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, 2004



[  ] 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(State or other jurisdiction of
incorporation or organization) | 22-2748019(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------ | ----------------------------------------------





800 Tucker Lane, Walnut, CA 91789

(Address of principal executive

offices) (Zip Code)



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



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



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



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



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



The issuer's revenue for the fiscal year ended March 31, 2004 totaled $4,997,973.



The aggregate market value of registrant's Common Stock held by non-affiliates based upon the average closing bid and asked sales price for June 1, 2004 as reported by the Pink Sheets LLCs Pink Sheets, was approximately $3,539,000. As of June 1, 2004 there were 489,057,359 shares of the registrant's Common Stock outstanding.

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ITEM 1.  DESCRIPTION OF BUSINESS

ITEM 2.  DESCRIPTION OF PROPERTY.

ITEM 3.  LEGAL PROCEEDINGS.

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

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

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

ITEM 7.  FINANCIAL STATEMENTS

Consolidated Financial Statements

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

ITEM 8A.  CONTROLS AND PROCEDURES

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

ITEM 10.  EXECUTIVE COMPENSATION

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES.























































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



DMEC markets and sells a variety of videocassette and DVD (Digital Video Disc) titles to the budget home video and DVD market. We also purchase and distribute general merchandise including children's toy products, general merchandise and sundry items.



Our videocassette and DVD titles include certain public domain programs and certain licensed programs. Public domain programs are video titles that are not subject to copyright protection. Licensed programs are programs that have been licensed by us from a third party for duplication and distribution, generally on a non-exclusive basis. We market our video programs to national and regional mass merchandisers, department stores, drug stores, supermarkets and other similar retail outlets. They generally sell our products to the public at retail prices ranging from $1.99 to $9.99 per videocassette and $3.99 to $12.99 per DVD program packs. Our video and DVD products are also offered by consignment arrangements through one large mail order catalog company and one retail chain. We are continuing to acquire new licensed video and DVD titles and upgrading the quality of its packaging and pre-printed materials in order to enhance its available products.  In addition, we provide duplication and packaging and fulfillment services.



The Companys wholly owned subsidiary Jewel Products International, Inc. ("JPI"). JPI is in the business of manufacturing and distributing toy products, purchasing various other general merchandise and children's toy products from U.S. based importers or directly from Asia for distribution, and distributing to mass merchandisers in the United States.  JPI continues to implement a strategy to capitalize on its extensive relationships and contacts with its mass merchandisers to expand our general merchandise product line items to include a wide range of low cost, high quality consumer products from Asia, such as albums, furniture, small office equipment and other sundry item.



VIDEO PROGRAM LINE



DMEC's products consist of a total of approximately 971  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 and sports highlights. Public domain programs account for approximately 696 titles, licensed programs account for approximately 263 titles of our program inventory and we own12 titles.



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·

Motion Pictures - Public Domain. We offer a total of 158 feature motion picture titles including many film classics, biblical tales, and a large collection of favorite performers. Titles include "Love Affair", "Milton Berle" and "Herod the Great".



·

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



·

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



·

Educational Programs - Owned.  We purchased all rights to the Learning Treehouse consisting of approximately12 educational videos which instruct preschoolers and school age children on topics such as learning numbers, telling time, simple mathematics, and color identification.



·

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



·

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



DVD PROGRAM LINE



The DVD program inventory currently consists of 243 titles, which are public domain feature films and television episodes.



·

Motion Pictures - We offer 222 titles in DVD format covering many film classics in various categories including drama, horror, westerns, action, and comedy.



·

Television Episodes  We offer 21classic television program titles.



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



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



During the year ended March 31, 2004, we acquired approximate 29 new titles. As of March 31, 2004, the net book value of our film masters and artwork was approximately $347,000. We believe that our film masters and artwork are significant assets since we derive the majority of our revenue from their use.



FULFILLMENT AND DUPLICATION SERVICES



We are continuing to offer our duplication, fulfillment and packaging services to corporate customers through our sales representatives   There can be no assurance that we will be able to market and distribute successfully our contract fulfillment, replication and duplication services to corporate customers or to our other customers. Revenues derived from our replicating and duplication services for the period ended March 31, 2004 and 2003 were minimal.



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GENERAL MERCHANDISE



JPI sells and manufactures one toy product called the Zoombie ®, its patented Double Wing Flier, a bi-wing aerodynamic flying toy a game of catch intended to compete directly with Frisbee(R), Aerobie(R) and Whoosh(TM). During the year ended March 31, 2004, the Zoombie was primarily sold through our web-site. Sales realized from Zoombie product were minimal.  We are continuing to seek out new general merchandise product line to include low cost, high quality, consumer products from U.S. based importers or directly from Asia such as small office equipment, furniture, and other toy products and games. As of June 1, 2004, we have no outstanding commitment from our customers to purchase our general merchandise product line. During the period ended March 31, 2004, the Company had sales of its train case producttotaling approximately $19,700. We are continuing to seek additional products for our general merchandise line to replace or add to our existing products.  For the years ended March 31, 2004 and 2003 we purchased general merchandise from one supplier, Duracom Corporation HK Ltd.  Purchases for such periods were minimal.



SUPPLIERS



VIDEO/DVD PRODUCTS



For the year ended March 31, 2004, the Company purchased video and DVD products from three suppliers that accounted for approximately 73% of the Company's net purchases.  During such period, the percentage of net video/DVD product purchases made from such suppliers were 28%, 27% and 18%, respectively. During such period, the percentage of net video/DVD product purchases made from such suppliers were 40% and 20%, respectively. We believe that, if for any reason we could not rely on or retain the services of any of our current suppliers, duplicators or manufacturers, other suppliers would be readily available in the marketplace.



MARKETING



VIDEO/DVD PRODUCTS



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

more than ten mass merchandisers such as Musicland, Walgreen and Starcrest of California, primarily in the Northeast, the South and the East Coast. These outlets sell our products to the general public at retail prices ranging from approximately $1.99 to $9.99 per videocassette and$3.99 to$12.99 per DVD program pack. For the years ended March 31, 2004 and 2003, we derived revenue from our video and DVD products of approximately $4,960,000and $3,146,000, respectively. For the year ended March 31, 2004, we had net sales to threemajor customers, Meijer, Dolgen Corp. Inc. and Musicland Group Inc. who accounted for approximately 20%, 18% and 14%,  respectively, or revenues of approximately $2,575,000.  For the year ended March 31, 2003, we had net sales to two major customers, Musicland and  Starcrest of California, who accounted for approximately 25% and 16%, respectively, or revenues of approximately $1,334,000.



CUSTOMERS



VIDEO/DVD PRODUCTS



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



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We derive approximately 80% of our gross revenue from sales to mass merchandisers and other retail outlets. Approximately 20% of gross revenue was derived during the fiscal year ended March 31, 2004 from sales through consignment arrangements with a catalog company and a retail company. We only book sales from consignment sales after the catalog company delivers the actual funds from such sales. Less than one percent of revenues are derived from products sold on a retail basis directly to consumers via the internet.





GENERAL MERCHANDISE



We market our general merchandise and toy products using outside sales personnel and manufacturers representatives and utilize independent manufacturer's representatives to reach our customers. For the years ended March 31, 2004 and 2003, revenues from our general merchandise products were $19,673 and $23,218, respectively.





SEASONALITY



VIDEO AND DVD PRODUCTS



DMEC generally experiences higher sales from our video and DVD programs from September through January due to increased consumer spending around the year-end holidays. During the year ended March 31, 2004, the Company derived approximately 61% of its gross revenue from sales during those five months, with approximately 39% of revenue generated in the remaining seven months of the year.





GENERAL MERCHANDISE



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





LICENSE ARRANGEMENTS



VIDEO AND DVD PRODUCTS



We  enter into various license agreements under which we acquire from licensors the right to duplicate and distribute a licensed video or video program. Licenses may be exclusive or non-exclusive, but typically are non-exclusive. Generally, licenses cover specific titles. In return for the grant of certain rights by the licensor, we pay certain advance payments or guarantees and also pay royalties.  Royalty payments under license agreements typically are credited against any advances paid. Generally, our licenses are for a term of between three and seven years. While our effort to renegotiate and renew our license agreements have generally been successful, there can be no assurance that such licenses will be renegotiated or renewed in the future. The programs that we have acquired under license contain limitations from the licensors regarding the geographic areas to which we can distribute our products and are usually restricted to distribution and sales in the United States and Canada.



The various licensing agreements that we have entered into with licensors provide for advance payments ranging from $1,500 to $100,000 and subsequent royalty payments based upon either a per video or DVD sold fee or a percentage of wholesale price fee. During the year ended March 31, 2004, and 2003 we incurred royalty expenses of approximately $27,600 and $58,000, respectively, under our licensing agreements.



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COMPETITION



VIDEO AND DVD PRODUCTS



The videocassette and DVD distribution industry is intensely competitive and highly fragmented.  Approximately 63% of our program inventory is public domain programs which are not our exclusive property.  Any competitor may easily enter our business by reproducing and distributing public domain programs, including those marketed by us.  DMEC competes with other distributors who sell budget priced videotapes and DVDs. We also compete with other video duplicators. We have been able to compete based on offering low pricing and superior packaging designs. Most of the companies with which we compete with, such as:  Platinum Entertainment, Brentwood Entertainment and Madacy, are better established, have broader public and industry recognition, have financial resources substantially greater than us and have manufacturing and distribution facilities better than those which now, or in the foreseeable future, may become available to us.



GENERAL MERCHANDISE



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





AMERICAN TOP REAL ESTATE



American Top Real Estate, Inc. ("ATRE") was formed in March 1989 for the purposes of acquiring, owning and holding real property for commercial development. ATRE does not engage in any other business operations.  The Company paid $50,000 for 50% of the issued and outstanding common stock of ATRE.  Subsequent loan participation by the investors in ATRE reduced the Companys shareholder interest to 35.9%. The Companys 2003 operations include a write-down of its investment in ATRE, which reduced the Companys investment in ATRE to zero, net of taxes. The write-down resulted from the operating results of ATRE which reduced the Companys investment in ATRE to zero and, as a consequence, the Companys future financial results will not be negatively affected by ATREs ongoing operations. The Company has no obligation to fund future operating losses of ATRE. Mr. Lu was President and director of ATRE until January 8, 2004, when he resigned his position as President.



