SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                    For the Fiscal Year Ended March 31, 2000

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


                           Commission File No. 0-17953


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

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

                 800 Tucker Lane, Walnut, CA                 91789
          (Address of principal executive offices)        (Zip Code)

                                 (909) 839-1989
                (Issuer's telephone number, including area code)

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

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

Check  whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

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

The  issuer's  revenue  for  the  fiscal  year  ended  March  31,  2000  totaled
$3,828,261.

The aggregate market value of registrant's  Common Stock held by  non-affiliates
based  upon the  closing  bid price on June 30,  2000,  as  reported  by the OTC
Bulletin Board, was approximately $2,804,166.

As of June 30, 2000,  there were 66,334,029  shares of the  registrant's  Common
Stock outstanding.

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

<PAGE>

                           FORWARD LOOKING INFORMATION

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

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

General

         Diamond  Entertainment  Corporation  d/b/a  e-DMEC  (the  "Company"  or
"e-DMEC"),   formerly  known  as  (i)  ATI  Mark  V  Products,   Inc.  and  (ii)
Trans-Atlantic Video, Inc., was formed under the laws of the State of New Jersey
on April 3, 1986. On July 15, 1991, the Company  completed the acquisition  (the
"Acquisition")  of  all  of  the  issued  and  outstanding   shares  of  Diamond
Entertainment   Corporation,   a   California   corporation   (the   "California
Subsidiary"),  and concurrently therewith, the parent company's name was changed
to Diamond Entertainment Corporation.  In May 1999 the Company registered in the
state of  California  to do  business  under  the  name  e-DMEC.  The  Company's
principal  executive offices are located at 800 Tucker Lane, Walnut,  California
91789.

         The Company,  through its subsidiary,  sells a variety of videocassette
and DVD (Digital Video Disc) titles to the budget home video market, principally
through the Company's New Jersey sales office and during fiscal 2000, introduced
a new line of trademarked  greeting cards call  CineChrome(TM)  In February 1997
the Company acquired a company,  now a wholly-owned  subsidiary,  known as Jewel
Products  International,  Inc.,  which  is in the  business  of  purchasing  and
distributing   general  merchandise   including   children's  toy  products  and
furniture.

         The increasing  consumer demand for  DVDs marks the re-generation  of a
new business for e-DMEC.  In a study  entitled  "World DVD Planning  Report" and
published  recently by "Strategy  Analytics,"  the report,  among other  things,
concluded that DVD will become the standard home video format within five years,
largely replacing VHS cassettes,  and that DVD video disc shipments, in calendar
year 2000,  will reach  nearly 400 million  units,  and  continue to soar to 2.3
billion by 2004,  worth $44 billion.  With identical  distribution and marketing
channels as its video products,  e-DMEC is able to immediately introduce its new
DVD line to its retailers and  distributors  who have been  conducting  business
with  e-DMEC over the past 10 years.  While DVD is still in the infant  stage of
its product life cycle,  easier market penetration and higher profit margins can
still be enjoyed by e-DMEC.

                                       1
<PAGE>

         The  Company   distributes  and  sells  videocassette  and  DVD  titles
including certain public domain programs and certain licensed  programs.  Public
domain  programs are video titles that are not subject to copyright  protection.
Licensed  programs  are programs  that have been  licensed by the Company from a
third party for  duplication  and  distribution,  generally  on a  non-exclusive
basis.  The Company  markets its video  programs to national and  regional  mass
merchandisers,  department stores,  drug stores,  supermarkets and other similar
retail  outlets.  They  generally  sell the Company's  products to the public at
retail prices ranging from $1.99 to $9.99 per  videocassette  and $6.99 to $9.99
per DVD titles.  The Company's  video  products are also offered by  consignment
arrangements  through one large mail order catalog company and one retail chain.
The Company had minimal sales of its CineChrome(TM) greeting cards during fiscal
2000 that sold at retail prices  ranging from  approximately  $5.50 to $6.95 per
card.

         Management is committed to acquiring more licensed video and DVD titles
and upgrading the quality of its packaging and pre-printed materials in order to
enhance its available products.  The Company's  videocassette  program inventory
currently  consists of approximately  739 titles,  including  approximately  464
public domain programs and 275 licensed  programs,  comprising  motion pictures,
cartoons,  educational,   sports  highlights,   computer-literacy  and  exercise
programs. The DVD program inventory currently consist of 22 titles, all of which
are public domain programs. The Company is continually identifying new titles to
add to its program  inventory  and intends to expand its  selection  of licensed
programs which have historically shown a higher profit margin than public domain
programs.

         In   September  of  1998,   the  Company   entered  into  an  exclusive
distribution  agreement with a licensing and distribution  company which granted
to the  Company  exclusive  distribution  rights for a new  product  line called
CineChrome(TM),  which is a trademarked product line utilizing classic images of
licensed properties from film, music, sport, fine art and fine photography.

         Until 1995, the Company was a full-service  video product  duplicating,
manufacturing,  packaging and distribution  company,  and was engaged in several
distinct video production activities.  In April 1995 the Company sold its custom
duplication  division,   through  which  the  Company  duplicated  and  packaged
videocassettes on a custom-made  basis. The Board believed that this transaction
was in the best interest of the Company  since it could not compete  effectively
in the  manufacture  and  duplication  of  videotapes.  The Company's  focus had
changed to development,  acquisition and distribution of video-related  products
to mass merchandisers and retailers. During the third quarter ended December 31,
1999,  the  Company  contracted  with a customer  to furnish  video  duplication
services  which was  rendered  through  a third  party  contractor.  There is no
assurance  that the  Company  will  receive  additional  orders  for such  video
duplication services in the foreseeable future.

                                       2

<PAGE>

         On January 31,  2000,  the Company  moved its  principal  offices  from
Cerritos, California to a smaller facility in Walnut, California. This move from
its prior  facility of  approximately  49,000 square feet to its new facility of
approximately  20,000 square feet was part of the Company's effort to reduce its
operating  overhead.  In making  this  move,  management  expects a  significant
reduction in its production costs in order to be more competitive in the pricing
of the products it distributes.

         The Company completed its  re-development of its web-site in early July
2000  as a fully  operational  e-commerce  web-site.  Although  there  can be no
assurances,  the Company  proposes to implement  aggressive  marketing and sales
campaign on its web-site,  during  fiscal 2001, to fully  capitalize on this new
marketing  and sales  vehicle to increase  its revenue and profit  margins.  The
Company  also  planned in fiscal  year 2000 to offer  web-site  hosting to other
companies on a membership  fee basis to enable such companies to market and sell
their  products and services on the  Company's  web-site,  however,  the Company
currently has not entered into any agreements for this web-site  hosting.  There
can be no  assurance  that the Company  will be able to offer  web-site  hosting
services successfully or at all.


Product Lines
-------------
      Video Program Line:

         The Company's video program inventory consists of a total of nearly 739
titles appealing to all age groups. The programs include cartoons, horror films,
science fiction, dramas, adventure stories, mysteries, musicals, comedies, fairy
tale adaptations,  educational  programs,  sports highlights,  instructional and
exercise programs.  Public domain programs account for approximately 464 titles,
and licensed  programs  account for  approximately  275 titles of the  Company's
program inventory.

         Motion  Pictures - Public  Domain.  The  Company  offers a total of 106
feature motion picture titles  including many film classics,  such as "Life With
Father," "Meet John Doe," "Pygmalion" and "The Little Princess," which generally
appeal to adult audiences.  The Company also markets its own special  collection
of  favorite  performers'  "Festivals,"  including  The Three  Stooges,  Shirley
Temple,  Bob Hope,  Jack Benny and Milton Berle.  The Company has recently added
titles such as "Call of The Wild," "Love Affair," "Thief of Bagdad,"  "Return of
Rin Tin Tin" and "Seven  Alone," and such horror titles such as "Slime  People,"
"Horror Riser from the Tomb,"  "Demon," and "Pieces."  Classical  biblical tales
including "Constantine and the Cross,' "Herod the Great," "Esther and the King,"
and "David and Goliath," were also recently add.

         Exercise  Programs - Licensed.  In August of 1999, the Company acquired
the sole  exclusive  rights to distribute  and market the workout  videos called
"Strong Mind Fit Body", starring the legendary quarterback Joe Montana.

                                       3

<PAGE>

         Animated  Programs - Licensed.  The Company has licensed  during fiscal
year  2000,  in  either  English  or  Spanish  language,  a very  high  quality,
full-length animation film, titled "Don Quixote." This film will was released in
video  during the  second  quarter  calendar  of 2000,  in  Spanish  and will be
followed by an English version.

         Children's Programs - Licensed and Public Domain. Most of the Company's
cartoons are public domain programs,  including 21 cartoon programs  redubbed in
Spanish.  These  programs  are  generally  30 minutes in length and consist of a
series  of  cartoons   selected  by  the  Company.   The  Company  also  markets
approximately 18 children's  holiday  features,  and 49 titles in its Testaments
and Children's Bible series.

         Educational Programs - Licensed.  The Company licenses approximately 68
educational  videos in two  categories.  For adults,  titles include  "Battle of
Britain," "The Shores of Iwo Jima," and  "Guadalcanal,"  along with titles which
instruct  preschoolers  and  school  age  children  on topics  such as  learning
numbers,  telling  time,  simple  mathematics,  color  identification  and other
practical skills.

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

         Computer Software  Learning  Tutorial Programs - Licensed.  The Company
has  licensed  approximately  45 titles of computer  tutorial  videos  including
titles such as "Family Guide to the  Computer,"  "Family Guide to the Internet,"
"Windows`98," "Word for Windows," "Mastering WordPerfect," "Mastering Excel for
Windows," and "Make Your Own Web Page."

        TV Episodes - Public Domain. The Company has added currently TV episodes
including "Mr. Lucky," "Peter Gunn," and "Yancy Derringer."

      DVD Program Line:

         The DVD program  inventory  currently  consist of 22 titles,  which are
public domain feature films and television episodes.

         Motion  Pictures - Public  Domain.  The Company's  offers titles in DVD
format such as "Zulu,"  "Constantine  and the  Cross,"  "The  Demon,"  "Mutant,"
"Creature,"  "Honor Thy  Father,"  "Great  St.  Louis  Bank  Robbery,"  and "The
Holcroft Covenant" which generally appeal to adult audiences.

         Television Episodes - Public Domain. Television episodes in DVD include
programs such as "The Lucy Show," "The Beverly  Hillbillies,"  The Andy Griffith
Show," and the "The Red Skelton Show."

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

                                       4

<PAGE>

The costs  associated with the Company's film masters (used for duplicating) and
artwork (for  packaging and  advertising)  include the purchase cost of masters,
initial fee for rights to duplicate, shooting costs and developing costs. During
the year ended March 31, 2000, the Company acquired approximately 65 new titles.
As of March 31,  2000,  the net book value of the  Company's  film  masters  and
artwork was approximately  $114,424.  The Company believes that its film masters
and artwork are significant assets since the Company derives the majority of its
revenue from their use.

Suppliers - Video/DVD Products
------------------------------
         The Company's programs are duplicated,  and in some cases packaged,  by
one DVD and  five  videotape  manufacturers/duplicators  located  in the  United
States.   Generally,   the  Company  arranges  with  these  firms  to  duplicate
Company-supplied  masters,  then  label,  package,  shrink-wrap  and  carton the
videocassettes  or DVD's.  Labels and  packaging  sleeves  are  supplied  by the
Company.  The Company submits its orders and instructions by purchase order with
terms payable within 90 days of delivery. For the year ended March 31, 2000, the
video  products  business of the Company had purchases  from two suppliers  that
amounted  to  approximately  60% of  net  purchases.  During  such  period,  the
percentage of net video product  purchases made from such suppliers were 49% and
11%, respectively. Management believes that, if for any reason it could not rely
on or retain  the  services  of any of its  current  suppliers,  duplicators  or
manufacturers, other suppliers would be available in the marketplace.

Markets and Customers - Video/DVD Products
------------------------------------------
         The Company markets its program inventory to large retail chain outlets
and provides each retail chain operator with  brochures,  advertising  materials
and literature  describing and promoting the Company's  program  inventory.  The
Company's  products are sold through  more than ten mass  merchandisers  such as
Sam's Club, Costco and Best Buy,  primarily in the Northeast,  the South and the
East Coast.  These outlets sell the Company's  products to the general public at
retail prices ranging from approximately  $1.99 to $9.99 per videocassette.  For
the years ended March 31, 2000 and 1999,  the Company  derived  revenue from its
Video and DVD products of approximately $3,563,400 and $4,133,000, respectively.
For the year ended March 31,  2000,  the  Company had net sales to 2  customers,
individually  of more  than  10% of the  Company's  revenues,  of  approximately
$1,003,000.  For the year ended  March 31,  1999,  the  Company had sales to one
customer of more than 10% of the Company's revenue, at approximately $2,466,000.
The loss one of these  customers  would  have a material  adverse  effect on the
financial condition and results of operations of the Company.

                                       5

<PAGE>

         The Company's  marketing  strategy of  distributing  directly to retail
chain  outlets has allowed  the Company to market its  products at all  consumer
levels.  In  particular,  the  Company  seeks to  attract  retail  customers  in
department,  drug, discount,  electronic,  music, toy and book stores as well as
supermarkets  and convenience  stores.  The Company is continuing to improve the
name  recognition  of the  Company as a video and DVD  company  specializing  in
educational,  children  and film  classic  video and DVD  titles.  In  addition,
through its sales  program,  the Company seeks to place  increased  focus on the
promotion of sales to major mass  merchandising  companies  which would increase
the  delivery of high volume  orders.  In  addition to using  independent  sales
representatives  in  certain  geographical   marketing  areas  the  Company  has
completed  development  of its web-site to enable it to sell its video and other
products to its current customer base and directly to the retail customer.

         The Company derives  approximately  40% of its gross revenue from sales
to mass  merchandisers  and other  retail  outlets.  Approximately  19% of gross
revenue is derived from sales through  consignment  arrangements  with a catalog
company  and retail  company  under which the  Company  delivers  tapes to their
facilities pending receipt of orders by customers.  The Company only books sales
from consignment  sales after the catalog company delivers the actual funds from
such sales. Less than one percent of revenue are derived from programs sold on a
retail basis directly to consumers.

Seasonality
-----------
         The  Company  generally  experiences  marginally  higher  sales  of its
programs  from  September  through  January due to increased  consumer  spending
around the year-end holidays.  During the year ended March 31, 2000, the Company
derived  approximately  48% of its gross  revenue  from sales  during those five
months, with approximately 52% of revenue generated in the other seven months of
the year.

License Arrangements
--------------------
         The Company enters into license agreements under which it acquires from
licensors  the right to  duplicate  and  distribute  a licensed  video  program.
Currently,  none of the DVD programs that the Company  distributes  are licensed
programs.  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,  the  Company  pays  certain  advance
payments or  guarantees  and also  royalties.  Royalty  payments  under  license
agreements  typically are credited  against any advances  paid.  Generally,  the
Company's  licenses are for a term of between  three and seven years.  While the
Company's efforts to renegotiate and renew its license agreements have generally
been  successful,  there  can  be  no  assurance  that  such  licenses  will  be
renegotiated  or  renewed in the  future.  The  programs  that the  Company  has
acquired  under license  contain  limitations  from the licensors  regarding the
geographic  areas to which the  Company  can  distribute  its  products  and are
usually restricted to distribution and sales in the United States and Canada.

                                       6

<PAGE>

         The various licensing agreements that the Company has 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  sold  fee or a
percentage  of wholesale  price fee.  During the year ended March 31, 2000,  the
Company incurred  royalty expenses of approximately  $71,000 under its licensing
agreements.

Competition
-----------
         The Company  competes with other  distributors of videotapes and DVD's,
including  major film studios and  independent  production  companies  including
Goodtime  Videos,   Platinum  and  Madasey.   The  Company  also  competes  with
manufacturers  and distributors of other video and DVD formats.  The Company has
been able to compete  based on  offering  low  pricing  and  superior  packaging
designs.  Most of the  companies  with  which the  Company  competes  are better
established,  have  broader  public and  industry  recognition,  have  financial
resources substantially greater than those of the Company and have manufacturing
and  distribution  facilities  better than those which now or in the foreseeable
future will become available to the Company.

JEWEL PRODUCTS INTERNATIONAL, INC.

         In May 1997,  the Company  consummated  an agreement and plan of merger
between BDC Acquisition, Inc. ("BDC Acquisition"),  a subsidiary of the Company,
and   Beyond   Design   Corporation   (subsequently   renamed   Jewel   Products
International,  Inc.  and  referred  to herein as "JPI").  JPI became the wholly
owned subsidiary of the Company via reverse merger when BDC Acquisition acquired
all of the issued and outstanding  stock of JPI in consideration of the issuance
of an  aggregate  of  2,427,273  shares of the  Company's  common  stock and the
assumption of certain obligations of JPI. The JPI acquisition was an arms-length
transaction.  JPI is in the business of (i) manufacturing one toy product,  (ii)
purchasing  various other  children's toy products from U.S.-based  importers or
directly from Asia, (iii)  distributing toys to mass merchandisers in the United
States and (iv) purchasing and distributing  furniture  products.  In the fiscal
year ended March 31, 2000,  revenue  realized  from JPI's  business  amounted to
approximately $222,900.

Product Lines
-------------
         At the time of its  acquisition,  JPI's sole line of  business  was the
manufacture  and sale of its patented  Woblong(R)  Double Wing Flier,  a bi-wing
aerodynamic flying toy. The Woblong,  subsequently renamed the Zoombie(R),  is a
game of catch  intended to compete  directly  with  Frisbee(R),  Aerobie(R)  and
Whoosh(TM).   During  the  year  ended  March  31,   2000  JPI  has   introduced
approximately  20 new toy items to its product line.  Popular  products  include
various plastic toy sets (for example, Fire Rescue set, Airport set, City Movers
set and plastic toy  figurines).  Toy  products  also  include a line of plastic
animal shaped squirt gun and a radio  controlled  sports utility  vehicle (SUV).
JPI's toy products sell at retail  prices  ranging from  approximately  $2.00 to
$12.00 per item.

                                       7

<PAGE>

         During  fiscal 1999,  JPI obtained the  exclusive  marketing  rights to
purchase  and  distribute  a line of padded  folding  chairs and table set.  The
furniture set sell at a retail price of  approximately  $109.00 to $129.00.  The
new furniture product line is purchased directly from Asia and is distributed to
mass  merchandisers  in the United  States and is also featured on the Company's
website. JPI commenced offering the furniture line on its website in July 2000.

Suppliers - Toy Products
------------------------
         For the year ended March 31, 2000, 39% of JPI's supplier purchases were
from one supplier. The Company is continuing to diversify its supplier base, and
made purchases  from eight U.S.  suppliers and two suppliers in China during the
year ended March 31, 2000.

Markets and Customers
---------------------
         In fiscal year 1998,  JPI  marketed its products  using  outside  sales
personnel   and   manufacturer    representatives   and   utilized   independent
manufacturer's  representatives to reach its customers. During fiscal year 1999,
Company has begun to pursue major chain retailers and drug store chains, such as
Target,  K-Mart, Toys R Us and Rite Aid and chain store opportunities in Canada.
During  fiscal year 2000 the Company began  shipping its Zoombie  flying toy for
sale by certain Target stores and the Company has placed the Zoombie toy product
for sale on its web-site.

Competition
-----------
         JPI  competes  with  other   distributors  of  toy  products  including
distributors of other flying toys such as "Frisbies".  The Company  concentrates
on the most popular and new products available and offers these toy products for
limited  sales period and, as demand for products  change,  JPI can  immediately
switch to newer and more popular products.  JPI competes primarily on uniqueness
of product and lower prices.  Most of the  distributors  with which JPI competes
are better  established,  have a broader product line and industry  recognition,
and have financial resources substantially greater then those of the Company.

Seasonality - Toy Products
--------------------------
         JPI's  revenues are  currently  generated  during the summer months and
were derived primarily in the period from June to September.

Greeting Card Products
----------------------
         In   September  of  1998,   the  Company   entered  into  an  exclusive
distribution  agreement with a licensing and distribution  company which granted
to the  Company  exclusive  distribution  rights for a new  product  line called
CineChrome(TM),  which is a trademarked product line utilizing classic images of
licensed  properties from film,  music,  sport,  fine art and fine  photography.
These classic images are being  published on the front cover (in a greeting card
format)  using the patented  print  technology,  KromeFX(TM).  KromeFX(TM)  is a
proprietary printing process, which combines reflectivity, color vibrancy, depth
of image and dimension.  The Company derived revenues of  approximately  $42,100
from the sale of these products during fiscal year 2000.

                                       8

<PAGE>

         The  CineChrome(TM)  cover is  laminated  to a high  quality  paper and
printed on the inside cover, inside back and back all in four color process. The
inside contains  editorial  information about the property  including full color
stills and the back cover  serves as a letter of  authenticity  with branded and
copyright  information.  The  CineChrome(TM) is completed with a custom designed
gallery standard envelope with the property's logo imprinted in two colors along
with a two color  CineChrome(TM)  logo. In order to protect the integrity of the
collectible  there  is an  inserted  stationery  quality  onion  sheet  note for
messages from the sender. The onion skin has watermarks of the property logo and
the branded logo, CineChrome(TM).

         The  Company  plans  to  distribute  the  CineChrome(TM)  product  line
worldwide  and expand the series of images to include a wide  variety from other
major   studios  and   licensors.   The  currently   existing   product  in  the
CineChrome(TM) product line is made up of 20 "Saturday Evening Post" Holiday and
Special Occasion Gift Cards. Two sets of ten cards have been made into gift sets
and  cards  can also be sold  separately.  There  can be no  assurance  that the
Company  will be able to  continue  to market and  distribute  successfully  the
CineChrome(TM) products on its website or to its other customers.

Suppliers - Greeting Card Product
---------------------------------
         The  Company  has two  sources  for its  CineChrome(TM)  products.  The
supplier  in  Carlsbad,  California  who owns  the  patented  print  technology,
KromeFX(TM)  and  another  supplier  in West  Bend,  WI,  who  utilizes  its own
proprietary  technology which is similar to KromeFX(TM)  process.  During fiscal
1999, the Company purchased  approximately  $50,000 in  CineChrome(TM)  products
utilizing the KromeFX(TM) process and approximately $14,000 from the supplier in
West Bend, WI.

Competition - Greeting Card Product
-----------------------------------

         The  processes  which  are  utilized  by the  Company's  CineChrome(TM)
products,  are  also  available  to the  Company's  competitors  who  are in the
business of selling posters,  trading cards, inserts and other similar products.
These competitors include Hallmark,  American Greeting Cards and Gibson. Most of
the  companies  with which the Company  competes  are better  established,  have
broader public and industry recognition,  have financial resources substantially
greater  than  those of the  Company  and have  manufacturing  and  distribution
facilities better than those which now or in the foreseeable  future will become
available  to  the  Company.  The  greeting  card  market  requires  substantial
resources to obtain shelf space in retail outlets, therefore, the Company cannot
make  assurances  that it can or will be successful in this  marketplace  in the
foreseeable future.


AMERICAN TOP REAL ESTATE

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

                                       9
<PAGE>


         Upon  sale or  development  of land,  proceeds  are  used to repay  all
related  loans and other  obligations,  with the remaining  balance  distributed
among the  shareholders of ATRE pro rata based on their  interests.  None of the
other investors in ATRE are otherwise  associated or affiliated with the Company
in its real estate holdings. ATRE has interests in two real estate parcels.

