UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 
 
 FORM
10-KSB/A
 Amendment
No. 2
  
 
 xANNUAL REPORT UNDER
SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For
the Fiscal Year Ended March 31,
2007
 
 o TRANSITION REPORT
UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission
File No. 0-17953
  Rx
for Africa, Inc.
 (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)
   462
Seventh Avenue, Suite 1200, New York, NY 10018
 (Address
of Principal Executive Offices)
 
 
 (646)
461-3082
 (Issuer's
telephone number)
 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 o
 
 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. o
 
 The
issuer's revenue for the fiscal year ended March 31, 2007 totaled $2,295,710.
 
 The
aggregate market value of registrant's Common Stock held by non-affiliates on
June 30, 2006 was approximately $11,900,000 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, 2007,
20,696,882 share (post-reverse split) of the issuer's Common Stock were
outstanding. On March 27, 2007, the registrant's 30 to 1 reverse stock split
became effective. As of June 30, 2007, 189,821,018 share (post-reverse split) of
the issuer's Common Stock were outstanding.
   Table of Contents
 
 TABLEOF CONTENTS
  PAGEITEM
      1.
              DESCRIPTION OF BUSINESS
              4ITEM
      2.
              DESCRIPTION OF PROPERTY
              8ITEM
      3.
              LEGAL PROCEEDINGS
              8ITEM
      4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
              8ITEM
      5.
              MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS
              9ITEM
      6.
              MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION
              13ITEM
      7.
              FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL
      STATEMENTS
              19ITEM
      8.
              CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      ANDFINANCIAL
      DISCLOSURE
              49ITEM
      8A.
              CONTROLS AND PROCEDURES
              49ITEM
      9.
              DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
      PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
      EXCHANGE ACT
              50ITEM
      10.
              EXECUTIVE COMPENSATION
              51ITEM
      11.
              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENTAND RELATED STOCKHOLDER MATTERS
              54ITEM
      12.
              CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS
              55ITEM
      13.
              EXHIBITS
              56ITEM
      14.
              PRINCIPAL ACCOUNTANT FEES AND SERVICES
              56
 
 
 
 Table of Contents
 
 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.
 
 EXPLANATORY
NOTE
  This Form
10-KSB is being filed by Rx for Africa, Inc. (“Rx for Africa”)on behalf of
Diamond Entertainment, Inc. (“Diamond”), its predecessor-in-interest, for
Diamond’s fiscal year ended March 31, 2007, as required by the rules and
regulations of the U.S. Securities and Exchange Commission (“SEC”). On May 4,
2007, Rx for Africa effectuated a merger with a shell company, Diamond,
whereinafter shares of Rx for Africa common stock and other securities exchanged
in the merger were registered under the Securities Exchange Act of 1934, as
amended.  As a result of the merger, Rx for Africa is the parent
holding company for a pharmaceutical manufacturing company located in Addis
Ababa, Ethiopia, which constitutes Rx for Africa’s only operating subsidiary and
business.  Further, Diamond experienced a change in control of
ownership, management and board of directors.  The details of the
merger are set forth in the Form 8-K filed by Diamond on May 10,
2007.
 
 This Form
10-KSB/A for Diamond is being filed as a formality to comply with SEC rules and
regulations and only speaks to the business and other details of Diamond at its
fiscal year ended March 31, 2007.
 We are
filing this amendment to Form 10-KSB for the period ended March 31, 2007, filed
with the Securities and Exchange Commission on July 16, 2007, to correct the
following error:
 
 Stock
options to purchase an aggregate 627,777 share (post-reverse split) of common
stock of the Company issued to Officers and Directors during the three months
ended June 30, 2005 became vested during the six months ended September 30,
2006. These options were valued at $130,200 and this amount was charged to
operations in this amended report.  The report as originally filed
disclosed 1,916,666 options vesting during the quarter, with an expense of
$45,521. The Company’s statement of operations is restated by the difference of
$84,679. We also changed the related disclosers regarding the vesting of these
options as appropriate.  In additional, amortization of the discount
to a financing agreement in the amount of $48,423 was credited to additional
paid-in capital in the report as originally filed; this amount should be
credited to the discount on the financing agreement. We have made that
correction in this amended report.
 
 During
the three months ended December 31, 2006, the Company completed a financing in
the amount of $1,150,000 in the form of convertible debt and
warrants.  The discount on this debt and the warrants were classified
as derivative financial instruments in the Company’s financial statements as
originally filed. The Company has since made the determination that these
instruments are not derivatives.  The restatement of the Company’s
financial statements for the year ended March 31, 2007 resulted in a net
decrease in expense in the amount of $9,036,561 due to the various aspects of
this accounting change.
 
 We also
corrected certain other minor errors in the Form 10-KSB as originally
filed.
  
 
 3
 Table of Contents
 
 PART I
 
 ITEM 1. 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 Video9
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.
 
 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, 2007, 2006 and 2007, JPI was
dormant and did not record sales of its products.
  VIDEO
PROGRAM LINE
 
 Our
products consist of a total of approximately 1,126 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 847 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".
 
 ●
              Children's
      Programs - Licensed and Public Domain. Most of our cartoons are public
      domain programs, including 25 cartoon programsre-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 videoswhich
      instruct preschoolers and school age children on topics such as learning
      numbers, telling time, simple mathematics, and coloridentification.
  ●
              Sports
      Programs - Licensed. We have licenses to market 18 sports programs of
      wrestling such as Wild Women of Wrestling and AJ StylesMatches
  ●
              Spanish
      Movies - Licensed. We license approximately 12 Spanish movies such as La
      Portere Ardiente and Conevion
Criminal.
   
 4
 Table of Contents
  DVD
PROGRAMLINE
 
 The DVD
program inventory currently consists of 398 titles, which are public domain
feature films and television episodes.
 
 ●
              Motion
      Pictures - We offer 300 titles in DVD format covering many film classics
      in various categories including drama, horror,westerns,
      action, and comedy.
 
 ●
              Television
      Episodes - We offer 42 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
 
 Our
program inventory consists of titles that appeal to children and those which
include popular performers, characters or themes. The 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, 2007 and March 31, 2006, we acquired approximately 28
and 58 new titles, respectively. As of March 31, 2007, the net book value of our
film masters and artwork was approximately $159,000. We believe that our film
masters and artwork are significant assets since we derive the majority of our
revenue from their use.
 
 SUPPLIERS
 
 VIDEO/DVD
PRODUCTS
 
 For the
year ended March 31, 2007, 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 percentages of net video/DVD product
purchases made from such suppliers were 55%, 13% 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
seven mass merchandisers such as, Walgreens, Dolgen., NWL Holdings, LLC,
Anderson Merchandisers 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, 2007 and
2006, we derived revenue from our video and DVD products of approximately
$$2,296,000 and $3,510,000, respectively. For the year ended March 31, 2007, we
had net sales to two major customers, Walgreens and Anderson merchandisers who
accounted for approximately 35% and 15% of total revenues, respectively, the
combined revenues of totaling approximately $1,149,000. 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% of total reeveues,
respectively, the combined revenues totaling of approximately
 $1,571,00.
   5
 Table of Contents
  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 have
established a 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 have 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, 2007, we derived approximately 86% of our gross
revenue from sales to mass merchandisers and other retail outlets and
approximately 14% 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.
  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. However, during the year ended March 31, 2007, the Company derived
approximately 52%f its gross revenue from sales during those five months, with
approximately 48% of revenue generated in the remaining seven months of the
year. During the year ended March 31, 2007, 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
 
 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, 2007, and 2006 we incurred
royalty expenses of approximately $29,000 and $80,000 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.
 
 6
 Table of Contents
  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 we had an outstanding loan balance and accrued interest of
$582,874 and $14,255 respectively, owed to ATRE, interest at the rate of 10% per
annum, and due upon demand. On November 27, 2007, in accordance the waiver of
debt clause of the then proposed merger agreement between the Company and Rx for
Africa which was finalized on May 4, 2007, ATRE entered into a Waiver of Debts
Agreement with the Company, whereby ATRE forgave the entire principal and
interest of the notes payable and interest of $582,874 and $14,255,
respectively.
 
 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
 
 As of
March 31, 2007, the Company and its subsidiaries employed 12 full-time personnel
and 5 part time employees as compared to 22 full-time employees as of March 31,
2006. During the peak season the Company engages additional part-time or
temporary personnel to help with the surge for Christmas season orders. The
Company reduces its manufacturing force after the peak season to improve the
profitability of the operations when sales orders decline. Neither the Company's
nor the subsidiaries' employees 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.
 
 We
license approximately 276 video 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.
   7
 Table of Contents
  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 expired on March 31,
2007, for use as manufacturing and warehouse facilities for a monthly rent of
$13,000. The Company entered into a month to month lease on April 1, 2007 for
monthly rent of $13,500 per month. Our lease is with an unaffiliated third
party.
 
 During
the period ended March 31, 2006 we leased 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. In May 2007 the
Company renewed this lease on a month to month basis for a monthly rent of
$3,750.
 
 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 Share
authorized to be issued from 600,000,000 share to 800,000,000 share, (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 share to 800,000,000 share were as follows:
15,681,866 votes for the proposal, 324,824 votes against the proposal, and 1,486
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 share 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: 15,148,842 votes for the proposal, 847,798 votes
against the proposal, and 1,536 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: 12,969,050 votes for the proposal, 416,746 votes
against the proposal, 19,935 votes abstained and 2,640,443 not voted. A majority
of the votes cast were voted "FOR" the proposal.
 
 
 8
 Table of Contents
  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
"DMON.OB" 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
              
              
              Common
      StockPost
      - Split Bid Price
              
              
              Pre
      - Split Bid PriceLOW
              
              
              HIGH
              
              
              LOW
              
              
              HIGHFISCAL
      YEAR 2006First
      Quarter
              
              
              0.2100
              
              
              
              0.5100
              
              
              
              0.0070
              
              
              
              0.0170Second
      Quarter
              
              
              0.2100
              
              
              
              0.3900
              
              
              
              0.0070
              
              
              
              0.0130Third
      Quarter
              
              
              0.2100
              
              
              
              0.6900
              
              
              
              0.0070
              
              
              
              0.0230Fourth
      Quarter
              
              
              0.2100
              
              
              
              0.3000
              
              
              
              0.0070
              
              
              
              0.0100FISCAL
      YEAR 2007First
      Quarter
              
              
              0.2550
              
              
              
              0.5700
              
              
              
              0.0085
              
              
              
              0.0190Second
      Quarter
              
              
              0.1200
              
              
              
              0.2700
              
              
              
              0.0040
              
              
              
              0.0090Third
      Quarter
              
              
              0.1530
              
              
              
              0.5670
              
              
              
              0.0051
              
              
              
              0.0189Fourth
      Quarter
              
              
              0.1800
              
              
              
              0.5800
              
              
              
              0.0060
              
              
              
              0.0193
 
 
 On March
27, 2007 the Company's reverse stock split of its common stock at a ratio of 1
to 30 became effective. The reverse split was authorized by the Company's
shareholders at the March 1, 2005 shareholder meeting.
 
 On June
29, 2007, the closing sales price for our common stock as reported in the OTC
Bulletin Board was $0.29. The above quotations reflect inter-dealer prices,
without retail markup, markdown, or commission and may not represent actual
transactions.
 
 As of
June 30, 2006 there were 2442 holders of record of our common stock, and 4
holders of record of our Series A Convertible Preferred Stock.
 
 The
transfer agent for our common stock is Continental Stock Transfer & Trust
Company, New York, New York.
 
 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 (POST STOCK SPLIT SHARE)
 
 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.
 
 9
 Table of Contents
  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.
 
 The
maximum aggregate number of shares of Common Stock issuable pursuant to the
Program is 2,166,667 shares (post-reverse split). No one person participating in
the Program may receive options for more than 833,333 shares (post-reverse
split) 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
1,936,667 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 $.21 per share (post-reverse
split). 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 833,333, 405,000 and 166,667 shares (post-reverse split),
respectively, and 166,667 and 83,333 options were granted to Murray Scott and
Jerry Lan, respectively, who are Directors of the Company. The remaining balance
of 248,333 options was granted to six employees and one consultant of the
Company. During years ended March 31, 2007 and 2006 three employees and one
consultant terminated employment with the Company and an aggregate of 120,000 of
such options 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.
 
 
 10
 Table of Contents
  Equity
      Compensation Plan InformationAs
      of March 31, 2007Number
      of securities to beissued
      upon exercise of
              
              
              Weighted
      average exercise
              
              
              Number
      of securitiesoutstanding
      options, warrants
              
              
              price
      of outstanding options,
              
              
              remaining
      available for futureand
      rights
              
              
              warrants
      and rights
              
              
              issuance.Plan
      category
              
              
              (Post-Stock
      Split Shs.)(a)
              
              
              (Post-Stock
      Split Shs.)(b)
              
              
              (Post-Stock
      Split Shs.)(c)Equity
      compensation plansapproved
      by security holders
              
              
              
              2,166,667
              
              
              $
              0.21
              
              
              
              383,333Equity
      compensation plansnot
      approved by securityholders
              
              
              
              --
              
              
              
              --
              
              
              
              -0-Total
              
              
              
              2,166,667
              
              
              $
              0.21
              
              
              
              383,333
  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 1,666,667 shares (post-reverse split) and/or non-qualified options
of the Company's common stock, no par value at a purchase price of $0.18, which
represented the fair value of the common stock on that date. On July 13, 2001,
1,666,667 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 666,667 and 333,333 shares (post-reverse split), respectively, and
166,667 options were granted to Murray Scott, a Director of the Company. The
remaining balance of 500,000 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 1,666,667 options expired and were
canceled.
 
 RECENT
SALES OF UNREGISTERED SECURITIES
 
 On
February 11, 2003, an investor converted one-half of a Series B Convertible
Preferred Share into 140,165 shares (post-reverse split) of the Company's common
stock at a conversion price of $.0381 per share (post-reverse
split).
 
 On June
27, 2003, an investor converted one share of a Series B Convertible Preferred
Share into 256,410 shares (post-reverse split) of the Company's common stock at
a conversion price of $.039 per share (post-reverse split).
 
