate of Incorporation of Trans-Atlantic Video
                filed
                December 31, 1990.


3.1.6
              (6)
            Certificate
                of Amendment to Certificate of Incorporation of Trans-Atlantic Video
                filed
                July 17, 1991.


3.1.7
              (6)
            Certificate
                of Amendment to Certificate of Incorporation of Diamond Entertainment
                Corporation filedNovember
                16, 1993.


3.1.8
              (6)
            Certificate
                of Amendment to Certificate of Incorporation of Diamond Entertainment
                Corporation filedMarch
                3, 1994.


3.1.9
              (6)
            Certificate
                of Amendment to Certificate of Incorporation of Diamond Entertainment
                Corporation filedOctober
                15, 1996.


3.1.10
              (3)
            Certificate
                of Amendment to Certificate of Incorporation of Diamond Entertainment
                Corporation filed withthe
                State of New Jersey State Treasurer on May 11, 2000 (originally filed
                as
                Exhibit 3.1.2).


3.1.11
              (3)
            Certificate
                of Amendment to Certificate of Incorporation of Diamond Entertainment
                Corporation filed withthe
                State of New Jersey State Treasurer on July 6, 2000 (originally filed
                as
                Exhibit 3.1.3).


3.2
              (1)
            By-laws,
                as amended.


4.1
              (1)
            Certificate
                for shares of Common Stock.


10.1
              (2)
            10%
                Callable Convertible Note, dated March 22, 1999, in the principal
                amount
                of $50,000 issued to Mr.Lu.


10.2
              (2)
            10%
                Callable Convertible Note, dated June 3, 1999, in the principal amount
                of
                $100,000 issued to Mr.Schillen.


10.3
              (3)
            Securities
                Purchase Agreement dated May 11, 2000 between the Company and eight
                investors concerningthe
                issuance and sale of 50 shares of the Company's Series A Convertible
                Preferred Stock.


10.4
              (3)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Anthony
                E.
                Rakosconcerning
                the issuance and sale of shares of the Company's Series A Convertible
                Preferred Stock.


10.6
              (3)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Gerald
                Holland concerningthe
                issuance and sale of shares the Company's Series A Convertible Preferred
                Stock.


10.7
              (3)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Jeffrey
                Hrutkay, MDconcerning
                the issuance and sale of shares of the Company's Series A Convertible
                Preferred Stock.


10.8
              (3)
            Registration
                Rights Agreement, dated May 11, 2000 between Company and Charles
                and Jane
                Adkinsconcerning
                the issuance and sale of shares of the Company's Series A Convertible
                Preferred Stock.


10.9
              (3)
            Registration
                Rights Agreement, dated May 11, 2000 between Company and Gordon D.
                Mogerley concerningthe
                issuance and sale of shares of the Company's Series A Convertible
                Preferred Stock.


10.10
              (3)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Michelle
                Levite concerningthe
                issuance and sale of shares of the Company's Series A Convertible
                Preferred Stock.


10.11
              (3)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Ralph
                Lowry
                concerning theissuance
                and sale of shares of the Company's Series A Convertible Preferred
                Stock.


10.12
              (3)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and John
                Bolliger
                concerning theissuance
                and sale of shares of the Company's Series A Convertible Preferred
                Stock.


10.13
              (3)
            Consulting
                Agreement dated June 1, 2000 between the Company and Peter
                Benz.


10.14
              (3)
            Consulting
                Agreement dated June 1, 2000 between the Company and S. Michael
                Rudolph.


10.15
              (3)
            Consulting
                Agreement dated June 1, 2000 between the Company and Owen
                Naccarato.





31





10.16
              (4)
            10%
                Callable Convertible Note, dated June 3, 1999, in the principal amount
                of
                $100,000 issued to Mr.Schillen.


10.17
              (4)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Anthony
                E.
                Rakosconcerning
                the issuance and sale of shares of our Series A Convertible Preferred
                Stock.


10.18
              (4)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Gerald
                Holland concerningthe
                issuance and sale of shares our Series A Convertible Preferred
                Stock.


10.19
              (4)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Jeffrey
                Hrutkay, MDconcerning
                the issuance and sale of shares of our Series A Convertible Preferred
                Stock.


10.20
              (4)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Charles
                and
                Jane Adkinsconcerning
                the issuance and sale of shares of our Series A Convertible Preferred
                Stock.


10.21
              (4)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Gordon
                D.
                Mogerleyconcerning
                the issuance and sale of shares of our Series A Convertible Preferred
                Stock.