As of March 31, 2004 and 2003, we had outstanding loan balances of $322,374 and $263,718, respectively, owed to ATRE, bearing interest at the rate of 10% per annum, and due on demand.





INSURANCE



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







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EMPLOYEES



As of March 31,  2004,  the  Company and its  subsidiaries  employed 35 full-time  and 1 part-time  employee as compared to 22 full-time and no part-time employees a year earlier. 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



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



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





ITEM 2.  DESCRIPTION OF PROPERTY.



We lease approximately 20,000 square feet of property located at 800 Tucker Lane, Walnut, California under a lease that commenced January 6, 2000 and expired on January 31, 2003, which we extended another 15 months for use as executive offices and manufacturing and warehouse facilities for a monthly rent of $12,000. We extended the lease until March 31, 2007, for a monthly rent of $12,000 to be increased to $12,500 and $13,000 per month on April 1, 2005 and April 1, 2006, respectively.  Our lease is with an unaffiliated third party. We believe that we have sufficient space for operations for the next twelve months.



ITEM 3.  LEGAL PROCEEDINGS.



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





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



None.













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PART II





ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.



Until August 22, 2003, our common stock was quoted on the NASD's OTC Bulletin Board under the symbol "DMEC." The following table sets forth the high and low bid prices for our Common Stock for each quarterly period during our last three fiscal years. The source of the quotes is NASD's OTC Bulletin Board quarterly quote summaries.



|                 | Common Stock
Bid Price
|---------------- | ----------------------
|                 | Low                   
|Fiscal Year 2002 |                       
|First Quarter    | 0.0050                
|Second Quarter   | 0.0025                
|Third Quarter    | 0.0020                
|Fourth Quarter   | 0.0021                
|                 |                       
|Fiscal Year 2003 |                       
|First Quarter    | 0.0016                
|Second Quarter   | 0.0001                
|Third Quarter    | 0.0001                
|Fourth Quarter   | 0.0001                



On August 22, 2003, our common stock ceased to be quoted on the OTC Bulletin Board as a result of our failure to comply with the eligibility requirements of the OTC Bulletin Board in that we did not timely file our Annual Report on Form 10KSB for the year ended March 31, 2003.  Since August 22, 2003, our common stock has been quoted in the Pink Sheets LLCs Pink Sheets under the symbol DMEC.  Generally, quotations for securities included in the Pink Sheets are not listed in newspapers and may be more difficult to obtain.  The Pink Sheets service enables market makers to display real time prices of equities, ADRs and foreign securities and is a quotation medium available with regard to the securities of issues that are unable to list their securities on NASDAQ or an exchange or have their securities quoted on the OTC Bulletin Board.  On June 1, 2004, the closing sales price for our common stock as reported in the Pink Sheets was $0.01.  The above quotations reflect inter-dealer prices, without retail markup, markdown, or commission and may not represent actual transactions.



As of June 1, 2004 there were 2,495 holders of record of our common stock, and 40 holders of record of our Series A Convertible Preferred Stock. As of March 31, 2004, there were 7 holders of record of our Series B Convertible Preferred Stock.  As of April 15, 2004, the 7 holders of record of our Series B Convertible Preferred Stock converted all their shares into the common stock of the Company.



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





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Dividend Policy



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



Securities authorized for issuance under equity compensation plans:



2001 Stock Compensation Plan:



On July 24, 2001,  the Board of Directors of the Company  adopted the Company's  2001 Stock  Compensation  Plan dated July 13,  2001 for the purpose of providing the Company with a means of compensating selected key employees (including officers),  and directors of the Company and its  subsidiaries  for their services  rendered in connection with the development of Company with shares of Common Stock of the Company. The plan authorized the Board of Directors of the Company to sell or award up to 50,000,000 shares and/or non-qualified options of the Company's common stock, no par value at a purchase price of $0.006, which represented the fair value of the common stock on that date.  On July 13, 2001, 50,000,000 options to purchase  the  Company's  common  stock were granted to the select key employees,  officers and a director of the Company expiring on July 12, 2004.  As of March 31, 2004, such options had not been exercised.





Equity Compensation Plan Information



|Plan category                                              | Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights | Weighted average exercise
price of outstanding options,
warrants and rights | Number of securities
remaining available for future
issuance.
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------------------
|                                                           | (a)                                                                                         | (b)                                                                         | (c)                                                          
|Equity compensation plans
approved by security holders     | --                                                                                          | --                                                                          | -0-                                                          
|Equity compensation plans
not approved by security
holders | 50,000,000                                                                                  | $0.006                                                                      | -0-                                                          
|Total                                                      | 50,000,000                                                                                  | $0.006                                                                      | -0-                                                          





Recent Sales of Unregistered Securities



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





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



On July 24, 2001, the Company granted three consulting firms options to purchase 27,000,000 shares at $0.005 per share. These options expire on July 23, 2002. These options were exercised on August 15, 2001. These shares were issued pursuant to the exemption provided for under Section 4(2) of the Securities Act of 1933, as amended, as a "transaction not involving a public offering." Furthermore, these consulting firms have represented to us that they are accredited investors.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



11

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



Conversion of debt



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



·

the issuance of 140,343,755 shares of the company's common stock to American Top Real estate, Inc. ("ATRE") upon the conversion by ATRE of the entire unpaid principal amount of $809,500 of its note and all accrued interest thereon in the amount of $102,734.41 at the conversion price of $0.0065 per share as of the close of business on July 23, 2001;



·

the issuance of 12,343,150 shares of the Company's common stock to Mr. Lu, the President of the Company, upon conversion of his $50,000 note and accrued interest thereon in the amount of $11,715.75 at the conversion price of $0.005 per share. The aggregate amount of these shares was issued on August 14, 2001; and



·

the issuance of 180,928,097 shares of the Company's common stock to GJ Products Corporation upon the conversion of the entire unpaid principal amount of $1,037,775 of its note and all accrued interest thereon in the amount of $138,257.63 at the conversion price of $0.0065 per share as of the close of business on July 23, 2001. These shares were issued on August 14, 2001.





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



(a)   PLAN OF OPERATION



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



Our short-term objectives are the following:



·

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



·

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



·

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



·

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



·

Continue expanding the overall market share of our core business by acquiring new videocassette and DVD titles for distribution.



·

Continue expanding into contract, duplication and fulfillment packaging business.



·

Maintain and improve our service through improved turnaround time.



·

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



12

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The intermediate and long-term objectives:



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



A.  Enhance Retailer and Mass Merchandiser Client Base



1.

Improve pricing and packaging innovations,



2.

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



3.

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



4.

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



5.

Improve efficiency in quick turnaround of product shipments.



B.   Increase our Internet e-Commerce Customer Base



1.

Maintain our competitive pricing.



2.

Improve customer service procedures.



3.

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



4.

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



5.

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



6.

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





C.  Expand Duplication, Replication and Packaging Service businesses.



1.

Improve efficiency and speed in fulfillment and packaging services.



2.

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



3.

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





D.

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



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



13

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We believe we have adequate cash resources to sustain our operations through the fourth quarter of fiscal 2005.  We are continuing to negotiate with several reliable investors to provide us with debt and equity financing for working capital purposes. We are likely to require cash resources and also are seeking potential merger or acquisition candidates that will help increase our revenues and cash liquidity.  Our principal objective is to implement the above items in the remaining quarters in fiscal 2005, which the Company expects will lead to a profitable operation if the items are successfully implemented, subject to market and other conditions. Although we believe that the outlook is favorable, there can be no assurance that market conditions will continue in a direction favorable to our Company or that we will be able to attain these objectives during fiscal 2005 or at all.  Moreover, we may find it difficult or impossible to raise additional equity financing or effect any potential merger or acquisition until we increase the number of our authorized number of common stock.  The Company as of June 15, 2004 has only approximately 3,000,000 authorized shares of common stock available for issuance in any such equity financing and we may be unable to effect any equity financing until we have increased our authorized shares of common stock and/or effected a restructuring of our equity capital, such as by means of a reverse stock split, combination or restructuring.  There is no assurance that we will be able to obtain stockholder approval for any such increase or restructuring.





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



Year Ended March 31, 2004 as Compared to Year Ended March 31, 2003



Revenues for the years ended March 31, 2004 and 2003 were approximately $4,998,000 and $3,253,000, respectively. Our sales increased by approximately $1,745,000 from the prior year with increased DVD product sales of approximately $2,482,000, offset by decreased video product and general merchandise sales of approximately $734,000 and $3,000, respectively. The higher DVD product sales for the year ended March 31, 2004, were primarily the result of increased orders from our major customers. The lower video product sales were primarily the result of the shifting of demand for and sales of our products from video to DVD products.  The decrease in general merchandise sales was the primarily the result of decreased demand for our train case and sundry products. Sales of our products are generally seasonal resulting in increased sales starting in the third quarter of the fiscal year.  We expect the sales to increase in fiscal year ending March 31, 2005, resulting from increased DVD product sales and products in our general merchandise line of products.



Our net profit for the year ended March 31, 2004 of approximately $85,000 arose primarily from our operating profit, compared to a net loss of approximately $540,000 for the same period last year.



Cost of goods sold for the years ended March 31, 2004 and 2003 were approximately $2,919,000 and $2,149,000 or 58% and 66% of sales, respectively. The increase in cost of sales of approximately $770,000 was primarily due to higher sales volume of the Companys products. The decrease in the cost of sales as a percentage to sales of approximately 8% when compared the same period a year earlier, was primarily the result of the shift in sales from video to DVD coupled with the higher average unit sales prices realized in the current year for video products.



For the years ended March 31, 2004 and 2003, DVD product cost of sales percentages when compared to sales were 60% and 63%, respectively. This decrease in the DVD product cost of sales percentage of 3% was caused primarily by the lower average cost resulting from a higher the level of production orders which reduced our unit manufacturing cost.