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

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

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

         At November  30,  1998,  ATRE has no binding  sales  contracts  for the
remaining parcels of real estate owned by ATRE as these parcels of land continue
to be developed for commercial use.  Contracts that were pending have not closed
due to possible changes in interest rates or possible overall market conditions.
In  addition,  the Company was  advised by ATRE that  proceeds  realized by ATRE
during fiscal 1998 were  reinvested into other parcels to improve the ability to
sell the remaining  parcels.  In December of 1998,  the Company  received from a
real estate development specialist an informal valuation reflecting an aggregate
approximate  value of $5,200,000  for the remaining  ATRE parcels.  Although the
Company  believes that final sales contracts will be able to be consummated,  at
this time it is not possible to predict with any  certainty  when the closing of
such sales contracts of commercial real estate may occur or whether the proceeds
expected  by  the  Company  for  their  share  in  this  real  estate  could  be
significantly less than anticipated. Therefore, the ultimate realizable value of
the  receivable  for  advances  from ATRE could be  substantially  less than the
preadjusted  carrying  value  of  $1,600,000.  The  Company  set up a  valuation
allowance in March 1998 of $1,117,788 and  accordingly,  charged  operations for
that amount so that the amount due from ATRE at March 31, 1998 is  presented  at
the amount of the 1998 subsequent receipts of approximately $500,000. Based upon
the above  circumstances  the likelihood is that $1,117,788 from future proceeds
from the sale of the ATRE  parcels  will not be realized by the Company with any
certainty.

                                       10

<PAGE>

         The Company in June 1998 borrowed  approximately  $809,500 from ATRE to
finance certain purchases of toy products. During the quarter ended December 31,
1999,  the Board of Directors of the Company  authorized  the  conversion of the
amount  borrowed of $809,500 into a one year 7% Convertible  Promissory Note due
on  September  30,  2000.  During the year ended  March 31,  2000,  the  Company
borrowed  $600,500  from  ATRE and paid  back  $81,000.  The  Company  owed ATRE
approximately $478,900 in short term notes at March 31, 2000.

         On June 2, 1999,  ATRE  entered into a sale  agreement  with respect to
0.097 acres of the remaining acres of parcel 1 for approximately $600,000 and in
September 1999,  entered into a sales agreement for remaining 0.091 acres parcel
of parcel 1 for  approximately  $550,000.  During June 2000, the sales agreement
for  $600,000  entered  into on June 2,  1999  was  canceled  by the  buyer  who
forfeited  the $25,000  purchase  deposit to ATRE.  The ability of the remaining
agreement to close or for the Company to realize as of March 31, 2000, its share
of the net proceeds to the Company,  however,  are  uncertain  and is subject to
certain contingencies.


Employees of the Company
------------------------
         As of March 31,  2000,  the  Company and its  subsidiaries  employed 19
full-time  and 1 part-time  employee as compared to 38 full-time and 3 part-time
employees a year earlier.  As a result of lower than expected revenues projected
for the last  quarter of fiscal 2000,  the Company laid off 11 employees  during
November 1999. During the peak season the Company engages  additional  part-time
or temporary  employees to help with the surge for Christmas season orders.  The
Company  reduces  its  manufacturing  force after the peak season to improve the
profitability of the operations when sales orders decline. Neither the Company's
nor the subsidiaries'  employees are unionized.  Management believes that it has
good working relations with its employees.

Copyright, Licenses and Other Proprietary Rights
--------------------------------------
         The Company relies on a combination of common law trademark,  copyright
and trade secret law to establish and protect the Company's  property rights and
promote our  reputation and the growth of the Company's  business.  In addition,
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, a design patent was issued on March 9, 1994 - D344,989.

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

                                       11

<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY.

         The Company leases approximately 20,000 square feet at 800 Tucker Lane,
Walnut,  California under a lease that commenced  January 6, 2000 and expires on
January 31, 2003, for use as executive  offices and  manufacturing and warehouse
facilities for a monthly rent of $10,500.00. The Company closed its 1,200 square
feet in Freehold,  New Jersey in April 2000, which it used for its sales office.
In addition,  the Company leases  approximately  22,080 square feet in Cerritos,
California  ("Cerritos  Property") for $9,274 per month which space was formerly
used by the Company for executive  offices and  warehousing.  The Company sublet
the  Cerritos  Property on January 1, 1999 for a term that  expires on March 31,
2001.  The sublease  requires the subtenant to pay the Company  $9,494 per month
through  February  2000,  and $9,936 per month through the remaining term of the
Sublease.   All  of  the  Company's  lease  and  sublease  agreements  are  with
unaffiliated  parties.  The Company  believes that it has  sufficient  space for
operations for the next twelve months.


ITEM 3.  LEGAL PROCEEDINGS.

         In  1998,  the  Company  was  contacted  by  attorneys  for  a  foreign
manufacturer   claiming  that  a  game  distributed  by  JPI  infringed  on  the
manufacturer's  trademark  and  copyright.  After  internal  investigation,  the
Company and JPI voluntarily ceased all sales of its allegedly infringing product
and has stored its  inventory of the game pending a resolution  of the conflict.
The  Company  places  a book  value  of  approximately  $450,000  on the  stored
inventory.  In March 1999, the JPI entered into a settlement  agreement with the
manufacturer  and  distributor  and,  as  part  of  the  settlement,   paid  the
manufacturer in March and April, 1999, an aggregate of $23,753 for the number of
games sold by JPI and has agreed with the  manufacturer in question that JPI may
not sell,  ship,  or  otherwise  exchange the games  without the  manufacturer's
express written  permission and in no event may JPI sell the games in the United
States. The Company is searching for a buyer Eastern Europe and South America.

         The Company has in the past been named as defendant and co-defendant in
various  legal  actions  filed  against  the  Company  in the  normal  course of
business. All past litigation have been resolved without material adverse impact
on the  Company.  For the year ended  March 31,  1999,  there  were three  civil
actions against the Company.  One action is for alleged  copyright  infringement
whereby the Company has entered into a settlement  agreement in February of 1998
to pay $208,000 over twenty-four months, whereby the Company has made all twenty
four of the required  payments due as of February 16, 2000. The second action is
for breach of service  whereby  the Company  settled for two  payments of $4,750
each,  which were paid in July and August,  1999. The third action,  the Company
challenged an alleged suit for copyright infringement and as of the date of this
report, the Company had not received a response to its challenge..

         On February 15, 2000,  one of the  Company's  suppliers  brought  legal
action against the Company to collect approximately $35,200 comprising of unpaid
invoices,  interest,  court costs and attorneys  fees owed to the supplier.  The
Company  has  acknowledged  that  this  amount  is owed to the  supplier  and is
currently  negotiating  a monthly  payment  plan with the supplier to settle the
amount owed.

                                       12

<PAGE>

         During March 2000,  the Company's  former lessor brought action against
the Company to recover  delinquent rental payment and penalties arising from the
termination of the Company's building lease in Cerritos,  California. The action
against  the  Company  resulted in a  stipulated  judgement  whereby the Company
agreed to pay  $72,000.00  at 10%  interest  by paying  $6,600.00  per month for
twelve  consecutive  months beginning April 1, 2000 through March 1, 2001. There
is a penalty clause for a failure to pay in a timely manner which  increases the
total amount to $119,000 with immediate  acceleration  in the event of a default
under the stipulated judgement. The required payments through July 2000 all have
been made in a timely manner and there have been no defaults.


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

         On April 27, 2000, the Company held its annual meeting of  shareholders
and the  following  proposals  were  approved by majority  vote:  (i) Jeffrey I.
Schillen  was  elected as a Class 1 director  to the Board of  Directors  of the
Company  for a term of three  years and James K. T. Lu and  Murray T. Scott were
elected  as Class 2  directors  of the Board of the  Company  for terms of three
years, (ii) the appointment of Merdinger,  Fruchter,  Rosen & Corso, P.C. as the
Company's  independent  certified public accountants,  (iii) the increase of the
authorized common stock of the Company from 100,000,000  shares of common stock,
no par value to 600,000,000  shares,  and (iv) the authorization of the Board of
Directors to effectuate a reverse stock split of the Company's  shares of common
stock up to a maximum ratio of 10 to 1 of the Company's authorized common stock.


                                     PART II

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

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

Period                               High Bid                   Low Bid
------                               --------                   -------
Fiscal 1999
-----------
         1st  quarter                 0.135                      0.041
         2nd quarter                  0.16                       0.055
         3rd quarter                  0.0625                     0.0625
           4th quarter                0.125                      0.08

Fiscal 2000
-----------
         1st quarter                  0.06                       0.24
         2nd quarter                  0.06                       0.19
         3rd quarter                  0.02                       0.11
         4th quarter                  0.05                       0.20


                                       13

<PAGE>

         These  quotations were obtained from OTC Bulletin Board quarterly quote
summaries,  and reflect interdealer prices, without retail markup,  markdown, or
commission  and may not represent  actual  transactions.  On June 30, 2000,  the
closing bid price for the Company's Common Stock was $0.05. As of the same date,
there were 2,428 holders of record of the Company's Common Stock.

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

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


Sales of Unregistered Stock
---------------------------
          In June 1995 Mr. Lu converted  approximately $1,131,000 in obligations
of the Company, which he had assumed personally, into 8,212,785 shares of Common
Stock.  In August 1995 Jeffrey I. Schillen and Murray T. Scott,  each a director
of the Company,  agreed to assume  $413,400 and $110,240,  respectively,  of the
obligations  assumed  by Mr. Lu. In  consideration  for the  assumption  of such
obligations,  Mr. Lu agreed to assign  3,000,000 and 800,000 of shares of Common
Stock,  respectively,  to Messrs.  Schillen and Scott.  The  assignment  of such
shares was effected during May 1999.

         On April 23, 1996 the Board of  Directors  agreed to reserve  1,000,000
shares of common stock for distribution to Messrs. Lu (as to 600,000 shares) and
Schillen  (as to 400,000  shares).  Such  shares can be  purchased  for $.25 per
share, in installment payments with a five year promissory note with interest at
6% per annum.  As of March 31, 1999 such  officers had not purchased any of such
shares.

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


                                       14

<PAGE>

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

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

         On  August  25,  1997,  as  compensation  pursuant  to four  consulting
agreements,  the Company issued 250,000 shares of Common Stock,  and warrants to
purchase an aggregate of 2,050,000 shares of Common Stock,  exercisable at $0.10
per share. The warrants expired on August 24, 1999.  Murray T. Scott, a director
of the Company,  received the 250,000 shares of Common Stock and 250,000 of such
warrants.  In July  1998,  two  individuals  who  received  warrants  under  the
consulting  agreements  each  exercised  warrants to purchase  100,000 shares of
Common Stock for  aggregate  consideration  of $20,000 and in 1999,  the Company
reduced the  exercise  price of 1,200,000  shares of such  warrants to $0.05 per
share and recorded a non-cash additional  consulting expense of $40,000 in 1999.
The warrants expired at the end of the two-year  consulting  period. The Company
recorded  deferred  consulting  costs  of  $100,000  for the  fair  value of the
warrants  and  expensed  approximately  $50,000  and $31,000 for the years ended
March 31, 1999 and 1998,  respectively.  The Company received $60,000 in January
and February of 1999 from the exercise of 600,000 options at $.10 per share.

         The Company executed nine employment  agreements effective September 1,
1997,  pursuant to which an  aggregate  of 550,000  shares of Common  Stock were
issued, with a deemed value of $11,000,  as payment for past services,  and also
issued  warrants to purchase  550,000  shares with an exercise price of $.10 per
share.  Such  shares were  subsequently  registered  pursuant  to the  Company's
Registration  Statement  on Form S-8 filed in  September  1997.  On September 1,
1999, the warrants to exercise the 550,000 shares of Common Stock expired.

         On August 27, 1999, the Company granted  warrants to  purchase  300,000
shares of Common Stock,  which expire on September 1, 2002, at an exercise price
of $.10 per share to the five remaining employees with employment agreements.

         On September 1, 1997 each of Messrs. Lu and Schillen were issued shares
of Common  Stock and granted  warrants as  consideration  for  agreeing to defer
payment of their salaries.  Mr. Lu was issued  3,000,000  shares of Common Stock
and granted warrants to purchase an additional  3,000,000 shares of Common Stock
at $0.10 per share  through  August 24, 2002.  Mr.  Schillen was issued  750,000
shares of Common Stock and granted  warrants to purchase an  additional  750,000
shares of Common Stock at $0.10 per share through August 24, 2002.

                                       15

<PAGE>

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

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

         On July 9, 1998 the Company  entered into a consulting  agreement  that
will  terminate  on July 8, 2001  whereby  a  consultant  received  an option to
purchase  1,000,000  shares of common  stock which  expire on July 8, 2001.  The
options are exercisable at a price of $.10 per share.  The agreement and options
were  canceled  in  September  1998 as the  consultant  failed  to  fulfill  his
obligations  under the consulting  agreement.  On July 13, 1999, the options for
1,000,000  shares of the Company's common stock were re-issued to the consultant
in accordance with the terms of the original  consulting  agreement entered into
on July 9, 1998 which was also  reinstated.  The  agreement can be terminated or
extended as agreed to between the parties. This option had not been exercised as
of March 31, 2000.

         In July and August of 1998,  Mr. Lu was granted  additional  options to
purchase  6,000,000  shares of Common Stock for $0.10 per share in consideration
of his (i) personal  guaranty of the Company's  bank line of credit,  (ii) loans
made to the Company,  (iii) certain  fulfillment orders submitted to the Company
and (iv) real estate  transactions  pertaining to its  investment  in ATRE.  The
Company recorded a $15,000 expense. Such options expire March 2003.

                                       16

<PAGE>

         On July 15, 1998,  the Company  incorporated  Galaxynet  International,
Inc.  ("GalaxyNet") in the State of Delaware, as a majority-owned  subsidiary of
the Company. GalaxyNet intended to develop and sell internet gaming software and
intended to offer its software to internet gaming companies and provide internet
gaming web sites to solicit gambling wagers from primarily,  Asian players.  The
Company  also  issued  4,000,000  options  exercisable  at $.10 per  share to an
investor and 2,000,000  options to the Chief  Executive  Officer  exercisable at
$.10 in connection with this project. On July 17, 1998, the Company,  along with
GalaxyNet,  entered into a memorandum of understanding  regarding the raising of
capital in a private  offering  to raise  gross  proceeds  in the  aggregate  of
between  $3,000,000 and $10,000,000 with an enterprise who would be paid the sum
of 15% of the aggregate  proceeds and receive options for up to 3,750,000 shares
of common  stock at  exercise  prices of between  $.10 and $.20 per  share.  The
private offering period ended September 30, 1998, and was extended until October
31, 1998.  The private  offering  resulted in raising  funding  proceeds of only
$250,000.  The  Company  subsequently  canceled  the project  and  refunded  the
$250,000  to the  investor  and  canceled  all the  project  related  options in
November 1998. The company  incurred  expenses on behalf of GalaxyNet for fiscal
1999 of approximately $30,000.

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

         On November 2, 1998, the 10% Debentures with a balance of $831,436 were
reinvested into a new note for $921,851 for a new two year term expiring October
31, 2000 with interest of 10% and an extension  bonus of $175,000,  due November
1999 which  bears  interest  at 2.5% per annum  payable  $50,000 per month after
payment of all prior interest and the restructured  note. The repayment term was
a weekly  amount of $6,250 in 1998 and  $12,500 in the years  1999 and 2000.  In
addition there was an acceleration clause of repayments for certain events and a
5% late  charge  for any  delinquent  payments.  The notes  contain an option to
convert the  principal  and  interest  balance  into common stock of the Company
subject to certain pricing calculations. Collateral security included all assets
of the Company and personal  collection  guarantee as additional security to the
holder after subordination to the primary lender.

         On January 10, 1999, the Company engaged three consultants for a period
of one year to provide  advice to  undertake  for and  consult  with the Company
concerning  management,  marketing,  consulting,  strategic planning,  corporate
organization and structure,  financial  matters in connection with the operation
of the  businesses  of the  Company,  expansion of  services,  acquisitions  and
business opportunities.  The consultants received options to purchase a total of
4,700,000  of the  Company's  common  stock  exercisable  at $.05  per  share in
exchange for  services to be rendered  and the options  shall expire on December
31,  2000.  The  Company  recorded  deferred  consulting  costs of  $31,000  and
amortized  $27,200  and  $3,800  for the years  ended  March 31,  2000 and 1999,
respectively.  These options were  exercised in February of 1999 for proceeds to
the Company of $275,000.

                                       17

<PAGE>

         In February  of 1999,  the  holders  converted  $640,000 of the the 10%
Debentures  into  8,000,000  shares of common stock.  On February 10, 1999,  the
Company  converted  the  remaining  the 10%  Debentures  balance of $172,661 and
unpaid  interest of $90,415 into 3,018,254  shares of common stock.  It was also
agreed  that the  $175,000  extension  bonus,  which was  recorded as a deferred
financing  cost in February of 1999,  could be  converted  into shares of common
stock at an agreed  exercise  price  subject to market  conditions.  The Company
amortized $20,000 and $155,000 of the extension bonus as a financing expense for
the year ended March 31, 1999 and March 31, 2000, respectively.  During the year
ended March 31, 2000,  $175,000  extension bonus and accrued interest of $13,125
was converted into 3,500,000 shares of the Company's common stock.

         In February  1999,  the Company  engaged a  consulting  firm to provide
internet  media  consulting  and public  relations  services for a period of one
year.  The fee for the  services to be rendered  included a monthly  cash fee of
$3,000. The consulting firm also received options to purchase a total of 250,000
shares of the Company's common stock with an exercise price of $.05 per share in
exchange for  services to rendered and the options  shall expire on February 11,
2001.  During the year ended March 31, 2000,  all of the options were  exercised
for services rendered by the consulting firm and cost incurred totaling $12,500.

         In March and June 1999, the  Company issued callable  convertible notes
for $50,000 and $100,000 to James Lu and Jeffrey I. Schillen,  respectively. The
notes bear interest at 10% per year with principal and interest due on the first
anniversary  of the  date of  issuance.  Each  note  has  been  extended  for an
additional year. The notes also call for any amount of the outstanding principal
to be converted  into  restricted  shares of the  Company's  common stock at the
option of the lenders at a conversion  rate of $0.05 per share.  As of March 31,
2000, neither of the debentures were converted.

         In March of 1999,  the Company  received a total of $150,000 from three
investors  and  issued  promissory  notes  due in one year  with  principal  and
interest  paid  bimonthly at an interest rate of 10%. The notes could be used as
proceeds for the exercised options held by the investors.  During the year ended
March 31, 2000,  the note  holders  used the  $150,000  and accrued  interest of
$2,500 as funds to exercise their common stock options for a total  aggregate of
3,000,000 shares of the Company's common stock.


                                       18

<PAGE>

         In March and April of 1999,  the Company issued two  convertible  notes
for  $100,000  and $50,000,  respectively.  The notes bear  interest at 10% with
principal and interest due on the first anniversary of the date of issuance. The
notes also call for any amount of the outstanding principal to be converted into
restricted shares of the Company's common stock at the option of the lender at a
conversion rate of $0.05 per share. As of March 2000, one investor converted the
$50,000 note into 1,000,000  shares of the Company's  common stock.  As of March
31, 2000, the outstanding  balance of convertible  notes was $100,000, which the
lender  extended  the due date to March 2001.  On June 2, 1999,  the Company was
advised  by the convertible note holder of the $100,000 note to waive receipt of
bimonthly  principal  payments and to continue to receive the bimonthly interest
only payments.

         On April 12, 1999, the Company  engaged three  consultants for a period
of one year each to provide  managerial  and strategic  planning  for  financial
matters and  expansion  of the  Company.  The  consultants  received  options to
purchase  and  aggregate  of  6,000,000  shares of the  Company's  common  stock
exercisable  at $0.05 per share in exchange  for services to be rendered and the
options  expire on April 11, 2000.  The options had an  aggregate  fair value at
date of grant of approximately  $292,000.  These options were exercised in April
1999, by the  forgiveness of $150,000 of notes  payable,  executed in March 1999
and cash proceeds of $150,000.

     On May 25, 1999, the Company's board of directors  approved and the Company
issued to the Company's President, as a bonus, options to purchase 2,500,000 and
1,000,000  shares of the  Company's  common  stock at $0.05 and $0.10 per share,
respectively.  The  options  expire  on May 24,  2004.  Since  the  options  are
accounted for under APB 25 and the exercise  price is below market,  the Company
has expensed the  aggregate  intrinsic  value at date of grant of  approximately
$410,000.

     On May 25, 1999, the Company's board of directors  approved and the Company
issued to the  Company's  V.P. of Sales and  Marketing,  as a bonus,  options to
purchase  500,000 and 500,000 shares of the Company's  common stock at $0.05 and
$0.10 per share,  respectively.  The options  expire on May 24, 2004.  Since the
options are accounted  for under APB 25 and the exercise  price is below market,
the Company  has  expensed  the  aggregate  intrinsic  value at date of grant of
approximately $110,000.

         On July 13, 1999, the Company  engaged a consultant for a period of one
year to provide  advice to undertake  for and consult  with  Company  concerning
managerial  and strategic planning for  financial  matters and  expansion of the
Company.  The consultant  received an option to purchase 1,000,000 shares of the
Company's  common stock  exercisable at $0.10 per share in exchange for services
to be rendered and the option  shall expire on July 12, 2002.  The option had an
aggregate fair value at date of grant of approximately  $127,000.  These options
had not been exercised as of March 31, 2000.

                                       19


<PAGE>


         On August 2, 1999, the Company  engaged two consultants for a period of
one year to  provide  advice  to  undertake  for and  consult  with the  Company
concerning  management,  marketing,  consulting,  strategic planning,  corporate
organization and structure,  financial  matters in connection with the operation
of the  businesses  of the  Company,  expansion of  services,  acquisitions  and
business opportunities.  The consultants received options to purchase a total of
1,965,000  of the  Company's  common  stock  exercisable  at $.05  per  share in
exchange for  services to be rendered and the options  shall expire on August 2,
2000. The options had an aggregate fair value at date of grant of  approximately
$202,000. The options were exercised during the year ended March 31, 2000 by the
forgiveness of $36,250 of principal and interest of debt outstanding for 725,000
shares and $50,000 cash and the  forgiveness of $12,000 of accounts  payable for
1,240,000 shares.

         During the quarter ended  December 31, 1999,  Board of Directors of the
Company authorized the conversion of approximately $1,880,725 in related parties
payables  into one  year 7%  Convertible  Promissory  Notes  of  $1,071,225  and
$809,500 each,  both due on September 30, 2000. The terms of the new convertible
notes allow the Company to make partial  principal  and interest  payments  from
time to time and the holders of the convertible notes have the option to request
such  payments of the  indebtedness  evidenced by the notes either in the lawful
money of the United States or in an equivalent value consisting of the Company's
common  stock,  the number of shares,  to be  determined by dividing the payment
amount by the average twenty day bid price for the Company's common stock during
the twenty  trading  days prior to the date of such  payment.  Also,  during the
quarter  ended  December  31, 1999,  the related  party to which  $1,071,225  in
related  parties  payable  was  owed by the  Company,  transacted  a  change  in
ownership of its common stock in which 100% of its outstanding  shares of common
stock was sold to a non-related  party and at March 31, 2000, the balance of the
Convertible  Promissory note to the non-related party was $1,050,775 as a result
of the Company  recording  payments toward the note in March 1999, by offsetting
$20,450 in money owed to the Company by the non-related party.

     On May 11,  2000,  the  Company  sold 50  shares  of  Series A  Convertible
Preferred  Stock  ("Series  A  Preferred  Stock")  for  total  consideration  of
$500,000,  or $10,000 per share. The May Davis Group, Inc. ("May Davis"),  acted
as  placement  agent for the  offering.  May Davis  received a placement  fee of
$40,000 and the Company issued warrants to purchase  1,500,000  shares of Common
Stock to May Davis and certain  designees  of May Davis and warrants to purchase
25,000  shares of Common Stock to Butler  Gonzalez,  LLP,  counsel to May Davis.
Such warrants are exercisable at a price of $.08 per share.