 On March
26, 2004, the Company issued warrants to purchase 1,166,667 of the Company's
common stock at an exercise price of $0.36 per share (post-reverse split)
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 $0.30 per share (post-reverse split). 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 75,000 shares (post-reverse split)
the Company's common stock at a price $.60 per share (post-reverse split) 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 57 1/2 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 $0.30 per share (post-reverse split). The Sellers canceled and
returned to the
Company 290,000 warrants to purchase the Company's common stock at price of $0.30
shares (post-reverse split) 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 $0.30 per share (post-reverse split) after such time the stockholders of the
Company approved
the increase in the authorized shares of the Company.
  11
 Table of Contents
  On April
1, 2004, the Company sold an aggregate of 750,000 shares (post-reverse split) of
the Company's
common stock at a price of $0.30 per share (post-reverse split) pursuant to
subscription agreements
dated April 1, 2004, entered into with Jeffrey I Schillen, James Lu and
Longview Fund LP, to purchase 83,333, 83,333 and 583,333 shares (post-reverse
split), 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 shareholders were converted into 2,745,084 shares
(post-reverse split) of the
Company's common stock at a conversion price of $0.30 per share (post-reverse
split).
 
 On April
15, 2004, the Company sold an aggregate of 116,667 shares (post-reverse split)
of the Company's
common stock at a price of $0.30 per share (post-reverse split) 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 75,500 share
(post-reverse split) of the Company's
common stock to the Company at a price of $.60 per share (post-reverse split).
The Shareholder
owed the Company a note totaling $45,300, which the Company subsequently
retired as consideration for the purchase of such share of common stock it
purchased from the stockholder.
  On May 9,
2005 the Board of Directors of the Company approved the issuance of 770,591
share (post-reverse split) 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 $0.30 per share (post-reverse split). 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 1,936,667
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 $.21 per share (post-reverse split).
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 833,333, 405,000 and 166,667 shares
(post-reverse split), respectively, and 166,667 and 83,333 options were granted
to Murray Scott
and Jerry Lan, respectively, who are Directors of the Company. The remaining
balance of 248,333 options was granted to six employees and one consultant
of the Company. During years ended March 31, 2007 and 2006 three employees
and one consultant terminated employment with the Company and an aggregate
of 3,600,000 of such options 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.
 
 On June
30, 2006, in connection with entering into a loan agreement with a financing
company located in San Francisco, California, the Company granted the lender,
stock warrants to purchase at any time, 3,333,333 shares (post-reverse split) of
the Company's
common stock at an exercise price of $0.075 per share (post-reverse split). The
warrants expire
on June 30, 2011. The fair value of these warrants was $860,000. Given loan
proceeds of $250,000, the relative fair value of the warrants was $193,694 and
is being treated as a loan discount which is being amortized over the life of
the loan (12 months). The company expensed $93,944 related to the relative fair
value of the warrants during the six month period ended September 30, 2006. The
warrants were issued for $100 cash and in consideration of the loan agreement
entered into by the lender with the Company pursuant to which the lender
agreed to loan to the Company up to $250,000. 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.
  On
November 28, 2006 the Company entered into a funding agreement from institutional
and accredited investors with gross proceeds of $2,300,000, to be received
in two traunches. The first traunch of $1,150,000 received upon execution
of the agreement and the remaining $1,150,000 within five days after the
first to occur of (i) the actual effectiveness of the Registration Statement or
(ii) the delivery by the Company of certified consolidated financial statements
of the Company. In connection with the funding, the Company granted the
investors stock warrants to purchase, at any time, shares of the Company's common
stock which shall convert at a price per share which shall be equal to a number
equal to $12,000,000 pre-money valuation on a fully diluted basis or $0.45 per
share (post-reverse split). In addition, 1,277,778 warrants were issued at an
exercise price
of $0.45 per share (post-reverse split). 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.
 
 On
January 31, 2007, Jeffrey I. Schillen, Executive Vice President and Co-CEO of the
Company entered into a Debt Waiver and Release Agreement and a Debt Forgiveness
and Release Agreement with the Company. Mr. Schillen waived and/or forgave
a demand note with interest and salaries owed to in the aggregate amount of
$687,739. As part such agreements the Company granted Mr. Schillen stock warrants
to purchase 1,200,000 shares (post-reverse split) of the Company's common stock
at $0.30 per share
(post-reverse split) exercisable immediately and expiring on January 31, 2017.
The value of these
warrants per Black Scholes using a $0.42 closing stock rice at March 31, 2007
with a volatility of 169% was $501,204.
  The
Company entered into settlement agreements with three of its major suppliers ("Supplier(s))
of inventory products whereby the Company in lieu of paying cash, issued
and aggregate of 360,875 of its common stock to such suppliers of settle its
obligations as follows:
  On March
5, 2007, the Company issued a supplier, 53,732 shares (post-reverse split) of
its common stock
at $0.42 per share (post-reverse split) to settle $22,567.40 in debt per a
settlement agreement dated
February 1, 2007.
  On March
14, 2007, the Company issued a supplier, 33,333 shares (post-reverse split) of
its common stock
at $0.30er share (post-reverse split) to settle $10,000.00 in debt per a
settlement agreement dated
March 6, 2007.
  On April
9, 2007, the Company issued a supplier, 273,810 shares (post-reverse split) of
its common stock
at $0.42 per share (post-reverse split) to settle $115,000.00 in debt per a
settlement agreement
dated January 1, 2007.
  12
 Table of Contents
  ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
 
 (a)   PLAN
OF OPERATION
 
 Management
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 its uncertainties.
  ACQUISITION
OR DISPOSITION OF ASSETS.
  On
November 30, 2006 Company announced signing a letter of intent to acquire RX for
Africa, Inc., and all its wholly owned subsidiaries through its new wholly owned
subsidiary, DMEC Acquisition Inc.
  ENTRY
INTO A MATERIAL DEFINITIVE AGREEMENT.
  On
November 28, 2006 the Company entered into a funding agreement from
institutional and accredited investors with gross proceeds of $2,300,000, to be
received in two traunches. On April 27, 2007 the funding agreement was amended
to reflect gross proceeds of $2,400,000. The first traunch of $1,150,000 was
received upon execution of the funding agreement on November 38, 2006 and a
second traunch of $1,250,000 was to be received upon meeting the certain
conditions under the terms of the funding agreement.
 
 The
funding consists of convertible securities which shall convert at a price per
share which shall be equal to a number equal to $12,000,000 pre-money valuation
on a fully diluted basis or $0.45 per share (post-reverse split). Warrants
totaling 1,277,778 shares (post-reverse split) were issued at an exercise price
of $0.45 per share (post-reverse split).
  The use
of funds for net proceeds of the first traunch was as follows: 1) $850,000 loan
to Africa (Ethiopia) P.L.C., 2) $144,000 for working capital, and 3) $156,000
legal fees and other closing costs. The use of funds for the net proceeds of the
2nd traunch funding by the Company is as follow: 1) $250,000 to be reserved for
the Company's DVD wind down expenses, 2) $950,000 for working capital, 3) legal
fees $15,000, 4) payment of Company's past salaries owed of
$35,000.
  On May 4,
2007, the Company's wholly owned subsidiary, Diamond Entertainment Acquisition,
Inc., acquired Rx for Africa, Inc. through a merger. Rx Africa (Ethiopia) PLC, a
subsidiary of Rx for Africa, Inc., owns and operates a state-of-the art
pharmaceutical plant located south of Addis Ababa, Ethiopia. The Company plans
to change its name from Diamond Entertainment, Corp. to Rx for Africa, Inc., and
concurrently to change its OTCBB trading symbol.
  On May 4,
2007, concurrent with the merger, the Company closed on the second traunch of a
private placement funding from institutional and accredited investors with gross
proceeds of $1,250,000.
  The
Company is in negotiation with a potential buyer to sell its existing DVD
operations including certain assets and believes it will be able to consummate
the sale in July 2007. In the event the Company fails sell its DVD operations
and certain assets, it plans to wind down its DVD operations and liquidate
certain assets. As of the date of this filing, Company had not signed a purchase
agreement with the potential buyer.
  Rx for
Africa, Inc.
 
 Rx for
Africa, Inc., through its wholly owned subsidiary Rx for Africa (Ethiopia) PLC,
operates a pharmaceutical
plant, formerly known as Sunshine Pharmaceutical. The plant is built on twenty
three thousand square meters of land located south of Addis Ababa, Ethiopia. The
plant was established to manufacture HIV/AIDS, Malaria, Tuberculosis and other
generic drugs in Ethiopia. The plant currently has 6 products and within six
months expects to produce a minimum of 30 new products.
 
 We
believe we have adequate cash resources to sustain our operations through the
third quarter of fiscal 2008. Our principal objective is to implement a
comprehensive strategy to meet certain objectives to benefit from the merger.
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 our planned objectives during fiscal
2008.
 
 (b)   MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
 
 YEAR
ENDED MARCH 31, 2007 AS COMPARED TO YEAR ENDED MARCH 31, 2006
  13
 Table of Contents
  NET
SALES
 
 Net sales
for the Company were  $2,295,710 for the year ended March 31,
2007  compared to  $3,510.475 for the year ended March 31,
2006,  a decrease of approximately 35%. DVD program net sales were
approximately $662,000 for the year ended March 31, 2007, as compared to
approximately $552,000 for the year ended March 31, 2006. The industry shift
from videocassette programs to DVD programs together with decreased orders
placed by our major customers for DVD and videocassette products contributed
toward these percent changes.
 
 COST
OF GOODS SOLD
 
 Cost
of goods sold was  $2,031,994 for the year ended March 31,
2007 compared to $3,139,461 for the year ended March 31, 2006, a decrease
of $1,107,467 or approximately 35%. The lower cost of sales was
primarily the result of decreased sales.
 
 SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
 
 Selling,
general, and administrative expenses for the year ended March 31, 2007 and 2006
were  $1,790,864 and $1,966,748, respectively. The decrease in selling
expenses of $175,884 or approximately 9% was primarily caused by decreased
levels in salaries/wages, commission expense, advertising and sales promotion,
freight, rent, legal fees, sales taxes, and provision for bad debts, offset by
increases in financing costs and compensation for stock option
plans.
 
 OTHER
INCOME AND EXPENSE
 
 Interest
expense for the year ended March 31, 2007 and 2006 was  $319,424 and
$31,916 respectively. The increase in interest expense of  $23,083 or
approximately 72% was primarily the result of increased interest resulting from
our new financing arrangement entered into in June and November 2006, and
amortization of the discount on the Convertible Notes.
 
 Interest
income for the year ended March 31, 2007 and 2006 was $41,505 and $942
respectively. The increase in interest income of $40,563 was primarily the
result of increased interest income resulting from the November 2006 note
receivable from Rx for Africa of $850,000.
 
 Increases
in Other income for the year ended March 31, 2007 and 2006 were the result of
the following:
 
 1)
                Other
      income - Debt Settlement increased by  $153,524 resulting from
      settlements of accounts payable owed to certain vendors of the
      Company.
 
 2)
                Other
      income - Waiver of Accrued Salaries/Wages and Other income - Forgiveness
      of Debt increased by  $491,070 and $714,329, respectively. The
      president - James Lu waived all of his accrued salaries totaling
      approximately $491,070 and holders of related party notes,
      forgave  $714,329 in related party notes and accrued interest in
      November 2006.
  GROSS
MARGIN
 
 Gross
margin for the years ended March 31, 2007 and 2006 were approximately $264,000
and $371,000. The decrease of approximately $107,000 was primarily theresult of
lower sales volume when compared to the previous year. Gross margins as a
percentage to sales were 12% and 11% of sales, for the period ended March31, 2007
and 2006, respectively.
  14
 Table of Contents
  For the
years ended March 31, 2007 and 2006, gross margin was impacted by activity
recorded the Company's inventory reserve balance of approximately ($13,000)
and $692,000, respectively or approximately 0.6% and 15% 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:
                
                March
      31, 2007
                
                
                March
      31, 20 06DVD
      Inventory
                
                $
                1,168,902
                
                
                $
                1,121,477Reserve
                
                
                (580,435
                )
                
                
                (470,874
                )Net
      DVD Inventory
                
                
                588,467
                
                
                
                650,603Video
      Inventory
                
                
                75,196
                
                
                
                375,691Reserve
                
                
                (46,995
                )
                
                
                (284,371
                )Net
      Video Inventory
                
                
                28,201
                
                
                
                91,320General
      Merchandise(Toys,
      Greeting Cards, & Misc.)
                
                
                6,512
                
                
                
                6,511Reserve
                
                
                (6,512
                )
                
                
                (6,511
                )Net
      General Merchandise
                
                
                -
                
                
                
                -TOTAL
      INVENTORY
                
                
                1,250,610
                
                
                
                1,503,679TOTAL
      RESERVE
                
                
                (633,942
                )
                
                
                (761,756
                )NET
      INVENTORY
                
                $
                616,668
                
                
                $
                741,923
 
 The
following table sets forth the impact on gross profit margin of activity recorded
in our inventory reserve balance for the applicable year:
 
 Fiscal
      Year EndedInventory
      Reserve Detail:
                
                March
      31, 2007
                
                
                March
      31, 2006Beginning
      Balance
                
                $
                (761,756
                )
                
                $
                (441,514
                )Provision
      to Cost of Goods Sold
                
                
                13,332
                
                
                
                (691,805
                )Inventory
      write-off
                
                
                114,482
                
                
                
                371,563Ending
      Reserve Balance
                
                $
                (633,942
                )
                
                $
                (761,756
                )Net
      Sales
                
                $
                2,295,710
                
                
                $
                3,510,475Total
      Charged to Cost of Goods
                
                
                (13,332
                )
                
                
                691,805Impact
      to Gross Margin as aPercentage
      of sales
                
                
                (0.6
                %)
                
                
                19.7
                %
 
 The
decrease in inventory reserve during the period ended March 31, 2007 was
the result of the decrease in reserves for our video inventory of
approximately $237,000 offset an increase in our DVD reserve of
approximately $109,000. The decrease in the video inventory reserve
resulted primarily from the write off of non-recoverable consignment
inventory held by a customer who filed bankruptcy. The increase in the DVD
inventory reserve of approximately $109,000 was the result of additional
reserves required for slower moving assorted DVD products and
displays.
 
 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.
 
 Our
auditors issued a report
indicating that the financial statements have been prepared assuming that the
Company will continue as a going concern and that the financial statements do
not include and adjustments that might result in the outcome of this
uncertainty.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.
 