For the years ended March 31, 2004 and 2003, video product cost of sales percentages when compared to sales were51% and 66%, respectively. This decrease in the video product cost of sales percentage of 15% was caused primarily the result of selling higher unit sales price video programs.



Net profit for the years ended March 31, 2004 and 2003 were approximately $2,079,000 and $1,103,000 or 42% and 34% of sales, respectively. The increase in the net profit as a percentage of sales of 8% was primarily the result of the shift in sales from video to DVD coupled with the higher average unit sales prices realized in the current year for video products.



14

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Total operating expenses for the years ended March 31, 2004 and 2003 were approximately $1,734,000 and $1,355,000, respectively.  The increase in operating expenses of approximately $379,000 was the result of higher selling and marketing expenses and administrative expenses of approximately $136,000 and $243,000, respectively.



Selling and marketing expenses for the years ended March 31, 2004 and 2003 were approximately $683,000 and $547,000, respectively. The increase in selling expenses of approximately $136,000 was attributable mainly to higher expense levels in salaries, sales commission expense, advertising, promotional expenses and freight costs, offset by lower royalty expenses.



Administrative expenses for the years ended March 31, 2004 and 2003 were approximately $1,052,000 and $809,000, respectively. The increase in administrative expenses of approximately $243,000 was primarily the result of increased expense levels totaling approximately $314,000 primarily in salaries and wages, accounting fees, travel and entertainment expenses, sales tax, non cash consulting fees and other miscellaneous expenses, offset by lower expense levels of approximately $71,000 primarily in consulting expense, settlement fees, bad debt expense and miscellaneous office expenses.



Other expense for the year ended March 31, 2004 and 2003 were approximately $2,000 and $16,000, respectively.  The decrease of other expense of approximately $14,000 was the result primarily of recording forgiveness of certain accounts payable and accrued expenses during the period ended March 31, 2003.



Impairment of equity investment for the years ended March 31, 2004 and 2003 were approximately zero and $60,000, respectively.  The decrease of approximately $60,000 was the result of a write-down in the previous fiscal year of our investment in American Top Real Estate (ATRE) which reduced our investment in ATRE to zero, net of taxes.  The write-down resulted from the operating results of ATRE, and, as a consequence, our future financial results will not be negatively affected by ATREs ongoing operations.



Interest expense for the years ended March 31, 2004 and 2003 were approximately $249,000 and $225,000, respectively. The increased in interest expense in fiscal 2004 over fiscal 2003 of approximately $24,000 was primarily the result of higher levels of borrowings during fiscal 2004. As of March 31, 2004 and 2003, our outstanding debt was approximately $1,108,000 and $515,000, respectively. The increase of $593,000 in outstanding debt was primarily the result of increased factoring of our trade accounts receivables.



The Company recorded a provision for California income taxes of approximately $23,000 for the period ended March 31, 2004, resulting from a moratorium placed on California corporations from applying net operating loss carry forwards against earnings for a period of one year.



Our auditors issued a going concern report for the year ended March 31, 2004 and March 31, 2003.  There can be no assurance that we will be able to continuing generating profits the next fiscal quarters or be successful in our efforts to obtain additional financing.



LIQUIDITY AND CAPITAL RESOURCES



The Company has three primary sources of capital which include cash provided by operations, a factoring arrangement with a financial institution to borrow against the Companys trade accounts receivable and funds derived from private investors.  During the year ended March 31, 2004, the Company recorded a positive cash flow of approximately $102,000 compared to a negative cash flow of approximately $9,000 for the period a year earlier. The upsurge in DVD product sales and increased borrowing by factoring its accounts receivables enable the Company to reach a positive cash flow position.  Although there can be no assurance, Management believes that its revenues will continue to increase during fiscal year 2005 and will generate positive cash flows in the coming year.  Management anticipates cash flow provided by operations will be adequate to operate the business for the next twelve months.  Management further believes the sales shift from Video products to its DVD product line will continue and increase its overall sales during fiscal year 2005, however, there is no assurance that this trend will continue.



15

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On March 31, 2004 the Company had assets of approximately $2,690,000 compared to $1,720,000 on March 31, 2004.  The Company had a total stockholder's deficiency of approximately $772,000 on March 31, 2004, compared to a deficiency of approximately $928,000 on March 31, 2003, a decrease of approximately $155,000. The decrease in stockholders' deficiency for the year ended March 31, 2004 was the result the Companys net profit of approximately $85,000 and a increase to common stock of $70,000 resulting from recording a non-cash consulting fee in connection with issuing warrants for the Companys common stock.



As of March 31, 2004 the Company's working capital deficit decreased approximately $144,000 from a working capital deficit of approximately $1,445,000 at March 31, 2003, to a working capital deficit of approximately $1,301,000 at March 31, 2004. The decrease in working capital deficit was attributable primarily to an increase in cash, accounts receivable, inventory and prepaid expenses offset by increases in accounts payable, accrued expenses, and customer deposits.



Net cash flow from operating activities was approximately $473,000 during the year ended March 31, 2004, compared to approximately $275,000 for the same period a year earlier. The increase of approximately $198,000 was primarilyattributable to increases in net income, depreciation and amortization, inventory reserve, amounts due factor, and customer deposits, offset by increases in accounts receivable and inventory.  Net cash used in investing activities were approximately $306,000 and $162,000 for fiscal 2004 and 2003, respectively. The increase of approximately $144,000 resulted from higher purchases of property and equipment and film masters and artwork.



The Company during the year ended March 31, 2004, used approximately $65,000 in cash flows used in financing activities primarily for the reductions in cash overdraft and repayment of notes payable, compared to approximately $122,000 during the year ended March 31, 2003, used mainly for repayment of the Companys loan obligations.



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



The cost of funds for the accounts receivable portion of the borrowings with the new factor is a 1.5% discount from the stated pledged amount of each invoice for every 30 days the invoice is outstanding.  The inventory portion of the borrowings was determined by the lesser of i) $800,000, ii) 25% of our finished toy inventory or iii) 55% of the clients finished videotape inventory.  The cost of funds for the inventory portion of the borrowings was at 1.4% per month on the average loan balance each month.  During the year ended March 31, 2003, the inventory portion of the borrowings of $103,777 together with all accrued interest was paid in full.  Substantially all of the accounts receivable as of March 31, 2004 and 2003 have been factored and pledged as collateral under the factoring agreement.



During the year ended March 31, 2004, the Company did not derive any funds from the sale of its common stock.  In fiscal 2003, it received $62,500 from the exercise of stock options. In fiscal year 2003, the Company issued 2,500,000 shares of its common stock at an exercise price of $0.005 upon the exercise of options in settlement of $12,500 in accounts payable.



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



16

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



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



Concurrent with these transactions, all of the Companys outstanding Series B Convertible Preferred Shares, which amounted to 82.5 shares, were converted on April 15, 2004, into approximately 82,353,000 shares of Common Stock at an exercise price of $.01 per share.



In connection with the restructuring of the terms of the recent Letter of Agreement to Convert Preferred Shares and Securities Purchase Agreement, entered into by the previous holders of the 821⁄2 shares of the Companys Series B Convertible, the Company has recorded as of March 31, 2004, an aggregate amount of approximately $231,000 of accrued interest and liquidated damages.  In order to convert such accrued interest and liquidated damages, the Companys stockholders will have to approve an increase in the number of authorized shares of common stock.





GOING CONCERN



During the years ended March 31, 2004 and 2003, our independent auditors reports contained a going concern qualification and we have included the following plan of operation to address such concerns.  As reflected in the accompanying consolidated financial statements, the Company has incurred recurring losses from operations, negative cash flows from operations, a working capital deficit and is delinquent in payment of certain accounts payable.   Moreover, the Company may have difficulty raising additional equity capital prior to increasing the number of authorized shares the reasons discussed above.   These matters raise substantial doubt about the Companys ability to continue as a going concern. In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Companys ability to continue to raise capital and generate positive cash flows from operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence.



17

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES



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

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



Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about

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





ITEM 7.  FINANCIAL STATEMENTS



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







18

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Diamond Entertainment Corporation and Subsidiaries

Consolidated Financial Statements

March 31, 2004 and 2003







C O N T E N T S









Independent Auditors' Report

F-2



Consolidated Balance Sheets

F-3 to F-4



Consolidated Statements of Operations

F-5



Consolidated Statements of Stockholders' Equity

F-6



Consolidated Statements of Cash Flows

F-7 to F-8



Notes to Consolidated Financial Statements

F-9 to F-37















F-1

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INDEPENDENT AUDITORS' REPORT



To the stockholders and Board of Directors of

Diamond Entertainment Corporation



We have audited the accompanying consolidated balance sheets of Diamond Entertainment Corporation and Subsidiaries as of March 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  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 audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Diamond Entertainment Corporation and Subsidiaries as of March 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.



The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the Company has incurred in prior years losses and a negative cash flow from operations. These matters, as well as incurred 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 2.  These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.