                                       20


<PAGE>

         On June 1, 2000, the Company entered into three  consulting  agreements
that will  terminate  on May 31,  2001,  whereby the  consultants  will  provide
consulting service for the Company concerning management, marketing, consulting,
strategic planning,  corporate  organization and financial matters in connection
with the  operation of the  businesses  of the  Company,  expansion of services,
acquisitions  and business  opportunities.  The consultants  received options to
purchase a total of 7,300,000 of the Company's common stock exercisable at $.035
per share in exchange for  services to be rendered and the options  shall expire
on May 31, 2001. In June and July of 2000, the Company received $215,500 in cash
for the issuance of the 6,157,143  shares upon the exercise of these options and
the  remaining  options of 1,142,857  were  exercised  for  consulting  services
incurred and owed by the Company to one of the consultants  totaling $30,000 and
from the  cancellation of a obligation of $10,000 in principal and interest owed
to the same consultant.

         The Company  believes that the transactions set forth above were exempt
from  registration  with the  Commission  pursuant to either Section 4(2) of the
Securities  Act  or  Rule  506  of  Regulation  D  promulgated  thereunder,   as
transactions by an issuer not involving any public offering,  Section 3(a)(9) of
the  Securities  Act as a  transaction  involving  an exchange by an issuer with
existing  security  holders,  or  Regulation  S under  the  Securities  Act as a
transaction that occurred outside the United States.  Except as set forth above,
no broker-dealer or underwriter was involved in the foregoing transactions.  All
certificates  representing  such securities  have been or will be  appropriately
legended.


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

Year Ended March 31, 2000 Compared with the Year Ended March 31, 1999
---------------------------------------------------------------------

Results of Operations
---------------------
The  Company's  net loss for the year  ended  March 31,  2000 was  approximately
$3,979,000 as compared to a net loss of  approximately  $1,600,000  for the same
period  last  year.  The  primary  reason  for the net  loss  was the  Company's
operating loss of approximately $3,575,000.

The Company's operating loss for the year ended March 31, 2000 was $3,575,000 as
compared to an operating  loss of  approximately  $1,378,000  for last year. The
increase in the  Company's  operating  loss of  approximately  $2,197,000  arose
primarily from reduced gross profit of approximately  $1,139,000,  and increased
non-cash  consulting  and  compensation  expenses of  approximately  $1,165,000,
offset by a reduction in other operating expenses of approximately $107,000.


                                       21

<PAGE>

The Company's sales for the years ended March 31, 2000 and 1999, were $3,828,261
and $4,549,525,  respectively.  The Company's sales  significantly  decreased by
approximately  $721,000 from the prior year with decreased video and toy product
sales of  approximately  $527,000 and  $194,000,  respectively.  The lower video
product  sales for the year ended March 31, 2000,  were  primarily the result of
the Company suspending most of its acquisition of new video titles until January
of 2000, which the Company received favorable  responses  substantiating  market
acceptance  for  certain  video  titles  in  DVD,  and  the  cancellation  of  a
significant holiday order from a major chain store during October 1999. The lack
of new video titles and the  cancellation  of the major holiday order forced the
Company to sell its existing  inventory at much reduced  prices to generate cash
for its operation,  which also  contributed the lower sales dollar volume during
the fiscal year ended March 31, 2000.  The lower toy product sales when compared
to the prior year were primarily  attributed to lower volume  purchases from the
Company's  major toy customer  and sales of slower  moving toy products at sales
prices below previous year's market prices.  Sales of the Company's products are
generally seasonal resulting in increased sales starting in the third quarter of
the fiscal year. The Company expects the sales to increase in fiscal year ending
March 31, 2001. The Company's  sales for the quarter ended March 31, 2000,  were
approximately  $633,000  as compared to the prior two  quarters  which  averaged
approximately  $1,248,000  a quarter.  This  decrease  in the last  quarter  was
primarily  attributable to the lack of new video titles  mentioned above and the
sale of video and toy product inventories at reduced selling prices.

Cost of sales for the years  ended  March 31,  2000 and 1999 were  approximately
$3,400,000 and $3,000,000 or 90% and 66% of sales, respectively. The significant
increase  in cost of sales as a  percentage  of sales of 24% was  primarily  the
result of lower sales prices charged to customers for video and toy products and
the  reduction of certain  video and slow moving toy  inventory  down to its net
realizable  value.  During  fiscal  year  2000,  the  Company  generated  custom
duplication  sales of  approximately  $618,000 having cost of sales 89% of sales
which also contributed the increase in cost of sales as a percentage of sales.

Gross  profit for the years  ended  March 31,  2000 and 1999 were  approximately
$400,000 and $1,500,000, or 10% and 34% of sales, respectively.  The significant
decrease in the gross profit as a percentage  of sales was  primarily due to the
Company  reducing  its selling  prices on video and toy  products,  lower margin
custom duplication sales and the write-down of certain video and toy inventory.


                                       22

<PAGE>

Operating   expenses   for  the  years  ended  March  31,  2000  and  1999  were
approximately  $4,000,000  and  $2,900,000,   respectively.   This  increase  in
operating  expenses of  approximately  $1,100,000  was  primarily  the result of
higher  expense  levels in  non-cash  consulting  and  compensation  expenses of
$1,200,000 associated with the issuance of stock options and warrants and higher
general and  administrative  expenses of approximately  $100,000 offset by lower
selling   expenses   of   approximately   $200,000.   The  higher   general  and
administrative  expenses of  approximately  $100,000 was primarily the result of
higher expense levels in facility rent and consulting  expense of  approximately
$140,000 and $180,000, respectively, offset by a decrease in bad debt expense of
approximately  $220,000.  The lower level of selling  expenses of  approximately
$200,000 was  primarily  attributable  to lower  expenses in marketing and sales
salaries  and  sales   commissions  of   approximately   $120,000  and  $80,000,
respectively.

Bad debt expense for the years ended March 31, 2000 and 1999 were  approximately
$100,000 and $320,000, respectively.

Interest   expense   for  the  years   ended   March  31,  2000  and  1999  were
$418,524 and $477,637,  respectively. The decrease in interest expense in fiscal
2000 over fiscal 1999 of  approximately  $142,000  was  primarily  the result of
lower levels of accounts receivable and asset-based  borrowing.  As of March 31,
2000, the outstanding debt of the Company was approximately  $3,940,000 of which
approximately $282,000 is classified as long term.

The Company's  auditors  issued a going concern  report for the year ended March
31, 2000. There can be no assurance that management's  plans to reduce operating
losses will continue or the  Company's  efforts to obtain  additional  financing
will be  successful.  Management's  plans are  discussed  under  "Liquidity  and
Capital Resources - Operations."


Liquidity and Capital Resources
-------------------------------
The  Company's  working  capital  deficit at March 31,  2000 was  $3,276,279  as
compared with working capital deficit of $2,154,599 at March 31, 1999.


This increase in the working capital deficit of approximately  $1,122,000 is the
result of the  Company's  lower  levels of  accounts  receivable  and  inventory
partially offset by higher deferred consulting cost and decreased borrowings. As
a result of lower sales recorded  during the fourth quarter of fiscal 2000, when
compared to sales in the same quarter a year earlier,  accounts  receivable were
lower by approximately  $300,000.  Inventory at March 31, 2000 was approximately
$1,100,000 as compared with  approximately  $2,200,000  at March  31,1999.  This
decrease in inventory of approximately  $1,100,000 was the result of the Company
efforts to sell off its slower moving video and toy  inventories,  together with
lower  inventory  requirements  and a  write  down  of  certain  video  and  toy
inventory.

                                       23

<PAGE>

Operations
----------
For  the  year  ended  March  31,  2000,   cash  utilized  for   operations  was
approximately  $442,000 as  compared  to  $872,000  for the year ended March 31,
1999. Net cash provided by financing  activities during the year ended March 31,
2000 and 1999 were approximately $479,000 and $477,000 respectively.

In June of 1998,  the Company  borrowed  approximately  $2,700,000 in short term
loans from two companies and the  borrowings  were used  primarily to reduce the
Company's  accounts  payable  balance.  On October 1, 1999, the balance of these
loans totaled approximately $1,880,725 and during the quarter ended December 31,
1999,  the Board of Directors of the Company  authorized the conversion of these
short term loans into one year 7% Convertible Promissory Notes of $1,071,225 and
$809,500 each,  both due on September 30, 2000.  The Company  intends to utilize
future debt or equity  financing or debt to equity  conversions  to help satisfy
past due obligations and to pay down its debt obligations.

The Company has also been  experiencing  difficulties in paying its vendors on a
timely basis. These factors create uncertainty  whether the Company can continue
as a going concern.

In fiscal year 2000 the Company  continued  to operate at a loss and its working
capital was substantially reduced. As a result, the Company has formulated a new
plan which has as its primary goals 1) generating an operating  profit in fiscal
2001, with the turn around complete in the second quarter and 2) positioning the
Company as a going  concern  which can generate  positive cash flow starting the
fourth  quarter and allowing the Company to operate as a significant  company in
the  distribution  of  home  video  cassettes,  DVD's  and  general  merchandise
business.  In order  to  achieve  these  objectives,  the  Company  proposes  to
undertake operating changes in fiscal 2001. These include:

o    The Company is seeking to obtain  additional debt or equity  financing.  In
     the event that the Company  secures such  financing,  the first $500,000 to
     $600,000  will be used to expand the  Company's  product  line and increase
     sales. Any amounts over this will be used to pay down notes payable related
     party.  There  is not  an  agreement  nor  assurance  to  secure  any  such
     financing.

o    Extended  the  maturity  date  for a  $100,000  convertible  debenture  and
     $150,000 of notes payable related party, convertible debenture, in order to
     reduce the Company's cash requirements.

o    Convert   approximately    $1,051,000   of   convertible   debentures   and
     approximately   $810,000  of  related  party  notes   payable   convertible
     debentures in order to reduce the Company's cash requirements.

o    Convert  approximately 50% of the Company's video products to DVD format in
     order to keep current with existing demand and technology. The new products
     are estimated to increase  overall sales by  approximately  18%, which will
     add to the overall gross profit margin by approximately 13%.

o    Reduce operating  expense to the lowest level possible,  as the Company has
     relocated  its office and  warehouse  facilities  in order to reduce annual
     rent expense by approximately $250,000.

                                       24
<PAGE>

o    Evaluate the lowest level of employee  requirements  to operate the Company
     effectively,  as the Company  has  reduced its payroll and payroll  related
     expenses by approximately $350,000.

The Company  believes it has adequate cash  resources to sustain its  operations
through the second  quarter of fiscal 2001.  In the third quarter of fiscal 2001
the Company will require additional  financing. However, a back-up plan is being
formulated  in case this planned  financing is not in place when  required.  The
Company will have an alternative cash flow plan to react to this situation.  The
principal  objective  of the Company is to  implement  the above items in fiscal
2001,  which will lead to a profitable  operation if the items are  successfully
implemented,  and subject to market and other  conditions.  Although the Company
believes  that the outlook is favorable,  there can be no assurance  that market
conditions will continue in a direction favorable to the Company.

In August of 1999, the Company entered into an agreement with American  Champion
Media,  Inc.,  for the  exclusive  rights to  distribute a workout  video titled
"Strong Mind,  Fit Body,"  starring Joe Montana in all formats of video and DVD.
The initial  term of the  agreement  is two years.  Royalty  payments  can range
between  $2.50 to $3.75  depending  on the length of the program and  quantities
sold. The Company completed development of this product in July 2000.

In December  of 1999,  the  Company  entered  into an  agreement  with  Romagosa
International  Merchandising,  S.L., for a full length  animated  feature titled
"Don Quixote," for the exclusive rights to distribute video and DVD units in the
United  States  and Canada  and their  possessions.  The  Company  paid  advance
royalties  of $7,500  for the year  ended  March 31,  2000 and $7,500 in June of
2000.

Beginning in October 1998, the Company  entered into a four-year  lease expiring
in June 2002,  for use as  executive  offices and  manufacturing  and  warehouse
facilities for approximately  $21,800 monthly.  During March 2000, the Company's
lessor brought  action against the Company to recover  delinquent rental payment
and penalties arising from the termination of this lease. The action against the
Company  resulted in a stipulated  judgement  whereby the Company  agreed to pay
$72,000.00 at 10% interest by paying $6,600.00 per month for twelve  consecutive
months  beginning April 1, 2000 through March 1, 2001. There is a penalty clause
for a failure to pay in a timely  manner  which  increases  the total  amount to
$119,000  with  immediate  acceleration  in the  event of a  default  under  the
stipulated  judgement.  The required  payments  through June, 2000 all have been
made in a timely  manner and there have been no defaults.  The Company  leased a
sales office space in Freehold,  New Jersey for approximately  $2,400 per month.
This lease was to expire on October 31, 2001,  however,  the Company in March of
2000  successfully  negotiated  the  termination of this lease by forfeiting the
lease  rental   deposits  of  $43,572.   Rent  expense  for  this  facility  was
approximately  $144,774  for the year ended March 31,  2000.  It also leased for
$9,274 per month  office and  warehousing  space which would  expire March 2001.
Rent  expense for this  facility was  approximately  $111,283 for the year ended
March 31,  2000.  The Company has entered  into a sublease for this space with a
subtenant  beginning  January  1,  1999  which  requires  the  subtenant  to pay
approximately  $9,494 per month from March 1, 1999 through  February  2000,  and
$9,936 per month from March 1, 2000 through March 31, 2001.

                                       25

<PAGE>

Investing
---------
For the years ended March 31, 2000 and 1999,  investments in masters and artwork
were $64,419 and $72,073, respectively.  Management continues to seek to acquire
new titles to enhance its product lines.

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

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

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

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

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

At November 28, 1998,  ATRE has no binding  sales  contracts  for the  remaining
parcels of real  estate  owned by ATRE as these  parcels of land  continue to be
developed for commercial use. Contracts that were pending have not closed due to
possible  changes in interest rates or possible  overall market  conditions.  In
addition,  the Company was advised by ATRE that proceeds realized by ATRE during
fiscal 1998 were  reinvested  into other  parcels to improve the ability to sell
the remaining  parcels.  In December of 1998,  the Company  received from a real
estate development specialist an aggregate approximate valuation of $5,200,000


                                       26

<PAGE>

for the remaining ATRE parcels.  Although the Company  believes that final sales
contracts  will be able to be  consummated,  at this time it is not  possible to
predict  with  any  certainty  when  the  closing  of such  sales  contracts  of
commercial real estate may occur or whether the proceeds expected by the Company
for  their  share  in  this  real  estate  could  be  significantly   less  than
anticipated.  Therefore,  the ultimate  realizable  value of the  receivable for
advances from ATRE could be  substantially  less than the  preadjusted  carrying
value of  $1,600,000.  The Company  setup a valuation  allowance  in the quarter
ended March 31, 1998, of $1,117,788 and accordingly, charged operations for that
amount so that the amount due from ATRE at March 31,  1998 is  presented  at the
amount of the 1998 subsequent receipts of approximately $500,000. Based upon the
above  circumstances the likelihood is that $1,117,788 from future proceeds from
the sale of the  ATRE  parcels  will not be  realized  by the  Company  with any
certainty. At March 31, 1999, no monies were due from ATRE.

The Company in June 1998  borrowed  approximately  $809,500 from ATRE to finance
certain  purchases of toy products.  During the quarter ended December 31, 1999,
the Board of Directors of the Company  authorized  the  conversion of the amount
borrowed  of  $809,500  into a one year 7%  Convertible  Promissory  Note due on
September 30, 2000.  During the year ended March 31, 2000, the Company  borrowed
$600,500  from ATRE and paid back $81,000.  The Company owed ATRE  approximately
$478,900 in short term notes at March 31, 2000.

On June 2, 1999,  ATRE entered into a sale agreement with respect to 0.097 acres
of the remaining acres of parcel 1 for  approximately  $600,000 and in September
1999,  entered into a sales agreement for remaining 0.091 acres parcel of parcel
1 for approximately $550,000. During June 2000, the sales agreement for $600,000
entered into on June 2, 1999 was canceled by the buyer who forfeited the $25,000
purchase deposit to ATRE. The ability of the remaining agreement to close or for
the Company to realize as of March 31,  2000,  its share of the net  proceeds to
the Company, however, are uncertain and is subject to certain contingencies.


Financing
---------

On May 8, 1995, the Company closed a sales agreement with a Mexican Company, for
$750,000 by allowing credit to the Company for duplication services and received
$750,000 of duplication  services in exchange for equipment  having a book value
of approximately  $630,000. The Company classified the outstanding obligation of
$288,701  at March 31,  1998 as notes  payable.  This note was  repaid in weekly
installments  of  $12,500  with the final  payment  made in  September  of 1998.
Interest expense of  approximately  $4,127 was recorded for the year ended March
31, 1999.

                                       27


<PAGE>

On August 30, 1996,  the Company  established a line of credit up to $2,500,000,
whereby, $2,000,000 was backed by pledged receivables and inventory and $500,000
was guaranteed by the Company's President. Interest was at a prime rate plus 3%.
Interest expense from April 1, 1997 through December 31, 1997 was  approximately
$148,500.  In December 1997, the Company repaid  $469,221 on this line of credit
and  engaged  another   financial   institution   for  a  $2,500,000   financing
arrangement.  This  arrangement  is  also  backed  by  pledged  receivables  and
inventory.  Cost is 1.5% discounted from pledged  invoices for every 30 days for
the accounts  receivable  portion of the line of credit. The portion of the line
of credit backed by inventory is  determined  by the lesser of $800,000,  25% of
the clients  finished  toy  inventory or 55% of the clients  finished  videotape
inventory.  Interest is charged at 16.18% per annum on this portion of the debt.
This was  formalized  with the Company in June of 1998.  Interest  expense  from
December 1997 through March 31, 1998 was approximately $27,500. Interest for the
years ended March 31, 2000 and 1999 were  approximately  $419,000 and  $478,000,
respectively.

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

As of March 31,  1997,  the 10%  Debentures  of  $290,000  were  converted  into
1,450,000  shares of the Company's  common stock by several off shore  companies
under  Regulation S and $967,988 of  convertible  promissory  notes payable were
outstanding  and in  default by the  Company.  Interest  expense of $97,000  and
$24,702 was recorded for the years ended March 31, 1998 and 1997.  Subsequent to
September 30, 1997, the Company  negotiated a one year  extension  agreement and
agreed to add 15% to the note as a deferred financing cost of $110,721.


In October 1997, the Company borrowed $360,000 from an unaffiliated  entity with
interest at 10% per year. At March 31, 1998,  $185,208 was  outstanding  on this
obligation.  This note was repaid in  September  of 1998 by weekly  payments  of
$7,500.  Interest expense for the years ended March 31, 1999 and 1998 was $4,712
and $12,708, respectively.

During fiscal March of 1998,  the 10% Debentures of $229,848 were converted into
6,037,668  shares of the Company's  common stock. In June of 1998, a convertible
debenture  holder  converted  a note  payable  with a balance  of  $91,750  into
2,823,077 shares of the Company's common stock.  This brought total  conversions
of $611,598 of debentures into 10,310,745 shares as of November 2, 1998.

                                       28
<PAGE>

For the year ended March 31, 1999, the Company amortized $84,587,  as a non-cash
financing cost, for the convertible  debentures  which is classified as interest
expense.  The convertible notes are secured by the Company's  entitlement to any
net cash proceeds derived from its interest in ATRE property.

On March 11,  1998,  the  Company  issued  347,368  shares of common  stock to a
salesman in lieu of  commissions  owed of $66,000.  On February  25,  1999,  the
Company issued 25,000 shares of common stock to a salesman's beneficiary in lieu
of commissions owed of $4,500.

In the  June  1998  quarter,  the  Company's  subsidiary  received  a  total  of
$2,721,860  from  related  parties to be  utilized by the Company to pay a major
supplier of the Company for toy  purchases.  Subsequently,  the related  parties
were  successful in receiving  credits of $743,935 from the toy supplier.  These
credits  were  applied by the related  parties to the monies owed by the Company
for the purchases of toys. The Company repaid the related  parties $50,000 which
left an outstanding obligation of $1,927,925 as of March 31, 1999.

The Company  negotiated and intended in July of 1999 to convert this outstanding
related party payables into shares of the Company's  common stock.  On August 5,
1999, the option to convert was canceled.

In July of 1998,  the Company raised $80,000 from the exercise of warrants for a
total 1,800,000 shares of the Company's common stock.

On  November  2,  1998,  the 10%  Debentures  with a balance  of  $831,436  were
reinvested into a new note for $921,851 for a new two year term expiring October
31, 2000 with interest of 10% and an extension  bonus of $175,000,  due November
1999 which  bears  interest  at 2.5% per annum  payable  $50,000 per month after
payment of all prior interest and the restructured  note. The repayment term was
a weekly  amount of $6,250 in 1998 and  $12,500 in the years  1999 and 2000.  In
addition there was an acceleration clause of repayments for certain events and a
5% late  charge  for any  delinquent  payments.  The notes  contain an option to
convert the  principal  and  interest  balance  into common stock of the Company
subject to certain pricing calculations. Collateral security included all assets
of the Company and personal  collection  guarantee as additional security to the
holder  after  subordination  to the primary  lender.  During the quarter  ended
December 31,  1999,  the holder  converted  the  $175,000  extension  bonus into
3,500,000 shares of the Company's common stock.



                                       29
<PAGE>

In February of 1999, the Company  converted  $640,000 of the 10% Debentures into
8,000,000  shares of common stock.  On February 10, 1999, the Company  converted
the  remaining  note  balance of $172,661  and unpaid  interest of $90,415  into
3,018,254 shares of common stock. It was also agreed that the $175,000 extension
bonus,  which was  recorded  as a deferred  financing  cost in February of 1999,
could be  converted  into  shares of common  stock at an agreed  exercise  price
subject to market  conditions.  During the quarter ended  December of 1999,  the
Company  converted the $175,000  extension bonus into 3,500,000 shares of common
stock.  The Company  amortized  $20,000 and $155,000 of the extension bonus as a
financing  expense  for the year  ended  March  31,  1999 and  March  31,  2000,
respectively. During the year ended March 31, 2000, $175,000 extension bonus and
accrued interest of $13,125 was converted into 3,500,000 shares of the Company's
common stock.

In March and June 1999, the Company issued into callable  convertible  notes for
$50,000 and $100,000 with James Lu and Jeffrey I.  Schillen,  respectively.  The
debentures  bear interest at 10% per year with principal and interest due on the
first  anniversary  of the date of issuance.  Each note has been extended for an
additional year. The notes also call for any amount of the outstanding principal
to be converted  into  restricted  shares of the  Company's  common stock at the
option of the lenders at a conversion  rate of $0.05 per share.  As of March 31,
2000,  neither of the  debentures  had been  converted.  Since the June note was
convertible into restricted shares of the Company's common stock at a rate below
market,  the first 20% of the below market amount was  attributed to the lack of
tradability  of the  shares due to  restriction  on sale and the  remainder  was
attributed  to  additional  interest.  The  additional  amount of  interest  was
calculated to be $167,200,  of which $139,333 has been expensed in 2000, and the
remainder of $27,867 has been  capitalized  and is being  expensed pro rata over
the remaining life of the debenture.

In March of 1999, the Company  received a total of $150,000 from three investors
and issued  promissory  notes due in one year with  principal  and interest paid
bimonthly  at an interest  rate of 10%.  The notes could be used as proceeds for
the  exercised  options held by the  investors.  During the year ended March 31,
2000, the note holders used the $150,000 and accrued interest of $2,500 as funds
to exercise their common stock options for a total aggregate of 3,000,000 shares
of the Company's  common stock.  In March and April of 1999, the Company entered
into  two  convertible  notes  for  $100,000  and  $50,000,   respectively.  The
debentures  bear  interest at 10% with  principal  and interest due on the first
anniversary  of the date of issuance.  The notes also call for any amount of the
outstanding  principal to be converted into  restricted  shares of the Company's
common  stock at the  option  of the  lender at a  conversion  rate of $0.05 per
share. As of March 2000, one investor  converted the $50,000 note into 1,000,000
shares of the Company's  common  stock.  As of March 31, 2000,  the  outstanding
balance of convertible debentures was 100,000, which the lender extended the due
date to March 2001. Since the $50,000  debenture was convertible into restricted
shares of the Company's  common stock at a rate below  market,  the first 20% of
the below market amount was  attributed to the lack of tradability of the shares
due to  restriction  on sale and the  remainder  was  attributed  to  additional
interest.  The additional amount of interest was calculated to be $17,500, which
has been  expensed  in 2000.  On June 2, 1999,  the  Company  was advised by the
convertible debenture holders of the $100,000 note to waive receipt of bimonthly
principal  payments  and to  continue  to receive the  bimonthly  interest  only
payments.