 15
 Table of Contents
  LIQUIDITY
AND CAPITAL RESOURCES
 
 The
Company has five primary sources of capital which include 1) cash
provided by operations, 2) a revolving loan arrangement with a financial
institution to borrow against the Company's trade accounts receivable, 3)
funds derived from the sale of its common stock, 4) a loan arrangements
with private investors and related parties and a factoring financing
arrangement.
 
 The
Company on May 2, 2006 terminated its factoring arrangements with
its financial institution located in Texas and on June 30, 2006, entered
into a new financing arrangement with another financing institution located
in San Francisco for an accounts receivable revolving line of credit up to
$250,000. On March 8, 2007, the Company entered into an accounts receivable
assignment factoring agreement with a private investor whereby it assigned
its accounts receivable from a customer totaling approximately $515,000 and
the Company was advanced $300,000 for use as working capital. Under the
terms of the agreement the Company guaranteed the payment by the customer
to the lending institution payments up to $400,000.
 
 The
Company continued reducing its operating expense in during the fiscal
year 2007 by implementing reductions primarily in salaries and wages and
other operating costs. 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.
 
 Management
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.
 
 ACQUISITION
OR DISPOSITION OF ASSETS.
 
 On
November 30, 2006 Company announced signing a letter of intent to acquire
RX for Africa, Inc., and all its wholly owned subsidiaries through its new
wholly owned subsidiary, DMEC Acquisition Inc.
 
 ENTRY
INTO A MATERIAL DEFINITIVE AGREEMENT.
 
 On
November 28, 2006 the Company entered into a funding agreement
from institutional and accredited investors with gross proceeds of
$2,300,000, to be received in two traunches. On April 27, 2007 the funding
agreement was amended to reflect gross proceeds of $2,400,000. The first
traunch of $1,150,000 was received upon execution of the funding agreement
on November 38, 2006 and a second traunch of $1,250,000 was to be received
upon meeting the certain conditions under the terms of the funding
agreement.
 
 The
funding consists of convertible securities which shall convert at a
price per share which shall be equal to a number equal to $12,000,000
pre-money valuation on a fully diluted basis or $0.45 per share
(post-reverse split). Warrants totaling 1,277,778 shares (post-reverse
split) were issued at an exercise price of $0.45 per share (post-reverse
split).
 
 The use
of funds for net proceeds of the first traunch was as follows: 1) $850,000
loan to Africa (Ethiopia) P.L.C., 2) $144,000 for working capital, and 3)
$156,000 legal fees and other closing costs. The use of funds for the
net proceeds of the 2nd traunch funding by the Company is as follow: 1)
$250,000 to be reserved for the Company's DVD wind down expenses, 2)
$950,000 for working capital, 3) legal fees $15,000, 4) payment of
Company's past salaries owed of $35,000.
 
 On May 4,
2007, the Company's wholly owned subsidiary, Diamond
Entertainment Acquisition, Inc., acquired Rx for Africa, Inc. through a
merger. Rx Africa (Ethiopia) PLC, a subsidiary of Rx for Africa, Inc., owns
and operates a state-of-the art pharmaceutical plant located south of Addis
Ababa, Ethiopia. The Company plans to change its name from Diamond
Entertainment, Corp. to Rx for Africa, Inc., and concurrently to change its
OTCBB trading symbol.
 
 On May 4,
2007, concurrent with the merger, the Company closed on the second traunch
of a private placement funding from institutional and accredited investors
with gross proceeds of $1,250,000.
 
 The
Company is in negotiation with a potential buyer to sell its existing
DVD operations including certain assets and believes it will be able to
consummate the sale in July 2007. In the event the Company fails sell its
DVD operations and certain assets, it plans to wind down its DVD operations
and liquidate certain assets. As of the date of this filing, Company had
not signed a purchase agreement with the potential buyer.
 
 We
believe we have adequate cash resources to sustain our operations through
the third quarter of fiscal 2008. Our principal objective is to implement
a comprehensive strategy to meet certain objectives to benefit from the
merger. 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 our planned objectives during
fiscal 2008.
 
 16
 Table of Contents
  On March
31, 2007 the Company had assets of approximately $2,479,000 compared
to $1,581,000 on March 31, 2006. The Company had a total stockholder's
deficiency of approximately $9,611,000 on March 31, 2006, compared to a
deficiency of approximately $1,656,000 on March 31, 2006, an increase of
approximately $7,955,000. The increase in stockholders' deficit for the
year ended March 31, 2007 was primarily the result the Company's increase
in its accumulated deficit.
 
 As of
March 31, 2007 the Company's working capital deficit increased
by approximately $7,655,000 from a working capital deficit of
approximately $2,251,000 at March 31, 2006, to a working capital deficit of
approximately $9,906,000 at March 31, 2007. The increase in working capital
deficit was attributable primarily to increase in current assets totaling
approximately $1,204,000 offset by increases in current liabilities of
approximately $8,859,000.
 
 Net cash
flow used operating activities was approximately $10,849,000 during
the year ended March 31, 2007, compared to approximately $469,000 net cash
used by operating activities for the same period a year earlier. The
increase of approximately $10,380,000 was primarily attributable to
increases in net loss, notes receivable and lower related party deferred
compensation.
 
 Net cash
used in investing activities were approximately $59,000 and $225,000 for
fiscal 2007 and 2006, respectively. The decrease of approximately
$196,000 resulted primarily from lower purchases of film masters and
artwork.
 
 The
Company during the year ended March 31, 2007, realized cash flows
provided by in financing activities of approximately $10,934,000 resulting
primarily from recording Black Scholes warrant and derivative liabilities
in connection with outstanding warrants and stock options. 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.
 
 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.
 
 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.
 
 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, being a director of the Company, served as a director of
ATRE.
 
 17
 Table of Contents
  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 we had an outstanding loan balance and accrued interest
of $582,874 and $14,255 respectively, owed to ATRE, interest at the rate of
10% per annum, and due upon demand. On November 27, 2007, in accordance the
waiver of debt clause of the then proposed merger agreement between the
Company and Rx for Africa which was finalized on May 4, 2007, ATRE entered
into a Waiver of Debts Agreement with the Company, whereby ATRE forgave the
entire principal and interest of the notes payable and interest of $582,874
and $14,255, respectively.
 
 For year
ended March 31, 2006, the Company raised net cash proceeds for the sale of
its common stock totaling approximately $238,000.
 
 On May 9,
2005 the Board of Directors of the Company approved the issuance of 770,591
shares (post-reverse split) 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
$0.30 per share (post-reverse split). 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.
 
 FUTURE CAPITAL REQUIREMENTS.
  Based on
recent performance, the merger on May 4, 2007, and the plan to sell its DVD
operations, management at the time of this report us uncertain as to the
estimated cash to be generated from operations for fiscal year 2008. 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.
 
 GOING
CONCERN.
  During
the years ended March 31, 2007 and 2006, our independent auditors' reports
contained a going concern qualification and we have included in 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 the future plans 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.
 
 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.
 
 18
 Table of Contents
  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:
 
 o
                Idle
      or slow moving inventory
 o
                Reduced
      sales activity
 o
                No
      assurance of future sales
 o
                Obsolete
      inventory.
 o
                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.
  ITEM 7.  FINANCIAL STATEMENTS
 
 The
report of independent auditors and financial statements are set forth
in this report beginning on Page 21.
 
 19
 Table of Contents
  DIAMOND
ENTERTAINMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
FINANCIAL STATEMENTS
 MARCH
31, 2007
 
 
 
 CONTENTS
 
 
 
 PageIndependent Auditors' Report
                21Consolidated Balance Sheet
                23Consolidated Statements of Operations
                25Consolidated Statements of Stockholders'
      Deficiency
                26Consolidated Statements of Cash Flows
                27Notes to Consolidated Financial
      Statements
                29
 
 
 
 20
 Table of Contents
 
 
 REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
     To the
Board of Directors of
   Diamond
Entertainment Corporation
   We have
audited the accompanying consolidated balance sheet of Diamond Entertainment
Corporation and subsidiaries ("the Company") as of March 31, 2007 and the
related statements of operations, changes in stockholders' deficiency, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
  We
conducted our audit 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 audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. 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 audit provides a reasonable basis for our
opinion.
  In our
opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of March 31, 2007 and the results of its
operations and its cash flows for the year 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, the
Company has incurred significant losses from operations since its inception and
has a working capital deficiency. These conditions raise substantial doubt about
the Company’s ability to continue as a going concern. Management’s plans in
regard to these matters are described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
  As more
fully described in Note 20, subsequent to the issuance of the Company’s 2007
financial statements and our report thereon dated July 31, 2007, the Company
restated its financial statements, expanded certain disclosures and added new
ones.These matters are further disclosed in notes 1, 2,
12, 15 and 16. In our original report we expressed an unqualified opinion on the
2007 financial statements, and our opinion on the revised financial statements,
as expressed herein, remains unqualified.
   /s/
Bernstein & Pinchuk
LLP
  New York,
New York July 31, 2007 - except for changes made in Note 1 regarding stock based
compensation, which was revised to comply with SFAS 123 (Revised) and earnings
per share showing slight change in basic shares and showing diluted shares, in
Note 1, regarding going concern discussions, in Note 2, regarding convertible
notes payable, in Note 12, regarding the issuance of warrants and other changes
in stockholders’ deficiency and Note 15, regarding stock options in Note 16, and
these matters are further disclose in Note 20, which reflects all of these
changes as to which the date is June 27, 2008.
 21
 Table of Contents
 
 INDEPENDENT
AUDITORS' REPORT
 
 To the
Stockholders and Board of Directors of Diamond Entertainment
Corporation
 
 We have
audited the accompanying consolidated balance sheet of
Diamond Entertainment Corporation and Subsidiaries as of March 31, 2006,
and the related consolidated statements of operations, stockholders' equity
and cash flows for the year 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 audit 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 audit provides 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 the consolidated results of their operations and their cash
flows for the year 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/ PMB Helin Donovan,
LLP
 Irvine,
California
 June 30,
2006
 
 
  22
 Table of Contents
 
 DIAMONDENTERTAINMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEET
 MARCH
31, 2007
  
 2007
                  (restated)ASSETSCURRENT
      ASSETSCash
                
                $
                46,612Accounts
      receivable, net of allowance for doubtfulaccounts of
      $1,358
                
                
                580,218Inventory,
      net of valuation allowance of $633,942
                
                
                616,668Notes
      Receivable
                
                
                850,000Prepaid
      expenses and other current assets
                
                
                90,032Total
      current assets
                
                
                2,183,530PROPERTY
      AND EQUIPMENT, lessaccumulated depreciation of
      $970,067
                
                
                107,882FILM
      MASTERS AND ARTWORK, lessaccumulated amortization of
      $5,203,568
                
                
                158,842OTHER
      ASSETS
                
                
                28,483TOTAL
      ASSETS
                
                $
                2,478,737
  The
accompanying notes are an integral part of these financial
statements.
 
 
 23
 Table of Contents
 
 DIAMOND
ENTERTAINMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEET (CONTINUED)
 MARCH 31, 2007
  2007(restated)LIABILITIES
      AND STOCKHOLDERS' DEFICIENCYCURRENT
      LIABILITIESBank
      overdraft
                
                $
                19,359Accounts
      payable
                
                
                663,040Related
      Party - deferred compensation
                
                
                95,018Other
      accrued expenses
                
                
                474,376Provision
      for estimated sales returns
                
                
                201,575Due
      to factor
                
                
                300,000Merger
      convertible notes
                
                
                1,150,000Discount
      on merger notes
                
                
                (273,263
                )Provision
      for returns
                
                
                146,777Notes
      payable
                
                
                1,263Customer
      Deposits
                
                
                16,400Total
      current liabilities
                
                
                2,794,545TOTAL
      LIABILITIES
                
                
                2,794,545
 STOCKHOLDERS'
      DEFICIENCYConvertible
      preferred stock, no par value;5,000,000 shares authorized; 483,251
      issued (of which 172,923 are held in
      treasury)
                
                
                376,593Treasury
      stock
                
                
                (48,803
                )Series
      A convertible preferred stock,$10,000 per share stated value; 50
      shares authorized; 40 issued and
      outstanding
                
                
                471,400Common
      stock, no par value; 800,000,000 sharesauthorized; 20,696,642
      issued and outstanding
                
                
                18,840,507Additional
      Paid in Capital
                
                
                1,144,298Accumulated
      deficit
                
                
                (21,099,803
                )TOTAL
      STOCKHOLDERS' DEFICIENCY
                
                
                (315,808
                )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIENCY
                
                $
                2,478,737
  The
accompanying notes are an integral part of these financial
statements.
 
 
 
 24
 Table of Contents
 
 DIAMONDENTERTAINMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 YEARS
ENDING MARCH 31, 2007 AND 2006
 
 2007
                
                
                2006(restated)IncomeRevenues
                
                $
                2,295,710
                
                
                $
                3,510,475Cost
      of goods sold
                
                
                2,031,994
                
                
                
                3,139,461Gross
      Margin
                
                
                263,716
                
                
                
                371,014Operating
      ExpensesSelling
      and marketing expenses
                
                
                350,435
                
                
                
                889,999Administrative
      expenses
                
                
                1,440,429
                
                
                
                1,076,749Total
      Operating Expenses
                
                
                1,790,864
                
                
                
                1,966,748Loss
      from Operations
                
                
                (1,527,148
                )
                
                
                (1,595,734
                )Other
      Income and (Expense)Other
      income (expense)
                
                
                54,999
                
                
                
                31,916Other
      Income - Debt settlement
                
                
                153,524
                
                
                
                -Other
      Income - Waiver of accrued salaries
                
                
                953,961
                
                
                
                -Other
      Income - Forgiveness of debt
                
                
                804,793
                
                
                
                -Interest
      expense
                
                
                (319,424
                )
                
                
                (83,926
                )Interest
      income
                
                
                41,505
                
                
                
                942Net
      Other Income and (Expense)
                
                
                1,689,358
                
                
                
                (51,068
                )Income
      (loss) Before Provisionfor Income Taxes
                
                
                162,210
                
                
                
                (1,646,802
                )Provision
      for Income Taxes
                
                
                (4,000
                )
                
                
                (4,000
                )Net
      Income (Loss)
                
                $
                158,210
                
                
                $
                (1,650,802
                )Loss
      Per Share (post-reverse split)Basic
                
                $
                0.01
                
                
                $
                (0.08
                )Diluted
                
                $
                0.01
                
                
                $
                (0.08
                )Number
      of shares (post-reverse split) used in calculation ofearnings per
      share (post-reverse split)Basic
                
                
                20,696,642
                
                
                
                20,528,528Diluted
                
                
                30,769,103
                
                
                
                20,528,528
 
 
 The
accompanying notes are an integral part of these financial
statements.
 