Pohl, McNabola, Berg and Company, LLP

Orange, California

June 10, 2004





F-2

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2004 AND 2003











|                                             |                                                                      |                      |              | 2004      |           | 2003   
|-------------------------------------------- | -------------------------------------------------------------------- | -------------------- | ------------ | --------- | --------- | -------
|Assets                                       |                                                                      |                      |              |           |          
|Current Assets                               |                                                                      |                      |              |           |          
|                                             | Cash and cash equivalents                                            | $                    | 109,295      |           | $         | 6,990  
|                                             | Accounts receivable, net of allowance for                            |                      |              |           |           |        
|                                             | doubtful accounts of $79,462 and $87,570, respectively               |                      | 878,588      |           |           | 196,426
|                                             | Inventory                                                            |                      | 946,925      |           |           | 759,372
|                                             | Due from related parties                                             |                      | 161,111      |           |           | 208,808
|                                             | Prepaid expenses and other current assets                            |                      | 65,933       |           |           | 2,872  
|                                             |                                                                      |                      |              |           |           |        
|                                             |                                                                      | Total Current Assets |              | 2,161,852 |           |        
|                                             |                                                                      |                      |              |           |           |        
|Property and Equipment (net of accumulated   |                                                                      |                      |              |           |          
|                                             | depreciation of $762,375 and $676,613, respectively)                 |                      | 142,018      |           |           | 217,904
|                                             |                                                                      |                      |              |           |           |        
|Film Masters and Artwork (net of accumulated |                                                                      |                      |              |           |          
|                                             | accumulated amortization of $4,321,951 and $4,084,783, respectively) |                      | 346,883      |           |           | 300,818
|                                             |                                                                      |                      |              |           |           |        
|                                             |                                                                      |                      |              |           |          
|                                             |                                                                      |                      |              |           |           |        
|Other Assets                                 |                                                                      | 39,456               |              |           | 26,814   
|                                             |                                                                      |                      |              |           |           |        
|                                             |                                                                      |                      | Total Assets | $         | 2,690,209 |        





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



F-3



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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

AS OF MARCH 31, 2004 AND 2003













|                                      |                                                          |                                                                                                      |                                             | 2004       |           | 2003        
|------------------------------------- | -------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------- | ---------- | --------- | ------------
|Liabilities and Stockholders' Deficit |                                                          |                                                                                                      |                                             |            |          
|Current Liabilities                   |                                                          |                                                                                                      |                                             |            |          
|                                      | Bank overdraft                                           | $                                                                                                    | 234,365                                     |            | $         | 270,153     
|                                      | Accounts payable and accrued expenses                    |                                                                                                      | 1,986,701                                   |            |           | 1,788,294   
|                                      | Due to factor                                            |                                                                                                      | 707,517                                     |            |           | 113,449     
|                                      | Notes payable - current portion                          |                                                                                                      | 28,350                                      |            |           | 37,800      
|                                      | Due to related parties - notes payable                   |                                                                                                      | 372,374                                     |            |           | 363,718     
|                                      | Customer Deposits                                        |                                                                                                      | 133,330                                     |            |           | 45,813      
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|                                      |                                                          | Total Current Liabilities                                                                            |                                             | 3,462,637  |           |             
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|Notes payable, less current portion   |                                                          | -                                                                                                    |                                             |            | 28,350   
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|                                      |                                                          |                                                                                                      | Total Liabilities                           |            | 3,462,637 |             
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|Stockholders' Deficit                 |                                                          |                                                                                                      |                                             |            |          
|                                      | Convertible preferred stock, no par value; 4,999,863 and |                                                                                                      |                                             |            |           |             
|                                      |                                                          | 5,000,000 shares authorized in 2004 and 2003, respectively; 483,251                                  |                                             |            |           |             
|                                      |                                                          | issued (of which 172,923 are held in treasury)                                                       |                                             | 376,593    |           |             
|                                      | Treasury stock                                           |                                                                                                      | (48,803)                                    |            |           | (48,803)    
|                                      | Series A convertible preferred stock, $10,000 per share  |                                                                                                      |                                             |            |           |             
|                                      |                                                          | stated value; 50 shares authorized; 40 issued and outstanding                                        |                                             | 471,400    |           |             
|                                      | Series B convertible preferred stock, $10,000 per share  |                                                                                                      |                                             |            |           |             
|                                      |                                                          | stated value; 87 shares authorized; 83 and 84 issued and
outstanding in 2004 and 2003,  respectively |                                             | 1,101,837  |           |             
|                                      | Common stock, no par value; 600,000,000 shares           |                                                                                                      |                                             |            |           |             
|                                      |                                                          | authorized; 489,057,359 and 481,365,051 issued and outstanding                                       |                                             |            |           |             
|                                      |                                                          | In 2004 and 2003, respectively                                                                       |                                             | 17,319,122 |           |             
|                                      | Accumulated deficit                                      |                                                                                                      | (19,992,577)                                |            |           | (20,077,722)
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|                                      |                                                          |                                                                                                      | Total Stockholders' Deficit                 |            | (772,428) |             
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|                                      |                                                          |                                                                                                      |                                             |            |           |             
|                                      |                                                          |                                                                                                      | Total Liabilities and Stockholders' Deficit | $          | 2,690,209 |             



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



F-4

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDING  MARCH 31, 2004 AND 2003











|                                                                |                                 |                                |                                                 |           |             |           |           |            
|--------------------------------------------------------------- | ------------------------------- | ------------------------------ | ----------------------------------------------- | --------- | ----------- | --------- | --------- | -----------
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|                                                                |                                 |                                |                                                 | 2004      |             | 2003     
|Income                                                          |                                 |                                |                                                 |           |            
|                                                                | Revenues                        | $                              | 4,997,973                                       |           | $           | 3,253,110
|                                                                | Cost of goods sold              |                                | 2,919,209                                       |           |             | 2,149,133
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|                                                                |                                 | Net Profit                     |                                                 | 2,078,764 |             |           | 1,103,977
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|Operating Expenses                                              |                                 |                                |                                                 |           |             |          
|                                                                | Selling and marketing expenses  |                                | 682,732                                         |           |             | 546,614  
|                                                                | Administrative expenses         |                                | 1,051,511                                       |           |             | 808,858  
|                                                                |                                 | Total Operating Expenses       |                                                 | 1,734,243 |             |           | 1,355,472
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|                                                                |                                 |                                | Income from Operations                          |           | 344,521     |           |           | (251,495)  
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|Other Income and Expense                                        |                                 |                                |                                                 |           |            
|                                                                | Other income (expense)          |                                | (1,771)                                         |           |             | (16,398) 
|                                                                | Interest Income                 |                                | 14,749                                          |           |             | 13,441   
|                                                                | Impairment of equity investment |                                | -                                               |           |             | (60,158) 
|                                                                | Interest Expense                |                                | (249,295)                                       |           |             | (225,156)
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|                                                                |                                 | Total Other Income and Expense |                                                 | (236,317) |             |           | (288,271)
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|                                                                |                                 |                                | Income (Loss) Before Provision for Income Taxes |           | 108,204     |           |           | (539,766)  
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|Provision for Income Taxes                                      |                                 | (23,059)                       |                                                 |           | -          
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|                                                                |                                 |                                | Net Income (Loss)                               | $         | 85,145      |           | $         | (539,766)  
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|Earning/Loss Per Share                                          |                                 |                                |                                                 |           |            
|                                                                |                                 |                                | Basic                                           | $         | 0.00        |           | $         | 0.00       
|                                                                |                                 |                                | Diluted                                         | $         | 0.00        |           | $         | 0.00       
|                                                                |                                 |                                |                                                 |           |             |           |           |            
|Number of shares used in calculation of earnings/loss per share |                                 |                                |                                                 |          
|                                                                |                                 |                                | Basic                                           |           | 488,477,876 |           |           | 474,581,345
|                                                                |                                 |                                | Diluted                                         |           | 488,477,876 |           |           | 474,581,345







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



F-5



---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDING MARCH 31, 2004 AND 2003









|                                             |                                    |                                | Convertible     |         | Series A Convertible |    | Series B Convertible |   |              |   |             |     |          |           |               |             |           |            |            | Total 
|-------------------------------------------- | ---------------------------------- | ------------------------------ | --------------- | ------- | -------------------- | -- | -------------------- | - | ------------ | - | ----------- | --- | -------- | --------- | ------------- | ----------- | --------- | ---------- | ---------- | ------
|                                             |                                    |                                | Preferred Stock |         | Preferred Stock      |    | Preferred Stock      |   | Common Stock |   | Accumulated |     | Treasury |           | Stockholders'
|                                             |                                    |                                | Shares          |         | Amount               |    | Shares               |   | Amount       |   | Shares      |     | Amount   |           | Shares        |             | Amount    |            | Deficit    |       
|Balance at March 31, 2002                    | 483,251                            |                                |                 | 376,593 |                      | 40 |                      |   | 471,400      |   | 87          |     |          | 1,146,837 |               | 457,634,142 |           |            | 17,129,122 |       
|                                             | Exercise of
common stock
options:  |                                |                 |         |                      |    |                      |   |              |   |             |     |          |           |               |             |           |            |            |       
|                                             |                                    | Cash                           | -               |         |                      | -  |                      | - |              |   | -           |     | -        |           |               | -           |           | 12,500,000 |            |       
|                                             |                                    | Settlement
of accounts
payable | -               |         |                      | -  |                      | - |              |   | -           |     | -        |           |               |             |           | 2,500,000  |            |       
|                                             | Conversion of
Series B
convertible |                                |                 |         |                      |    |                      |   |              |   |             |     |          |           |               |             |           |            |            |       
|                                             | Preferred stock
to common
stock    | -                              |                 |         | -                    |    | -                    |   |              | - |             | (3) |          |           | (35,000)      |             | 8,730,909 |            |            | 35,000
|Net loss                                     | -                                  |                                |                 | -       |                      | -  |                      |   | -            |   | -           |     |          | -         |               | -           |           |            | -          |       
|Balance at March
31, 2003                    | 483,251                            |                                | $               | 376,593 |                      | 40 |                      | $ | 471,400      |   | 84          |     | $        | 1,111,837 |               | 481,365,051 |           | $          | 17,239,122 |       
|                                             | Conversion of
Series B
convertible |                                |                 |         |                      |    |                      |   |              |   |             |     |          |           |               |             |           |            |            |       
|Preferred stock
to common
stock              | -                                  |                                |                 | -       |                      | -  |                      |   | -            |   | (1)         |     |          | (10,000)  |               | 7,692,308   |           |            | 10,000     |       
|Pref. Warrants issued
for consulting
service | -                                  |                                |                 | -       |                      | -  |                      |   | -            |   | -           |     |          | -         |               | -           |           |            | 70,000     |       
|Net loss                                     | -                                  |                                |                 | -       |                      | -  |                      |   | -            |   | -           |     |          | -         |               | -           |           |            | -          |       
|Balance at March
31, 2004                    | 483,251                            |                                | $               | 376,593 |                      | 40 |                      | $ | 471,400      |   | 83          |     | $        | 1,101,837 |               | 489,057,359 |           | $          | 17,319,122 |       