                                       30
<PAGE>

On April 12, 1999,  the Company  engaged three  consultants  for a period of one
year each to provide managerial and strategic planning for financial matters and
expansion  of the  Company.  The  consultants  received  options to purchase and
aggregate of 6,000,000 shares of the Company's common stock exercisable at $0.05
per share in exchange for  services to be rendered and the options  shall expire
on April 11, 2000.  The options had an aggregate  fair value at date of grant of
approximately  $292,000.  These  options were  exercised  in April 1999,  by the
forgiveness  of  $150,000  of notes  payable,  executed  in March  1999 and cash
proceeds of $150,000.

On May 25,  1999,  the  Company's  board of  directors  approved and the Company
issued to the Company's President, as a bonus, options to purchase 2,500,000 and
1,000,000  shares of the  Company's  common  stock at $0.05 and $0.10 per share,
respectively.  The  options  expire  on May 24,  2004.  Since  the  options  are
accounted for under APB 25 and the exercise  price is below market,  the Company
has expensed the  aggregate  intrinsic  value at date of grant of  approximately
$410,000.

On May 25,  1999,  the  Company's  board of  directors  approved and the Company
issued to the  Company's  V.P. of Sales and  Marketing,  as a bonus,  options to
purchase  500,000 and 500,000 shares of the Company's  common stock at $0.05 and
$0.10 per share,  respectively.  The options  expire on May 24, 2004.  Since the
options are accounted  for under APB 25 and the exercise  price is below market,
the Company  has  expensed  the  aggregate  intrinsic  value at date of grant of
approximately $110,000.

On August 2, 1999, the Company  engaged two consultants for a period of one year
to provide  advice to  undertake  for and consult  with the  Company  concerning
management,  marketing,  consulting,  strategic planning, corporate organization
and  structure,  financial  matters  in  connection  with the  operation  of the
businesses  of the Company,  expansion of  services,  acquisitions  and business
opportunities. The consultants received options to purchase a total of 1,965,000
of the  Company's  common  stock  exercisable  at $.05 per share in exchange for
services to be  rendered  and the options  shall  expire on August 2, 2000.  The
options had an aggregate fair value at date of grant of approximately  $202,000.
The  options  were  exercised  during  the  year  ended  March  31,  2000 by the
forgiveness of $36,250 of principal and interest of debt outstanding for 725,000
shares and $50,000 cash and the  forgiveness of $12,000 of accounts  payable for
1,240,000 shares. [See Note 12]


During the quarter  ended  December 31, 1999,  Board of Directors of the Company
authorized  the  conversion  of  approximately  $1,880,725  in  related  parties
payables  into one  year 7%  Convertible  Promissory  Notes  of  $1,071,225  and
$809,500 each,  both due on September 30, 2000. The terms of the new convertible
notes,  allow the Company to make partial  principal and interest  payments from
time to time and the holders of the convertible notes have the option to request
such payments of the indebtedness evidenced by the notes in either in the lawful


                                       31
<PAGE>

money of the United States or in an equivalent value consisting of the Company's
common stock, the number of shares, to determined by dividing the payment amount
by the average  twenty day bid price for the  Company's  common stock during the
twenty  trading days prior to the date of such payment  date.  Also,  during the
quarter  ended  December  31, 1999,  the related  party to which  $1,071,225  in
related  parties  payable  was  owed by the  Company,  transacted  a  change  in
ownership  its common  stock in which 100% of its  outstanding  shares of common
stock  was sold to a  non-related  and at March 31,  2000,  the  balance  of the
Convertible  Promissory note to the non-related party was $1,050,775 as a result
of the Company  recording  payments  toward note in March  1999,  by  offsetting
$20,450 in money owed to the Company by the non-related party.


On May 11,  2000,  the Company  entered  into a  Securities  Purchase  Agreement
("Securities  Purchase  Agreement")  with  eight  investors.   Pursuant  to  the
Securities Purchase Agreement, the Company issued and sold 50 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") for total consideration
of $500,000,  or $10,000 per share.  The May Davis Group,  Inc.  ("May  Davis"),
acted as placement agent for the offering. May Davis received a placement fee of
$40,000 and the Company issued warrants to purchase  1,500,000  shares of Common
Stock to May Davis and certain  designees  of May Davis and warrants to purchase
25,000  shares of Common Stock to Butler  Gonzalez,  LLP,  counsel to May Davis.
Such warrants are exercisable at a price of $.08 per share.

Commencing  August 9, 2000,  the Series A Preferred  Stock is  convertible  into
shares of the  Company's  Common Stock and  automatically  converts  into Common
Stock on April 12, 2002. The conversion price of our Series A Preferred Stock is
the lower of $.08 per share or 80% of the  average of the  closing bid prices of
the  Company's  Common  Stock on any five  trading  days in the ten  trading day
period  preceding the date of conversion.  The conversion  price of the Series A
Preferred Stock is also adjusted in the event of stock dividends,  stock splits,
recapitalizations,  reorganizations, consolidations, mergers or sales of assets.
The Series A Preferred stock also provides for a dividend upon conversion of the
Series A  Preferred  Stock at the rate of 6% per  annum  payable  in  additional
shares of the  Company's  Common  Stock.  In no event can the Series A Preferred
Stock be converted into more than 11,575,000 shares of Common Stock.  Additional
features  of the  Series A  Preferred  Stock  include,  among  other  things,  a
redemption feature at the option of the Company commencing September 8, 2000, of
shares of Series A Preferred  Stock having a stated  value of up to $100,000,  a
mandatory  redemption  feature upon the  occurrence of certain  events such as a
merger,  reorganization,  restructuring,  consolidation  or similar event, and a
liquidation  preference  over the  Common  Stock in the event of a  liquidation,
winding up or dissolution of the Company.  The Series A Preferred Stock does not
provide any voting rights, except as may be required by law.


                                       32
<PAGE>

Under  Registration   Rights  Agreements  the  Company  entered  into  with  the
purchasers  of the Series A Preferred  Stock,  the Company is required to file a
registration  statement to register the Common Stock issuable upon conversion of
the Series A Preferred  Stock under the Securities Act to provide for the resale
of such  Common  Stock.  The  Company  is  required  to keep  such  registration
statement effective until all of such shares have been resold.


Year Ended March 31, 1999 Compared with the Year Ended March 31, 1998
---------------------------------------------------------------------

Results of Operations
---------------------
The  Company's  net loss for the year  ended  March 31,  1999 was  approximately
$1,600,000 as compared to a net loss of  approximately  $1,500,000  for the same
period  last  year.  The  primary  reason  for the net  loss  was the  Company's
operating loss of approximately $1,400,000.

The Company's operating loss for the year ended March 31, 1999 was $1,400,000 as
compared to an  operating  loss of  approximately  $193,000  for last year.  The
Company's  operating  loss arose  primarily  from lower  sales of  approximately
$4,200,000  and reduced gross profit of  approximately  $1,540,000,  offset by a
reduction in operating expenses of approximately $300,000.

The Company's sales for the years ended March 31, 1999 and 1998, were $4,549,525
and $8,724,149,  respectively.  The Company's  sales decreased by  approximately
$4,200,000  from the period year with  decreased  video and toy product sales of
approximately  $2,100,000 each. The lower video product sales for the year ended
March 31, 1999,  were  primarily  the result of lower  purchases by three of the
Company's major retailers.  One of the Company's major video retailers was sold,
the second retailer  experienced  financial  difficulties and the third opted to
purchase videos from the Company's competitors. The lower toy product sales when
compared  to the same  period a year  earlier  was  attributed  to higher  sales
realized  from the  initial  roll out of the  Company's  new toy line during the
previous  year's holiday season.  Sales of the Company's  products are generally
seasonal  resulting  in  increased  sales  starting in the third  quarter of the
fiscal  year.  The  Company  expects the sales to increase in fiscal year ending
March 31, 2000.  The  Company's  sales for the quarter  ended March 31, 1999 was
approximately  $900,000  as compared to the prior two  quarters  which  averaged
approximately  $1,500,000  a quarter.  This  decrease  in the last  quarter  was
attributable  to the selling of certain toy inventory at a reduced selling price
as a  result  of  marketing  difficulties.  The  Company  intends  on  marketing
furniture and personal computers in the second half of fiscal 2000.

                                       33
<PAGE>

Cost of sales for the years  ended  March 31,  1999 and 1998 were  approximately
$3,000,000 and $5,700,000 or 66% and 65% of sales, respectively. The increase in
cost of sales as a percent to sales was primarily the result of reducing certain
toy inventory down to its net realizable values.

Gross  profit for the years  ended  March 31,  1999 and 1998 were  approximately
$1,500,000 and $3,000,000, or 34% and 35% of sales, respectively.  The decreased
percentage  for  gross  profit as a percent  to sales was  primarily  due to the
write-down of certain toy inventory.

Operating   expenses   for  the  years  ended  March  31,  1999  and  1998  were
approximately  $2,900,000  and  $3,200,000,   respectively.   This  decrease  in
operating  expenses of  approximately  $300,000 was  primarily the result of the
Company's cost reduction program.

Bad debt  expense for the years ended March 31, 1999 and 1998 were  $307,013 and
$152,440, respectively.

Interest  expense for the years ended March 31, 1999 and 1998 were  $393,050 and
$374,449,  respectively.  The  increase in interest  expense in fiscal 1999 over
fiscal  1998 of  approximately  $20,000  was the  result  of  higher  levels  of
borrowing.  As of March  31,  1999,  the  outstanding  debt of the  Company  was
approximately  $1,960,000,  primarily  all of which is  classified  as  current.
Interest  income for the years  ended  March 31,  1999 and 1998 were  $1,000 and
$129,000,  respectively.  The lower accounts  receivable  from ATRE at March 31,
1998,  and the  subsequent  cash payments  from ATRE,  resulted in lower accrued
interest  income for the year ended  March 31,  1999 when  compared  to the same
period a year earlier.

The Company's  auditors  issued a going concern  report for the year ended March
31, 1999. There can be no assurance that management's  plans to reduce operating
losses will continue or the  Company's  efforts to obtain  additional  financing
will be successful.


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


                                       34
<PAGE>

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

In April 1998, the American  Institute of Certified  Public  Accountants  issued
Statement  of  Position  ["SOP"]  98-5,  "Reporting  on the  Costs  of  Start-Up
Activities." SOP 98-5 provides  guidance on the financial  reporting of start-up
costs and  organization  costs,  and requires  that such costs to be expensed as
incurred.  SOP 98-5  applies to all  nongovernmental  entities  and is generally
effective  for  fiscal  years  beginning   after  December  15,  1998.   Earlier
application is encouraged in fiscal years for which annual financial  statements
previously  have not been  issued.  The  adoption of SOP 98-5 is not expected to
have a material  impact on results of operations,  financial  position,  or cash
flows of the  Company  as the  Company's  current  policy  is  substantially  in
accordance with SOP 98-5.

FASB  has had on its  agenda  a  project  to  address  certain  practice  issues
regarding  Accounting  Principles Board ["APB"] Opinion No. 25,  "Accounting for
Stock Issued to Employees." The FASB plans on issuing various interpretations of
APB Opinion No. 25 to address these practice issues. The proposed effective date
of these interpretations would be the issuance date of the final Interpretation,
which is expected to be in September 1999. If adopted,  the Interpretation would
be applied  prospectively  but would be applied to plan  modification and grants
that occur after December 15, 1998. The FASB's tentative  interpretations are as
follows:

* APB Opinion No. 25 has been  applied in practice to include in its  definition
of  employees,  outside  members  of the  board  or  directors  and  independent
contractors.  The FASB's  interpretation  of APB  Opinion  No. 25 will limit the
definition of an employee to  individuals  who meet the common law definition of
an employee [which also is the basis for the distinction  between  employees and
nonemployees  in the current  U.S.  tax code].  Outside  members of the board of
directors and  independent  contractors  would be excluded from the scope of APB
Opinion No. 25 unless they qualify as employees  under common law.  Accordingly,
the cost of issuing stock options to board members and  independent  contractors
not meeting the common law  definition of an employee will have to be determined
in  accordance  with  FASB  Statement  No.  123,   "Accounting  for  Stock-Based
Compensation,"  and  usually  recorded  as an expense in the period of the grant
[the service period could be prospective, however, see EITF 96-18].

* Options [or other equity  instruments] of a parent company issued to employees
of a  subsidiary  should be  considered  options,  etc.  issued by the  employer
corporation in the consolidated  financial  statements,  and,  accordingly,  APB
Opinion  No.  25  should  continue  to  be  applied  in  such  situations.  This
interpretation  would apply to subsidiary  companies only; it would not apply to
equity method investees or joint ventures.

                                       35
<PAGE>


* If the terms of an option  [originally  accounted  for as a fixed  option] are
modified  during the option  term to directly  change the  exercise  price,  the
modified  option should be accounted for as a variable  option.  Variable  grant
accounting  should  be  applied  to the  modified  option  from  the date of the
modification until the date of exercise.  Consequently, the final measurement of
compensation expense would occur at the date of exercise. The cancellation of an
option and the  issuance of a new option  with a lower  exercise  price  shortly
thereafter  [for example,  within six months] to the same  individual  should be
considered in substance a modified [variable] option.

* Additional  interpretations  will address how to measure  compensation expense
when a new measurement date is required.


Year 2000 Issue
---------------
During the year ended March 31, 2000,  the Company  conducted an  assessment  of
issues related to the Year 2000 and  determined  that it was necessary to modify
or replace portions of its software in order to ensure that its computer systems
will properly utilize dates beyond December 31, 1999. The Company completed Year
2000 systems modifications and conversions during the year ended March 31, 2000.
Costs  associated  with becoming Year 2000 were not material.  At this time, the
Company  cannot  determine  the impact that Year 2000 issue will have on its key
customers or suppliers.  If the Company's  customers or suppliers  don't convert
their  systems  to become  Year 200  compliant,  the  Company  may be  adversely
impacted. The Company is addressing these risks in order to reduce the impact on
the Company.  As of the date of this report,  the Company did not experience any
disruption to operations or any other problems relating to the Year 2000 issue.


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


ITEM 7.  FINANCIAL STATEMENTS.

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


                                       36
<PAGE>


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

         On January 14, 2000, the Registrant's  independent public  accountants,
Moore  Stephens,  P.C.  terminated  its  client-auditor  relationship  with  the
Registrant.  On January 18, 2000, the Registrant's Board of Director's  approved
the  engagement  of  Merdinger,  Fruchter,  Rosen & Corso,  P.C. to serve as the
Company's  independent public accountants and to be the principal accountants to
conduct  the audit of the  Company's  financial  statements  for the fiscal year
ending March 31, 2000,  replacing the firm of Moore Stephens,  P.C. who had been
engaged to audit the Company's  financial  statements for the fiscal years ended
March 31, 1996, 1997, 1998, and 1999. The former accountant's  opinion contained
a  going  concern  disclaimer.  Management  of  the  Company  knows  of no  past
disagreements with the former accountants on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope.



                                    PART III

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

         The Company's directors and officers are as follows:

Name                           Age     Title
----                           ---     -----
James K.T. Lu.............     53      Chairman of the Board, President, Chief
                                       Executive Officer, Secretary and Director

Jeffrey I. Schillen.......     54      Executive Vice President, Sales and
                                       Marketing and Director

Murray T. Scott...........     78      Director


Background of Executive Officers and Directors

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


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


                                       37
<PAGE>


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

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

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

         Under the certificate of incorporation of the Company  ("Certificate of
Incorporation"), the Board of Directors of the Company is divided into three (3)
classes,  with each class to be elected by the  shareholders  every three years.
The Company's Board presently  consists of three (3) directors:  one (1) Class 1
director  whose term  expires in 2003,  two (2) Class 2  directors  whose  terms
expire in 2003,  which  directors  were elected for such terms at the  Company's
annual meeting of  shareholders  held April 27, 2000. No director of the Company
has resigned or declined to stand for  re-election  due to a disagreement on any
matter relating to the Company's operations, policies or practices.


Committees of the Board of Directors

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


                                       38
<PAGE>

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.

         Based solely upon a review of Forms 4 furnished to the Company pursuant
to Rule 16a-3  under the  Exchange  Act during its fiscal  year ended  March 31,
2000, such required reports were all filed on a timely basis.

                                       39

<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION.

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

<TABLE>
<CAPTION>
                                   Summary Compensation Table


                                                  Annual Compensation              Long Term Compensation
                                               ------------------------  ------------------------------------------
                                                                           Awards                Payouts
                                                                         ------------ -----------------------------
                                                                         Securities                     All Other
                                                                         Underlying   LTIP Payouts    Compensation
Name and Principal Position          Year      Salary ($)    Bonus ($)   Options (#)       ($)             ($)
--------------------------------     ----      ----------- ------------  ------------ -------------- --------------
<S>                                  <C>       <C>         <C>           <C>          <C>            <C>
James K.T. Lu (1)                    2000        37,500         0             0             0            27,606
  President, Chief Executive         1999       120,000         0             0             0            89,983
  Officer and Secretary              1998        78,350         0             0             0            31,572


Jeffrey I. Schillen (2)              2000        50,000         0             0             0            15,618
  Executive Vice President of        1999       100,000         0             0             0            13,036
  Sales and Marketing                1998        51,500         0             0             0            20,792
</TABLE>


(1)  Mr. Lu's annual  salary is $150,000  during the fiscal year ended March 31,
     2000 and he elected to defer until August 2000,  a  substantial  portion of
     his salary for this  period.  During  March 2000,  Mr. Lu waived all of his
     deferred  salary  owed as of  March  31,  1999  and as of the  date of this
     report, Mr. Lu continues to defer a substantial portion of his salary.

(2)  Mr. Schillen's annual salary is $120,000 during the fiscal year ended March
     31,  2000 and he elected to defer a  substantial  portion of his salary for
     this period.  During March 2000,  Mr.  Schillen  waived all of his deferred
     salary owed as of March 31, 1999,  and as of the date of this  report,  Mr.
     Schillen continues to defer until August 2000, a substantial portion of his
     salary.


                                       40
<PAGE>


Option/SAR Grants in Last Fiscal Year
-------------------------------------
         The following table sets forth certain  information with respect to the
options  granted  during the year ended March 31, 2000, for the persons named in
the Summary Compensation Table (the "Named Executive Officers"):

                        Number of    Percent of Total
                        Securities     Options/SARs
                        Underlying      Granted to       Exercise
                       Options/SARs    Employees in      or Base     Expiration
Name                    Granted (#)     Fiscal Year     Price($/Sh)     Date
----                   ------------  ----------------   -----------  ----------
James K.T. Lu           2,500,000           56%             0.05      5/24/04
James K.T. Lu           1,000,000           22%             0.10      5/24/04

Jeffrey I. Schillen       500,000           11%             0.05      5/24/04
Jeffrey I. Schillen       500,000           11%             0.10      5/24/04


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

         The  following  table sets forth  certain  information  with respect to
options  exercised  during the year ended March 31, 2000 by the Named  Executive
Officers and with respect to unexercised options held by such persons at the end
of 1999.

<TABLE>
<CAPTION>
                                                       Number of Securities
                                                      Underlying Unexercised         Value of Unexercised
                                                          Options/SARs             In-the-Money Options/SARs
                            Shares                        At FY-End (#)                   at FY-End ($)
                          Acquired On     Value      ---------------------------   ---------------------------
Name                      Exercise (#)  Realized ($) Exercisable   Unexercisable   Exercisable   Unexercisable
--------------------      ------------  -----------  ------------- -------------   -----------   -------------
<S>                       <C>           <C>          <C>           <C>             <C>           <C>
James K.T. Lu                  0              0       10,100,000   4,000,000 (1)        0              0
Jeffrey I. Schillen            0              0        2,150,000        0               0              0
</TABLE>


(1)  Unexercisable  options to purchase  4,000,000 shares are exercisable by Mr.
     Lu  upon  the  occurrence  of the  following:  (i)  2,000,000  shares  upon
     successfully  selling all real estate  under  development  by ATRE and (ii)
     2,000,000 upon successful completion of a video duplication and fulfillment
     opportunity and upon the CineChrome Card Business reaching profitability.


                                       41

<PAGE>

Employment Agreements

         In 1991 the Company  entered  into  employment  agreement  with each of
Messrs.  Lu and  Schillen  for annual  compensation  of  $150,000  and  $90,000,
respectively;  both  provide  for  annual  adjustments  in  accordance  with the
consumer  price  index,   however,   effective  1996,  Mr.   Schillen's   annual
compensation was increased to $120,000.  Consequently,  contracted salary levels
are at  $150,000  for Mr. Lu and  $120,000  for Mr.  Schillen.  Both  employment
agreements were extended in July 2000 for a period of five years  terminating on
December 31,  2005.  Mr. Lu and Mr.  Schillen in March 2000,  both waived all of
their  deferred  salaries owed as of March 31, 1999.  See "Summary  Compensation
Table" above, and the notes thereto.

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

         In September 1997 as consideration  for each of Messrs. Lu and Schillen
agreeing  to defer up to 90% of their  salaries  through  March  31,  1998,  the
Company  issued  3,000,000  shares of  Common  Stock and  warrants  to  purchase
3,000,000  shares of Common Stock to Mr. Lu, and issued 750,000 shares of Common
Stock and warrants to purchase  750,000 shares of Common Stock to Mr.  Schillen.
All of such warrants have an exercise price of $.10 per share.  The warrants are
fully vested and were  exercisable  until March 31, 1999. In March of 1999,  the
Company extended the terms until August 24, 2002.

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

         On September 1, 1997 the Company  entered  into  employment  agreements
with nine other employees holding important  positions.  The agreements provided
for the issuance of an  aggregate of 550,000  shares of Common Stock with a fair
value of $11,000,  as payment for services,  warrants for 550,000 shares with an
exercise  price  of  $.10  per  share  and  the  semi-monthly   compensation  of
approximately  $14,000 in the  aggregate.  On September 1, 1999, the warrants to
exercise the 550,000  shares of Common Stock  expired.  On August 27, 1999,  the
Company  granted  warrants of 300,000  shares of Common  Stock,  which expire on
September 1, 2002, at an exercise  price of $.10 per share to the five remaining
employees with employment agreements.

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

                                       42
<PAGE>

On June 9, 2000,  the Board of  Directors of the Company  adopted the  Company's
2000 Stock  Compensation  Plan ("Plan") for the purpose of providing the Company
with a means  of  compensating  selected  key  employees  (including  officers),
directors and consultants to the Company and its subsidiaries for their services
rendered in connection with the development of Diamond Entertainment Corporation
through the issuance of shares of Common Stock of the Company,  which authorized
the Board of  Directors  of the  Company  is  authorized  to sell or award up to
13,000,000  shares and/or options of the Company's  Common Stock,  no par value.
The Plan is  administered  by the Board of Directors which has the discretion to
determine  the  grantees,   the  number  of  shares,  the  of  each  grant,  the
consideration  for the shares and such other terms and  conditions  as the Board
may determine. The Plan terminates on May 31, 2001.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following  table sets forth  information as of June 30, 2000,  with
respect to the beneficial  ownership of the outstanding  shares of the Company's
Common Stock and  Preferred  Stock by (i) each person known by the Company to be
the beneficial owner of more than 5% of the Common Stock, (ii) each director of
the Company,  (iii) each Named  Executive  Officer of the Company;  and (iv) all
directors and executive officers as a group.  Unless otherwise  indicated below,
such  individuals  have the sole power to control  the vote and  dispose of such
shares of capital stock.