  25
 Table of Contents
 
  DIAMONDENTERTAINMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIENCY (restated)
 FOR
THE YEARS ENDING MARCH 31, 2007 AND 2006
 
 Additional
                
                
                TotalSeries
      A
                
                
                
                
                
                
                
                
                Accumulated
                
                
                Treasury
                
                
                Deferred
                
                
                Paid-in
                
                
                StockholdersConvertible
      Preferred Stock
                
                
                Convertible
      Preferred Stock
                
                
                Common
      Stock
                
                
                Deficit
                
                
                Stock
                
                
                Compensation
                
                
                Capital
                
                
                DeficitBalance
      at March 31, 2005
                
                483,251
                
                
                $
                376,593
                
                
                
                40
                
                
                $
                471,400
                
                
                
                19,838,162
                
                
                $
                18,569,762
                
                
                $
                (19,607,211
                )
                
                $
                (48,803
                )
                
                $
                -
                
                
                $
                -
                
                
                $
                (238,259
                )Issuance
      of common stock forconversion of dividends and penaltiesof
      Series B Preferred stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                770,591
                
                
                
                231,177
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                231,177Stock
      options issued to consultant
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,000Deferred
      compensation stock optionsissued to consultant
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,806
                )
                
                
                
                
                
                
                (6,806
                )Amortization
      of deferred compensationstock
      options
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,746
                
                
                
                
                
                
                
                1,746Net
      loss for the year ended
                  March
      31, 2006
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,650,802
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,650,802
                )Balance
      at March 31, 2006
                
                483,251
                
                
                
                376,593
                
                
                
                40
                
                
                
                471,400
                
                
                
                20,608,753
                
                
                
                18,807,939
                
                
                
                (21,258,013
                )
                
                
                (48,803
                )
                
                
                (5,060
                )
                
                
                0
                
                
                
                (1,655,944
                )Issuance
      of common stock forvendor debt
      settlement
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                87,065
                
                
                
                32,568
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                32,568Amortization
      of deferred stockoptions - consultant
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,060
                
                
                
                
                
                
                
                5,060Officer
      stock options vested
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                130,200
                
                
                
                130,200Reverse
      stock split rounding
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,063
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                0Discount
      on convertible notes
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                319,200
                
                
                
                319,200Discount
      on financing agreement
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                193,694
                
                
                
                193,694Issuance
      of options to officer
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                501,204
                
                
                
                501,204Net
      loss for the year ended March 31, 2007
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                158,210
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                158,210Balance
      at March 31, 2007
                
                483,251
                
                
                
                376,593
                
                
                
                40
                
                
                
                471,400
                
                
                
                20,696,881
                
                
                
                18,840,507
                
                
                
                (21,099,803
                )
                
                
                (48,803
                )
                
                
                0
                
                
                
                1,144,298
                
                
                
                (315,808
                )
  The
accompanying notes are an integral part of these financial
statements.
 
  26
 Table of Contents
  DIAMONDENTERTAINMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDING MARCH 31, 2007 AND 2006
 
 
 2007
                
                
                2006(restated)Cash
      Flows from Operating Activities:Net
      loss
                
                $
                158,210
                
                
                $
                (1,650,802
                )Adjustments
      to reconcile net income to net cashprovided by operating
      activities:Depreciation
      and amortization
                
                
                365,570
                
                
                
                431,257Amortization
      of discounts on debt
                
                
                191,206
                
                
                
                -Amortization
      of deferred compensation
                
                
                5,060
                
                
                
                -Options
      vested by officer
                
                
                130,200
                
                
                
                -Debt
      Settlement
                
                
                (153,524
                )
                
                
                -Waiver
      of accrued salary
                
                
                (953,961
                )
                
                
                -Forgiveness
      of debt
                
                
                (804,793
                )
                
                
                -Provision
      for doubtful accounts
                
                
                -
                
                
                
                115,914Inventory
      reserve
                
                
                (247,431
                )
                
                
                320,242Changes
      in certain assets and liabilities:Notes
      receivable
                
                
                -
                
                
                
                -Due
      from related party
                
                
                4,845
                
                
                
                5,548Accounts
      receivable
                
                
                (426,079
                )
                
                
                211,397Inventory
                
                
                372,686
                
                
                
                (237,475
                )Prepaid
      expenses and other current assets
                
                
                (31,715
                )
                
                
                15,326Overdraft
                
                
                (15,422
                )
                
                
                -Accounts
      payable
                
                
                (296,388
                )
                
                
                731,539Related
      party deferred compensation
                
                
                706,656
                
                
                
                122,505Other
      accrued expense
                
                
                123,221
                
                
                
                (224,946
                )Provision
      for estimated sales returns
                
                
                (5,223
                )
                
                
                (309,785
                )Customer
      deposits
                
                
                100
                
                
                
                -Net
      Cash Used inOperating Activities
                
                
                (722,863
                )
                
                
                (469,280
                )Cash
      Flows from Investing Activities:Purchase
      of property and equipment
                
                
                -
                
                
                
                (65,000
                )Other
      assets
                
                
                -
                
                
                
                45,641Notes
      receivable
                
                
                (850,000
                )
                
                
                -Purchase
      of film masters and artwork
                
                
                (59,333
                )
                
                
                (205,351
                )Net
      Cash Used in Investing Activities
                
                
                (909,333
                )
                
                
                (224,710
                )Cash
      Flows from Financing Activities:Decrease
      in bank overdraft
                
                
                -
                
                
                
                (26,717
                )Advance
      from factor
                
                
                355,000
                
                
                
                1,092,000Payments
      to factor
                
                
                (87,929
                )
                
                
                (1,363,181
                )Proceeds
      from financing agreement
                
                
                250,000
                
                
                
                -Payments
      of notes payable
                
                
                (8,841
                )
                
                
                (7,576
                )Payments
      of notes payable (related party)
                
                
                1,150,000
                
                
                
                322,500Deferred
      compensation - stock option
                
                
                -
                
                
                
                (5,060
                )Proceeds
      from the sale of common stock
                
                
                -
                
                
                
                238,177Net
      Cash Provided byFinancing Activities
                
                
                1,658,230
                
                
                
                250,143
 
 The
accompanying notes are an integral part of these financial
statements.
 
 27
 Table of Contents
 
 DIAMOND
ENTERTAINMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
 FOR
THE YEARS ENDING MARCH 31, 2007 AND 2006
 
 2007
                
                
                2006Net
      Increase (Decrease) in Cash and Cash Equivalents
                
                $
                26,034
                
                
                $
                (443,847
                )Cash
      and Cash Equivalents - Beginning of Year
                
                
                20,578
                
                
                
                464,425Cash
      and Cash Equivalents - End of Year
                
                $
                46,612
                
                
                $
                20,578Supplemental
      Information:Cash Paid for:Interest
      expense
                
                $
                46,637
                
                
                $
                101,974Income
      taxes
                
                $
                -
                
                
                $
                -
 
 SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 2007
                
                
                2006Issuance
      of common stock for consulting services
                
                $
                -
                
                
                $
                7,000Issuance
      of common stock for series Bpreferred-liquidated
      damages
                
                $
                -
                
                
                $
                231,177Options
      vested by officer
                
                $
                130,200
                
                
                $
                -Discount
      to financing agreement
                
                $
                193,694
                
                
                $
                -Waiver
      of accrued salaries
                
                $
                491,070
                
                
                $
                -Settlement
      of debt
                
                $
                153,524
                
                
                $
                -Settlement
      of notes to related parties
                
                $
                714,329
                
                
                $
                -
 
 The
accompanying notes are an integral part of these financial
statements.
 
 
 28
 Table of Contents
  DIAMONDENTERTAINMENT CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEAR ENDING MARCH 31, 2007
 
 
 1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
 
 BASIS
OF PRESENTATION
 
 The
accompanying consolidated financial statements include the accounts
of Diamond Entertainment Corporation (the "Company"), a holding 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. Galaxy was dissolved on April 18, 2006.
 
 4) E-DMEC
Corporation ("e-DMEC") incorporated under the laws of the state
of California on April 30, 1985.
 
 5) DMEC
Acquisition Inc. incorporated under the laws of New Jersey on October 31,
2006.
 
 6) DMEC
Acquisition Inc. ("DMECA") incorporated under the laws of Delaware on April
2, 2004.
 
 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, through normal distribution channels throughout the
United States.
 
 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.
 
 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.
  
 29
 Table of Contents
  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.
 
 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 the
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.
144, "Accounting for the Impairment and Disposal of Long-Lived Assets,"
long-lived assets to be held and used are analyzed for impairment and
disposal of 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.
 
 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.
 
 30
 Table of Contents
  FACTORED
ACCOUNTS RECEIVABLE
 
 The
Company is obligated to repurchase transferred receivables under
its agreement with its factor, and therefore such 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
 
 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 $-0-
and $82,000 for the years ended March 31, 2007 and 2006,
respectively.
 
 SHIPPING
COSTS
 
 Shipping
costs are included in Selling and marketing expenses in the amounts
of approximately $150,000 and $271,000 for 2007 and 2006,
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
 
 Effective January 1, 2006, the Company adopted SFAS No. 123 (revised),
"Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective
approach. Prior to the adoption of SFAS 123(R)
we accounted for stock option grant in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" (the
intrinsic value method), and accordingly, recognized compensation
expense for stock option grants.
 
 Under the
modified prospective approach, SFAS 123(R) applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized in the nine months of fiscal 2006 includes compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and compensation cost for all share-based
payments granted subsequent to January 1, 2006 based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). Prior periods
were not restated to reflect the impact of adopting the new
standard.
 
 31
 Table of Contents
  A summary
of option activity under the Plan as of March 31, 2007, and
changes during the period ended are presented below:
 
 WeightedAverageExerciseOptions
                
                
                PriceOutstanding
      at March 31, 2006
                
                
                1,916,667
                
                
                $
                0.21Issued
                
                
                1,200,000
                
                
                $
                0.30Exercised
                
                
                -Forfeited
      or expired
                
                
                (100,000
                )
                
                $
                0.21Outstanding
      at December 31, 2006
                
                
                3,016,667
                
                
                $
                0.25Not
      exercisable at December 31, 2006
                
                
                1,211,111
                
                
                $
                0.21Exercisable
      at December 31, 2006
                
                
                1,805,556
                
                
                $
                0.27
 
 Aggregate intrinsic value
of options outstanding and exercisable at March 31, 2007 was $595,833.
Aggregate intrinsic value represents the difference between the
Company's closing stock price on the last trading day of the
fiscal period, which was $0.54 as of March 31, 2007, and the
exercise price multiplied by the number of options
outstanding. As of March 31, 2007, total unrecognized
stock-based compensation expense related to stock options
was $271,422. The total fair value of options vested during the
nine months ended March 31, 2007 was $130,200.
 
 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.
 
 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.
 
 Dilutive
potential common shares are calculated in accordance with the
treasury stock method, which assumes that proceeds from the exercise of all
warrants and options 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.
 
 32
 Table of Contents
  The
following table provides the basic and diluted income (loss) per
share computations:
  Twelve
      Months EndedMarch
      31,2007
                
                
                2006Net
      Income (Loss)
                
                $
                158,210
                
                
                $
                (1,650,802
                )Weighted-average
      basic shares outstanding
                
                
                20,696,881
                
                
                
                20,528,528Dilutive
      effect of:Warrants and option to purchase common stock
                
                
                8,794,444
                
                
                
                -Note
      payable convertible into common stock
                
                
                1,277,778
                
                
                
                -Weighted
      average diluted shares outstanding
                
                
                30,769,103
                
                
                
                20,528,528Basic
      earnings (loss) per share (post-reverse split)
                
                $
                0.01
                
                
                $
                (0.08
                )Diluted
      earnings (loss) per share (post-reverse split)
                
                $
                0.01
                
                
                $
                (0.08
                )
 
 Dilutive
potential common shares are calculated in accordance with the
treasury stock method, which assumes that proceeds from the exercise of all
warrants and options 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.
 
 RECENT
ACCOUNTING PRONOUNCEMENTS
 
 In July
2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" ("FIN 48"). FIN 48, an interpretation of
FASB Statement 109, prescribes a comprehensive model for recognizing,
measuring, presenting and disclosing in the financial statements tax
positions taken or expected to be taken on a tax return, including a
decision whether to file or not to file in a particular jurisdiction. FIN
48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. FIN 48 is effective
for the Company beginning January 1, 2007. The differences between the
amounts recognized in the statements of financial position prior to the
adoption of FIN 48 and the amounts reported after adoption will be
accounted for as a cumulative-effect adjustment recorded to the beginning
balance of retained earnings. As this guidance was recently issued, the
Company has not yet determined the impact, if any, of adopting
the provisions of FIN 48 on its financial position, results of operations
and liquidity.
 
 In
September 2006, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurements ("FAS
157"). The Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. FAS 157 is effective for
fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The Company is currently in the process of evaluating
the impact that the Statement will have on its financial
statements.
 
 In
September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans - an amendment
of FASB Statements No. 87, 88, 106 and 132(R)." SFAS No. 158 requires an
employer to recognize the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability in its statement of
financial position and recognize changes in the funded status in the year
in which the changes occur. SFAS No. 158 is effective for fiscal years
ending after December 15, 2006. The Company is currently assessing the
impact of SFAS No. 158 on its consolidated financial
statements
 
 In
September 2006, the SEC staff issued Staff Accounting Bulletin No.
108, "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements" ("SAB
108"). SAB 108 was issued in order to eliminate the diversity of practice
surrounding how public companies quantify financial statement
misstatements. In SAB 108, the SEC staff established an approach that
requires quantification of financial statement misstatements based on the
effects of the misstatements on each of the company's financial statements
and the related financial statement disclosures. This model is commonly
referred to as a "dual approach" because it requires quantification of
errors under both the iron curtain and the roll-over methods. The
Company currently uses, and has historically applied, the dual method for
quantifying identified financial statement misstatements. The Company will
initially apply the provisions of SAB 108 in connection with the
preparation of the annual financial statements for the year ending March
31, 2007. The Company is currently evaluating SAB 108, but does not expect
the adoption of SAB 108 to have a significant effect on its financial
position, results of operations, or cash flows.
  33
 Table of Contents
  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. During the year ended
3/31/2007 the Company's net income was $158,210 and the Company had a
deficit in stockholders equity of 315,808.  It used $722,863 cash
in operating activities. 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
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 its uncertainties.
 