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



F-6



---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDING MARCH 31, 2004 AND 2003









|                                      |                                           |                                                        |                                  |                                                               |                                           | 2004      |           | 2003
|------------------------------------- | ----------------------------------------- | ------------------------------------------------------ | -------------------------------- | ------------------------------------------------------------- | ----------------------------------------- | --------- | --------- | ----
|Cash Flows from Operating Activities: |                                           |                                                        |                                  |                                                               |                                          
|                                      | Net income (loss)                         | $                                                      | 85,145                           |                                                               | $                                         | (539,766)
|                                      |                                           | Adjustments to reconcile net income (loss) to net cash |                                  |                                                               |                                           |           |          
|                                      |                                           |                                                        | Provided by operating activities |                                                               |                                           |           |           |     
|                                      |                                           |                                                        |                                  | Depreciation and amortization                                 |                                           | 322,938   |           |     
|                                      |                                           |                                                        |                                  | Provision for doubtful accounts                               |                                           | (8,108)   |           |     
|                                      |                                           |                                                        |                                  | Inventory reserve                                             |                                           | (104,824) |           |     
|                                      |                                           |                                                        |                                  | Issuance of equity instruments as compensation and other fees |                                           | -         |           |     
|                                      |                                           |                                                        |                                  | Impairment of equity investment                               |                                           | -         |           |     
|                                      |                                           |                                                        |                                  | Issuance of warrants for consulting service                   |                                           | 70,000    |           |     
|                                      |                                           | Changes in certain assets and liabilities              |                                  |                                                               |                                           |           |          
|                                      |                                           |                                                        |                                  | Due from related party                                        |                                           | 47,697    |           |     
|                                      |                                           |                                                        |                                  | Accounts receivable                                           |                                           | (674,054) |           |     
|                                      |                                           |                                                        |                                  | Inventory                                                     |                                           | (82,729)  |           |     
|                                      |                                           |                                                        |                                  | Prepaid expenses and other current assets                     |                                           | (63,061)  |           |     
|                                      |                                           |                                                        |                                  | Due to factor                                                 |                                           | 594,068   |           |     
|                                      |                                           |                                                        |                                  | Accounts payable and accrued expenses                         |                                           | 198,407   |           |     
|                                      |                                           |                                                        |                                  | Customer deposits                                             |                                           | 87,517    |           |     
|                                      |                                           |                                                        |                                  |                                                               |                                           |           |           |     
|                                      |                                           |                                                        |                                  |                                                               | Net Cash Provided by Operating Activities |           | 472,996   |     
|                                      |                                           |                                                        |                                  |                                                               |                                           |           |           |     
|Cash Flows from Investing Activities: |                                           |                                                        |                                  |                                                               |                                          
|                                      | Purchase of property and equipment        |                                                        | (9,876)                          |                                                               |                                           | (10,551) 
|                                      | Other assets                              |                                                        | (12,642)                         |                                                               |                                           | 6,623    
|                                      | Purchase of film masters and artwork      |                                                        | (283,241)                        |                                                               |                                           | (157,684)
|                                      |                                           |                                                        |                                  |                                                               |                                           |           |           |     
|                                      |                                           |                                                        |                                  |                                                               | Net Cash Used in Investing Activities     |           | (305,759) |     
|                                      |                                           |                                                        |                                  |                                                               |                                           |           |           |     
|Cash Flows from Financing Activities: |                                           |                                                        |                                  |                                                               |                                          
|                                      | Increase (decrease) in bank overdraft     |                                                        | (35,788)                         |                                                               |                                           | 260,330  
|                                      | Net repayments of financing agreement     |                                                        | -                                |                                                               |                                           | (103,777)
|                                      | Payments of notes payable                 |                                                        | (37,800)                         |                                                               |                                           | (37,800) 
|                                      | Payments of notes payable (related party) |                                                        | 8,656                            |                                                               |                                           | (303,140)
|                                      | Proceeds from the exercise of options     |                                                        | -                                |                                                               |                                           | 62,500   
|                                      |                                           |                                                        |                                  |                                                               |                                           |           |           |     
|                                      |                                           |                                                        |                                  |                                                               | Net Cash Used in Financing Activities     |           | (64,932)  |     





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



F-7



---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDING MARCH 31, 2004 AND 2003











|                                                     |                |                  |   |         |         | 2004 |         | 2003
|---------------------------------------------------- | -------------- | ---------------- | - | ------- | ------- | ---- | ------- | ----
|                                                     |                |                  |   |         |         |      |         |     
|Net Increase (Decrease) in Cash and Cash Equivalents |                | 102,305          |   |         | (8,652)
|                                                     |                |                  |   |         |         |      |         |     
|Cash and Cash Equivalents - Beginning of Year        |                | 6,990            |   |         | 15,642 
|                                                     |                |                  |   |         |         |      |         |     
|Cash and Cash Equivalents - End of Year              | $              | 109,295          |   | $       | 6,990  
|                                                     |                |                  |   |         |         |      |         |     
|Supplemental Information:                            |                |                  |   |         |        
|                                                     | Cash Paid for: |                  |   |         |         |     
|                                                     |                | Interest expense | $ | 210,264 |         | $    | 157,888
|                                                     |                | Income taxes     | $ | 4,000   |         | $    | -      





SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:



For the year ended March 31, 2004:



The Company converted one share of Series B convertible preferred stock into 7,692,308 shares of its common stock.



The Company issued 35,000,000 warrants for the issuance of common stock at $0.012 per share for $70,000 in consulting services.



For the year ended March 31, 2003:



The Company issued 2,500,000 shares of its common stock for the settlement of accounts payable related consulting fees totaling $12,500.



The Company converted 4 shares of Series B convertible preferred stock into 8,730,909 shares of its common stock.



Company has recognized $372,857 of stock discount expense relating to this feature.









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



F-8

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





1.

Summary of Significant Accounting Policies



Basis of Presentation



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



1)

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



2)

Grand Duplication ("Grand"), incorporated under the laws of the state of California on August 13, 1996; and



3)

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



All intercompany transactions and balances have been eliminated in consolidation.





Nature of Business



The Company is in the business of distributing and selling videocassettes, general merchandise, patented toys, furniture and Cine-Chrome gift cards, through normal distribution channels throughout the United States and through a web site.  As of March 31, 2004 and 2003, 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 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.  The Company also distributes a product called Cine-Chrome utilizing classic images of licensed properties; and



General Merchandise



The Company, through its wholly owned subsidiary, JPI, purchases and distributes toy products to mass merchandisers in the U.S.  The Company offers the toy products for limited sale periods and as demand for products change, the Company switches to newer and more popular products.



F-9



---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





1.

Summary of Significant Accounting Policies (continued)



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented.  Actual results could differ from those estimates.





Revenue Recognition



The Company records sales when products are shipped to customers and are shown net of estimated returns and allowances.  Customer deposits and credits are deferred until such time products are shipped to customers.  The Company grants certain distributors limited rights of return and price protection on unsold products.  Product revenue on shipments to distributors that have rights of return and price protection is recognized upon shipment by the distributor.



Cash and Cash Equivalents



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



Concentrations of Credit Risk



Financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents and accounts receivable arising from Company's normal business activities.  The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.  The Company places its cash with high quality financial institutions and at times may exceed the FDIC $100,000 insurance limit.  The Company had $2,083 in deposits as of March 31, 2003, with financial institutions subject to a credit risk beyond the insured amount.



Inventory



Inventory is stated at the lower of cost or market utilizing the first-in, first-out method.  Inventory consists primarily of videocassettes, general merchandise, patented toys, furniture and Cine-Chrome gift cards.



F-10

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





1.

Summary of Significant Accounting Policies (continued)



Property and Equipment



Property and equipment is presented at historical cost less accumulated depreciation.  Depreciation is computed utilizing the straight-line method for all furniture, fixtures and equipment over a five-year period, which represents the estimated useful lives of the respective assets.  Leasehold improvements are being amortized over the lesser of their estimated useful lives or the term of the lease.





Film Masters and Artwork



The cost of film masters and related artwork is capitalized and amortized using the straight-line method over a three-year period.  Film masters consist of original "masters", which are purchased for the purpose of reproducing videocassettes that are sold to customers.  The Company estimates that the approximate useful life of the film masters and artwork is 3 years.





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.





Bank Overdraft



The Company maintains overdraft positions at certain banks. Such overdraft positions are included in current liabilities.



Advertising Costs

Advertising costs are expensed as incurred.  Advertising costs were approximately $32,042 and $16,454 for the years ended March 31, 2004 and 2003, respectively.



Shipping Costs



Shipping costs are not separately billed to customers and are included in Selling and marketing expenses in the amounts of $229,658 and $160,235 for 2004 and 2003, respectively.



F-11

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





1.

Summary of Significant Accounting Policies (continued)



Fair Value of Financial Instruments



For certain of the Company's financial instruments, including accounts receivable, bank overdraft and accounts payable and accrued expenses, the carrying amounts approximate fair value, due to their relatively short maturities.  The amounts owed for long-term debt also approximate fair value because current interest rates and terms offered to the Company are at current market rates.





Stock-Based Compensation



The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees".  Under APB 25, the Company does not recognize compensation expense related to options issued under the Company's employee stock option plans, unless the option is granted at a price below market price on the date of grant.



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 with SFAS No. 123 and values the equity securities based on the fair value of the security on the date of grant.  For stock-based awards, the value is based on the market value for the stock on the date of grant and if the stock has restrictions as to transferability, a discount is provided for lack of 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



The Company adopted SFAS No. 130, "Reporting Comprehensive Income.  SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements.  Comprehensive income consists of net income and unrealized gains (losses) on available for sale marketable securities and is presented in the consolidated statements of shareholders' equity and comprehensive income.  The Statement requires only additional disclosures in the consolidated financial statements and does not affect the Company's financial position or results of operations.



F-12

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





1.