<TABLE>
<CAPTION>
                                                                                               Percentage of Common
                                                                                                 Stock Assuming
                                        Common Stock         Percentage of       Preferred        Conversion of
 Name (1)                                  Owned             Common Stock     Stock Owned (2)   Preferred Stock (3)
 ----                                   ------------         -------------    ---------------  --------------------
 <S>                                    <C>                  <C>              <C>              <C>
 James K.T. Lu (4)                        20,444,960             19.78%           209,287         20.18%
 Diamond Entertainment Corporation
 800 Tucker Lane
 Walnut, CA 91789

 Jeffrey I. Schillen (5)                   7,005,750              6.78%            36,282          6.84%
 Diamond Entertainment Corporation
 48 St. Lawrence Way
 Marlboro, NJ 07746

 Murray T. Scott (6)                       1,300,000              1.26%            75,796          1.40%
 Diamond Entertainment Corporation
 800 Tucker Lane
 Walnut, CA 91789

 All directors and officers as a          28,750,710             27.82%           321,365         28.42%
 group (3 persons) (7)
</TABLE>

                                       43
<PAGE>

----------------

(1)  Beneficial  ownership is determined in accordance with Rule 13d-3 under the
     Security Exchange Act of 1934, as amended,  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 owners of record by each
     individual  named as beneficial  owner and such  individual has sole voting
     and  disposition  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 assuring that any option,  warrants or  convertible  securities  held by
     such person or entity which are  exercisable  or  convertible  with 60 days
     from the date hereof have been exercised or converted as the case any be.

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

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

(4)  Mr. Lu is President,  Chief Executive Officer,  Secretary and a director of
     the  Company.  Includes  14,100,000  shares of Common Stock  issuable  upon
     exercise of warrants, options and convertible notes

(5)  Mr. Schillen is the Executive Vice President and a director of the Company.
     Includes  4,150,000  shares of  Common  Stock  issuable  upon  exercise  of
     warrants, options and convertible notes.

(6)  Mr. Scott is a director of the Company.  Includes  250,000 shares of Common
     Stock issuable upon exercise of warrants .

(7)  Represents  10,250,710  shares of Common Stock  outstanding  and 18,500,000
     shares of Common Stock issuable upon exercise of warrants or options.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         In May 1995, James Lu, the Company's Chairman,  Chief Executive Officer
and President,  personally assumed  obligations of the Company to three services
providers in the aggregate amount of approximately  $1,131,000.  The obligations
are secured by all shares of the Company's  Common Stock owned or to be owned by
Mr. Lu. In June 1995, Mr. Lu converted such obligations into 8,212,785 shares of
Common  Stock.  In August 1995 Jeffrey I.  Schillen and Murray T. Scott,  each a
director of the Company,  agreed to assume $413,400 and $110,240,  respectively,
of the obligations  assumed by Mr. Lu. In consideration  for the reassignment of
such  obligations,  Mr. Lu agreed to assign  3,000,000  and 800,000 of shares of
Common Stock,  respectively,  to Messrs.  Schillen and Scott.  The assignment of
such shares was effected during May 1999.

                                       44
<PAGE>

         During  the  quarter  ended  June  30,  1996  the  Company  issued  10%
convertible  debentures ("10%  Debentures") in the original  principal amount of
$1,257,988.  The principal was convertible  into shares of the Company's  Common
Stock at a  conversion  price equal to 65% of the average  closing bid price for
the Common  Stock for five  trading days  immediately  prior to the  conversion.
Through  March 31, 1999,  10%  Debentures  in the  aggregate  amount of $519,848
(including  $39,848 in accrued  interest and $37,650 in  extension  bonuses) had
been converted into 7,487,668 shares of the Company's Common Stock at conversion
prices  ranging  from $0.026 to $0.20 per share.  One of the  purchasers  of 10%
Debentures was UC Financial, Ltd., which, upon purchasing 10% Debentures, became
the beneficial holder of more than 5% of the Company's Common Stock.  Subsequent
to March 31, 1998, an additional  $91,750 in 10%  Debentures  had been converted
into 2,823,077 additional shares of Common Stock.

         On August 25, 1997 the Company  executed a  consulting  agreement  with
Murray T. Scott,  a director of the Company,  for long term  strategic  planning
including development of marketing strategies and development and acquisition of
new products.  Mr.  Scott's  consulting  agreement  has a term of two years.  As
compensation under the agreement,  Mr. Scott was issued 250,000 shares of Common
Stock, and warrants to purchase an additional  250,000 shares of Common Stock at
an exercise price of $0.10 per share. Such warrants expired on August 25, 1999.

         On September 1, 1997 each of Messrs. Lu and Schillen were issued shares
and granted  warrants as  consideration  for agreeing to defer  payment of their
salaries.  Mr.  Lu was  issued  3,000,000  shares of  Common  Stock and  granted
warrants to purchase an additional 3,000,000 shares of Common Stock at $0.10 per
share through March 31, 1999.  Mr.  Schillen was issued 750,000 shares of Common
Stock and granted  warrants to purchase an additional  750,000  shares of Common
Stock at $0.10 per share  through  March of 1999.  The warrants are fully vested
and were  exercisable  until  March  31,  1999.  In March of 1999,  the  Company
extended the terms until August 24, 2002.

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

         In June of  1998,  the  Company  borrowed  approximately  $2,700,000 in
short term loans from two companies and the  borrowings  were used  primarily to
reduce the Company's  accounts payable balance.  On October 1, 1999, the balance
of these loans  totaled  approximately  $1,880,725  and during the quarter ended
December  31,  1999,  the  Board of  Directors  of the  Company  authorized  the
conversion  of these  short term loans into one year 7%  Convertible  Promissory
Notes of  $1,071,225  and $809,500  each,  both due on September  30, 2000.  The
Company  intends to utilize  future debt or equity  financing  or debt to equity
conversions  to help  satisfy  past  due  obligations  and to pay  down its debt
obligations   and  at  March  31,  2000,   the  balances  of  these  notes  were
approximately $1,051,000 and $809,500, respectively.

         In July and August of 1998,  Mr. Lu was granted  additional  options to
purchase  6,000,000  shares of Common Stock for $0.10 per share in consideration
of his (i) personal  guaranty of the Company's  bank line of credit,  (ii) loans
made to the Company,  (iii) certain  fulfillment orders submitted to the Company
and (iv) real estate  transactions  pertaining to its  investment in ATRE.  Such
options expire July 9, 2003.


                                       45
<PAGE>


        On July 15, 1998, the Company incorporated Galaxynet International, Inc.
["GalaxyNet"] in the State of Delaware,  as a  majority-owned  subsidiary of the
Company.  GalaxyNet  intended to develop and sell internet  gaming  software and
intended to offer its software to internet gaming companies and provide internet
gaming web sites to solicit gambling wagers from primarily,  Asian players.  The
Company  also  issued  4,000,000  options  exercisable  at $.10 per  share to an
investor and 2,000,000  options to the Chief  Executive  Officer  exercisable at
$.10 in connection with this project. On July 17, 1998, the Company,  along with
GalaxyNet,  entered into a memorandum of understanding  regarding the raising of
capital in a private  offering  to raise  gross  proceeds  in the  aggregate  of
between  $3,000,000 and $10,000,000 with an enterprise who would be paid the sum
of 15% of the aggregate  proceeds and receive options for up to 3,750,000 shares
of common  stock at  exercise  prices of between  $.10 and $.20 per  share.  The
private offering period ended September 30, 1998, and was extended until October
31, 1998.  The private  offering  resulted in raising  funding  proceeds of only
$250,000.  The  Company  subsequently  canceled  the project  and  refunded  the
$250,000  to the  investor  and  canceled  all the  project  related  options in
November  1998. The company  incurred  expenses on behalf of GalaxNet for fiscal
1999 of approximately $30,000.

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


                                       46
<PAGE>


         On November 2, 1998, the 10% Debentures with a balance of $848,861 were
reinvested into a new note for $921,851 for a new two year term expiring October
31, 2000 with interest of 10% and an extension  bonus of $175,000,  which caries
interest of 1.5% per annum payable  $50,000 per month after payment of all prior
interest and the  restructured  note.  The repayment term was a weekly amount of
$6,250 and $12,500 in the years 1999 and 2000.

         On January 10, 1999, the Company engaged three consultants for a period
of one year to provide  advice to  undertake  for and  consult  with the Company
concerning  management,  marketing,  consulting,  strategic planning,  corporate
organization and structure,  financial  matters in connection with the operation
of the  businesses  of the  Company,  expansion of  services,  acquisitions  and
business  opportunities.  The consultants received option to purchase a total of
4,700,000  of the  Company's  common  stock  exercisable  at $.05  per  share in
exchange for  services to be rendered  and the options  shall expire on December
31,  2000.  The  Company  recorded  deferred  consulting  costs of  $31,000  and
amortized  $27,200  and  $3,800  for the years  ended  March 31,  2000 and 1999,
respectively.  These options were  exercised in February of 1999 for proceeds to
the Company of  $275,000.

         In February  of 1999,  the  Company  converted  $640,000 of the the 10%
Debentures  into  8,000,000  shares of common stock.  On February 10, 1999,  the
Company  converted the remaining note balance of $172,661 and unpaid interest of
$90,415  into  3,018,254  shares of common  stock.  It was also  agreed that the
$175,000  extension  bonus,  which was recorded as a deferred  financing cost in
February of 1999,  could be  converted  into shares of common stock at an agreed
exercise price subject to market  conditions.  The Company amortized $20,000 and
$155,000 of the extension bonus as a financing  expense for the year ended March
31, 1999 and March 31, 2000, respectively. During the year ended March 31, 2000,
$175,000  extension  bonus and accrued  interest of $13,125 was  converted  into
3,500,000 shares of the Company's common stock.

         At March 31, 1999, the Company was owed approximately  $69,000 from the
President  of the Company for  advances  and loans.  Simple  interest is accrued
monthly at an annual rate of 10% on the outstanding balance. For the years ended
March 31, 1999 and 1998,  the  Company  recorded  interest  income of $1,170 and
$6,607,  respectively.  This loan amount is due in December  2001.  On March 15,
1999, the unpaid balance of approximately $69,000 was forgiven by the Company in
consideration  for the  President's  1999 and 1998 personal  guarantees  for two
leases and promissory notes.

         In  March  and June  1999,  the  Company  issued  callable  convertible
notes  for  $50,000  and   $100,000  to  James  Lu  and  Jeffrey  I.   Schillen,
respectively.  The  debentures  bear interest at 10% per year with principal and
interest due on the first  anniversary  of the date of  issuance.  Each note has
been extended for an additional  year. The notes also call for any amount of the
outstanding  principal to be converted into  restricted  shares of the Company's
common  stock at the  option of the  lenders at a  conversion  rate of $0.05 per
share. As of March 31, 2000, neither of the notes had been converted.

                                       47
<PAGE>

         In March of 1999,  the Company  received a total of $150,000 from three
investors  and  issued  promissory  notes  due in one year  with  principal  and
interest  paid  bimonthly at an interest rate of 10%. The notes could be used as
proceeds for the exercised options held by the investors.  During the year ended
March 31, 200, the note holders used the $150,000 and accrued interest of $2,500
as funds to  exercise  their  common  stock  options  for a total  aggregate  of
3,000,000 shares of the Company's common stock.

         In March and April of 1999,  the Company  entered into two  convertible
debentures for $100,000 and $50,000,  respectively. The debentures bear interest
at 10% with  principal and interest due on the first  anniversary of the date of
issuance.  The notes also call for any amount of the outstanding principal to be
converted into restricted  shares of the Company's common stock at the option of
the  lender at a  conversion  rate of $0.05 per  share.  As of March  2000,  one
investor  converted  the $50,000  note into  1,000,000  shares of the  Company's
common  stock.  As of March 31, 2000,  the  outstanding  balance of  convertible
debentures was 100,000, which the lender extended the due date to March 2001.

         On April 12, 1999, the Company  engaged three  consultants for a period
of one year each to provide  managerial and  strategic  planning  for  financial
matters and  expansion  of the  Company.  The  consultants  received  options to
purchase  an  aggregate  of  6,000,000  shares  of the  Company's  common  stock
exercisable  at $0.05 per share in exchange  for services to be rendered and the
options shall expire on April 11, 2000.  The options had an aggregate fair value
at date of grant of  approximately  $292,000.  These  options were  exercised in
April 1999, by the  forgiveness of $150,000 of notes payable,  executed in March
1999 and cash proceeds of $150,000.

     On May 25, 1999, the Company's board of directors  approved and the Company
issued to the Company's President, as a bonus, options to purchase 2,500,000 and
1,000,000  shares of the  Company's  common  stock at $0.05 and $0.10 per share,
respectively.  The  options  expire  on May 24,  2004.  Since  the  options  are
accounted for under APB 25 and the exercise  price is below market,  the Company
has expensed the  aggregate  intrinsic  value at date of grant of  approximately
$410,000.

     On May 25, 1999, the Company's board of directors  approved and the Company
issued to the  Company's  V.P. of Sales and  Marketing,  as a bonus,  options to
purchase  500,000 and 500,000 shares of the Company's  common stock at $0.05 and
$0.10 per share,  respectively.  The options  expire on May 24, 2004.  Since the
options are accounted  for under APB 25 and the exercise  price is below market,
the Company  has  expensed  the  aggregate  intrinsic  value at date of grant of
approximately $110,000.


                                       48
<PAGE>


         During the quarter ended  December 31, 1999,  Board of Directors of the
Company authorized the conversion of approximately $1,880,725 in related parties
payables  into one  year 7%  Convertible  Promissory  Notes  of  $1,071,225  and
$809,500 each,  both due on September 30, 2000. The terms of the new convertible
notes,  allow the Company to make partial  principal and interest  payments from
time to time and the holders of the convertible notes have the option to request
such payments of the indebtedness evidenced by the notes in either in the lawful
money of the United States or in an equivalent value consisting of the Company's
common stock, the number of shares, to determined by dividing the payment amount
by the average  twenty day bid price for the  Company's  common stock during the
twenty  trading days prior to the date of such payment  date.  Also,  during the
quarter  ended  December  31, 1999,  the related  party to which  $1,071,225  in
related  parties  payable  was  owed by the  Company,  transacted  a  change  in
ownership  its common  stock in which 100% of its  outstanding  shares of common
stock was sold to a non-related  party and at March 31, 2000, the balance of the
Convertible  Promissory note to the non-related party was $1,050,775 as a result
of the Company  recording  payments  toward note in March  1999,  by  offsetting
$20,450 in money owed to the Company by the non-related party.

         On June 9, 2000, the Company entered into three  consulting  agreements
that will  terminate  on May 31,  2001,  whereby the  consultants  will  provide
consulting service for the Company concerning management, marketing, consulting,
strategic planning,  corporate  organization and financial matters in connection
with the  operation of the  businesses  of the  Company,  expansion of services,
acquisitions  and business  opportunities.  The consultants  received options to
purchase a total of 7,300,000 of the Company's common stock exercisable at $.035
per share in exchange for  services to be rendered and the options  shall expire
on May 31, 2001. In June and July of 2000, the Company received $215,500 in cash
for the issuance of the 6,157,143  shares upon the exercise of these options and
the  remaining  options of 1,142,857  were  exercised  for  consulting  services
incurred and owed by the Company to one of the consultants  totaling $30,000 and
from the  cancellation of a obligation of $10,000 in principal and interest owed
to the same consultant.



                                       49
<PAGE>



ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits

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

Exhibit
Number            Description
--------          -----------
3.1    (4)     Certificate of Incorporation, as amended.

3.1.2  (1)     Certificate of Amendment to Certificate of  Incorporation  of
               Diamond  Entertainment  Corporation  filed  with the State of New
               Jersey State Treasurer on May 11, 2000

3.1.3  (1)     Certificate of Amendment to Certificate of  Incorporation  of
               Diamond  Entertainment  Corporation  filed  with the State of New
               Jersey State Treasurer on July 6, 2000.

3.2    (4)     By-laws, as amended.

4.1    (4)     Certificate for shares of Common Stock.

10.1  (3)(2)   Employment Agreement effective as of January 1, 1991 between the
               Company and James K.T. Lu, and Amendment No. 1 to Employment
               Agreement,  dated September 1, 1997

10.2  (3)(2)   Employment  Agreement  effective  as of August  16,  1991
               between the Company and Jeffrey I.  Schillen,  and Amendment No.1
               to Employment Agreement, dated September 1, 1997.

10.3   (5)     Agreement of Merger dated May 13, 1997, between BDC Acquisition
               Corp. and Beyond Design Corporation.

10.4   (6)     Consulting Agreement dated August 25, 1997 between the Company
               and Peter Benz.

10.5   (6)     Consulting Agreement dated August 25, 1997 between the Company
               and George Furla.

10.6   (6)     Consulting Agreement dated August 25, 1997 between the Company
               and Al Davis.

10.7  (2)(6)   Consulting Agreement dated August 25, 1997 between the Company
               and Murray T. Scott.

10.8   (6)     Consulting  Agreement dated August 25, 1997 among the Company
               and Bruce W. Barren and the EMCO/Hanover Group.


                                       50
<PAGE>


Exhibit
Number            Description
--------          -----------
10.9   (6)     Employment Agreements dated as of September 1, 1997, between the
               Company and various employees.

10.10  (3)     Standard  Sublease  Agreement,  dated as of July  30,  1998,
               between the Company and Shinho Electronics & Communication, Inc.,
               for executive offices on Carmenita Road, Cerritos, California.

10.11  (3)     Standard Industrial/Commercial  Multi-Tenant Lease Agreement,
               dated as of November 1, 1995,  between the Company and  Marquardt
               Associates, for offices on Marquardt Avenue, Cerritos, California

10.12  (3)     Office  Lease  Agreement  dated  October  31, 1997,  between  the
               Company and Freehold-Craig Road Partnership, for offices in
               Freehold, New Jersey.

10.13  (3)     Form of Sublease  Agreement  between the Company as sublessor and
               Vigor Sports, Inc. as subtenant, for offices on Marquardt Avenue,
               Cerritos, California.

10.14  (7)     10%  Callable  Convertible Note,  dated  March 22, 1999,  in  the
               principal amount of $50,000 issued to Mr. Lu.

10.15  (7)     10%  Callable  Convertible  Note,  dated  June  3, 1999,  in  the
               principal amount of $100,000 issued to Mr. Schillen.

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

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

10.18  (1)     Registration Rights Agreement, dated May 11, 2000 between the
               Company and Gerald  Holland  concerning the issuance and  sale of
               shares the Company's Series A Convertible Preferred Stock

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

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

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


                                       51
<PAGE>


Exhibit
Number            Description
--------          -----------
10.22  (1)     Registration Rights Agreement, dated May 11, 2000 between the
               Company and Michelle  Levite  concerning the issuance and sale of
               shares of the Company's Series A Convertible Preferred Stock.

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

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

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

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

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

10.28  (1)     2000 Stock Option Plan dated June 9, 2000

21.1   (1)     Subsidiaries of the Registrant.

27     (1)     Financial Data Schedule.

--------------
(1)  Filed herewith.

(2)  Indicates  a  management  contract  or  compensatory  plan  or  arrangement
     required to be filed.

(3)  Incorporated by reference as Registrant's  exhibits to the Annual Report on
     Form 10-KSB for the year ended March 31,  1998,  filed  December  24, 1998,
     File Number 0-17953.

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

(5)  Incorporated  by reference to the  Registrant's  Current Report on Form 8-K
     filed May 16, 1997, File No. 0-17953.

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

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


                                       52
<PAGE>


     (b) Reports on Form 8-K

         The Company  filed on January  24,  2000 a current  report on Form 8-K,
File No.  000-17953,  dated January 14, 2000,  which reported that the Company's
independent   public   accountants,   Moore   Stephens,   P.C.   terminated  its
client-auditor  relationship with the Registrant on January 14, 2000 and further
reported that on January 18, 2000,  the Company's  Board of Director's  approved
the  engagement  of  Merdinger,  Fruchter,  Rosen & Corso,  P.C. to serve as the
Company's  independent public accountants and to be the principal accountants to
conduct  the audit of the  Company's  financial  statements  for the fiscal year
ending March 31, 2000,  replacing the firm of Moore Stephens,  P.C. who had been
engaged to audit the Company's  financial  statements for the fiscal years ended
March 31, 1996, 1997, 1998, and 1999. The former accountant's  opinion contained
a  going  concern  disclaimer.  Management  of  the  Company  knows  of no  past
disagreements with the former accountants on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope.





                                       53
<PAGE>



               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                      PAGE
                                                                      -----

The following consolidated financial statements are included in Item 7:


INDEPENDENT AUDITORS' REPORT                                         F-2


CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000                      F-3 - F-4


CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
    MARCH 31, 2000 AND 1999                                          F-5


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY FOR THE
    YEARS ENDED MARCH 31, 2000 AND 1999                              F-6 - F-7


CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED
    MARCH 31, 2000 AND 1999                                          F-8 - F-10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                           F-11 - F-39






                                      F-1


<PAGE>



                          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, 2000 and the related
consolidated statements of operations,  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.

The consolidated  financial statements of Diamond Entertainment  Corporation and
Subsidiaries  as of March 31, 1999 were audited by other  auditors  whose report
dated June 16, 1999, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  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,  2000,  and the
consolidated  results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated  financial statements,  the Company's recurring losses and negative
cash  flow  from  operations,  as  well  as  a  working  capital  deficit  raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also discussed in Note 1. These  consolidated
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.