 Entry
into a Material Definitive Agreement.
 
 On
November 28, 2006 the Company entered into a funding agreement
from institutional and accredited investors with gross proceeds of
$2,300,000, to be received in two traunches. On April 27, 2007 the funding
agreement was amended to reflect gross proceeds of $2,400,000. The first
traunch of $1,150,000 received upon execution of the agreement and the
remaining $1,250,000 was received on the closing date of escrow on May 4,
2007, the effective date of Merger
 
 The
funding consists of convertible securities which shall convert at a
price per share which shall be equal to a number equal to $12,000,000
pre-money valuation on a fully diluted basis or $0.45 per share
(post-reverse split). Warrants totaling 1,277,777 shares (post reverse
split) were issued at an exercise price of $0.45 per share (post-reverse
split).
 
 Diamond
Entertainment Corporation will use the net proceeds of the first traunch as
follows: 1) $850,000 loan to Africa (Ethiopia) P.L.C., 2) $144,000
for working capital, and 3) $156,000 legal fees and other closing costs.
The net proceeds to the 2nd traunch funding will be used by the Company as
follow: 1) $250,000 to be reserved for the DVD wind down expenses, 2)
$950,000 for working capital, 3) legal fees $15,000, 4) payment of
Company's past salaries owed $35,000.
 
 On May 4,
2007, Diamond Entertainment Corporation consummated its merger with Rx for
Africa, Inc., (including its wholly owned subsidiary Rx for
Africa (Ethiopia) PLC, formerly known as Sunshine Pharmaceutical). Rx
Africa (Ethiopia) PLC owns and operates a state-of-the art pharmaceutical
plant built on twenty three thousand square meters of land located south of
Addis Ababa, Ethiopia. The facility was established to manufacture
HIV/AIDS, malaria, tuberculosis and other generic drugs for distribution
initially in Ethiopia and eventually throughout Africa. The company is
currently producing and marketing a total of six products, and is in the
process of scaling up its production with the expectation of producing at
least 30 new products by late 2007.
 
 Concurrent
with the merger, DMON closed on the second traunch of a private placement
funding from institutional and accredited investors with gross proceeds of
$1,250,000.
 
 The
funding consists of convertible securities which shall convert at a
price per share (post-reverse split) of $0.45. In addition, 1,388,889
warrants were issued at an exercise price of $0.45 per share (post reverse
split).
 
 DMEC is
in negotiation with a potential buyer to sell its existing DVD operations
together with all its assets and believes it will be able to sell
the business in July 2007. In the event DMEC fails to sell the business,
DMEC plans to wind down the business operations and liquidate its assets.
As of the date of this filing, DMEC had not signed the definitive merger
agreement from Rx for Africa.
 
 Rx for
Africa, Inc.
 
 Rx for
Africa, Inc., through its wholly owned subsidiary Rx for Africa (Ethiopia)
PLC, operates a pharmaceutical plant, formerly known as
Sunshine Pharmaceutical. The plant is built on twenty three thousand square
meters of land located south of Addis Ababa, Ethiopia. The plant was
established to manufacture HIV/AIDS, Malaria, Tuberculosis and other
generic drugs in Ethiopia. The plant currently has 6 products and within
six months expects to produce a minimum of 30 new products.
 
 We
believe we have adequate cash resources to sustain our operations through
the third quarter of fiscal 2008. Our principal objective is to implement
a comprehensive strategy to meet certain objectives with or merger partner
in the remaining quarters in fiscal 2008. 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 our objectives during fiscal 2008 or at all.
 
 34
 Table of Contents
  3.  ACCOUNTS
RECEIVABLE
 
 Accounts
receivable as of March 31, 2007 was $581,576 before an allowance
for doubtful accounts of $1,358. Substantially all of the accounts
receivable as of March 31, 2007 have been pledged as collateral under a
revolving loan agreement.
 
 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, 2007 the Company had an allowance for doubtful accounts
of 140,117. During the year ended March 31, 2007 the Company recorded a
write off one accounts receivable totaling $134,263 to allowance for
doubtful accounts as resulting from a customer filing
bankruptcy.
 
 4.  INVENTORY
 
 Inventory
consisted of the following as of:
 March
      31, 2007Raw
      materials
                
                $
                554,627Finished
      goods
                
                
                695,983Sub-total
                
                
                1,250,610Less:
      valuation allowance
                
                
                (633,942
                )Inventory,
      net
                
                $
                616,668
 
 ALLOWANCE
 
 An
allowance has been established for inventory totaling $633,942 as of
March 31, 2007.
 
 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 and the inventory balance for this customer was
written off against the valuation allowance during fiscal
2007.
 
 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:
 
 As of
March 31, 2006, the Company had a miscellaneous receivable due from
GJ Products (a shareholder) of $4,613. During the year ended March 31,
2007, this amount was offset against a loan owed to GJ
Products
 
 DUE
TO RELATED PARTIES - CURRENT NOTES PAYABLE
 
 In
connection with the terms of merger letter of intent dated November 30,
2006 between the Company and Rx for Africa, the Company during fiscal 2007
entered into a Waiver of Debt Agreement with ATRE, GJ Products Jeffery
Schillen and James Lu for the outstanding balance of the notes payable
totaling $582,874, $97,000, $48,000 and $20,000 respectively. The Company
recorded a write off of the outstanding balances of these notes payable to
other income forgiveness of debt during November 2006 and January 2007. The
balance of accrued interest payable of $14,255, $50,865 and $200 for the
ATRE, GJ Products and GJ notes payable, respectively, was also written off
to other income - forgiveness of debt.
 
 35
 Table of Contents
  DUE
TO RELATED PARTIES - DEFERRED COMPENSATION
 
 Related
party deferred compensation consists of deferred accrued salaries
and vacations due to officers and key employees of $95,018 as of March 31,
2007. During the year ended March 31, 2007 two executive officers of the
Company under the terms of Waiver of Debt Agreement, waive an aggregate of
$1,121,269 in salaries and wages owed to them.
 
 6. NOTES
RECEIVABLES
 
 Notes
Receivable:
 
 Pursuant
to a subscription agreement between the Company and its
subscribers, Longview Fund, LP and Alpha Capital Anstalt, the Company
received a bridge loan of $1,000,000 and $150,000, respectively, from the
subscribers. Concurrent with the funding of the bridge loan on November 28,
2006, the Company loaned to Rx for Africa $850,000 of the bridge loan due
upon the closing of the acquisition of Rx for Africa by the Company as set
forth in the letter of intent entered into by the Company and Rx for Africa
on November 30, 2006. Interest on the note receivable is at 14% per
annum.
 
 7. PROPERTY
AND EQUIPMENT
 
 Property
and equipment consisted of the following as of:
 
 March
      31, 2007Furniture
      and equipment
                
                $
                1,034,204Automobile
                
                
                24,487Leasehold
      improvements
                
                
                19,2581,077,949Less: accumulated
      depreciation
                
                
                (970,067
                )Furniture
      and equipment, net
                
                $
                107,882
 
 Depreciation
expense for the years ended March 31, 2007 and 2006 was $55,539
and $79,400, respectively.
 
 8.  FILM
MASTERS AND ARTWORK
 
 Film
Masters and Artwork consisted of the following as of:
  March
      31, 2007Intellectual
      property
                
                $
                3,376,003Other
      film masters and artwork
                
                
                1,986,407Total
                
                
                5,362,410Less: accumulated
      amortization
                
                
                (5,203,568
                )Film
      Masters and Artwork, net
                
                $
                158,842
  
 36
 Table of Contents
  Amortization
expense for the year ended March 31, 2007 was $310,134. 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, 2007, no such events
have occurred.
 
 9.  INVESTMENT
IN EQUITY SUBSIDIARY
 
 As of
March 31, 2007, 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.
 
 10.  DUE
TO FACTOR/FINANCING AGREEMENT PAYABLE
 
 Due to
Factor:
 
 March
      31, 2007Due
      to factor payable
                
                $
                300,000
 
 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.
 
 On March
8, 2007, the Company entered into an accounts receivable
assignment factoring agreement with a private investor whereby it assigned
its accounts receivable from a customer totaling approximately $515,000 and
the Company was advanced $300,000 for use as working capital. The terms of
the agreement calls for the Company to guarantee the payment by its
customer to the private investor payments up to $400,000. The Company in
March 2007 recorded $100,000 in accrued interest.
 
 Due
Financing Agreement Payable:
 
 March
      31, 2007Longview
      Fund, LC - Revolving note payable
                
                $
                201,575
 
 On June
30, 2006, the Company entered into an Accounts Receivable Revolving
Loan Agreement ("Agreement") with a 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 was 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. All of the
assets of the Company as of March 31, 2007 and have been collateralized
under the security agreement with the lender. The loan Agreement may be
terminated by the lender by giving the Company 30 days written
notice. Concurrent with this loan, the Company granted 3,333,333 warrants
to the lender with an expiration date of June 30, 2011 and a $0.075
exercise price. The fair value of these warrants was $860,000. Given loan
proceeds of $250,000, the relative fair value of the warrants was $193,694
and is being treated as a loan discount which is being amortized over the
life of the loan (12 months). The amount of $191,206 was amortized to interest
expense during the year ended March 31, 2007.
  37
 Table of Contents
  11.  NOTES
PAYABLE
 
 Notes
payable represent the following as of:
 
 March
      31, 2007Production
      Equipment
                
                $
                1,263Less
      current
                
                
                1,263Long
      term
                
                $
                -
 
 12.  CONVERTIBLE
NOTES PAYABLE
 
 During
the year ended March 31, 2007 the Company issued convertible notes to third
parties (the “Convertible Notes”) along with warrants (the “Convertible Note
Warrants”) to purchase shares of common stock.
 
 Date
      of Note
                
                Amount
      of Notes
                
                
                Conversion
      Price(1)
                
                Term
      of NoteNovember
      30, 2006 (1)
                
                $
                1,150,000
                
                
                $
                0.45
                
                2
      years
  Date
      of Warrants Issued
                
                Number
      of Warrants
                
                
                Exercise
      Price
                
                Term
      of WarrantsNovember
      30, 2006
                
                
                1,277,777
                
                
                $
                0.45
                
                5
      years
 
 The
Company has included the entire debt as a current liability on the balance sheet
at December 31, 2006 since the debt is immediately convertible at the option of
the holder.\
 
 The
Convertible Notes represent aggregate gross proceeds of $2,300,000, to be
received in two traunches. The first traunch of $1,150,000 received upon
execution of the agreement and the remaining $1,150,000 within five days after
the first to occur of (i) the actual effectiveness of the Registration Statement
or (ii) the delivery by the Company of certified consolidated financial
statements of the Company. In connection with the funding, the Company granted
the investors stock warrants to purchase, at any time, shares of the Company's
common stock which shall convert at a price per share which shall be equal to a
number equal to $12,000,000 pre-money valuation on a fully diluted basis or
$0.45per share (post-reverse split). In addition, 1,277,777 warrants were issued
at an exercise price of $.015 per share (post-reverse split). 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.
 
 The
Convertible Notes contain provisions for interest accrual at the “prime rate”
published in The Wall Street Journal from time to time, plus three percent (3%).
The Interest Rate shall not be less than eight percent (8%). Interest shall be
calculated on a 360 day year. Interest on the Principal Amount shall be payable
monthly, commencing 120 days from the closing and on the first day of each
consecutive calendar month thereafter (each, a “Repayment Date”) and on the
Maturity Date.
 
 Following
the occurrence and during the continuance of an Event of Default (as discussed
in the Note), the annual interest rate on the Note shall automatically be
increased by two percent (2%) per month until such Event of Default is
cured.
 
 The Notes
also provide for liquidated damages on the occurrence of several events. As of
March 31, 2007, no liquidating damages have been incurred by the
Company.
 
 Redemption Option - The
Company will have the option of prepaying the outstanding Principal Amount
(“Optional Redemption”), in whole or in part, by paying to the Holder a sum of
money equal to one hundred twenty percent (120%) of the Principal Amount to be
redeemed, together with accrued but unpaid interest thereon.
 
 Debt features - The Holder
shall have the right, but not the obligation, to convert all or any portion of
the then aggregate outstanding Principal Amount of this Note, together with
interest and fees due hereon, into shares of Common Stock.
 
 38
 Table of Contents
  The
proceeds from the financing transactions were allocated to the debt features and
to the warrants based upon their fair values. After the latter allocations, the
remaining value, if any, is allocated to the Note on the financial
statements.
 
 The debt
discount is being accreted using the effective interest method over the term of
the note. The value of the discount on the converted notes on the books is being
accreted over the term of the note (two years). For the year ended March 31,
2007, the Company accreted $211,125 of debt discount related to the
Notes.
 
 The
Company has calculated the fair value of the beneficial conversion feature
associated with the Convertible Notes in the amount of $44,600, and the fair
value of the Convertible Note Warrants in the amount of $274,600.The aggregate
of the fair value of the beneficial conversion feature associated with the
Converitible Notesand the fair value of the Convertible Note Warrants in the
amount of $319,200 is considered a discount tothe notes. This discount is being
amortized over the two-year term of the notes using the effective interest
method.During the year ended March 31, 2007, the amount of $45,937 was charged
to interest expense. At March 31, 2007, the remaining amount of the discount was
$273,263.The estimated fair value of the beneficial conversion feature
associated with the Convertible Notes and the Convertible Note Warrants was
determined using the Black-Scholes option-pricing model with a closing price of
on the date of issuance and the respective exercise price, a 5 year term, and
the volatility factor relative to the date of issuance. The model uses several
assumptions including: historical stock price volatility, risk-free interest
rate (4.50%), remaining time till maturity, and the closing price of the
Company’s common stock.
 
 13.   PROVISION
FOR ESTIMATED SALES RETURNS
 
 Provision
for estimated sales returns relates to sales to customers for which return
rights or price protection are established. For the year ended March
31, 2007 the Company recorded provision for estimated sales returns
of $146,777.
 
 14.   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, 2007 and 2006,
royalty expense was $28,756 and $80,155, respectively, pursuant to these
agreements.
 