Summary of Significant Accounting Policies (continued)



Earnings (Loss) per Share



SFAS No. 128, "Earnings per Share," requires presentation of basic earning/loss per share ("Basic EPS/LPS") and diluted earning/loss per share ("Diluted EPS/LPS").  The computation of basic earning/loss per share is computed by dividing income/loss available to common stockholders by the weighted average number of outstanding common shares during the period.  Diluted earning/loss per share gives effect to all dilutive potential common shares outstanding during the period.  The computation of diluted EPS/LPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on income/losses.



The shares used in the computation of earning/loss per share were as follows:



|        | March 31,  
|------- | -----------
|        | 2004       
|        |            
|Basic   | 488,477,876
|        |            
|Diluted | 488,477,876



Segment Disclosure



SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, was issued, which changes the way public companies report information about segments.  SFAS No. 131, which is based on the selected segment information, requires quarterly and entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenues.



Recent Accounting Pronouncements



On June 29, 2001, SFAS No. 141, "Business Combinations," was approved by the Financial Accounting Standards Board ("FASB").  SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001.  Goodwill and certain intangible assets will remain on the balance sheet and not be amortized.  On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary.  The Company is required to implement SFAS No. 141 on April 1, 2002, and its impact, if any, is not expected to be material, on its financial position or results of operations.



On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was approved by the FASB.  SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach.  Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement.  The Company is required to implement SFAS No. 142 on April 1, 2002, and its impact on its financial position or results of operations, if any, is not expected to be material.



F-13

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





1.

Summary of Significant Accounting Policies (continued)



Recent Accounting Pronouncements (continued)



In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligation.  SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, and will require companies to record a liability for asset retirement obligations in the period in which they are incurred, which typically could be upon completion or shortly thereafter.  The FASB decided to limit the scope to legal obligations and the liability will be recorded at fair value.  The effect of adoption of this standard on the Company's results of operations and financial positions is being evaluated.



In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets.  SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.  It provides a single accounting model for long-lived assets to be disposed of and replaces SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of.  The effect of adoption of this standard on the Company's results of operations and financial positions is being evaluated.



In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities.  SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).  SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred, rather than at the date of commitment to an exit or disposal plan.  SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002.  The Company does not expect that the adoption of SFAS 146 will have a material impact on the Company's financial position or results of operations, although SFAS 146 may impact the timing of recognition of costs associated with future restructuring, exit or disposal activities.



In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation  Transition and Disclosure  An Amendment of FASB Statement No. 123.  SFAS 148 amends Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures both in annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The Company has included the disclosures required by SFAS 148 in Note 1  "The Company and Summary of Significant Accounting Policies" and Note 10  "Stockholders' Equity."



F-14

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





1.

Summary of Significant Accounting Policies (continued)



Recent Accounting Pronouncements (continued)



In November 2002, the FASB issued Interpretation No. 45 ("FIN 45") "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.  FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees.  It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee.  However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties or to guarantees accounted for as derivatives.  The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002.  The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002.  The Company has not yet determined the effect of adopting FIN 45 on its results of operations or financial position.



In January 2003, the FASB issued Interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest Entities.  Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests.  FIN 46 requires a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns.  Management is currently evaluating the effect of adopting FIN 46 on its results of operations and financial position.



In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables.  EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets.  The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003.  The Company does not believe the adoption of EITF 00-21 will have a material impact on its financial position or results of operations.



In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue 00-21, addressing how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets.  Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any undelivered item is probable.  Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions.  The final consensus is applicable to agreements entered into in fiscal periods beginning after June 15, 2003.  The provisions of this consensus are not expected to have a significant effect on the Companys results of operations or financial position.



F-15

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





1.

Summary of Significant Accounting Policies (continued)



Recent Accounting Pronouncements (continued)



In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends SFAS 133 for certain decisions made by the FASB Derivatives Implementation Group.  In particular, SFAS 149: (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (4) amends certain other existing pronouncements.  This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003.  In addition, most provisions of SFAS 149 are to be applied prospectively.  Management does not expect the adoption of SFAS 149 to have a material impact on the Companys financial position, cash flows or results of operations.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150).  SFAS 150 changes the accounting for certain financial instruments that under previous guidance issuers could account for as equity.  It requires that those instruments be classified as liabilities in balance sheets.  The guidance in SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003.  Management does not expect the adoption of SFAS 150 to have a material impact on the Companys financial position, cash flows or results of operations.





2.

Going Concern



As reflected in the accompanying consolidated financial statements, while the Company was marginally profitable during the current year, the Company historically has incurred recurring losses from operations, negative cash flows from operations, a working capital deficit and is delinquent in payment of certain accounts payable.  These matters raise substantial doubt about the Company's ability to continue as a going concern.



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



Management plans to take, or has taken, the following steps that it believes will be sufficient to provide the Company with the ability to continue in existence and mitigate the effects of the uncertainties.



F-16

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





2.

Going Concern (continued)



The Company has implemented a plan to increase its overall market share of core business and its general merchandise line products, and to expand into the contract replication, duplication and packaging business.  The Company has implemented the following goals and strategies to achieve its plan:



·

attain leadership in the market segment of high quality budget priced distribution of videocassettes and DVD titles.



·

Expand the Companys association with firms in China to source and handle QA functions for its general merchandise line of products and market a wide selection of high quality, low price general merchandise and sundry items from China.



·

Re-establish sales to club type stores with the Companys new general merchandise line of products.



·

Utilize the Companys relationship with mass merchandisers to introduce and market its general merchandise line of products.



·

Continue to seek out additional financing sources to support the expected growth in the Companys general merchandise line of products.



·

Avoid direct competition with larger competitors who sell in the same product categories as the Company, by offering higher quality budgeted price products.



·

Continue to acquire new videocassette and DVD titles for distribution.



·

Expand the Companys internet e-Commerce.



The Company believes it has adequate cash resources to sustain its operations through the third quarter of fiscal 2004, when it expects to generate a positive cash flow.  The Company is continuing to negotiate with several reliable investors to provide the Company with debt and equity financing for working capital purposes.  The principal objective of the Company is to implement the above strategies during fiscal 2004.  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.





3.

Accounts Receivable



Accounts receivable as of March 31, 2004 and 2003, net of allowance for doubtful accounts were $878,588 and $196,426, respectively.  Substantially all of the accounts receivable as of March 31, 2004 and 2003 have been factored and pledged as collateral under a factoring agreement (see Note 9).



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



F-17

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





3.

Accounts Receivable (continued)



As of March 31, 2004 and 2003, the Company had an allowance for doubtful accounts of $79,462 and $87,570, respectively.







4.

Inventory



Inventory consisted of the following as of:



|                          | March 31,
|------------------------- | ---------
|                          | 2004     
|                          |          
|Raw materials             | $        
|Finished goods            |          
|                          |          
|                          |          
|Less: valuation allowance |          
|                          |          
|Inventory, net            | $        





Allowance



An allowance has been established for inventory totaling $228,479 and $333,303 as of March 31, 2004 and 2003, respectively.  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;



(b)

inventory, which has passed its peak selling season; and



(c)

deemed to be non-salable.



F-18

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





5.

Related Party Transactions



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



Due from related parties:



|                                       |           |         |      |   |        
|-------------------------------------- | --------- | ------- | ---- | - | -------
|                                       | March 31,
|                                       | 2004      |         | 2003
|                                       |           |         |      |   |        
|a) Principal and interest from Officer | $         | 115,811 |      | $ | 165,008
|                                       |           |         |      |   |        
|b) GJ Products                         |           | 45,300  |      |   | 43,800 
|                                       |           |         |      |   |        
|                                       | $         | 161,111 |      | $ | 208,808



a)

As of March 31, 2004 and 2003, the Company had $71,792 and $135,030, respectively, due from an officer of the Company.  Simple interest is accrued monthly at an annual rate of 10% on the outstanding balance and totals $44,019 and $29,978 as of March 31, 2004 and 2003, respectively.  The loan is due on demand.



b)

As of March 31, 2004 and 2003, the Company had a miscellaneous receivable due from GJ Products (shareholder) of $45,300 and $43,800, respectively.



Due to related parties - notes payable:



|                                                          | March 31,
|--------------------------------------------------------- | ---------
|                                                          | 2004     
|a) Note payable  American Top Real Estate, Inc. (ATRE) | $        
|                                                          |          
|b) Convertible note payable - Jeffrey Schillen            |          
|                                                          |          
|Less:  current portion                                    |          
|Long term                                                 | $        



F-19

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





5.

Related Party Transactions (continued)



a)

Note Payable - ATRE As of March 31, 2004 and 2003, the Company was advanced $322,374 and $263,718, from ATRE (see Note 8), bearing interest at the rate of 10% per annum, and due on demand.



b)

Convertible Debenture - Related Party:  The debenture bears interest at 10% per year with principal and interest due on the first anniversary of the date of issuance.  The note is due on demand.  The note also calls 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.  During the year ended March 31, 2004, the $50,000 was paid on the note and as of March 31, 2004, the balance remaining is $50,000 and is not converted, and accrued interest is $42,115.





Automobile expense



During 2004, the company recorded expense of $7,150 for a leased vehicle for the use of Jeffrey Schillen.





Issuance of stock options



During the years ending March 31, 2004 and 2003, the Company issued various stock options to certain related parties.  (See note 14).





6.

Property and Equipment



Property and equipment consisted of the following as of:



|                                | March 31,
|------------------------------- | ---------
|                                | 2004     
|Furniture and equipment         | $        
|Automobile                      |          
|Leasehold improvements          |          
|                                |          
|Less:  accumulated depreciation |          
|and amortization                |          
|Furniture and equipment, net    | $        



Depreciation and amortization expense for the years ended 2004 and 2003 was $85,933 and $88,723, respectively.



F-20

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003







7.

Film Masters and Artwork



Film Masters and Artwork consisted of the following as of:



|                                | March 31,
|------------------------------- | ---------
|                                | 2004     
|Intellectual property           | $        
|Other film masters and artwork  |          
|                                |          
|Less:  accumulated amortization |          
|Film Masters and Artwork, net   | $        



Amortization expense for the years ended March 31, 2004 and 2003 was $237,164 and $128,016, respectively.