                                   MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
                                   Certified Public Accountants

Los Angeles, California
July 13, 2000

                                       F-2

<PAGE>


               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                 MARCH 31, 2000


        ASSETS
CURRENT ASSETS
  Accounts receivable, net of allowance for
    doubtful accounts of $137,750                                  $    421,196
  Inventories                                                         1,094,878
  Deferred consulting costs                                             255,013
  Prepaid expenses and other current assets                             116,456
                                                                  --------------
    Total current assets                                              1,887,543

FURNITURE AND EQUIPMENT, net                                            266,570
FILM MASTERS AND ARTWORK, less
  accumulated amortization of $3,813,596                                114,424
OTHER ASSETS
  Investment                                                             50,000
  Other assets                                                           60,982
                                                                    -----------
      TOTAL ASSETS                                                  $ 2,379,519
                                                                    ===========


                                       F-3

<PAGE>


               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET (continued)
                                 MARCH 31, 2000


        LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Book overdraft                                                  $      19,428
  Accounts payable and accrued expenses                               1,486,143
  Financing agreement payable                                           909,131
  Notes payable - current portion                                       125,762
  Related parties-notes and advances payable -
    current portion                                                   1,543,841
  Convertible debentures - current portion                            1,050,775
  Capital lease obligations - current portion                            28,742
                                                                  --------------
    Total current liabilities                                         5,163,822

LONG-TERM LIABILITIES
  Notes payable, less current portion                                    63,872
  Related parties-notes and advances payable - less
    current portion                                                     100,000
  Convertible debentures, less current portion                          100,000
  Capital lease obligations, less current portion                        17,912
                                                                  --------------
      TOTAL LIABILITIES                                               5,445,606

COMMITMENTS AND CONTINGENCIES (Note 12)                                       -

STOCKHOLDERS' DEFICIENCY
  Convertible preferred stock, no par value;
    5,000,000 shares authorized; 483,251 issued
    (of which 172,923 are held in treasury)                             376,593
  Common stock, no par value; 100,000,000 shares
    authorized; 62,334,049 issued and outstanding                    12,822,717
  Accumulated deficit                                               (16,216,594)
  Treasury stock                                                    (    48,803)
                                                                  --------------
    TOTAL STOCKHOLDERS' DEFICIENCY                                  ( 3,066,087)
                                                                  -------------
      TOTAL LIABILITIES AND STOCKHOLDERS'
          DEFICIENCY                                              $   2,379,519
                                                                  =============

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

                                       F-4

<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                       For the Year Ended
                                                              March 31,
                                                   ----------------------------
                                                        2000            1999
                                                   ------------   -------------
SALES-net                                         $   3,828,261   $   4,549,525

COST OF GOODS SOLD                                    3,437,976       3,020,405
                                                  -------------   -------------
GROSS PROFIT                                            390,285       1,529,120

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES          3,965,176       2,907,138
                                                  -------------   -------------
LOSS FROM OPERATIONS                               (  3,574,891)   (  1,378,018)
                                                  -------------   -------------

OTHER INCOME (EXPENSE)
  Interest expense                                 (    418,524)  (     477,637)
  Other income                                           14,316          48,262
  Valuation adjustment for investment                         -         138,773
                                                  -------------   -------------
    Total other income (expense)                   (    404,208)  (     290,602)
                                                  -------------   -------------

LOSS BEFORE INCOME TAXES                           (  3,979,099)   (  1,668,620)

INCOME TAXES                                                  -               -
                                                  -------------   -------------

NET LOSS FROM CONTINUING OPERATIONS                (  3,979,099)   (  1,668,620)

EXTRAORDINARY INCOME - Forgiveness of debt,
  net of tax effect of $0                                     -          65,968
                                                  -------------   -------------
NET LOSS                                          $(  3,979,099)  $(  1,602,652)
                                                  =============   =============

LOSS PER SHARE, basic and diluted
  CONTINUING OPERATIONS                           $(       0.07)  $(       0.05)
  EXTRAORDINARY INCOME                                        -               -
                                                  -------------   -------------
  NET LOSS                                        $(       0.07)  $(       0.05)
                                                  =============   =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted                       59,375,234       34,392,178
                                                  =============   =============

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

                                       F-5
<PAGE>
<TABLE>
<CAPTION>
                                    DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
                                       FOR THE YEARS ENDED MARCH 31, 2000 AND 1999


                                                           Convertible
                                                          Preferred Stock              Common Stock        Additional
                                                       --------------------     ------------------------    Paid-in
                                                       Shares       Amount        Shares       Amount       Capital
                                                       -------    ---------     ----------  ------------  -------------
<S>                                                    <C>        <C>           <C>         <C>           <C>
Balance at March 31, 1998                              483,251    $ 376,593     28,753,250  $ 10,417,647  $(  1,210,231)

   Convertible principal debt converted June 1998            -            -      2,823,077        91,750              -
   Convertible principal debt and interest converted
     February 1999                                           -            -     11,018,179       903,076              -
   Options issued to consultants in January and
     February 1999                                           -            -              -             -         33,000
   Consulting expense                                        -            -              -             -              -
   Options issued for guarantee of debt                      -            -              -             -         10,000
   Options issued for fulfillment of order                   -            -              -             -          5,000
   Consulting expense - February 1999 for change in
     Exercise price                                          -            -              -             -          6,000
   Exercise of options and warrants                          -            -      6,500,000       355,000              -
   Settlement agreement                                      -            -      1,499,523        30,000              -
   Shares issued in lieu of commission                       -            -         25,000         4,500              -
   Net loss                                                  -            -              -             -              -
                                                       -------    ---------     ----------  ------------  -------------

Balance at March 31, 1999                              483,251      376,593     50,619,029    11,801,973   (  1,156,231)
    Correction of error                                      -            -              -       111,200              -
                                                       -------    ---------     ----------  ------------  -------------

Balance at March 31, 1999 - corrected                  483,251      376,593     50,619,029    11,913,173   (  1,156,231)
   Elimination of additional paid-in capital                 -            -              -   ( 1,156,231)     1,156,231
   Consulting expense                                        -            -              -             -              -
   Interest for convertible debentures                       -            -              -       184,400              -

   Exercise of common stock options:

     Cash                                                    -            -      4,000,000       200,000              -
     Settlement of debt and interest                         -            -      7,225,000       376,875              -
     Settlement of accounts payable                          -            -        490,000        24,500              -
   Options issued for consulting services                    -            -              -       660,000              -
   Options issued for officers compensation                  -            -              -       620,000              -
   Net loss                                                  -            -              -             -              -
                                                       -------    ---------     ----------  ------------  -------------
Balance at March 31, 2000                              483,251    $ 376,593     62,334,029  $ 12,822,717  $           -
                                                       =======    =========     ==========  ============  =============
</TABLE>


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

                                                          F-6

<PAGE>
<TABLE>
<CAPTION>
                                    DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (continued)
                                       FOR THE YEARS ENDED MARCH 31, 2000 AND 1999

                                                                        Treasury
                                                                          Stock                          Total
                                                        Accumulated     Preferred       Deferred     Stockholders'
                                                          Deficit        At Cost         Costs        Deficiency
                                                        ------------   ------------   ------------   ------------
<S>                                                     <C>            <C>            <C>            <C>
Balance at March 31, 1998                               $(10,634,843)  $  (  48,803)  $(   94,180)   $(1,193,817)

   Convertible principal debt converted June 1998                  -              -             -         91,750
   Convertible principal debt and interest converted
     February 1999                                                 -              -             -        903,076
   Options issued to consultants in January and
     February 1999                                                 -              -    (   33,000)             -
   Consulting expense                                              -              -        79,000         79,000
   Options issued for guarantee of debt                            -              -             -         10,000
   Options issued for fulfillment of order                         -              -             -          5,000
   Consulting expense - February 1999 for change in
     Exercise price                                                -              -             -          6,000
   Exercise of options and warrants                                -              -             -        355,000
   Settlement agreement                                            -              -             -         30,000
   Shares issued in lieu of commission                             -              -             -          4,500
   Net loss                                              ( 1,602,652)             -             -     (1,602,652)
                                                        ------------   ------------   ------------   ------------


Balance at March 31, 1999                                (12,237,495)   (    48,803)  $     48,180)   (1,312,143)
    Correction of error                                            -              -             -        111,200
                                                        ------------   ------------   ------------   ------------

Balance at March 31, 1999 - corrected                    (12,237,495)   (    48,803)     (  48,180)   (1,200,943)
   Elimination of additional paid-in capital                       -              -             -              -
   Consulting expense                                              -              -         48,180        48,180
   Interest for convertible debentures                             -              -             -        184,400

   Exercise of common stock options:

     Cash                                                          -              -             -        200,000
     Settlement of debt and interest                               -              -             -        376,875
     Settlement of accounts payable                                -              -             -         24,500
   Options issued for consulting services                          -              -             -        660,000
   Options issued for officers compensation                        -              -             -        620,000
   Net loss                                              ( 3,979,099)             -             -     (3,979,099)
                                                        ------------   ------------   ------------   ------------

Balance at March 31, 2000                               $(16,216,594)  $ (   48,803)  $         -    $(3,066,087)
                                                        ============   =============  ============   ============
</TABLE>

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

                                                          F-7

<PAGE>
<TABLE>
<CAPTION>
               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                  For the Year Ended
                                                                       March  31,
                                                               --------------------------
                                                                   2000          1999
                                                               -----------   ------------
<S>                                                            <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                     $(3,979,099)  $ (1,602,652)
    Adjustments to reconcile net income (loss) to net cash
      provided by (used in) operating activities
      Depreciation and amortization                                279,038        502,270
      Provision for doubtful accounts                           (   51,205)       307,013
      Inventory reserve                                            176,386        500,000
      Reduction of exercise price to consultants                         -          6,000
      Issuance of stock as compensation and other fees                   -         15,000
      Issuance of stock options as compensation and other fees   1,024,987              -
      Valuation adjustment of investment                                 -     (  138,773)
      Changes in assets and liabilities
      (Increase) decrease
       Accounts receivable                                         423,055         81,449
       Inventories                                                 891,177      1,121,231
       Deferred consulting costs                                    66,425              -
       Prepaid expenses and other current assets                   281,786         20,173
       Other assets                                                216,401          7,547
       Accounts receivable - related party                               -         29,684
      Increase (decrease)
       Accounts payable and accrued expenses                       199,368     (1,720,779)
       Accrued interest                                             29,997              -
                                                               -----------   ------------
Net cash used in operating activities                           (  441,684)    (  871,837)
                                                               -----------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Repayments by ATRE                                                     -        588,773
  Purchase of property and equipment                            (   18,506)    (  109,558)
  Purchase of masters and artwork                               (   66,420)    (   72,073)
  Loans receivable                                                       -         30,701
                                                               -----------   ------------

Net cash provided by (used in) investing activities            $(   84,926)  $    437,843
                                                               -----------   ------------
</TABLE>

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

                                       F-8
<PAGE>
<TABLE>
<CAPTION>
               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

                                                                  For the Year Ended
                                                                       March  31,
                                                               --------------------------
                                                                   2000          1999
                                                               -----------   ------------
<S>                                                            <C>           <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Increase (decrease) in book overdraft                        $(  133,549)  $    152,977
  Net repayments of financing agreement                         (  224,076)             -
  Proceeds from notes payable                                       35,000      6,938,954
  Payments of notes payable                                     (  191,570)    (7,208,630)
  Proceeds from notes payable related party                        784,341              -
  Payments of notes payable related party                                -     (   50,000
  Proceeds from convertible debentures                              50,000        300,000
  Payment of convertible debentures                             (   16,370)             -
  Payments on capital leases                                    (   25,240)    (   11,763)
  Proceeds from the exercise of options                            200,000        355,000
                                                               -----------   ------------
Net cash provided by financing activities                          478,536        476,538
                                                               -----------   ------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                         (   48,074)        42,544

CASH AND CASH EQUIVALENTS -
   BEGINNING OF YEAR                                                48,074          5,530
                                                               -----------   ------------

CASH AND CASH EQUIVALENTS - END OF YEAR                        $         -   $     48,074
                                                               ===========   ============

SUPPLEMENTAL INFORMATION:
    Interest paid                                              $   237,000   $    300,000
                                                               ===========   ============
    Income taxes paid                                          $         -   $          -
                                                               ===========   ============
</TABLE>

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

                                       F-9

<PAGE>


                DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

In 1998,  the Company  recorded  $75,000 in deferred costs for the fair value of
shares  granted to officers of the Company for deferral of 90% of their salaries
in 1998 and amortized $25,000 and $50,000 for the years ended March 31, 1999 and
1998.

In February of 1999, the Company negotiated a $175,000 extension payment whereby
the Company  amortized  $155,000 and $20,000 as financing  expense for the years
ended March 31, 2000 and 1999.

During Fiscal 1998, the Company  granted  warrants in connection with consulting
agreements  and  recorded  $100,000 in deferred  consulting  costs and  expensed
$19,180 and $50,000 for the years ended March 31, 2000 and 1999.

In July and August of 1998, the Company  granted  options to the Chief Executive
Officer for 6,000,000 shares of common stock  exercisable at $0.10 per share and
recorded non-cash compensation expense of $15,000.

During fiscal 1999,  $994,826 in  convertible  debentures  were  converted  into
13,841,256 shares of common stock.

During fiscal 1999, the Company granted  options for 4,950,000  shares of common
stock in  connection  with four  consulting  agreements  executed  in the fourth
quarter of fiscal 1999 and recorded $33,000 in deferred consulting costs whereby
$29,000 and $4,000 was expensed in the years ended March 31, 2000 and 1999.

During  fiscal  1999,  there were  retirements  of film  masters and artwork for
approximately  $70,686.  In addition in fiscal 1999, the Company retired an auto
with a book value of approximately $22,000.

During the year ended March 31, 1999,  the Company  entered  into capital  lease
agreements for equipment totaling approximately $70,000.

During fiscal 2000,  $994,826 of notes payable and accrued  interest and $24,500
of accounts  payable were converted  into  7,225,000 and 490,000,  respectively,
shares of the Company's  common stock.  Also,  the Company  granted  options for
14,465,000  shares of its common stock in connection with consulting  agreements
and  officer  compensation.  The  options  were  valued at  $1,280,000  of which
$1,024,987  was  expensed  and the  remainder of $255,013 was deferred and to be
expensed in fiscal 2001.

During  fiscal  2000,  $1,860,275  of  accounts  payable to related  parties was
converted into two separate  convertible  debentures for i) $1,050,775 issued to
an unrelated third party, and ii) $809,500 issued to a related party.  Also, the
Company entered into a legal settlement for the termination of its office lease.
The settlement  agreement was for the Company's issuance of a $72,000 promissory
note payable at 12 monthly payments of $6,600 with interest at 10%.

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

                                      F-10
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Nature of Business
          ------------------
          The  Company  is  in  the   business  of   distributing   and  selling
          videocassettes,  general merchandise,  patented toys,  furniture,  and
          Cine-Chrome   gift  cards,   through  normal   distribution   channels
          throughout the United States and through a web site. At March 31, 2000
          and 1999,  the Company's  management  evaluated its  operations by two
          separate  product lines to assess  performance  and the  allocation of
          resources.  These product lines have been  reflected as two reportable
          segments,  video  products  and  general  merchandise,   described  as
          follows:

          Video Programs and Other Licensed  Products - The Company  distributes
          and  sells  videocassette   titles  including  certain  public  domain
          programs and certain licensed programs.  The Company markets its video
          programs to  national  and  regional  mass  merchandisers,  department
          stores,  drug stores,  supermarkets  and other similar retail outlets.
          Also, in September of 1998,  the Company  entered into a  distribution
          agreement  for a new  product  called  Cine-Chrome  utilizing  classic
          images of licensed properties.

          General   Merchandise   -  The  Company,   through  its  wholly  owned
          subsidiary, Jewel Products International,  Inc. ("JPI"), purchases and
          distributes  toy  products to mass  merchandisers  in the U.S.,  which
          commenced  in fiscal  1999.  The Company  offers the toy  products for
          limited  sales  periods and as demand for products  change the Company
          switches to newer and more popular products.

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

          Basis of Presentation
          ---------------------
          As reflected in the accompanying  consolidated  financial  statements,
          the Company has had recurring  losses from  operations,  negative cash
          flow from  operations,  its  current  liabilities  exceed its  current
          assets and the Company is  delinquent  in payment of certain  accounts
          payable.  These  matters raise  substantial  doubt about the Company's
          ability to continue as a going concern.

                                      F-11
<PAGE>


               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Basis of Presentation (Continued)
          ---------------------
          In  view  of  the  matters  described  in  the  preceding   paragraph,
          recoverability  of a major portion of the recorded asset amounts shown
          in the  accompanying  consolidated  balance  sheet is  dependent  upon
          continued operations of the Company, which, in turn, is dependent upon
          the  Company's  ability to  continue  to raise  capital  and  generate
          positive  cash  flows  from  operations.  The  consolidated  financial
          statements   do  not   include   any   adjustments   relating  to  the
          recoverability and classification of recorded asset amounts or amounts
          and  classifications of liabilities that might be necessary should the
          Company be unable to continue its existence.

          Management  plans to take, or has taken,  the following  steps that it
          believes will be sufficient to provide the Company with the ability to
          continue in existence:

          o    The  Company is seeking to secure a line of credit.  The  Company
               will require  $500,000 to expand the Company's  product line (DVD
               products) and in turn increase  sales;  any amounts over $500,000
               will be used  to pay  down  related  parties-notes  and  advances
               payable.

          o    Extended the maturity date for a $100,000  convertible  debenture
               and $150,000 of related  parties-convertible  debentures in order
               to reduce the Company's cash requirements.

          o    Convert to common stock $1,051,000 of convertible  debentures and
               $810,000 of related  parties-convertible  debentures  in order to
               reduce the Company's cash requirements.

          o    Convert  approximately 50% of the Company's video products to DVD
               format  in  order  to  keep  current  with  existing  demand  and
               technology.  The new products are  estimated to increase  overall
               sales by  approximately  18%, which will add to the overall gross
               profit margin approximately 13%.

          o    Reduce  operating  expense to the lowest level  possible,  as the
               Company has  relocated  its office and  warehouse  facilities  in
               order to reduce annual rent expense by approximately $250,000.

          o    Evaluate the lowest level of employee requirements to operate the
               Company  effectively,  as the  Company  has  reduced  its  annual
               payroll and payroll related expenses by approximately $350,000.

                                      F-12
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

          Fair Value of Financial Instruments
          -----------------------------------
          For certain of the Company's financial instruments, including accounts
          receivable,  book 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.

          Cash and Cash Equivalents
          -------------------------
          Cash  equivalents  are comprised of certain highly liquid  investments
          with  maturities of three months or less when  purchased.  The Company
          has no 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 its normal business  activities.  The
          Company  routinely  assesses the  financial  strength of its customers
          and, based upon factors  surrounding  the credit risk,  establishes an
          allowance for uncollectible  accounts and, as a consequence,  believes
          that  its  accounts   receivable  credit  risk  exposure  beyond  such
          allowance  is limited.  The Company  places its cash 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,  2000,
          with  financial  institutions  subject  to a credit  risk  beyond  the
          insured amount.

          Inventories
          -----------
          Inventories are stated at the lower of FIFO (first-in, first-out) cost
          or  market,  and  consist  of  videocassettes,   general  merchandise,
          patented toys, furniture, and Cine-Chrome gift cards.

                                      F-13
<PAGE>


               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Furniture and Equipment
          -----------------------
          Furniture  and  equipment  are  presented  at  historical   cost  less
          accumulated   depreciation.    Depreciation   is   computed   by   the
          straight-line method for all furniture, fixtures, and equipment over 5
          years,  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  videocassettes that are sold to customers.
          The Company periodically analyzes the estimates of future revenues for
          each  master  and, if  necessary,  a revision is made to  amortization
          rates and a write down to net realizable value may occur. The net film
          masters  and  artwork are  presented  on the balance  sheet at the net
          realizable value for each master.

          Impairment of Long-Lived Assets
          -------------------------------
          In accordance with Statement of Financial Accounting Standard ("SFAS")
          No. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
          Long-Lived Assets to Be Disposed Of", long-lived assets to be held and
          used are  analyzed  for  impairment  whenever  events  or  changes  in
          circumstances  indicate that the related  carrying  amounts may not be
          recoverable.  The Company evaluates at each balance sheet date whether
          events  and   circumstances   have  occurred  that  indicate  possible
          impairment.  If there are indications of impairment,  the Company uses
          future  undiscounted cash flows of the related asset or asset grouping
          over  the  remaining   life  in  measuring   whether  the  assets  are
          recoverable.  In the event  such cash  flows  are not  expected  to be
          sufficient  to  recover  the  recorded  asset  values,  the assets are
          written down to their  estimated fair value.  Long-lived  assets to be
          disposed of are reported at the lower of carrying amount or fair value
          of asset less cost to sell.

          Revenue Recognition
          -------------------
          The Company  records  sales when products are shipped to customers and
          are shown net of estimated returns and allowances.

          Advertising Costs
          -----------------
          Advertising  costs are  expensed as incurred.  Advertising  costs were
          approximately  $44,500 and $54,700 for the years ended March 31, 2000,
          and 1999, respectively.

                                      F-14
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Stock Based Compensation
          ------------------------
          The Company  accounts for employee  stock options in  accordance  with
          Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
          Stock  Issued to  Employees".  Under APB 25,  the  Company  recognizes
          compensation  expense  related to options  issued under the  Company's
          employee  stock option  plan,  if options are granted at a price below
          market price on the date of grant.

          In 1996,  SFAS No.  123  "Accounting  for  Stock-Based  Compensation",
          became  effective for the Company.  SFAS No. 123, which prescribes the
          recognition of compensation expense based on the fair value of options
          on the grant date,  allows  companies  to continue  applying APB 25 if
          certain pro forma  disclosures  are made  assuming  hypothetical  fair
          value   method,   for  which  the  Company   uses  the   Black-Scholes
          option-pricing model.

          For non-employee  stock based  compensation the Company  recognizes an
          expense in  accordance  SFAS No. 123 and values the equity  securities
          based on the fair  value of the  security  on the date of  grant.  For
          stock-based  awards  the  value is based on the  market  value for the
          stock on the date of grant  and if the stock  has  restrictions  as to
          transferability a discount is provided for lack of tradability.  Stock
          option awards are valued using the Black-Scholes option-pricing model.

          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
          --------------------
          SFAS No. 130, "Reporting  Comprehensive  Income" establishes standards
          for  the  reporting  and  display  of  comprehensive  income  and  its
          components in the financial statements. As of March 31, 2000 and 1999,
          the  Company  has no items that  represent  comprehensive  income and,
          therefore,  has not included a schedule of comprehensive income in the
          accompanying consolidated financial statements.


                                      F-15
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Net Loss Per Share
          ------------------
          The Company uses SFAS No. 128,  "Earnings  Per Share" for  calculating
          the basic and diluted loss per share. Basic loss per share is computed
          by  dividing  net loss  attributable  to  common  stockholders  by the
          weighted average number of common shares outstanding. Diluted loss per
          share is  computed  similar  to basic loss per share  except  that the
          denominator  is increased to include the number of  additional  common
          shares that would have been outstanding if the potential common shares
          had been issued and if the additional common shares were dilutive.  At
          March  31,  2000  and  1999,   the  weighted   average  common  shares
          outstanding  would have been  increased by 19,004,000  and  14,004,000
          shares if the issued and  exercisable  stock  options  would have been
          dilutive.

          Impact of Year 2000 Issue
          -------------------------
          During  the year  ended  March 31,  2000,  the  Company  conducted  an
          assessment of issues related to the Year 2000 and  determined  that it
          was  necessary to modify or replace  portions of its software in order
          to ensure that its computer systems will properly utilize dates beyond
          December  31,   1999.   The  Company   completed   Year  2000  systems
          modifications  and  conversions  during the year ended March 31, 2000.
          Costs  associated with becoming Year 2000 compliant were not material.
          At this time, the Company  cannot  determine the impact that Year 2000
          issue will have on its key  customers or  suppliers.  If the Company's
          customers or suppliers don't convert their systems to become Year 2000
          compliant,  the  Company  may be  adversely  impacted.  The Company is
          addressing these risks in order to reduce the impact on the Company.

NOTE 2 - CORRECTION OF ERROR

          In March 1999, the Company issued a convertible debenture for $100,000
          to an unrelated third party and a $50,000 convertible debenture to the
          Company's  president.   Since  the  debentures  are  convertible  into
          restricted  shares of the  Company's  common stock at a rate below the
          current  market of the Company's  common stock on the date of issuance
          of the  debentures,  the  first  20% of the below  market  amount  was
          attributed to the lack of tradability of the shares due to restriction
          on sale and the remainder was attributed to additional  interest.  The
          additional  amount  of  interest  was  calculated  to be  $73,600  and
          $37,600, respectively,  which is to be expensed over the one-year life
          of the  debentures.  The  Company  did not  record  the effect of this
          matter  on its  1999  financial  statements.  The  effect  on the 1999
          financial  statements  would have been a $111,200  increase  in common
          stock and a  corresponding  increase  in  prepaid  expenses  and other
          current  assets as of March 31, 1999 and no effect on the statement of
          operations  for the year  ended  March  31,  1999.  The  $111,200  was
          expensed during the year ended March 31, 2000.


                                      F-16
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 3 - ACCOUNTS RECEIVABLE

          Accounts  receivable  at March 31, 2000 net of allowance  for doubtful
          accounts  were  approximately  $420,000.   Substantially  all  of  the
          accounts  receivable at March 31, 2000 have been pledged as collateral
          for the Company's financing agreement (see Note 8).

NOTE 4 - INVENTORIES

          Inventories consisted of the following as of March 31, 2000:

                  Raw materials                   $   525,209
                  Finished goods                    1,246,055
                                                  -----------
                                                    1,771,264
                  Less: valuation allowance           676,386
                                                  -----------
                  Inventories, net                $ 1,094,878
                                                  ===========

          Allowance
          ---------
          An allowance has been established for the inventories of approximately
          $676,000.  This reserve is primarily for the anticipated reductions in
          selling prices (which are lower than the carrying value) for inventory
          which has been (a) restricted to specified distribution territories as
          a result  of legal  settlements  and (b) a rise in  certain  inventory
          which may have passed the peak selling season.