 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
 
 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
expired on March 31, 2007, for use as manufacturing and warehouse
facilities for a monthly rent of $13,000. The Company entered into a month
to month lease on April 1, 2007 for monthly rent of $13,500 per month with
an unaffiliated third party.
 
 During
the period ended March 31, 2006 we leased approximately 995 square feet at18725
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. In May 2007 the Company renewed this lease on a month to month
basis for a monthly rent of $3,750.
 
 Rent
expense for the years ended March 31, 2007 and 2006 was
approximately $158,846 and $150,000, respectively.
  39
 Table of Contents
  15.  STOCKHOLDERS'
DEFICIT
 
 COMMON
STOCK
 
 As of
March 31, 2007, 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, 2007 and 2006 20,696,882, and 19,838,162 shares
(post-reverse split) were issued and outstanding.
 
 On March
27, 2007 the Company had a 30 to 1 reverse split.
 
 During,
the years ended March 31, 2007 and 2006, the Company had the
following issuances of its common stock:
 
 COMMON
STOCK ISSUED
 
 The
Company during year ended March 31, 2007 entered into settlement
agreements with two of its major inventory suppliers whereby the Company in
lieu of paying cash, issued and aggregate of 360,875 of its common stock to
such suppliers of settle its obligations as follows:
 
 On March
5, 2007, the Company issued a supplier, 53,732 shares (post-reverse split) of
its common stock at $0.42 per share (post-reverse split) to settle
$22,567.40 in debt per a settlement agreement dated February 1,
2007.
 
 On March
14, 2007, the Company issued a supplier, 33,333 shares (post-reverse split) of
its common stock at $0.30 per share (post-reverse split) to settle
$10,000.00 in debt per a settlement agreement dated March 6,
2007.
 
 WARRANTS
ISSUED
 
 On June
30, 2006, in connection with a loan agreement with a financing company located
in San Francisco, California, the Company granted the lender warrants to
purchase at any time, 100,000,000 shares (post-reverse split) of the Company’s
common stock at an exercise price of $0.075 per share (post-reverse split). The
warrants expire on June 30, 2011. The fair value of these warrants was $860,000.
Given loan proceeds of $250,000, the relative fair value of the warrants was
$193,694 and is being treated as a loan discount which is being amortized over
the life of the loan (12 months). The company expensed $93,944 related to the
relative fair value of the warrants during the six month period ended September
30, 2006. The warrants were issued for $100 cash and in consideration of the
loan agreement entered into by the lender with the Company pursuant to which the
lender agreed to loan to the Company up to $250,000. 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.
 
 On
November 2006 in connection with the Convertible Notes (see note 9), the company
issued the Convertible Note Warrants to purchase 1,277,777 shares (post-reverse
split) of the Company’s common stock at a price of $0.45 per share (post-reverse
split). The Company has calculated the amount of the discount on the Convertible
Notes attributable to the beneficial conversion feature and the Convertible Note
Warrants to be a total of $319,200; of this amount, the relative fair value of
$274,600 was allocated to the Convertible Note Warrants.
   40
 Table of Contents
 
 The
following schedules summarize warrants outstanding at March 31,
2007:
 
 Warrants
      Outstanding
                
                
                Warrants
      ExercisableRange
      of
                  Exercise
      Prices
                
                
                Number
                  Outstanding
                  as
      of
                  March
      31, 2007
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
      Life (years)
                
                
                Weighted
                  Average
                  Exercise
      Price
                
                
                Number
                  Exercisable
                  as
      of
                  March
      31, 2007
                
                
                Weighted
                  Average
                  Exercise
      Price$
                0.75
                
                
                
                3,333,333
                
                
                
                4.25
                
                
                $
                0.75
                
                
                
                3,333,333
                
                
                $
                0.75$
                0.36
                
                
                
                1,166,666
                
                
                
                2.00
                
                
                $
                0.36
                
                
                
                1,166,666
                
                
                $
                0.36$
                0 .45
                
                
                
                1,277,777
                
                
                
                4.67
                
                
                $
                0.45
                
                
                
                1,277,777
                
                
                $
                0.455,777,776
                
                
                
                4.13
                
                
                $
                0.21
                
                
                
                5,777,776
                
                
                $
                0.21
 
 OPTIONS
ISSUED
 
 The
following summarizes the common stock option transactions for the periods ended
March 31, 2007 and 2006:
 
 Options issued and
outstanding not under a stock option plan:
  2007
                
                
                2006Weighted
                
                
                
                
                
                WeightedAverage
                
                
                
                
                
                AverageExercise
                
                
                
                
                
                ExerciseOptions
                
                
                Price
                
                
                Options
                
                
                PriceOutstanding
      at March 31
                
                
                483,333
                
                
                $
                0.18
                
                
                
                483,333
                
                
                $
                0.18Issued
                
                
                -
                
                
                
                
                
                
                
                -Exercised
                
                
                -
                
                
                
                
                
                
                
                -Forfeited
      or expired
                
                
                -
                
                
                
                
                
                
                
                -Outstanding
      at June 30
                
                
                483,333
                
                
                $
                0.18
                
                
                
                483,333
                
                
                $
                0.18Not
      exercisable at June 30
                
                
                -
                
                
                
                
                
                
                
                -Exercisable
      at June 30
                
                
                483,333
                
                
                $
                0.18
                
                
                
                483,333
                
                
                $
                0.18
 Issued
                
                
                -
                
                
                
                
                
                
                -Exercised
                
                
                -
                
                
                
                
                
                
                -Forfeited
      or expired
                
                
                -
                
                
                
                
                
                
                -Outstanding
      at September 30
                
                
                483,333
                
                
                $
                0.18
                
                
                
                483,333
                
                
                $
                0.18Not
      exercisable at September 30
                
                
                -
                
                
                
                
                
                
                
                -Exercisable
      at September 30
                
                
                483,333
                
                
                $
                0.18
                
                
                
                483,333
                
                
                $
                0.18
 Issued
                
                
                -
                
                
                
                
                
                
                -Exercised
                
                
                -
                
                
                
                
                
                
                -Forfeited
      or expired
                
                
                (483,333
                )
                
                $
                0.18
                
                
                
                (483,333
                )
                
                $
                0.18Outstanding
      at December 31
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Not
      exercisable at December 31
                
                
                -
                
                
                
                
                
                
                
                -Exercisable
      at December 31
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Issued
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Forfeited
      or expired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding
      at March 31
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Not
      exercisable at March 31
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Exercisable
      at March 31
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
 
 41
 Table of Contents
  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 1,936,666 shares (post-reverse split) of its common
stock with an exercise price of $0.21 per share (post-reverse split). These
options vest at a rate of one-third upon each anniversary date of their
issuance. During the three months ended June 30, 2006, one-third, or
611,111 of these options, became vested. The Company charged the
amount of $130,200 to operations representing the fair value of these shares at
the time they were issued. These options were valued using the
Black-Scholes valuation model; the assumptions for this calculation were: a 10
year term; 154% volatility; 3.50% discount rate; and an exercise price of
$0.21.
 
 CONVERTIBLE
PREFERRED STOCK
 
 As of
March 31, 2007 and 2006, 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 (post-reverse split) of preferred
    stock,
 
 ii.)
                conversion
      rights at 1.95 shares (post-reverse split) of common stock for each share
      of preferred,
  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, 2007 and 2006, the Company had authorized 50 shares (post-reverse
split) 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
(post-reverse split).
 
 The
Series A Stock has no par value and a stated value of $10,000 per share
(post-reverse split), 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 395,833
shares (post-reverse split) 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.
 
 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.
 
 42
 Table of Contents
  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 (post-reverse split) 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 395,833 shares (post-reverse split) 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 (395,833 shares
(post-reverse split)) includes the shares to be issued in payment of
dividends.
 
 SERIES
B CONVERTIBLE PREFERRED STOCK
 
 The
Company had authorized 87 shares (post-reverse split) of convertible Series B
preferred stock (the "Series B Stock") with a stated value of $10,000 per
share.
 
 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.
 
 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.
 
 43
 Table of Contents
  Three
holders of record of the Company's Series B Convertible Preferred
Shares representing an aggregate of 25 Series B Convertible Preferred
Shares (post-reverse split) entered into a Letter Agreement to Convert
Preferred Shares (post-reverse split), whereby such holders of the Series B
Convertible Preferred Shares (post-reverse split) agreed to convert their
respective shares (post-reverse split) and any liquidated damages and
accrued interest in the aggregate amount of approximately $50,000 into
shares (post-reverse split) of the Company's common stock at $0.01
per share (post-reverse split). 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 (post-reverse split) of the Company. As part of this letter
agreement such holders canceled and returned to the Company warrants
to purchase 750,000 shares (post-reverse split) the Company's common stock
at a price $.60 per share (post-reverse split) issued to them in
conjunction with the Series B Convertible Preferred Shares (post-reverse
split).
 
 Four
holders (the "Sellers") of record of the Company's Series B
Convertible Preferred Shares (post-reverse split) representing an aggregate
of 57 1/2 Series B Convertible Preferred Shares (post-reverse split)
entered into a Securities Purchase Agreement to sell all of their
respective portion of the Company's Series B Convertible Preferred Shares
(post-reverse split) to two accredited investors, (the "Buyers"). Under the
terms of the Securities Purchase Agreement the Buyers agreed to convert
their respective shares (post-reverse split) of the Company's Series B
Convertible Preferred Shares (post-reverse split) into the shares (post-reverse
split) of the Company's common stock at $0.30 per share (post-reverse
split). The Sellers canceled and returned to the Company 290,000 warrants
to purchase the Company's common stock at price of $0.60 shares
(post-reverse split) in conjunction with their respective Series B Convertible
Preferred Shares (post-reverse split) 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 (post-reverse split) of the Company's
common stock at $0.01 per share (post-reverse split) as soon as the
stockholders of the Company approve the increase in the authorized shares
(post-reverse split) of the Company.
 
 Concurrent
with these transactions, during the year ended March 31, 2005,
all outstanding shares (post-reverse split) of the Company's Series B
Preferred Stock in the aggregate amount of eighty two and one half shares
(post-reverse split) 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
share (post-reverse split)holder were converted into 2,745,084 shares
(post-reverse split) of the Company's common stock at a conversion price of
$0.30 per share (post-reverse split).
  16.
COMMON STOCK OPTIONS
  2005
EQUITY COMPENSATION PROGRAM
 
 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.
 
 44
 Table of Contents
  The
following summarizes the common stock option transactions for the years ended
March 31, 2007 and 2006
  Options issued and
outstanding under a stock option plan:
 
 2007
                
                
                2006Weighted
                
                
                
                
                
                WeightedAverage
                
                
                
                
                
                AverageExercise
                
                
                
                
                
                ExerciseOptions
                
                
                Price
                
                
                Options
                
                
                PriceOutstanding
      at March 31
                
                
                1,916,667
                
                
                $
                0.21
                
                
                
                -Issued
                
                
                -
                
                
                
                
                
                
                
                1,936,667
                
                
                $
                0.21Exercised
                
                
                -
                
                
                
                
                
                
                
                -Forfeited
      or expired
                
                
                (33,333
                )
                
                $
                0.21
                
                
                
                -Outstanding
      at June 30
                
                
                1,883,333
                
                
                $
                0.21
                
                
                
                1,936,667
                
                
                $
                0.21Not
      exercisable at June 30
                
                
                1,255,556
                
                
                $
                0.21
                
                
                
                1,936,667
                
                
                $
                0.21Exercisable
      at June 30
                
                
                627,778
                
                
                $
                0.21
                
                
                
                -Issued
                
                
                -
                
                
                
                
                
                
                
                1,936,667
                
                
                $
                0.21Exercised
                
                
                -
                
                
                
                
                
                
                
                -Forfeited
      or expired
                
                
                -
                
                
                $
                0.21
                
                
                
                -Outstanding
      at September 30
                
                
                1,883,333
                
                
                $
                0.21
                
                
                
                1,936,667
                
                
                $
                0.21Not
      exercisable at September 30
                
                
                1,255,556
                
                
                $
                0.21
                
                
                
                1,936,667
                
                
                $
                0.21Exercisable
      at September 30
                
                
                627,778
                
                
                $
                0.21
                
                
                
                -Issued
                
                
                -
                
                
                
                
                
                
                
                -Exercised
                
                
                -
                
                
                
                
                
                
                
                -Forfeited
      or expired
                
                
                (66,667
                )
                
                $
                0.21
                
                
                
                -Outstanding
      at September 30
                
                
                1,816,667
                
                
                $
                0.21
                
                
                
                1,936,667
                
                
                $
                0.21Not
      exercisable at September 30
                
                
                1,211,111
                
                
                $
                0.21
                
                
                
                1,936,667
                
                
                $
                0.21Exercisable
      at September 30
                
                
                605,556
                
                
                $
                0.21
                
                
                
                -Issued
                
                
                1,200,000
                
                
                $
                0.30
                
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                -Forfeited
      or expired
                
                
                -
                
                
                
                
                
                
                
                (20,000
                )
                
                $
                0.21Outstanding
      March 31
                
                
                3,016,667
                
                
                $
                0.25
                
                
                
                1,916,667
                
                
                $
                0.21Not
      exercisable at March 31
                
                
                1,211,111
                
                
                $
                0.27
                
                
                
                -
                
                
                
                -Exercisable
      at March 31
                
                
                1,805,556
                
                
                $
                0.21
                
                
                
                1,916,667
                
                
                $
                0.21
 
 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 1,936,667 shares (post-reverse split) of its common
stock with an exercise price of $0.21 per share (post-reverse split). These
options vest at a rate of one-third upon each anniversary date of their
issuance. During the three months ended June 30, 2006, one-third, or
627,778 of these options, became vested. The Company charged the
amount of $130,200 to operations representing the fair value of these shares at
the time they were issued. These options were valued using the
Black-Scholes valuation model; the assumptions for this calculation were: a 10
year term; 154% volatility; 3.50% discount rate; and an exercise price of
$0.21.
 
 45
 Table of Contents
 
 17. 
MAJOR CUSTOMERS/SUPPLIERS
 
 CUSTOMERS
 
 For the
year ended March 31, 2007, the Company had net sales to two customers that
accounted for approximately 35% and 15%, respectively. 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, 2007, the Company had accounts receivable from
five customers that accounted for approximately 94%.
 
 For the
year ended March 31, 2006, the Company had accounts receivable from
five customers that accounted for approximately 66%.
 