The cost of film masters and related artwork is capitalized and amortized using the straight-line method over a three-year period.  Film masters consist of original "masters", which are purchased for the purpose of reproducing videocassettes that are sold to customers.  In accordance with SFAS No. 121, film masters and related artwork are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.  The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.  If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable.  As of March 31, 2004 and 2003, no such events have occurred.







8.

Investment in Equity Subsidiary



During 1989, the Company paid $50,000 for 50% of the issued and outstanding common stock of American Top Real Estate ("ATRE").  Subsequent loan participation by the investors in ATRE reduced the Companys shareholder interest to 35.9%.  The Companys 2003 operations include a write-down of its investment in ATRE, which reduced the Companys investment in ATRE to zero, net of taxes.  The write-down resulted from the operating results of ATRE.  The write-down reduced the Companys investment in ATRE to zero and, as a consequence, the Companys future financial results will not be negatively affected by ATREs ongoing operations.  The Company has no obligation to fund future operating losses of ATRE.



F-21

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003







9.

Due to Factor/Financing Agreement Payable



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



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





The asset-based note was terminated on November 15, 2002.  The Company paid interest of approximately $114,068 and $95,181 for the years ended March 31, 2004 and 2003, respectively.  The financing agreement and factor advances were as follows:



|                      | March 31,
|--------------------- | ---------
|                      | 2004     
|Due to factor payable | $        
|                      |          
|                      |          
|                      |          







10.

Notes Payable



Notes payable represent the following as of:



|                     | March 31,
|-------------------- | ---------
|                     | 2004     
|Production Equipment | $        
|Less current         |          
|Long term            | $        



During the year ended March 31, 2002, the Company incurred a three-year note in the amount of $113,400, bearing interest at 10% to purchase a Sony printer for in house video duplication.  The balance of such note at March 31, 2004 and 2003 was $28,350 and $66,150, respectively.



F-22



---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003







11.

Commitments and Contingencies



Royalty Commitments



The Company has entered into various royalty agreements for licensing of titles with terms of one to seven years.  The Company licenses titles of films not yet covered by public domain.  The Company produces duplicate videos and DVDs for sale.  Certain agreements include minimum guaranteed payments.  For the years ended March 31, 2004 and 2003, royalty expense was $27,583 and $57,745, 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.  For the year 1996, one of the officers' employment agreements was amended to increase his annual salary by $30,000.  These agreements terminate in the year 2005 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, 2004 and 2003, the officers did not purchase these shares.





Lease Commitments



The Company leases office and storage facilities under an operating lease, which originally expired in January 2003 and was extended through July 2003.  The Company has negotiated a month-to-month lease commencing August 2003. The monthly rent expense is $12,000.





Rent expense for the years ended March 31, 2004 and 2003 was approximately $144,000 and $135,225, respectively.





F-23



---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003







12.

Stockholders' Deficiency



Common Stock



As of March 31, 2003, the aggregate number of shares of common stock that the Company has authority to issue is 600,000,000 shares with no par value.  As of March 31, 2004 and 2003, 489,057,359 and  481,365,051 shares were issued and outstanding.



During, the years ended March 31, 2004 and 2003, the Company had the following significant issuances of its common stock:



Common stock issued for exercise of stock options



During the year ended March 31, 2003, the Company issued 15,000,000 shares of its common stock for the exercise of 15,000,000 stock options.  The consideration received was $72,500 and for consulting services incurred and owed by the Company.





Conversion of Series B convertible preferred stock



During the year ended March 31, 2003, 8,730,909 shares of common stock were issued for the conversion of 4 Series B convertible preferred shares (see Series B convertible preferred stock).



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



Convertible Preferred Stock



As of March 31, 2004 and 2003, the Company had authorized 5,000,000 shares of no par value, convertible preferred stock.  The Company had issued 483,251 shares (of which 172,923 valued at $48,803 are held in treasury).  The preferred stock has:



i.)

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



ii.)

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



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.



F-24

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003







12.

Stockholders' Deficiency (continued)





Series A Convertible Preferred Stock



As of March 31, 2004 and 2003, the Company had authorized 50 shares of convertible Series A preferred stock with a stated value of $10,000 per share. The Company had issued 40 shares.



The Series A Preferred Stock is convertible, at the investor's 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; and



iii.)

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 also required to keep such a registration statement effective until all of such shares have been resold.



F-25

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003







12.

Stockholders' Deficiency (continued)



Series B Convertible Preferred Stock



As of March 31, 2004 and 2003, the Company had authorized 87 shares of convertible Series A preferred stock with a stated value of $10,000 per share. The Company had 83 and 84 shares issued and outstanding at March 31, 2004 and 2003, respectively.



The Series B Preferred Stock is convertible, at the investor's option, into shares of the Company's Common Stock and automatically converts into Common Stock on November 16, 2003.  The conversion price of the Series B Preferred Stock is the lower of $.02 per share or 70% of the average of the closing bid prices of the Company's Common Stock on any five trading days in the 30 trading day period preceding the date of conversion.  The conversion price of the Series B Preferred Stock is also adjusted in the event of stock dividends, stock splits, recapitalizations, reorganizations, consolidations, mergers or sales of assets.  The Series B Preferred Stock also provides for additional shares of the Company's Common Stock calculated at a rate of 6% to determine the conversion rate of the Company's Common Stock upon conversion.



Additional features of the Series B Preferred Stock include, among other things:



i.)

a redemption feature at the option of the Company commencing May 15, 2002 of shares of Series B 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;



iii.)

and the Series B 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 B Preferred Stock, the Company is required to file a registration statement to register the Common Stock issuable upon conversion of the Series B Preferred Stock under the Securities Act to provide for the resale of such Common Stock.  The Company is required to keep such a registration statement effective until all of such shares have been resold.



During the year ended March 31, 2003, 4 shares of Series B Convertible Preferred Stock with a stated value of $10,000 per share were converted into 8,730,909 shares of common stock at a price per share equaling 70% of the average 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 prices ranged from $.00127 to $.00740 and totaled $35,000.



During the year ended March 31, 2004, 1 share of Series B Convertible Preferred Stock with a stated value of $10,000 per share was converted into 7,692,308 shares of common stock. at a price per share equaling 70% of the average 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 was $0.0013.



F-26

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





13.

Warrants



The following schedules summarize warrants for the years ended :



|                         | Warrants Outstanding |                                         | Warrants Exercisable
|------------------------ | -------------------- | --------------------------------------- | --------------------
|Range of
Exercise
Prices |                      | Number
Outstanding
as of March
31, 2004 |                     
|                         |                      |                                         |                     
|0.012                    |                      | 35,000,000                              |                     
|                         |                      |                                         |                     
|0.020                    |                      | 10,950,000                              |                     
|                         |                      |                                         |                     
|0.070                    |                      | 1,525,000                               |                     
|                         |                      |                                         |                     
|                         |                      |                                         |                     
|                         |                      | 47,475,000                              |                     



|                         | Warrants Outstanding |                                         | Warrants Exercisable
|------------------------ | -------------------- | --------------------------------------- | --------------------
|Range of
Exercise
Prices |                      | Number
Outstanding
as of March
31, 2003 |                     
|                         |                      |                                         |                     
|0.020                    |                      | 10,950,000                              |                     
|                         |                      |                                         |                     
|0.070                    |                      | 1,525,000                               |                     
|                         |                      |                                         |                     
|                         |                      |                                         |                     
|                         |                      | 12,475,000                              |                     



F-27

---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





13.

Warrants (continued)



Warrants Granted to Independent Consultant



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



Warrants Granted to Independent Consultant (continued)



The weighted average estimated fair value of warrants granted during 2004 was $0.002.  These amounts were determined using the Black-Scholes option-pricing model, which values options and warrants based on the stock price at the grant date, the expected life of the option or warrants, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option.  The assumptions used in the Black-Scholes model were as follows for warrants granted in: Risk-free interest rate - 5.48%; Expected volatility of common stock - 400%; Dividend yield - 0.0%; Expected life of warrants 5 years.



The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options and the Companys options do not have the characteristics of traded options, the option valuation models do not necessarily provide a reliable measure of the fair value of its options.



F-28



---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





14.

Common Stock Options



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



Options issued and outstanding not under a stock option plan:



|                                    | Officers/
Directors |  | Consultants  |  | Weighted
Average
Exercise
Price
|----------------------------------- | ------------------- |  | ------------ |  | -------------------------------
|Options exercisable, March 31,
2002 | 26,000,000          |  | 16,000,000   |  | $                              
|                                    |                     |  |              |  |                                
|Granted                             | -                   |  | -            |  | $                              
|Exercised                           | -                   |  | (15,000,000) |  | $                              
|Expired/cancelled                   | (2,000,000)         |  | (1,000,000)  |  | $                              
|Options exercisable, March 31,
2003 | 24,000,000          |  | -            |  | $                              
|                                    |                     |  |              |  |                                
|Granted                             |                     |  |              |  |                                
|Exercised                           |                     |  |              |  |                                
|Expired/cancelled                   |                     |  |              |  |                                
|                                    |                     |  |              |  |                                
|Options exercisable, March 31, 2004 | 24,000,000          |  | -            |  | $                              





Officers/directors



The options expire on various dates starting in September 2002 through August 2005.



F-29



---

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





14.