10.22
              (4)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Michelle
                Levite concerningthe
                issuance and sale of shares of our Series A Convertible Preferred
                Stock.


10.23
              (4)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and Ralph
                Lowry
                concerning theissuance
                and sale of shares of our Series A Convertible Preferred
                Stock.


10.24
              (4)
            Registration
                Rights Agreement, dated May 11, 2000 between the Company and John
                Bolliger
                concerning theissuance
                and sale of shares of our Series A Convertible Preferred
                Stock.


10.25
              (4)
            Consulting
                Agreement dated June 1, 2000 between the Company and Peter
                Benz.


10.26
              (4)
            Consulting
                Agreement dated June 1, 2000 between the Company and S. Michael
                Rudolph.


10.27
              (4)
            Consulting
                Agreement dated June 1, 2000 between the Company and Owen
                Naccarato.


10.28
              (4)
            2000
                Stock Option Plan dated June 9,
                2000.


10.29
              (5)
            Stonestreet
                Convertible Series B Preferred Stock Purchase Agreement, November
                2001


10.30
              (5)
            Stonestreet
                LP Warrant Agreement, November 2001


10.31
              (5)
            Stonestreet
                Corp Warrant Agreement, November
                2001


10.32
              (5)
            Stonestreet
                Registration rights Agreement November
                2001


10.33
              (5)
            Filter
                International Convertible Series B Preferred Stock Purchase Agreement,
                November 2001


10.34
              (5)
            Filter
                International Warrant Agreement, November
                2001


10.35
              (5)
            Filter
                International Registration rights Agreement November
                2001


10.36
              (5)
            Kaufman
                Convertible Series B Preferred Stock Purchase Agreement, November
                2001


10.37
              (5)
            Kaufman
                Warrant Agreement, November 2001


10.38
              (5)
            Kaufman
                Registration rights Agreement November
                2001


10.39
              (5)
            Alpha
                Capital Convertible Series B Preferred Stock Purchase Agreement,
                January
                2002


10.40
              (5)
            Alpha
                Capital Warrant Agreement, January
                2002


10.41
              (5)
            Alpha
                Capital and Balmore S.A Registration rights Agreement January
                2002


10.42
              (5)
            Balmore
                S.A. Convertible Series B Preferred Stock Purchase Agreement, January
                2002


10.43
              (5)
            Balmore
                S.A Warrant Agreement, January 2002


10.44
              (3)
            2000
                Stock Option Plan dated June 9, 2000 (originally filed as Exhibit
                10.16)


10.45
              (6)
            Lease
                dated January 6, 2000.


10.46
              (8)
            Bi-Coastal
                Common Stock Purchase Warrant dated March 26,
                2004


10.47
              (8)
            Securities
                Purchase Agreement dated March 31, 2004, between four sellers and
                two
                buyers of our Series BPreferred
                Stock.


10.48
              (8)
            Longview
                Fund, LP Subscription Agreement dated April 1,
                2004.


10.49
              (8)
            James
                Lu Subscription Agreement dated April 1,
                2004.


10.50
              (8)
            Jeff
                Schillen Subscription Agreement dated April 1,
                2004.


14.1
              (8)
            Diamond
                Entertainment Corporation Code of Ethics dated August 29,
                2003


21.1
              (8)
            Subsidiaries
                of the Registrant.


31.1
                  (9)
                Certification
                    of President and Co-Chief Executive Pursuant to Rule 13-14 or
                    Rule 15-14
                    of The Securities
                    and Exchange Act of 1934 as adopted pursuant to Section 302 of
                    The
                    Sarbanes-Oxley act of
                    2002.


31.2
                  (9)
                Certification
                    of Co-Chief Executive Officer Pursuant to Rule 13-14 or Rule
                    15-14 of The
                    Securities
                    and Exchange Act of 1934 as adopted pursuant to Section 302 of
                    The
                    Sarbanes-Oxley act of
                    2002


31.3
                  (9)
                Certification
                    of Chief Financial Officer Pursuant to Rule 13-14 or Rule 15-14
                    of The
                    Securities
                    and Exchange Act of 1934 as adopted pursuant to Section 302 of
                    The
                    Sarbanes-Oxley act of
                    2002.






32


32.1
                (9)
            Certification
                of President and Co-Chief Executive Officer Pursuant to 18 U.S.C.
                Section
                1350 as adoptedpursuant
                to Section 906 of The Sarbanes-Oxley act of
                2002.