 SUPPLIERS
 
 For the
year ended March 31, 2007, 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 percentages of net
video/DVD product purchases made from such suppliers were 55%, 13% 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.
 
 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.
 
 18.  INCOME
TAXES
 
 The
components of the provision for income taxes are as follows:
 For
      The Years EndedMarch
      31,2007
                
                
                2006Current
      Tax ExpenseU.S.
      federal
                
                $
                -
                
                
                $
                -State
      and local
                
                
                4,000
                
                
                
                4,000Total
      Current
                
                
                4,000
                
                
                
                4,000Deferred
      Tax ExpenseU.S.
      federal
                
                
                -
                
                
                
                -State
      and local
                
                
                -
                
                
                
                -Total
      deferred
                
                
                -
                
                
                
                -Total
      tax provision from continuing operations
                
                $
                4,000
                
                
                $
                4,000
   46
 Table of Contents
  Deferred
income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
statement purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of March 31, 2007 are as follows:
 
 Deferred
      tax assets:Net
      operating loss carry forwards
                
                $
                (30,136,364
                )30,136,364Net
      deferred tax asset
                
                
                10,246,363Less
      valuation allowance
                
                
                (10,246,363
                )$
                --
 
 At March
31, 2007, the Company had federal net operating loss ("NOL") carryforwards
of approximately $30,136,364. Federal NOLs could, if unused, begin to
expire in 2021.
 
 The
valuation allowance for deferred tax assets as of March 31, 2007
is $10,246,363.
 
 The
reconciliation of the effective income tax rate to the federal
statutory rate for the years ended March 31, 2007 and 2006 is as
follows:
 
 2007
                
                
                2006Federal
      income tax rate
                
                
                (34.0
                %)
                
                
                (34.0
                %)State
      tax, net of federal benefit
                
                
                --
                
                
                
                --Loss
      for which no federal benefit was received
                
                
                34.0
                %
                
                
                34.0
                %Effective
      income tax rate
                
                
                0.0
                %
                
                
                0.0
                %
  19.  SUBSEQUENT
EVENTS
 
 On April
26, 2007, the Board of Directors accepted the following resignation
of Executive officers and directors of the Company who submitted letters
of resignations to the Board of Directors, terminating their positions with
the Company as follows: James Lu as President and Co-CEO, Jeffrey I.
Schillen as Executive Vice President, Co-CEO and Director, Fred U. Odaka as
Director, Murray T. Scott as Director and Jerry S. Lan as Director.
Concurrently April 26, 2007 the Board of Directors appointed Dr. Mulugetta
Bezzabeh as CEO and Director and Howard Becker as Director.
 
 On May 4,
2007, The Company's wholly owned subsidiary, Diamond
Entertainment Acquisition, Inc., a Delaware corporation, acquired 100% of
Rx for Africa, Inc. through a merger in exchange for 168,849,504 shares
(post-reverse split) of post reverse stock split shares of the Company
representing eighty five percent (85%) of the issued and outstanding fully
diluted shares common stock outstanding. Concurrent with the merger, the
Company closed on the second traunch of a private placement funding from
institutional and accredited investors with gross proceeds of
$1,250,000 under a November 28, 2006 funding agreement, as amended, from
institutional and accredited investors totaling $2,400,000, the first
traunch of $1,150,000 in gross proceeds being received by the Company in
November, 2006.
 As a
result of the merger, the Company has ceased the historical business activities
of Diamond Entertainment.  The Company is now the holding company of
Rx for Africa, a pharmaceutical manufacturing company located in Addis Ababa,
Ethiopia, which constitutes the Company’s only operating subsidiary and
business.
  On May
25, 2007, the Company changed its principal independent accountants
from PMB + Helin Donovan Co, LLP, 50 Francisco Street, Suite 120, San
Francisco, CA 94133 to Bernstein & Pinchuk, LLP, 7 Penn Plaza, Suite
830, New York, NY 10001. PMB + Helin Donovan Co, LLP was dismissed and
the decision to change accountants was approved by the Board of Directors
and audit committee.
 
 On July
13, 2007, Diamond Entertainment filed a Form 14c notice proxy for
the following actions approved by the shareholders holding a majority of
the Company's outstanding shares:
 
 1.           amendment
of our certificate of incorporation to change the Company name from Diamond
Entertainment, Corp. to Rx for Africa, Inc.
 
 2.           the
ratification of the appointment of Bernstein & Pinchuk, LLP as our
independent accountants for the current fiscal year.
 
 47
 Table of Contents
  On July
17, 2007, the Company entered into an Asset Purchase
Agreement ("Agreement") with The Garr Group, LLC, located in Voorhees, New
Jersey. Under the terms and conditions of the Agreement the Company sold,
transferred and assigned to the Garr Group, LLC, substantially all of its
inventory, electronic media, machinery and equipment used in its DVD
operations including a portion of its accounts receivables for a purchased
price of $250,000.00, payable in three installments as follows: One hundred
Thousand Dollars payable on the closing date of July 24, 2007 and
$150,000.00 payable by delivery of a promissory note on the closing date
providing for two (2) equal payments of Seventy-Five Thousand Dollars
($75,000) payable August 23, 2007 and September 22, 2007.
 
 NOTE
20 - CHANGES TO PREVIOUSLY REPORTED FINANCIAL STATEMENTS
 
 Stock
options to purchase an aggregate 627,776 shares (post-reverse split) of common
stock of the Company issued to Officers and Directors during the three months
ended June 30, 2005 became vested during the year ended March 31, 2007. These
options were valued at $130,200 and this amount was charged to operations in
this amended report. The report as originally filed disclosed 57,500,000
options vesting during the quarter, with an expense of $45,521. The Company’s
statement of operations is restated by the difference of $84,679. We also
changed the related disclosers regarding the vesting of these options as
appropriate. We also corrected certain other minor errors in the Form
10-KSB as originally filed.
 
 During
the three months ended December 31, 2006, the Company issued the Convertible
Notes Payable and Convertible Notes Payable Warrants (see notes 9 and
11). In the Form 10-QSB as originally filed, the Company determined that
the beneficial conversion feature of the Convertible Notes Payable and the
Convertible Note Warrants should be classified as derivative financial
instruments. The Company has subsequently made the determination that this
classification was in error. The warrants and beneficial conversion
features were valued at $3,371,164 and $1,420,673, respectively, and these
amounts were charged to expense and classified as current liabilities in the
Company’s financial statements. In addition, these instruments were re-valued at
December 31, 2006, which resulted in an additional charge to expense of $674,679
and $1,020,007 for the change in fair value of the warrants and derivatives,
respectively. In the amended financial statements for the three months
ended December 31, 2006, the Company has valued the beneficial conversion
feature of the Convertible Notes and the Convertible Note Warrants via the
intrinsic value method and has arrived at an aggregate value of
$319,200. Of this amount, $44,600 was assigned to the beneficial conversion
feature of the Convertible Notes, and $274,600 was assigned to the Convertible
Note Warrants via the relative fair value method. The aggregate amount of
$319,200 was charged to discount on notes payable and to additional paid-in
capital. This amount is being amortized over the life of the Convertible Notes,
or two years. During the year ended March 31, 2007, a total of $45,937 of
this discount was amortized to interest expense.
 
 The
following table indicates the primary changes to the Company’s financial
statements for the year ended March 31, 2007 compared to the report as
originally filed. There were other small corrections of errors and
reclassifications made to the amended financial statements which are not
considered material to the financial statements taken as a whole.
 
 OriginallyReported
                
                
                Change
                
                
                AmendedBalance
      sheet:Financing
      agreement payable
                
                $
                56,306
                
                
                $
                145,269
                
                
                $
                201,575Convertible
      notes payable - net
                
                
                (211,125
                )
                
                
                665,612
                
                
                
                876,737Warrant
      liability
                
                
                2,923,060
                
                
                
                (2,923,060
                )
                
                
                -Derivative
      liability
                
                
                7,228,740
                
                
                
                (7,228,740
                )
                
                
                -Current
      Liabilities
                
                
                12,089,716
                
                
                
                (9,295,171
                )
                
                
                2,794,545Additional
      paid-in capital
                
                
                885,688
                
                
                
                258,610
                
                
                
                1,144,298Accumulated
      deficit
                
                
                (30,136,364
                )
                
                
                9,036,561
                
                
                
                (21,099,803
                )Stockholders'
      deficiency
                
                
                9,610,979
                
                
                
                (9,295,171
                )
                
                
                315,808YEAR
      ENDED MARCH 31, 2007Statements
      of operations:Interest
      expense
                
                $
                (227,739
                )
                
                $
                (91,685
                )
                
                $
                (319,424
                )Interest
      expense - derivatives and warrants
                
                
                (9,212,925
                )
                
                
                9,212,925
                
                
                
                -Net
      income (loss)
                
                
                (8,878,351
                )
                
                
                9,036,561
                
                
                
                158,210Earnings
      per share Basic and Diluted
                
                
                (0.43
                )
                
                
                0.44
                
                
                
                0.01Net
      Cash used in Operating Activities
                
                
                (10,849,114
                )
                
                
                10,126,251
                
                
                
                (722,863
                )Net
      Cash provided by Investing Activities
                
                
                (59,333
                )
                
                
                (850,000
                )
                
                
                (909,333
                )Net
      Cash provided by Financing Activities
                
                
                10,934,481
                
                
                
                (9,276,251
                )
                
                
                1,658,230
 
 
 
 48
 Table of Contents
 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
 
 CHANGE
IN REGISTRANT'S CERTIFYING ACCOUNTANT.
 
 (1)            Change
of Principal Accountants
 
 (i)          On
May 25, 2007, Diamond Entertainment Corporation informed PMB + Helin
Donovan, LLP ("PMB +HD") (the "Former Accountants") that they
were dismissed and that Diamond Entertainment had retained new
principal accountants.
 
 (a)      
    On May 4, 2007 the Company filed Form 8-K as
notification that Bernstein & Pinchuk, LLP succeeds PMB +
HD.
 
 (ii)           PMB
+ HD's report on our consolidated financial statements as of and for the
fiscal years ended March 31, 2005 and 2006, did not contain an adverse
opinion or a disclaimer of opinion, nor was either such report modified as
to audit scope or accounting principles, but were modified for going
concern (see below).
 
 (a)           Fiscal
Year 2006 going concern modification:
 
 The
accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1
to the 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.
 
 (iii)         The
decision to change auditors was recommended by the Board
of Directors.
 
 (iv)         Neither
of the reports of PMB + HD on the Company's financial statements for the
two most recent fiscal years contained an adverse opinion or a disclaimer
of opinion, nor was either such report qualified or modified as to
uncertainty, audit scope or accounting principles.
 
 (a)           During
the Company's two most recent fiscal years and through December 31, 2006,
there were no disagreements with PMB + HD on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure, which disagreements, if not resolved to the satisfaction of
PMB + HD, would have caused them to make reference thereto in
their reports on the financial statements for such years.
 
 (b)           During
the Company's two most recent fiscal years and through December 31, 2006,
there have been no reportable events (as defined in Regulation S-B Item
304(a)(1)(iv)(b)).
 
 (v)         
The Company has requested that PMB + HD furnish it with a letter addressed
to the Securities and Exchange Commission stating whether or not PMB + HD
agrees with the above statements. A copy of PMB + HD's letter required by
Item 304(a)(3) of Regulation S-B is filed as Exhibit 16 to the Form
8-K.
 
 (vi)       
 During the Company's two most recent fiscal years and
through December 31, 2006 neither the Company, nor anyone on its behalf,
consulted with Bernstein & Pinchuk, LLP regarding either the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered
on the Company's financial statements; or any matter that was either a
subject of disagreement (as defined in Item 304(a)(1)(iv)(A) of Regulation
S-B and the related instructions to that Item) or a reportable event (as
described in Item 304(a)(1)(iv)(b) of Regulation S-b).
 
 (vii)        We
have notified the members of our board of directors of the facts set forth
in this report including the appointment of Bernstein & Pinchuk, LLP as
our independent registered auditor and no member has disapproved of this
appointment.
 
 ITEM8A. CONTROLS AND PROCEDURES
 
 The 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 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.
 49
 Table of Contents
  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 CompanyMulugetta
      Bezzabeh
                
                
                64
                
                CEO
      and DirectorJames
      K.T. Lu.
                
                
                59
                
                DirectorHoward
      Becker
                
                
                48
                
                DirectorFred
      U. Odaka.
                
                
                70
                
                Chief
      Financial Officer
 
 MULUGETTA BEZZABEH, PhD (Cass 2 Director). Mr.
Bezzabeh was appointed on April 26, 2007 as CEO and Director and is the
founder, President and CEO of Rx Africa (Ethiopia) PLC, which was founded
in 2003 as Sunshine Pharmaceuticals, as a manufacturer and distributor of
generic pharmaceuticals, as a joint venture with the People's Republic of
China. A factory was built and production commenced in generic
anti-malarial and other pharmaceuticals. In 2006 the Chinese were
bought out by private interests, with the goal of becoming one of the few
FDA-GMP (Good Manufacturing Practices)-approved pharmaceutical factories in
Sub-Saharan Africa.
 
 Dr.
Bezzabeh was awarded his PhD from the University of Leeds in the UK.
He began his career as the Minister for Rural Development in Ethiopia. He
joined the United Nations in 1980, first working from Rome, Italy at the
Food and Agriculture division, and later, as the Senior Regional Advisor in
the Economic Commission for Africa at the United Nations headquarters in
New York City, in charge of Rural Development throughout Africa. Dr.
Bezzabeh has published many articles on this subject.
 
 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. On April 26, 2007 in connection with the terms of the Merger
Agreement with Rx of Africa, Inc. Mr. Lu resigned as Co.CEO, President, and
Co-Chairman and was concurrently elected as Director of the
Company.
 