NOTE 5 -  FURNITURE AND EQUIPMENT

          Furniture  and  equipment  consisted of the  following as of March 31,
          2000:

                  Furniture and equipment                    $    1,079,941
                  Automobile                                         24,487
                  Leasehold improvements                             40,174
                                                             --------------
                                                                  1,144,602
                  Less:  accumulated depreciation and
                     amortization                                   878,032
                                                             --------------
                  Furniture and equipment, net               $      266,570
                                                             ==============

          Depreciation  expense  for the years ended March 31, 2000 and 1999 was
          approximately $89,000 and $107,000, respectively.


                                      F-17
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 6 -  RELATED PARTIES RECEIVABLES

          At March 31, 1998, the Company was owed approximately $69,000 from the
          President of the Company for advances and loans.  Simple  interest was
          accrued monthly at an annual rate of 10% on the  outstanding  balance.
          For the years  ended March 31,  1999 and 1998,  the  Company  recorded
          interest income of $1,170 and $6,607,  respectively.  This loan amount
          was due in December  2001.  On March 15, 1999,  the unpaid  balance of
          approximately  $69,000  was  forgiven  by the Company and treated as a
          financing cost on the statement of operations in consideration for the
          President's  1998 and 1999  personal  guarantees  for two  leases  and
          promissory notes.

NOTE 7 - INVESTMENT IN AMERICAN TOP REAL ESTATE ("ATRE")

          The Company paid $50,000 for 50% of the issued and outstanding  common
          stock of ATRE.  Since the  Company  does not have  greater  than a 50%
          investment, this  investment is accounted for using the equity method.
          The  operations of ATRE are not  considered to be  significant  to the
          Company's operations; therefore the Company has not included a summary
          of ATRE's assets and liabilities.  Also, the March 31, 2000 investment
          of $50,000  approximates  the Company's 50% interest in the net assets
          of ATRE as of March 31, 2000.

          The Company received  approximately $600,000 from ATRE during the year
          ended March 31, 1999.

NOTE 8 -  FINANCING AGREEMENT PAYABLE

          The Company has a financing agreement for a maximum borrowing of up to
          $2,500,000.  Substantially all assets of the Company have been pledged
          as collateral for the borrowings.  The agreement calls for a factoring
          of the Company's accounts receivable,  and an asset-based note related
          to the  Company's  inventories.  The  cost of funds  for the  accounts
          receivable  portion of the  borrowings is a 1.5%  discounted  from the
          stated pledged amount of each invoice for every 30 days the invoice is
          outstanding.  The asset-based  portion of the borrowings is determined
          by the lesser of i)  $800,000,  ii) 25% of the  clients  finished  toy
          inventory or iii) 55% of the clients finished videotape inventory. The
          cost of funds for the inventory  portion of the  borrowings is at 2.0%
          per month on the highest outstanding balance each month. The agreement
          stipulates  an $8,000 per week payment  against the  asset-based  note
          payable,  with final  payment  in  November  2000.  The  Company  paid
          interest of $110,000  and  $340,000 for the years ended March 31, 2000
          and 1999,  respectively.  The  financing  agreement  consisted  of the
          following as of March 31, 2000:

                  Factor payable                              $  358,111
                  Note payable - inventory                       551,020
                                                              ----------
                                                              $  909,131

                                      F-18
<PAGE>
               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 9 - NOTES PAYABLE

          The Company has a vehicle financing agreement with monthly payments of
          $562 for principal and interest at 9.75% per annum, due in March 2001.
          The balance as of March 31, 2000 was $12,214.

          Note payable at 16% annual  interest with twelve monthly  installments
          of principal of $2,292.  This note is  guaranteed  by the President of
          the Company and is  subordinated to the financing  agreement  payable.
          Since  the Company did not pay-off the note on the scheduled  maturity
          date,  the lender has  extended  the  maturity  date and  assessed  an
          additional  interest  charge  of 20% per  annum as an  penalty  on the
          unpaid  balance each month.  At March 31, 2000, the balance is $27,500
          and matures in May 2001.

          In March 2000, the Company  entered into a legal  settlement  with its
          prior  landlords for unpaid rent. The Company agreed to a note payable
          for $72,000 at 10% interest payable in twelve monthly  installments of
          principal  and interest of $6,600.  At March 31, 2000,  the balance of
          $72,000 is due and payable March 2001.

          As of March 31,  2000,  the Company had various  payables  aggregating
          $77,920, due on demand.

          Scheduled annual maturities of these obligations at March 31, 2000 are
          as follows:
                  Year
                  2001                                       $125,762
                  2002                                         63,872
                                                             --------
                                                             $189,634
                                                             ========
NOTE 10 - RELATED PARTIES-NOTES AND ADVANCES PAYABLE

          Convertible Debentures
          ----------------------
          In March and June  1999,  the  Company  entered  into two  convertible
          debentures for $50,000 and $100,000, respectively. The debentures bear
          interest at 10% per year with  principal and interest due on the first
          anniversary  of the date of issuance.  Each note has been extended for
          an  additional  year.  The  notes  also  call  for any  amount  of the
          outstanding  principal to be converted into  restricted  shares of the
          Company's  common  stock at the option of the lender's at a conversion
          rate of  $0.05  per  share.  As of  March  31,  2000,  neither  of the
          debentures were converted.  Since the debentures are convertible  into
          restricted  shares  of the  Company's  common  stock  at a rate  below
          market, the first 20% of the below market amount was attributed to the
          lack of  tradability  of the shares due to restriction on sale and the
          remainder was attributed to additional interest. The additional amount
          of interest for the years ended March 31, 2000 and 1999 was calculated
          to be $167,200 and $37,600,  respectively,  of which $176,933 has been
          expensed in 2000,  and the  remainder of $27,867 has been  capitalized
          and is  being  expensed  pro  rata  over  the  remaining  life  of the
          debentures (see Note 2 - Correction of Error).

                                      F-19
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 10 -  NOTES PAYABLE RELATED PARTY

          Convertible Debentures (Continued)
          ----------------------
          Also,  at March 31,  1999,  the Company had  $809,500 due to a related
          party for payment of trade payables.  In October 1999, the outstanding
          balance was converted into a convertible debenture at 7% per annum due
          and  payable on or before  September  30,  2000.  At the option of the
          lender  all or part of the  balance  can be paid  with  shares  of the
          Company's common stock. The number of shares is determined by dividing
          the principal  being  converted by the average  twenty-day  bid price,
          prior to the date of such payment  request,  for the Company's  common
          stock. As of March 31, 2000, the outstanding balance was $809,500.

          Note Payable
          ------------
          As of March 31, 2000,  the Company has a $90,000 note payable,  due to
          an officer, at 10% due on demand.

          Advances Payable
          ----------------
          At March 31, 2000,  the Company has the following  liabilities,  which
          are non-interest  bearing and due on demand:  $478,900 due to ATRE and
          $115,441 due to an officer.

          Interest Expense
          ----------------
          For the years  ended March 31,  2000 and 1999,  the  Company  incurred
          interest  expense of $62,368  and $0,  respectively,  for these  notes
          payable to related parties.

NOTE 11 - CONVERTIBLE DEBENTURES

          On November 2, 1998, convertible debentures with a balance of $831,436
          were  reinvested  into a new note for $921,851 for a new two year term
          expiring  October  31, 2000  bearing  interest of 10% per annum and an
          extension bonus of $175,000,  due November 1999,  which bears interest
          at 2.5% per annum payable $50,000 per month after payment of all prior
          interest and the  restructured  note.  The repayment term was a weekly
          amount of $6,250 in 1998 and  $12,500 in the years  1999 and 2000.  In
          addition,  there was an acceleration  clause of repayments for certain
          events and a 5% late  charge for any  delinquent  payments.  The notes
          contain an option to convert the principal  and interest  balance into
          common stock of the Company subject to certain  pricing  calculations.
          Collateral  security  included  all assets of the Company and personal
          collection  guarantee  as  additional  security  to the  holder  after
          subordination  to the  primary  lender.

                                      F-20
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 11 - CONVERTIBLE DEBENTURES (Continued)

          In February of 1999,  $640,000 of the  debentures  was converted  into
          8,000,000  shares of common stock.  On February 10, 1999,  the Company
          converted the remaining  note balance of $172,661 and unpaid  interest
          of $90,415 into 3,018,254  shares of common stock.  It was also agreed
          that the $175,000  extension  bonus,  which was recorded as a deferred
          financing cost in February of 1999,  could be converted into shares of
          common stock at an agreed exercise price subject to market conditions.
          The Company amortized $155,000 and $20,000 of the extension bonus as a
          financing  expense  during the years  ended  March 31,  2000 and 1999,
          respectively.  During  the year ended  March 31,  2000,  the  $175,000
          extension  bonus and accrued  interest of $13,125 was  converted  into
          3,500,000 shares of the Company's common stock

          In March of 1999, the Company  received a total of $150,000 from three
          investors and issued  promissory  notes due in one year with principal
          and interest  payable  bimonthly at an interest rate of 10%. The notes
          could  be  used as  proceeds  for the  exercised  options  held by the
          investors. During the year ended March 31, 2000, the note holders used
          the $150,000 and accrued interest of $2,500 as funds to exercise their
          common stock options for a total aggregate of 3,000,000  shares of the
          Company's common stock.

          In March and  April of 1999,  the  Company  entered  into  convertible
          debentures for $100,000 and $50,000, respectively. The debentures bear
          interest  at  10%  with  principal  and  interest  due  on  the  first
          anniversary  of the date of  issuance.  The  notes  also  call for any
          amount of the  outstanding  principal to be converted into  restricted
          shares of the Company's  common stock at the option of the lender at a
          conversion  rate of $0.05 per share.  As of March 2000,  one  investor
          converted  the $50,000  note into  1,000,000  shares of the  Company's
          common  stock.  As of March  31,  2000,  the  outstanding  balance  of
          convertible debentures was $100,000, which the lender extended the due
          date  to  March  2001.  Since  the  debentures  are  convertible  into
          restricted  shares  of the  Company's  common  stock  at a rate  below
          market, the first 20% of the below market amount was attributed to the
          lack of  tradability  of the shares due to restriction on sale and the
          remainder was attributed to additional interest. The additional amount
          of interest was  calculated to be $91,100,  which has been expensed in
          2000 (see Note 2 - Correction of Error).

          For the year ended March 31, 1999, the Company  amortized $84,587 as a
          non-cash  financing  cost, for the  convertible  debentures,  which is
          classified as interest  expense.  The convertible notes are secured by
          the Company's  entitlement  to any net cash proceeds  derived from its
          interest in ATRE property.

                                      F-21
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 11 - CONVERTIBLE DEBENTURES (Continued)

          At March 31, 1999,  the Company had  $1,118,425 due to a related party
          for payment of trade payables.  In October 1999, the Company ceased to
          have a  relationship  with the party,  so the  outstanding  balance of
          $1,050,775 was converted into a convertible  debenture.  The debenture
          bears  interest at 10% with  principal  and  interest due on the first
          anniversary  of the date of issuance.  At the option of the holder all
          or part of the balance can be paid with shares of the Company's common
          stock.  The number of shares is  determined  by dividing the principal
          being converted by the average twenty-day bid price, prior to the date
          of such payment  request,  for the Company's common stock. As of March
          31,  2000,  the  outstanding  balance was  $1,050,775.

NOTE 12 - COMMITMENTS AND CONTIGENCIES

          Royalty Commitments
          -------------------
          The Company has entered into various royalty  agreements for licensing
          of titles with terms of one to seven years. Certain agreements include
          minimum  guaranteed  payments.  For the years ended March 31, 2000 and
          1999, royalty expense was $103,841 and $73,356, 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.

          Employment Agreements
          ---------------------
          In 1991, two employment  agreements were executed for two officers for
          annual compensation  totaling $240,000.  These agreements terminate in
          the  year  2001  and are  adjusted  annually  in  accordance  with the
          Consumer Price Index.  The Board of Directors agreed on April 23, 1996
          to reserve  1,000,000  shares of common stock for  distribution to two
          officers of the  Company.  The  officers at current  market  prices in
          installment  payments with a five-year  promissory  note with interest
          can purchase  the common stock at 6% per annum.  As of March 31, 2000,
          the officers did not purchase these shares.


                                      F-22
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 12 - COMMITMENTS AND CONTIGENCIES
          Employment Agreements (Continued)
          ---------------------
          In  September  1997,  the two  officers  agreed  to defer 90% of their
          salaries  until  further  notice,  but not beyond March 31,  1998.  As
          consideration,  the  Company  granted a total of  3,750,000  shares of
          common  stock  and  warrants  to  purchase  3,750,000  shares  of  the
          Company's  common  stock at an exercise  price of $.10 per share.  The
          common shares  granted vested during fiscal 1997 and the warrants were
          exercisable  until  March  31,  1999.  In March of 1999,  the  Company
          extended the term until August 24, 2002. The Company  recorded $75,000
          in  deferred  costs  for the fair  value  of the  shares  granted  and
          amortized  $25,000  and  $50,000 in the years ended March 31, 1999 and
          1998,  respectively.  No deferred costs were recorded for the warrants
          granted,  as the fair market value of the underlying common shares was
          approximately  equal to the exercise  price.  These  warrants were not
          exercised.

          In September 1997, the Company entered into employment agreements with
          nine employees  holding key positions.  The agreements  provide for an
          aggregate  of  550,000  shares of common  stock  with a fair  value of
          $11,000  for  past  services,  warrants  for  550,000  shares  with an
          exercise  price of $.10 per share  and  semi-monthly  compensation  of
          approximately  $14,000.  No  deferred  costs  were  recorded  for  the
          warrants  granted,  as the fair market value of the underlying  common
          shares was approximately  equal to the exercise price. During the year
          ended  March 31,  2000,  the options  expired  and  certain  employees
          received an additional  300,000  options at the current  market price.
          These warrants were not exercised as of March 31, 2000.

          Financial Consultant Commitments
          --------------------------------
          In August of 1997, the Company  engaged four  consultants for a period
          of two years to provide  assistance in restructuring and designing the
          Company's  operations and long-term  strategic  plan. The  consultants
          received  warrants to purchase an aggregate of 2,050,000 shares of the
          Company's  common  stock at an  exercise  price of $.10 per share.  In
          1999,  the Company  reduced the exercise  price to $.05 and recorded a
          non-cash  additional  consulting  expense  of  $40,000  in  1999.  The
          warrants  expire at the end of the  two-year  consulting  period.  The
          Company  recorded  deferred  consulting costs of $100,000 for the fair
          value of the warrants and expensed  approximately  $50,000 and $31,000
          for the years ended March 31,  1999 and 1998,  respectively.  The fair
          value of the  warrants  was  determined  based  upon the fair value of
          services to be rendered by the  consultant.  In addition,  the Company
          also  issued  250,000  shares  of stock to one of the  consultants  in
          consideration  of entering  into a two-year  consulting  agreement and
          recorded  $5,000  as a signing  bonus.  In July of 1998,  the  Company
          raised $20,000 from the exercise of warrants for 200,000 shares of the
          Company's  common stock.  The Company  received $60,000 in January and
          February  of 1999 from the  exercise  of  600,000  options at $.10 per
          share.

                                      F-23
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 12 - COMMITMENTS AND CONTIGENCIES
          Financial Consultant Commitments (Continued)
          --------------------------------
          On January 10,  1999,  the Company  engaged  three  consultants  for a
          period of one year to provide advice to undertake for and consult with
          the Company concerning management,  marketing,  consulting,  strategic
          planning,  corporate organization and structure,  financial matters in
          connection  with  the  operation  of the  businesses  of the  Company,
          expansion of services,  acquisitions and business  opportunities.  The
          consultants  received  options to purchase a total of 4,700,000 of the
          Company's  common stock  exercisable at $.05 per share in exchange for
          services to be rendered  and the options  shall expire on December 31,
          2000. The Company  recorded  deferred  consulting  cost of $31,000 and
          amortized  $27,200  and $3,800 for the years  ended March 31, 2000 and
          1999,  respectively.  These options were exercised in February of 1999
          for proceeds to the Company of $275,000.  The Company filed a Form S-8
          in February of 1999 for these shares of common stock.

          In February  1999,  the Company  engaged a consulting  firm to provide
          Internet media consulting and public  relations  services for a period
          of one  year.  The fee for the  services  to be  rendered  included  a
          monthly cash fee of $3,000.  The consulting firm also received options
          to purchase a total of 250,000  shares of the  Company's  common stock
          with an exercise  price of $0.05 per share in exchange for services to
          be rendered and the options  shall  expire on February  11, 2001.  The
          Company recorded deferred consulting costs of approximately $2,000 and
          amortized $1,800 and $200 for the years ended March 31, 2000 and 1999,
          respectively.  These  options were not exercised as of March 31, 2000.
          The Company  filed a Form S-8 in February of 1999 for these  shares of
          common stock.

          Exclusive Distribution Agreement
          --------------------------------
          In April of 1998,  the  Company  entered  into an  agreement  with S4C
          Corporation  for the exclusive  rights to distribute a home video tape
          through  December 31, 2003 with total advance  payments  aggregating a
          total  commitment of approximately  $100,000 and additional  royalties
          due as a  percentage  of  wholesale  prices.  The Company paid royalty
          advances of $84,300 for the year ended March 31, 1999 whereby  $39,745
          has been earned and expensed.


                                      F-24
<PAGE>
               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 12 - COMMITMENTS AND CONTIGENCIES (Continued)

          Lease Commitments
          -----------------
          The Company  leases  office and  storage  facilities  under  operating
          leases, which expire in 2003. Also, the Company leases equipment under
          capital leases, which expire through 2002.

          The Company's  future minimum  annual  aggregate  rental  payments for
          operating  and capital  leases that have initial or remaining  term in
          excess of one year are as follows:
                                                      Capital         Operating
                                                      Leases            Leases
             Year Ending March 31,:                 -----------     ------------
             2001                                   $    34,960     $    135,000
             2002                                        20,179          131,000
             2003                                             -          105,000
                                                    -----------     ------------
             Total minimum lease payments                55,139     $    371,000
                                                                    ============
             Less: amount representing interest           8,485
                                                    -----------
             Present value of minimum lease
               payments                                  46,654
             Less:  current portion                      28,742
                                                    -----------
             Long-term portion                      $    17,912
                                                    ===========

          Rent  expense  for the  years  ended  December  31,  2000 and 1999 was
          approximately $154,000 and $302,000, respectively.

          The following is a summary of property  held under the capital  leases
          as of March 31, 2000:

            Furniture and equipment                              $  87,081
            Less: accumulated depreciation                          28,000
                                                                ----------
              Total                                              $  59,081
                                                                 =========

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

                                      F-25
<PAGE>
               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            MARCH 31, 2000 AND 1999

NOTE 13 - EQUITY

          Authorized Shares
          -----------------
          The Board of directors has  authorized a total number of shares in the
          amount  of  105,000,000  of  which  5,000,000  has been  dedicated  to
          preferred stock and 100,000,000 shares for common stock.

          Preferred Stock
          ---------------
          The  preferred  stock has i) voting rights upon all matters upon which
          common  stockholders  have at a 1.95 vote for each share of  preferred
          stock,  ii)  conversion  right at 1.95 shares 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.

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

          On November 2, 1998, convertible debentures with a balance of $831,436
          were  reinvested  into a new note for $921,851 for a new two year term
          expiring  October 31, 2000 with interest of 10% and an extension bonus
          of $175,000,  due November  1999,  which carries  interest of 2.5% per
          annum payable  $50,000 per month after  payment of all prior  interest
          and the  restructured  note. The repayment term was a weekly amount of
          $6,250 in 1998 and  $12,500 in the years 1999 and 2000.  In  addition,
          there was an acceleration  clause of repayments for certain events and
          a 5% late charge for any delinquent  payments.  The notes contained an
          option to convert the principal  and interest  balance into the common
          stock  of  the  Company  subject  to  certain  pricing   calculations.
          Collateral  security  included  all the  assets of the  Company  and a
          personal  collection  guarantee as additional security to holder after
          subordination to primary lender.

          Conversion of Debentures Payable
          --------------------------------
          In February of 1999, the Company converted  $640,000 of the debentures
          into  8,000,000  shares of common  stock.  On February 10,  1999,  the
          Company  converted the  remaining  note balance of $172,661 and unpaid
          interest of $90,415 into 3,018,254 shares of common stock. It was also
          agreed that the  $175,000  extension  bonus,  which was  recorded as a
          financing cost in February of 1999,  could be converted into shares of
          common stock at an agreed exercise price subject to market conditions.
          In  March  of  1999,  the  Company  additionally  received  a total of
          $300,000 from one officer and five  investors  and issued  convertible
          promissory  notes due in one year with  principal  and  interest  paid
          bimonthly  at an  interest  rate of 10%.  The  notes  are  convertible
          immediately  into common stock at the rate of $.05 per share. At March
          31,  1999,  the  balance  of  convertible   debentures  was  therefore
          $475,000.
                                      F-26
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 13 - EQUITY (Continued)

          Employment Agreements
          ---------------------
          In September  1997, two officers agreed to defer 90% of their salaries
          until further notice, but not beyond March 31, 1998. As consideration,
          the Company  granted a total of  3,750,000  shares of common stock and
          warrants to purchase 3,750,000 shares of the Company's common stock at
          an exercise price of $.10 per share.  The common shares granted vested
          during fiscal 1997 and the warrants were  exercisable  until March 31,
          1999. In March of 1999, the Company extended the term until August 24,
          2002.  The Company  recorded  $75,000 in  deferred  costs for the fair
          value of the shares  granted and amortized  $25,000 and $50,000 in the
          years ended March 31, 1999 and 1998,  respectively.  No deferred costs
          were recorded for the warrants granted as the fair market value of the
          underlying  common  shares  was  approximately  equal to the  exercise
          price.

          Stock in Lieu of Commissions
          ----------------------------
          On February 25, 1999, the Company issued 25,000 shares of common stock
          to a salesman's beneficiary in lieu of commissions owed of $4,500.

          Additional Stock Issuances
          --------------------------
          On October 24, 1998,  the Company  issued  1,499,523  shares of common
          stock to the Company's  president  pursuant to a settlement  agreement
          for a value of $30,000.

          During the year ended March 31,  2000,  the Company had the  following
          significant issuances of its common stock:

          o    7,225,000  shares for the  exercise  of  options  with the option
               price  settled by the holders'  conversions  of $376,875 of notes
               payable and accrued interest.

NOTE 14 - COMMON STOCK OPTIONS

          For the  fiscal  year  ended  March  31,  1999,  the  Company  had the
          following common stock option transactions:

          o    In January  1999,  the Board  reduced the exercise  price for two
               consultants,  who each had 600,000 warrants, from $0.10 per share
               to $0.05 per share.  The  Company  recorded  additional  non-cash
               consulting   expense   of  $6,000  for  this   transaction.   The
               consultants  exercised  these  warrants in February 1999 for cash
               proceeds of $60,000.