32.2
                  (9)
                Certification
                    of Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
                    as
                    adopted pursuant to Section 906 of The Sarbanes-Oxley act of
                    2002.


32.3
              (9)
            Certification
                of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as
                adopted
                pursuant to Section906
                of The Sarbanes-Oxley act of 2002.








(1)
            Incorporated
                by reference to Registrant's Registration Statement on Form S-18,
                File No.
                33-33997.





(2)
            Incorporated
                by reference to Registrant's exhibits to the Annual Report on Form
                10-KSB
                for the year ended March 31,1999,
                filed July 14, 1999, File Number 0-17953 and Annual Report on Form
                10-KSB/A for the year March 31, 1999, filedAugust
                23, 1999, File Number 0-17953.





(3)
            Incorporated
                by reference to Registrant's exhibits to the Annual Report on Form
                10-KSB
                for the year ended March 31,2000,
                filed August 21, 2000, File Number
                0-17953.





(4)
            Incorporated
                by reference to Registrant's exhibits to the Annual Report on Form
                10-KSB/A for the year ended March 31,2000,
                filed October 26, 2000 (File No.
                0-17953)





(5)
            Incorporated
                by reference to Registrant's exhibits to the Registration Statement
                on
                Form SB-2, filed April 18, 2002 (FileNo.
                333-86570).




(6)
            Incorporated
                by reference to Registrant's exhibits to the Annual Report on Form
                10-KSB
                for the year ended March 31,2002,
                filed July 16, 2002, File Number
                0-17953.





(7)
            Incorporated
                by reference to Registrant's exhibits to the Annual Report on Form
                10-KSB
                for the year ended March 31,2003,
                filed March 15, 2004, File Number
                0-17953.





(8)
            Incorporated
                by reference to Registrant's exhibits to the Annual Report on Form
                10-KSB
                for the year ended March 31,2004,
                filed June 29, 2004, File Number
                0-17953.





(9)
            Filed
                herewith.







33


ITEM
        14. Principal Accounting Fees and Services.
 
 The
        following is a summary of the aggregate fees billed to Registrant by its
        principal accountant(s) for professional services rendered for the fiscal
        years
        ended March 31, 2006 and 2005.
 
 **Fee
                  Category**
              
              **Fiscal
                  2006 Fees**
                **($)**
              
              **Fiscal
                  2005 Fees**
                **($)**Audit
                  Fees1
              
              
              80,487
              
              
              72,670Audit-Related
                  Fees2
              
              
              0
              
              
              0Tax
                  Fees3
              
              
              3,500
              
              
              3,500All
                  Other Fees4
              
              
              0
              
              
              0Total
                  Fees
              
              
              83,987
              
              
              76,170
  
 1.  *Audit
        Fees.* Consists
        of fees billed for professional services rendered for the audits of Registrant’s
        financial statements for the fiscal years ended March 31, 2006 and 2005,
        and for review of the financial statements included in Registrant’s Quarterly
        Reports on Form 10-QSB for those fiscal years.
 
 2.  *Audit-Related
        Fees.* Consists
        of fees billed for services rendered to Registrant for audit-related services,
        which generally include fees for audit and review services in connection
        with a
        proposed spin-off transaction, separate audits of employee benefit and pension
        plans, and ad hoc fees for consultation on financial accounting and reporting
        standards.
 
 3.  *Tax
        Fees.* Consists
        of fees billed for services rendered to Registrant for tax services, which
        generally include fees for corporate tax planning, consultation and compliance.
 
 4.  *All
        Other Fees.* Consists
        of fees billed for all other services rendered to Registrant, which generally
        include fees for consultation regarding computer system controls and human
        capital consultations. No services were performed related to financial
        information systems design and implementation for the fiscal years ended
        March 31, 2006 and 2005.
 
 None
        of the "audit-related," "tax" and "all other" services in 2006 and 2005,
        as
        defined above, were approved by an Audit Committee in reliance on the de
        minimus
        exception to the pre-approval requirements under federal securities laws
        and
        regulations.


34





SIGNATURES





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this amended report to be signed on its behalf by the undersigned, thereunto
      duly authorized.




DIAMOND
              ENTERTAINMENT CORPORATIONDated:
              July 14, 2006
            By:
            /s/ James
              K.T. LuJames
                K.T. Lu
              President
                and Co-Chief Executive Officer Dated:
              July 14, 2006
            By:
            /s/ Fred
              U.
              OdakaFred
                U.
                Odaka
              Chief
                Financial Officer, Principal Financial Officer and Principal
              Accounting
                Officer






35