 HOWARD BECKER (Class 1 Director) Mr. Becker was
elected as a Director of the Company on April 26, 2007. Mr. Becker is also
currently serving as Acting Chief Executive Officer and Director of CepTor
Corporation (OTC BB: CEPO), a publicly traded, development stage
biopharmaceutical company headquartered in New York City. Before joining
CepTor in December 2006, Mr. Becker was Vice President of Operations of
Xechem International, Inc. (OTC BB: XKEM), a development
stage pharmaceutical company based in New Brunswick, New Jersey. Prior to
joining Xechem, Mr. Becker served as a management consultant to a number of
public and private companies. Mr. Becker is also a licensed
(non-practicing) attorney who practiced law for eighteen years in New York
City, specializing in business reorganizations and corporate
restructurings, including ten years with Kaye, Scholer, Fierman, Hays &
Handler, LLP. He also has been associated with Skadden, Arps and Milbank,
Tweed, Hadley & McCloy, LLP. Mr. Becker graduated MAGNA CUM LAUDE from
Tufts University in 1981 and received his law degree from
the University of Michigan Law School in 1984.
 
 FRED U. ODAKA. 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.
On April 26, 2007, Mr. Odaka, in connection with terms the Merger Agreement
with Rx of Africa, Inc., resigned as Director of the Company.
 
 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 three directors and our
directors were appointed in April, 2007 and subject to ratification and
election in our next annual meeting of stockholders for terms up to
three-year. On April 26, 2007 the following directors resigned from the
Board of Directors: Jeffery I. Schillen, Murray T. Scott and Jery Lan. None
of the 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 any existing employment agreements, serve at the discretion
of our board.
 
  50
 Table of Contents
 
 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
former Executive Officer for services rendered in all capacities during the
year ended March 31, 2007, 2006 and 2005.
 
 Summary
Compensation Table
 
 Annual
      Compensation
                
                
                Long Term
      CompensationAwards
                
                
                PayoutsSecurities
                  Underlying
                
                
                LTIPPayouts
                
                
                All
      OtherCompensationName
      and Principal Position
                
                Year
                
                
                Salary
      ($)
                
                
                Bonus
      ($)
                
                
                Options
      (#)
                
                
                ($)
                
                
                ($)James
      K.T. Lu (1) President,
                
                2007
                
                
                
                150,000
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                33,424Co-Chief
      Executive Officer and Secretary
                
                2006
                
                
                
                150,000
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                45,3662005
                
                
                
                150,000
                
                
                
                17,308
                
                
                
                0
                
                
                
                0
                
                
                
                41,228Jeffrey
      I. Schillen (2)
                
                2007
                
                
                
                150,000
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                13,262Co-CEO,ExecutiveVice
      President of Sales and Marketing
                
                2006
                
                
                
                150,000
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                23,4622005
                
                
                
                150,000
                
                
                
                13,846
                
                
                
                0
                
                
                
                0
                
                
                
                26,001
  (1) Prior
to the merger on May 4, 2007, Mr. Lu resigned from his positions with the
Company on April 26, 2007 as Co-CEO, President and Co-Chairman and
was concurrently appointed as Director. Mr. Lu's annual salary was $150,000
during the fiscal year ended March 31, 2007, 2006 and 2005. During the
fiscal years ended March 31, 2007, 2006 and 2005, Mr. Lu was paid salaries
totaling $0.00, $112,500 and $150,000, respectively. He elected to defer a
portion of his salary for the years ended March 31, 2006 and 2004. In
November 2006, Mr. Lu entered into a Waiver of Debts Agreement with the
Company and under such agreement Mr. Lu waived all salaries owed to him by
the Company totaling approximately $449,000.
 
 (2) Prior
to the merger on May 4, 2007, Mr. Schillen resigned from his positions with
the Company on April 26, 2007 as Executive Vice President - Sales
and Marketing, Co-CEO and Co-Chairman. Mr. Schillen's annual salary was
$150,000 during the fiscal years ended March 31, 2007, 2006 and 2005.
During the fiscal years ended March 31, 2007, 2006 and 2005, Mr. Schillen
was paid salaries totaling $0.00, $112,500 and $120,000. respectively. He
elected to defer a portion of his salary for the years ended March 31,
2006, 2005 and 2004. In January 2007, Mr. Schillen, entered into a Waiver
of Debts Agreement with the Company and under such agreement Mr. Schillen
waived all salaries owed to him by the Company totaling approximately
$588,000.
 51
 Table of Contents
  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, 2006 and
2005, for the persons named in the Summary Compensation Table (the "Named
Executive Officers"):
  Number
      of Securities
                  Underlying Options/
      SARs
                
                
                Percent
      of Total
                    Options/SARs
                    Underlying
      Options/SARs
                    Granted toEmployees
    in
                
                
                Exercise
      or BaseName
                
                Year
                
                Granted
      (Canceled)
                
                
                Fiscal
      Year
                
                
                Price
      ($/Sh)
                
                Expiration
      DateJames
      K. T Lu
                
                2007
                
                
                (14,500,000
                )
                
                
                n/a
                
                
                $
                0.006
                
                11/15/06Jeffrey
      I. Schillen
                
                2007
                
                
                36,000,000
                
                
                
                100
                %
                
                $
                0.010
                
                1/31/17James
      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
                
                3/31/05
 
 AGGREGATE OPTION/SAR EXERCISED 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, 2007 by the Named
Executive Officers and with respect to unexercised options held by such
persons at March 31, 2007
  Number
      of Securities Underlying
                    Unexercised
      Options/SARs
                    At
      FY-End (#)
                
                
                Value
      of Unexercised
                    In-the-Money
      Options/SARs
                      at
      FY-End ($)Name
                
                Shares
      Acquired On Exercise (#)
                
                
                ValueRealized ($)
                
                
                Exercisable
                
                
                Unexercisable
                
                
                Exercisable
                
                
                UnexercisableJames
      K.T. Lu
                
                
                0
                
                
                
                0
                
                
                
                16,666,667
                
                
                
                8,333,333
                
                
                $
                161,111
                
                
                $
                80,556Jeffrey
      I. Schillen
                
                
                0
                
                
                
                0
                
                
                
                44,100,000
                
                
                
                4,050,000
                
                
                $
                426,300
                
                
                $
                39,150
 
 
 52
 Table of Contents
  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 were 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.
During the year ended March 31, 2007, both Mr. Lu and Mr. Schillen agreed
to waive all salaries and wages owed to them for the current fiscal year
including all prior years. In November 2006 and January 2007, Mr. Lu and
Mr. Schillen entered into a Waiver of Debt Agreement, respectively, whereby
Mr. Lu and Mr. Schillen waived approximately $449,000 and $588,000,
respectively, in accrued salaries and wages. See "Summary Compensation
Table" above, and the notes thereto.
 
 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 1,936,667 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 $.21 per share (post-reverse split). 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 833,333, 405,000 and 166,667 shares (post-reverse
split), respectively, and 166,667 and 83,333 options were granted to Murray
Scott and Jerry Lan, respectively, who are Directors of the Company. The
remaining balance of 248,333 options was granted to six employees and one
consultant of the Company. During years ended March 31, 2007 and 2006 three
employees and one consultant terminated employment with the Company and an
aggregate of 120,000 of such options 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.
 
 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 (post-reverse
split) of common stock, and warrants to purchase an additional 250,000
shares (post-reverse split) of common stock at an exercise price of $0.10
per share (post-reverse split). On July 24, 2001 we lowered the exercise price
of the warrants from $0.10 to $0.005 per share (post-reverse split). 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.
  53
 Table of Contents
  ITEM11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
 
 The
following table sets forth current information as of June 30, 2007
relating to the beneficial ownership of the outstanding post reverse stock
split 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.
 
 Common
      Stock
                
                
                Percentage
      of
                
                
                Preferred
                
                
                Percentage
      ofCommon
      StockAssumingConversion
      ofName
      (1)
                
                Owned
                
                
                Common
      Stock
                
                
                Stock
      Owned (2)
                
                
                Preferred
      Stock (3)James
      K. T. Lu (4)
                
                
                1,178,493
                
                
                
                0.62
                %
                
                
                13,603
                
                
                
                0.63
                %Diamond
      Entertainment Corporation800
      Tucker LaneWalnut,
      CA
                
                
                91789Fred
      U. Odaka (5)
                
                
                111,111
                
                
                
                0.06
                %
                
                
                0
                
                
                
                0.06
                %Diamond
      Entertainment Corporation800
      Tucker LaneWalnut,
      CA
                
                
                91789Mulugetta
      Bezzabeh (6)
                
                
                85,269,000
                
                
                
                44.76
                %
                
                
                0
                
                
                
                44.76
                %437
      Mountain Ave.Westfield,
      NJ 07090Margie
      Chassman
                
                
                58,336,437
                
                
                
                30.62
                %
                
                
                0
                
                
                
                30.62
                %445
      W. 23rd Street #16ENew
      York, NY 10011All
      directors and executive officers as
      a group(3 persons) (7)
                
                
                86,558,604
                
                
                
                45.44
                %
                
                
                13,603
                
                
                
                45.45
                %
 
 __________
  (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 (post-reverse
      split) of common stock.
 
 (3)
                Assumes
      conversion of shares of preferred stock beneficially
  owned.
 
 (4)
                Mr.
      Lu is director. Includes 555,556 shares (post-reverse split) of common
      stock issuable upon exercise of
options.
 
 (5)
                Mr.
      Odaka is CFO. Includes 111,111 shares (post-reverse split) of common stock
      issuable upon exercise of
options.
 
 (6)
                Represents
      85,891,937 shares (post-reverse split) of common stock outstanding and
      666,667 shares (post-reverse split) of common stock issuable upon
      exercise of options.
 
 There are
no agreements or other arrangements or understandings known to
us concerning the voting of our common stock or otherwise concerning
control of us which are not disclosed herein. There are no pre-emptive
rights applicable to our securities.
 
 54
 Table of Contents
  ITEM12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
 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 1,666,667 shares
(post-reverse split) and/or non-qualified options of the Company's common
stock, no par value at a purchase price of $0.18, which represented the
fair value of the common stock on that date. On July 13, 2001, 1,666,667
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 666,667 and 333,333 shares (post-reverse split), respectively,
and 166,667 options were granted to Murray Scott, a Director of the
Company. The remaining balance of 500,000 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
1,666,667 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 $01.50to $7.50 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 389,167 shares
(post-reverse split) be amended and lowered to $0.15. 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 303,333, 71,667, 8,333, and 5,833 shares (post-reverse split),
respectively. Of such aggregate amount of option shares granted totaling
389,167, the balance remaining at June 1, 2004 totals 125,000 consisting of
100,000 and 25,000 shares (post-reverse split) granted to Mr. Lu and Mr.
Schillen, respectively, which expire on March 31, 2005. The balance of
264,167 options expired and was canceled.
 
 On
November 16, 2001, Mr. Lu, the Company's president waived his right
to exercise 966,667 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 483,333
shares (post-reverse split) of the company's common stock . The option
expiring on November 15, 2006, will be exercisable at $0.18 per share
(post-reverse split).
 
 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 166,667 shares (post-reverse split) of
the Company's common stock at a price of $0.30 per share (post-reverse
split) pursuant to subscription agreements dated April 1, 2004, entered
into with Jeffrey I. Schillen and James Lu, each purchasing 2,500,000
shares (post-reverse split).
 
 On June
16, 2005, the Board of Directors of the Company approved the granting
of 1,936,667 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 $.21 per share (post-reverse split). 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 833,333, 405,000 and
166,667 shares (post-reverse split), respectively, and 166,667 and 83,333
options were granted to Murray Scott and Jerry Lan, respectively, who are
Directors of the Company. The remaining balance of 248,333 options was
granted to six employees and one consultant of the Company. During years
ended March 31, 2007 and 2006 three employees and one consultant terminated
employment with the Company and an aggregate of 3,600,000 of such options
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.
 
 On
January 31, 2007, Jeffrey I. Schillen, Executive Vice President and Co-CEO
of the Company entered into a Debt Waiver and Release Agreement and a
Debt Forgiveness and Release Agreement with the Company. Mr. Schillen
waived and/or forgave a demand note with interest and salaries owed to in
the aggregate amount of $687,739. As part such agreements the Company
granted Mr. Schillen stock warrants to purchase 1,200,000 sharews
(post-reverse split) of the Company's common stock at $0.30 per share
(post-reverse split) exercisable immediately and expiring on January 31,
2017.
 
 On April
26, 2007 the following executive officers and directors resigned
their respective positions with the Company as follow: 1) James K.T. Lu
resigned as Co-CEO, Co-Chairman and President, 2) Jeffrey I. Schillen as
Co-CEO, Executive Vice President, and Director, 3) Murray T. Scott as
Director and 4) Jerry Lan as Director and 5) Fred U. Odaka as
Director.
 
 On April
26, 2007 the following executive officers and directors were appointed to
their respective positions as follows: 1) Mulugetta Bezzabeh as CEO
and Director, 2) Howard Becker as Director and James K.T. Lu as
Director.
 
 55
 Table of Contents
  ITEM13. Exhibits, List and Reports in Form 8-K
 
 (a)
                Exhibits31.1
                Certification of the Chief Executive Officer pursuant to
      Rule 13a-14(a)( Section 302 of the Sarbanes-Oxley Act of
      2002)32.1
                Certification of the Chief Executive Officer pursuant to
      18 U.S.C.ss1350 (Section 906 of the Sarbanes-Oxley Act of
      2002)
  (b)
                Reports
      on Form 8-KJuly
      15, 2005
                Items
      202 and 901: Financial results for the year ended March 31,
      2005December
      11, 2006
                Items
      101, 201 and 901: Entered into a funding agreement and
      subsidiary acquired Rx for Africa, Inc.March
      27, 2007
                Items
      801 and 901: Reverse split and change of trading
      symbolMay
      10, 2007
                Items
      201 and 901: Consummated merger with RX for Africa,
      Inc.May
      30, 2007
                Items
      401 and 901: Reported change in
  Certifying Accountant
 
 ITEM14. 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, 2007 and 2006.
 
 FEE
      CATEGORY
                
                FISCAL
      2007 FEES
                
                
                FISCAL
      2006 FEES($)
                
                
                ($)Audit
      Fees 1
                
                
                88,500
                
                
                
                80,487Audit-Related
      Fees 2
                
                
                0
                
                
                
                0Tax
      Fees 3
                
                
                4,500
                
                
                
                3,500All
      Other Fees 4
                
                
                0
                
                
                
                0Total
      Fees
                
                
                93,000
                
                
                
                83,987
 
 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, 2007 and
      2006, 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.
  
 56
 Table of Contents
  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 CORPORATION
  Dated:
September 5, 2008
  By: /s/ Mulugetta Bezzabeh,
Phd
 Mulugetta Bezzabeh, Phd
 Principal
Executive Officer and
 Principal Financial Officer
      57
 Table of Contents