                                      F-27
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 14 - COMMON STOCK OPTIONS (Continued)

          o    Options issued to chief executive officer - Fiscal 1999 - In July
               and August of 1998,  the  Company  granted  options to purchase a
               total of 6,000,000  shares of common stock to the Chief Executive
               Officer for a potential  customer,  in  consideration  of certain
               fulfillment  orders  submitted to the  Company,  and his personal
               guarantee on the Company's loan  agreements and loans made to the
               Company.  The Company recorded a $15,000  expense.  These options
               may be exercised for $.10 per share until March 2003.

          o    Cancellation   of  options  -  On  July  15,  1998,  the  Company
               incorporated Galaxynet  International,  Inc. ("GalaxyNet") in the
               State of Delaware, as a majority-owned subsidiary of the Company.
               GalaxyNet  intended to develop and sell internet  gaming software
               and intended to offer its software to internet  gaming  companies
               and provide  internet gaming web sites to solicit  gambling wages
               from primarily,  Asian players. The Company also issued 4,000,000
               options  exercisable  at  $.10  per  share  to  an  investor  and
               6,000,000 options to the Chief Executive  Officer  exercisable at
               $.10 in  connection  with this  project.  On July 17,  1998,  the
               Company,  along with  GalaxyNet,  entered  into a  memorandum  of
               understanding  regarding  the  raising  of  capital  in a private
               offering to raise  gross  proceeds  in the  aggregate  of between
               $3,000,000 and  $10,000,000  with an enterprise who would be paid
               the sum of 15% of the  aggregate  proceeds and  received  finders
               options for up to  3,750,000  shares of common  stock at exercise
               prices of between $.10 and $.20 per share.  The private  offering
               period ended  September 30, 1998,  and was extended until October
               31,  1998.  The  private  offering  resulted  in raising  funding
               proceeds of only $250,000.  The Company subsequently canceled the
               project and  refunded  the  $250,000 to the investor and canceled
               all the project  related  options in November  1998.  The Company
               incurred  expenses  on behalf of  GalaxyNet  for  fiscal  1999 of
               approximately $30,000.

          o    Consultant  Agreements - Fiscal 1999 - On January 10,  1999,  the
               Company  engaged  three  consultants  for a period of one year to
               provide  advice to  undertake  for and  consult  with the Company
               concerning management, marketing, consulting, strategic planning,
               corporate  organization  and  structure,   financial  matters  in
               connection  with the operation of the  businesses of the Company,
               expansion of services,  acquisitions and business  opportunities.
               The consultants received options to purchase a total of 4,700,000
               of the Company's  common stock  exercisable  at $.05 per share in
               exchange for services to be rendered and the options shall expire
               on December 31, 2000. These options were exercised in February of
               1999 for proceeds to the Company of $275,000.


                                      F-28

<PAGE>
               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 14 - COMMON STOCK OPTIONS (Continued)

         o    In  February  1999,  the  Company  engaged a  consulting  firm to
               provide internet media  consulting and public relations  services
               for a period of one year. The fee for the services to be rendered
               included a monthly cash fee of $3,000.  The consulting  firm also
               received  options to  purchase  a total of 250,000  shares of the
               Company's  common stock with an exercise price of $0.05 per share
               in exchange  for  services to be rendered  and the options  shall
               expire on February 11,  2001.These  options were not exercised as
               of March 31, 1999.

          o    The  Company  recorded  deferred  consulting  cost of $33,000 for
               these  1999  consulting   agreements  and  amortized   $4,000  as
               consulting expense for the year ended March 31, 1999.

          For the  fiscal  year  ended  March  31,  2000,  the  Company  had the
          following common stock option transactions:

          The per unit  weighted-average  fair value of unit options granted for
          the year ended March 31, 2000 was $0.11 using the Black-Scholes option
          pricing  model  with  the  following   weighted-average   assumptions:
          weighted-average  risk-free interest rates of 5.5%; dividend yields of
          0%;  weighted-average  volatility factors of the expected market price
          of the  Company's  common  stock of 178%;  and  expected  lives of the
          options  ranging from 1 to 3 years.  The Company  issued the following
          stock options:

          o    In July  1999,  the Company  engaged a consultant for a period of
               one year to  provide  managerial  and  strategical  planning  for
               financial  matters and expansion of the Company.  The  consultant
               received an option to purchase  1,000,000 shares of the Company's
               common  stock  exercisable  at $0.10  per share in  exchange  for
               services to be rendered  and the option  shall  expire on July 8,
               2001.  The option had an aggregate fair value at date of grant of
               approximately $40,000.

          o    On April 12, 1999, the Company  engaged three  consultants  for a
               period of one year each to  provide  managerial  and  strategical
               planning for financial matters and expansion of the Company.  The
               consultants   received   options  to  purchase  an  aggregate  of
               6,000,000  shares of the Company's  common stock  exercisable  at
               $0.05 per share in exchange  for  services to be rendered and the
               options  shall  expire  on April 11,  2000.  The  options  had an
               aggregate fair value at date of grant of approximately  $291,000.
               These options were exercised in April 1999, by the forgiveness of
               $150,000 of  notes  payable,  executed  in  March  1999, and cash
               proceeds of $150,000.

                                      F-29
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 14 -  COMMON STOCK OPTIONS (Continued)

          o    On May 25, 1999,  the Company's  board of directors  approved and
               the  Company  issued  to the  Company's  President,  as a  bonus,
               options  to  purchase  2,500,000  and  1,000,000  shares  of  the
               Company's   common   stock  at  $0.05  and   $0.10   per   share,
               respectively.  The  options  expire  on May 24,  2004.  Since the
               options are accounted for under APB 25 and the exercise  price is
               below market,  the Company has expensed the  aggregate  intrinsic
               value at date of grant of approximately $410,000.

          o    On May 25, 1999,  the Company's  board of directors  approved and
               the Company  issued to the Company's V.P. of Sales and Marketing,
               as a bonus, options to purchase 500,000 and 500,000 shares of the
               Company's   common   stock  at  $0.05  and   $0.10   per   share,
               respectively.  The  options  expire  on May 24,  2004.  Since the
               options are accounted for under APB 25 and the exercise  price is
               below market,  the Company has expensed the  aggregate  intrinsic
               value at date of grant of approximately $110,000.

          o    On July 13, 1999,  the Company  engaged a consultant for a period
               of one year to provide  advice to and  consult  with the  Company
               concerning  managerial  and  strategical  planning for  financial
               matters and expansion of the Company.  The consultant received an
               option to purchase 1,000,000 shares of the Company's common stock
               exercisable  at $0.10 per share in  exchange  for  services to be
               rendered and the option shall expire on July 12, 2002. The option
               had an  aggregate  fair  value at date of grant of  approximately
               $127,000.

          o    On August 2, 1999,  the  Company  engaged two  consultants  for a
               period of one year each to provide advice to and consult with the
               Company  concerning   managerial  and  strategical  planning  for
               financial  matters and expansion of the Company.  The consultants
               received options to purchase in the aggregate 1,965,000 shares of
               the  Company's  common  stock  exercisable  at $0.05 per share in
               exchange for services to be rendered and the options shall expire
               on August 1, 2000.  The  options had an  aggregate  fair value at
               date  of  grant  of  approximately  $202,000.  The  options  were
               exercised during the year ended March 31, 2000 by the forgiveness
               of $36,250 of  principal  and  interest of debt  outstanding  for
               725,000 shares and $50,000 cash and the forgiveness of $12,000 of
               accounts payable for 1,240,000 shares.


                                      F-30
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 14 -  COMMON STOCK OPTIONS (Continued)

          The  following   summarizes   the  common  stock  options  issued  for
          consulting services for the years ended March 31, 2000 and 1999:

                                                                     Weighted
                                                                      Average
                                                                     Exercise
                                          Employees     Consultants    Price
                                         ----------     ----------   --------
   Options outstanding, March 31, 1998    5,000,000      4,004,000   $   0.12
   Granted                                6,000,000      4,950,000   $   0.07
   Exercised                                      -     (6,500,000)  $   0.08
   Expired/cancelled                              -              -          -
                                         ----------     ----------   --------

   Options outstanding, March 31, 1999   11,000,000      2,454,000   $   0.10
   Granted                                4,500,000      9,965,000   $   0.06
   Exercised                                      -     (8,215,000)  $   0.05
   Expired/cancelled                              -     (1,000,000)  $   0.25
                                         ----------     ----------   --------

   Options outstanding, March 31, 2000   15,500,000      3,204,000   $   0.10
                                         ==========     ==========
   Options exercisable, March 31, 2000   11,500,000      3,204,000   $   0.10
                                         ==========     ==========

          The  Company  applies  SFAS No. 123 and related  interpretations,  for
          stock options issued to officers and consultants in accounting for its
          stock  options.  Compensation  expense  has  been  recognized  for the
          Company's  stock-based  compensation  for  consulting  services in the
          amount of  $1,328,167  and  $21,000 for the years ended March 31, 2000
          and 1999,  respectively.  The  exercise  price  for all stock  options
          issued to these  individuals  during  fiscal  years 2000 and 1999 were
          below the market price of the Company's stock at the date of grant.


                                      F-31
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 14 - COMMON STOCK OPTIONS (Continued)

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

          The following summarizes the Company's stock option transactions under
          the stock option plan:

                                                                      Weighted
                                                                      Average
                                                   Stock Options      Exercise
                                                    Outstanding        Price
                                                   ------------       --------
            Options Outstanding, March 31, 1998        550,000        $  0.10
            Granted                                          -              -
                                                   -----------

            Options Outstanding, March 31, 1999        550,000        $  0.10
            Granted                                    300,000        $  0.10
            Expired                                  ( 550,000)       $  0.10
                                                    ----------
            Options Exercisable and
              Outstanding, March 31, 2000              300,000        $  0.10
                                                    ==========

          The  weighted  average  remaining  contract  lives  of  stock  options
          outstanding are 2.42 years.


                                      F-32
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 14 - COMMON STOCK OPTIONS
          STOCK OPTION PLAN (Continued)

          The Company has adopted  only the  disclosure  provisions  of SFAS No.
          123. It applies APB 25 and related  interpretations  in accounting for
          its  plan  and  does  not  recognize   compensation  expense  for  its
          stock-based  compensation plan other than for stock and options issued
          under compensation plans and to outside third parties.  If the Company
          had  elected to  recognize  compensation  expense  based upon the fair
          value at the grant date for awards under the plan  consistent with the
          methodology  prescribed  by SFAS 123, the  Company's net loss would be
          increased  by $279,000 and $409,010 for the years ended March 31, 2000
          and 1999, respectively, to the pro forma amounts indicated below.

                                                 2000               1999
                                             -----------         ------------
          Net Loss:
                As Reported                  $(3,979,099)        $(1,602,652)
                                             ===========         ===========
                Pro forma                    $(4,258,099)        $(2,011,662)
                                             ===========         ===========

          The per unit  weighted-average  fair value of unit options granted for
          the year  ended  March 31,  2000 was  $0.10.  The fair value for these
          options  was  estimated  at the  date of grant  using a  Black-Scholes
          option pricing model with the following  weighted-average  assumptions
          for years ended March 31, 2000 and 1999:  weighted-  average risk-free
          interest  rates  of  5.7%  and  6.0%;  dividend  yields  of 0% and 0%;
          weighted-average  volatility  factors of the expected  market price of
          the Company's  common stock of 178% and 144%;  and a weighted  average
          expected life of the option of 2.5 and 2.5 years.

NOTE 15 - MAJOR CUSTOMERS

          For the year ended March 31,  1999,  the Company had net sales to five
          customers that amounted to approximately $2,466,000 or 54%.

          For the year ended  March 31,  2000,  the Company had net sales to two
          customers   that  accounted   for   approximately   17.1%  and  10.8%,
          respectively.



                                      F-33
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 16 - INCOME TAXES

          The components of the provision for income taxes are as follows:

                                                     For The Years Ended
                                                           March  31,
                                                 ----------------------------
                                                    2000              1999
                                                 -----------     ------------
            Current Tax Expense
               U.S. federal                      $        -      $         -
               State and local                            -                -
                                                 -----------     ------------
            Total Current                                 -                -
                                                 -----------     ------------

            Deferred Tax Expense
               U.S. federal                               -                -
               State and local                            -                -
                                                 -----------     ------------
            Total deferred                                -                -
                                                 ------------    ------------
            Total tax provision from
             continuing operations               $         -     $         -
                                                 ============    ============

          The  reconciliation  of the  effective  income tax rate to the Federal
          statutory  rate is as follows  for the years  ended March 31, 2000 and
          1999:


             Federal income tax rate                                (    34.0)%
             Effect of valuation allowance                               34.0%
                                                                    -----------
             Effective income tax rate                                    0.0%
                                                                    ===========

          At March 31, 2000 and 1999, the Company had net carryforward losses of
          approximately $11,300,000 and $8,387,000, respectively. Because of the
          current uncertainty of realizing the benefit of the tax carryforwards,
          a valuation  allowance equal to the tax benefit for deferred taxes has
          been established.  The full realization of the tax benefit  associated
          with  the  carryforwards  depends  predominantly  upon  the  Company's
          ability to generate taxable income during the carryforward period. The
          net change in the  valuation  allowance  for the years ended March 31,
          2000  and 1999  increased  by  approximately  $491,000  and  $545,000,
          respectively.

                                      F-34
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 16 - INCOME TAXES (Continued)

          At March 31, 2000 and 1999, the Company had net carryforward losses of
          approximately $11,045,000 and $8,387,000, respectively. Because of the
          current uncertainty of realizing the benefit of the tax carryforwards,
          a valuation  allowance equal to the tax benefit for deferred taxes has
          been established.  The full realization of the tax benefit  associated
          with  the  carryforwards  depends  predominantly  upon  the  Company's
          ability to generate taxable income during the carryforward period. The
          net change in the  valuation  allowance  for the years ended March 31,
          2000  and 1999  increased  by  approximately  $491,000  and  $653,000,
          respectively.

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

                                                           March  31,
                                                 -----------------------------
                                                     2000             1999
                                                 -----------       -----------
            Deferred Tax Assets
               Loss carryforwards                $ 3,755,000       $ 3,355,000
               Less:  valuation allowance          3,755,000         3,355,000
                                                 -----------       -----------
            Net Deferred Tax Assets              $         -       $         -
                                                 ===========       ===========

          Net operating loss carryforwards expire starting in 2007 through 2018.
          Per year  availability  is subject to change of ownership  limitations
          under Internal Revenue Code Section 382.



                                      F-35
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 17 - SEGMENT INFORMATION

          The following  financial  information is reported on the basis that is
          used internally for evaluating segment performance and deciding how to
          allocate resources.  During 2000 and 1999, the Company operated in two
          principal industries;

          a)   Video programs and other licensed products
          b)   General merchandise

                                                        Year Ended March 31,
                                                   ----------------------------
                                                       2000            1999
                                                   -----------      ------------
           Revenues:
             Video programs and other licensed
               products                            $ 3,605,343      $ 4,132,512
             Merchandise                               222,918          417,013
                                                   -----------      ------------
                                                   $ 3,828,261      $ 4,549,525
                                                   ===========      ===========

           Loss before taxes:
             Video programs and other licensed
               products                            $(3,456,552)    $( 1,000,647)
             Merchandise                            (  522,547)     (   667,973)
                                                   -----------     ------------
                                                   $(3,979,099)    $( 1,668,620)
                                                   ===========     ============



                                      F-36
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 17 - SEGMENT INFORMATION (Continued)

                                                        Year Ended March 31,
                                                   ----------------------------
                                                       2000            1999
                                                   -----------      ------------
           Depreciation and amortization:
             Video programs and other licensed
                products                           $   242,976     $    302,621
             Merchandise                                36,062           36,062
                                                   -----------     ------------
                                                   $   279,038     $    338,683
                                                   ============    ============
           Segment assets:
             Video programs and other licensed
                products                           $ 2,068,580     $  3,141,302
             Merchandise                               310,939          887,840
                                                   -----------     ------------
                                                   $ 2,379,519     $  4,029,142
                                                   ===========     ============
           Expenditure for segment assets:
             Video programs and other licensed
                products                           $    84,926     $    181,306
             Merchandise                                     -                -
                                                   -----------     ------------
                                                   $    84,926     $    181,631
                                                   ===========     ============

NOTE 18 - SUBSEQUENT EVENTS

          Authorized Shares
          -----------------
          In July 2000,  the Company  amended its Articles of  Incorporation  to
          increase the number of authorized common stock from 100,000,000 shares
          to 600,000,000 shares.

          Stock Option Plan
          -----------------
          On June 9, 2000,  the Board of Directors  of the Company  approved the
          Company's  2000 Stock  Compensation  Plan  ("Plan") for the purpose of
          providing  the  Company  with a means  of  compensating  selected  key
          employees  (including  officers),  directors  and  consultants  to the
          Company and its subsidiaries for their services rendered in connection
          with the development of Diamond Entertainment  Corporation with shares
          of  Common  Stock of the  Company.  The plan  authorizes  the Board of
          Directors  of the  Company  to sell or award up to  13,000,000  shares
          and/or options of the Company's Common Stock, no par value.

                                      F-37
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 18 - SUBSEQUENT EVENTS (Continued)

          Consulting Agreements
          ---------------------
          On June 1, 2000, the Company entered into three consulting  agreements
          that will  terminate on May 31,  2001,  whereby the  consultants  will
          provide  consulting  service  for the Company  concerning  management,
          marketing,  consulting, strategic planning, corporate organization and
          financial  matters in connection  with the operation of the businesses
          of the  Company,  expansion  of  services,  acquisitions  and business
          opportunities. The consultants received options to purchase a total of
          7,300,000 of the Company's common stock exercisable at $.035 per share
          in exchange for  services to be rendered and the options  shall expire
          on May 31, 2001.

          The per unit  weighted-average  fair value of unit options  granted on
          June 1, 2000 was $0.029 at the date of grant  using the  Black-Scholes
          option pricing model with the following weighted-average  assumptions:
          weighted-average  risk-free interest rates of 5.86; dividend yields of
          0%;  weighted-average  volatility factors of the expected market price
          of the Company's common stock of 178%; and a weighted average expected
          life of the option was 2 months. In June and July of 2000, the Company
          received  $215,500 in cash for the  issuance of the  6,157,143  shares
          upon the  exercise  of these  options  and the  remaining  options  of
          1,142,857 were exercised for consulting  services incurred and owed by
          the Company to one of the  consultants  totaling  $30,000 and from the
          cancellation of a obligation of $10,000 in principal and interest owed
          to the same consultant.

          Series A Convertible Preferred Stock
          ------------------------------------
          On May 11,  2000,  the  Company  entered  into a  Securities  Purchase
          Agreement  ("Securities  Purchase  Agreement")  with eight  investors.
          Pursuant to the Securities Purchase Agreement,  the Company issued and
          sold 50 shares of Series A  Convertible  Preferred  Stock  ("Series  A
          Preferred Stock") for total consideration of $500,000,  or $10,000 per
          share.  The May Davis Group,  Inc. ("May  Davis"),  acted as placement
          agent for the offering.  May Davis received a placement fee of $40,000
          and the Company issued warrants to purchase 1,500,000 shares of Common
          Stock to May Davis and certain  designees of May Davis and warrants to
          purchase  25,000  shares of  Common  Stock to  Butler  Gonzalez,  LLP,
          counsel to May Davis. Such warrants are exercisable at a price of $.08
          per share.


                                      F-38
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2000 AND 1999

NOTE 18 - SUBSEQUENT EVENTS (Continued)

          Series A Convertible Preferred Stock (Continued)
          ------------------------------------
          Commencing   August  9,  2000,   the  Series  A  Preferred   Stock  is
          convertible,  at the investors'  option,  into shares of the Company's
          Common Stock and automatically converts into Common Stock on April 12,
          2002.  The  conversion  price of the Series A  Preferred  Stock is the
          lower  of $.08 per  share or 80% of the  average  of the  closing  bid
          prices of the  Company's  Common Stock on any five trading days in the
          ten  trading  day  period  preceding  the  date  of  conversion.   The
          conversion  price of the Series A Preferred  Stock is also adjusted in
          the  event  of  stock  dividends,  stock  splits,   recapitalizations,
          reorganizations,  consolidations,  mergers  or  sales of  assets.  The
          Series A Preferred  stock also provides for a dividend upon conversion
          of the Series A Preferred Stock at the rate of 6% per annum payable in
          additional  shares of the Company's  Common Stock. In no event can the
          Series A Preferred Stock be converted into more than 11,575,000 shares
          of Common Stock.

          Additional  features of the Series A Preferred  Stock  include,  among
          other  things,  i) a  redemption  feature at the option of the Company
          commencing  September 8, 2000,  of shares of Series A Preferred  Stock
          having a stated  value of up to $100,000,  ii) a mandatory  redemption
          feature  upon the  occurrence  of  certain  events  such as a  merger,
          reorganization,  restructuring,  consolidation or similar event, and a
          liquidation  preference  over  the  Common  Stock  in the  event  of a
          liquidation,  winding up or dissolution  of the Company.  The Series A
          Preferred  Stock does not provide any voting rights,  except as may be
          required by law.

          Under Registration Rights Agreements the Company entered into with the
          purchasers of the Series A Preferred Stock, the Company is required to
          file a  registration  statement to register the Common Stock  issuable
          upon  conversion of the Series A Preferred  Stock under the Securities
          Act to provide  for the resale of such  Common  Stock.  The Company is
          required to keep such  registration  statement  effective until all of
          such shares have been resold.





                                      F-39


<PAGE>




                                   SIGNATURES

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

                               DIAMOND ENTERTAINMENT CORPORATION


Dated:  August 17, 2000         By:     /s/ James K.T. Lu
                                   --------------------------------------
                                   James K.T. Lu
                                   President, Chief Executive Officer,
                                   Principal Executive Officer and Director


Dated:  August 17, 2000         By:    /s/ Fred U. Odaka
                                    ---------------------------------------
                                    Fred U. Odaka
                                    Chief Financial Officer, Principal Financial
                                    Officer and Principal Accounting Officer


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

         Signature                          Title                      Date


/s/ James K.T. Lu                President, Chief Executive     August 17, 2000
----------------------------       Officer, Secretary and
James K.T. Lu                      Director

/s/ Jeffrey I. Schillen          Executive Vice President       August 17, 2000
----------------------------      and Director
Jeffrey I. Schillen


/s/ Murray T. Scott              Director                       August 17, 2000
----------------------------
Murray T. Scott



                                       58
<PAGE>



                        DIAMOND ENTERTAINMENT CORPORATION

                                  EXHIBIT INDEX


Exhibit No.     Description

3.1.2       Certificate  of  Amendment  to  Certificate  of  Incorporation of
            Diamond  Entertainment  Corporation  filed  with the State of New
            Jersey State Treasurer on May 11, 2000

3.1.3       Certificate  of  Amendment  to  Certificate of  Incorporation  of
            Diamond  Entertainment  Corporation  filed  with the State of New
            Jersey State Treasurer on July 6, 2000.

10.16       Securities  Purchase  Agreement  dated  May  11, 2000 between the
            Company and eight  investors  concerning the issuance and sale of
            50 shares of the Company's Series A Convertible Preferred Stock.

10.17       Registration  Rights  Agreement,  dated May 11, 2000 between  the
            Company and Anthony E. Rakos  concerning the issuance and sale of
            shares of the Company's Series A Convertible Preferred Stock.

10.18       Registration  Rights  Agreement,  dated May 11, 2000 between  the
            Company and Gerrald  Holland  concerning  the  issuance  and sale
            of shares the Company's Series A Convertible Preferred Stock

10.19       Registration  Rights  Agreement,  dated May 11, 2000 between  the
            Company and Jeffrey Hrutkay, MD concerning the issuance and  sale
            of shares of the Company's Series A Convertible Preferred Stock.

10.20       Registration  Rights Agreement,  dated May 11, 2000  between  the
            Company and Charles and Jane Adkins concerning  the  issuance and
            sale of shares of the Company's Series A Convertible Preferred
            Stock.

10.21       Registration  Rights Agreement,  dated  May 11, 2000 between  the
            Company and Gordon D. Mogerley  concerning the issuance and  sale
            of shares of the Company's Series A Convertible Preferred Stock.

10.22       Registration  Rights  Agreement,  dated May 11, 2000  between the
            Company and Michelle Levite  concerning  the issuance and sale of
            shares of the Company's Series A Convertible Preferred Stock.

10.23       Registration  Rights  Agreement,  dated May  11, 2000 between the
            Company and Ralph  Lowry  concerning  the  issuance  and  sale of
            shares of the Company's Series A Convertible Preferred Stock.

10.24       Registration  Rights  Agreement,  dated May 11, 2000  between the
            Company and John  Bolliger  concerning  the  issuance and sale of
            shares of the Company's Series A Convertible Preferred Stock.


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<PAGE>



Exhibit No.     Description

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

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

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

10.28       2000 Stock Option Plan dated June 9, 2000

21.1        Subsidiaries of the Registrant.

27          Financial Data Schedule.






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