Common Stock Options (continued)



2001 Stock Compensation Plan



The following summarizes the 2001 stock compensation plan transactions for the years ended :



|                                                    | Stock Options Outstanding |  | Weighted Average Exercise Price
|--------------------------------------------------- | ------------------------- |  | -------------------------------
|Options Exercisable and Outstanding, March 31, 2002 | 50,000,000                |  | $                              
|                                                    |                           |  |                                
|Granted                                             | -                         |  |                                
|Expired                                             | -                         |  |                                
|Canceled                                            | -                         |  |                                
|                                                    |                           |  |                                
|Options Exercisable and Outstanding, March 31, 2003 | 50,000,000                |  | $                              
|                                                    |                           |  |                                
|                                                    |                           |  |                                
|                                                    |                           |  |                                
|                                                    |                           |  |                                
|Options Exercisable and Outstanding, March 31, 2004 | 50,000,000                |  | $                              







2001 Stock Compensation Plan (continued)



The Company's 2001 Stock Compensation Plan was established for the purpose of providing the Company with a means of compensating selected key employees (including officers), and directors of the Company and its subsidiaries for their services rendered in connection with the development of Company with shares of Common Stock of the Company.  The plan authorized the Board of Directors of the Company to sell or award up to 50,000,000 shares and/or options of the Company's common stock, no par value at a purchase price of $0.006, which represented the fair value of the common stock on that date.  On July 24, 2001, 50,000,000 options to purchase the Company's common stock were granted to the select key employees, officers and a director of the Company expiring on July 24, 2004.  Of such options granted, James Lu, the President and Jeffrey Schillen, the Executive Vice President of the Company were granted options to purchase 20,000,000 and 10,000,000 shares, respectively, and 5,000,000 options to purchase were granted to Murray Scott, a Director of the Company.  The remaining balance of 15,000,000 options was granted to eight other key employees of the Company.  As of March 31, 2004 and 2003, none of the options that were granted under this plan were exercised.



F-30

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003







2000 Stock Compensation Plan



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



|                                                     | Stock Options Outstanding |  | Weighted Average Exercise
Price
|---------------------------------------------------- | ------------------------- |  | -------------------------------
|                                                     |                           |  |                                
|Options, Exercisable and Outstanding, March 31, 2002 | 600,000                   |  | $                              
|                                                     |                           |  |                                
|Granted                                              | -                         |  | $                              
|Expired                                              | -                         |  | $                              
|                                                     |                           |  |                                
|Options, Exercisable and Outstanding, March 31, 2003 | 600,000                   |  | $                              
|                                                     |                           |  |                                
|Granted                                              |                           |  |                                
|Expired                                              | (600,000)                 |  |                                
|                                                     |                           |  |                                
|Options, Exercisable and Outstanding, March 31, 2004 | -                         |  |                                





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



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



The Company applies SFAS No. 123, and related interpretations, for stock options issued to 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 $12,500 for the year ended  March 31, 2003.





F-31

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003







14.

Common Stock Options (continued)



The following schedules summarize options for the years ended March 2004 and 2003:



2000 Stock Compensation Plan (continued)





|                         | Options Outstanding |                                         | Options Exercisable
|------------------------ | ------------------- | --------------------------------------- | -------------------
|Range of
Exercise
Prices |                     | Number
Outstanding
as of March
31, 2004 |                    
|                         |                     |                                         |                    
|0.006                    |                     | 74,000,000                              |                    
|                         |                     |                                         |                    
|                         |                     |                                         |                    
|                         |                     | 74,000,000                              |                    







|                         | Options Outstanding |                                         | Options Exercisable
|------------------------ | ------------------- | --------------------------------------- | -------------------
|Range of
Exercise
Prices |                     | Number
Outstanding
as of March
31, 2003 |                    
|                         |                     |                                         |                    
|0.006                    |                     | 74,000,000                              |                    
|                         |                     |                                         |                    
|0.050                    |                     | 600,000                                 |                    
|                         |                     |                                         |                    
|                         |                     |                                         |                    
|                         |                     | 74,600,000                              |                    



F-32



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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





14.

Common Stock Options (continued)



Black-Scholes Calculation



The Company has adopted only the disclosure provisions of SFAS No. 123 for stock options issued to employees for services rendered.  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 compensatory plans and to outside third parties.



|                   |             | 2004 |        | 2003
|------------------ | ----------- | ---- | ------ | ----
|Net Income (Loss): |             |      |        |     
|                   |             |      |        |     
|                   | As Reported | $    | 85,145 |     
|                   |             |      |        |     
|                   | Pro Forma   | $    | 85,145 |     



The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model.  The Company has not granted or modified any options for the years ended 2004 and 2003.







15.

Major Customers/Suppliers



Customers



For the year ended March 31, 2004, the Company had net sales to two customers that accounted for approximately 20% and 18%, respectively.



For the year ended March 31, 2003, the Company had net sales to two customers that accounted for approximately 26% and 16%, respectively.



Suppliers



For the year ended March 31, 2004, the Company purchased video and DVD products from three suppliers that accounted for approximately 73% of the Company's net purchases.  During such period, the percentage of net video/DVD product purchases made from such suppliers were 28%, 27% and 18%, respectively.



For the year ended March 31, 2003, the Company purchased video and DVD products from four suppliers that accounted for approximately 60% of the Company's net purchases.  During such period, the percentage of net video/DVD product purchases made from such suppliers were 40% and 20%, respectively.



F-33



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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





16.

Income Taxes



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



|                                               | For The Years Ended
March 31,
|---------------------------------------------- | -----------------------------
|                                               | 2004                         
|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 :



|Federal income tax rate       | (35.0)%
|----------------------------- | -------
|Effect of valuation allowance | 35.0%  
|                              |        
|Effective income tax rate     | 0.0%   



At March 31, 2004 and 2003, the Company had net carryforward losses of approximately $13,971,384 and $20,007,770, 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, 2004 and 2003, decreased by approximately $2,449,743 and increased by approximately $394,220, 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:



F-34

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003







16.

Income Taxes (continued)



|                        | March 31,                
|----------------------- | -------------------------
|                        | 2004                     
|Deferred Tax Assets     |                          
|                        | Loss carryforwards       
|                        | Less: valuation allowance
|                        |                          
|Net Deferred Tax Assets | $                        



Net operating loss carryforwards expire starting in 2007 through 2019.  Per year availability is subject to change of ownership limitations under Internal Revenue Code Section 382.





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 2004 and 2003, the Company operated in two principal industries;



a) Video programs and other licensed products

b) General merchandise



|                          | Year Ended March 31,                      
|------------------------- | ------------------------------------------
|                          |                                           
|                          | 2004                                      
|Revenues:                 |                                           
|                          | Video programs and other licensed products
|                          | Merchandise                               
|                          | $                                         
|                          |                                           
|COGS:                     |                                           
|                          | Video programs and other licensed products
|                          | Merchandise                               
|                          | $                                         
|                          |                                           
|(Loss) gain before taxes: |                                           
|                          | Video programs and other licensed products
|                          | Merchandise                               
|                          | $                                         



F-35



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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003





17.

Segment Information (continued)



|                               | Year Ended March 31,                      
|------------------------------ | ------------------------------------------
|                               | 2004                                      
|Depreciation and amortization: |                                           
|                               | Video programs and other licensed products
|                               | Merchandise                               
|                               |                                           
|                               | $                                         
|                               |                                           
|Segment assets:                |                                           
|                               | Video programs and other licensed products
|                               | Merchandise                               
|                               |                                           
|                               | $                                         





18.

Subsequent Events



Operating Leases



The Company entered into a three year rental agreement commencing April 1, 2004 for the office and warehouse space at 800 Tucker Lane in the City of Industry, California. The monthly expense is $12,000.



The future minimum lease payments under this lease are as follows:



Year ending March 31, 2005

$ 144,000

2006

144,000

2007

144,000



$432,000







On May 11, 2004, the Company entered into a month-to-month rental agreement commencing August 1, 2004 to lease office space at 18725 E. Gale Avenue in the City of Industry, California. The monthly expense is $1,642.



On April 15, 2004, the Company concluded several transactions that retired all the outstanding shares of the Companys Series B Convertible Preferred Shares, noted as follows:



F-36



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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 AND 2003







18.

Subsequent Events (Continued)



Three holders of record of the Companys Series B Convertible Preferred Shares representing an aggregate of 25 Series B Convertible Preferred Shares entered into a Letter Agreement to Convert



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



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



Concurrent with these transactions, all of the Companys outstanding Series B Convertible Preferred Shares, which amounted to 82.5 shares, were converted into approximately 82,353,000 shares of Common Stock at an exercise price of $.01 per share.



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



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



F-37





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



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



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



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



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



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



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





ITEM 8A.  CONTROLS AND PROCEDURES



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



Our President/Co-CEO and our Chief Financial Officer conduct updates and review and evaluate the effectiveness the Companys disclosure controls and procedures and have concluded, based on their evaluation as of March 31, 2004, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934.  There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation.

19

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PART III



ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT



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



Name

Age

Position with Company



James K.T. Lu.

56

Chairman of the Board, President, Co-Chief Executive Officer,

Co-Chairman, Secretary and Director

Jeffrey I. Schillen.

57

Executive Vice President, Sales and Marketing, Co-Chief Executive Officer,

Co-Chairman  and Director

Murray T. Scott.

81

Director



Fred U. Odaka..

66

Chief Financial Officer





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



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



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



FRED U. ODAKA. Mr. Odaka has been our Chief Financial Officer since September 2000. From December 1998 to September 2000 Mr. Odaka was a consultant to Diamond Entertainment and was our "acting" Chief Financial Officer. From July 1996 to July of 1998, Mr. Odaka served as chief financial officer for Front Row Collectibles, Inc., a manufacturer and distributor of super event collectibles. From January 1993 to June 1996, Mr. Odaka was a financial consultant and analyst for Kibel, Green Inc., a West Coast business advisory and financial services firm specializing in corporate re-structuring and crisis intervention. From July 1986 to December 1992, Mr. Odaka was a partner and principal of two investment banking firms concentrating in mergers and acquisitions.  From November 1984 to June 1986, Mr. Odaka was vice president and chief financial officer for Ibex Computer Corporation, a manufacturer of computer tape drives.  Mr. Odaka was a founder of Rexon, Inc., a publicly traded manufacturer of computers and computer peripheral equipment and, from May 1978 to October 1984, held the positions of vice president and chief financial officer and was instrumental in taking the company public. From January 1970 to April of 1978, Mr. Odaka was controller of the computer division of Perkin-Elmer Corporation, a publicly traded company that manufactures life sciences systems and analytical instruments. Mr. Odaka received his Bachelor of Science degree in finance from Fresno State College, Fresno, California.



Under our certificate of incorporation, our board of directors is divided into three (3) classes, with each class to be elected by the shareholders every three years.  All directors hold office for terms 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. Our board presently consists of three directors and our directors were elected at the 2000 annual meeting of stockholders for concurrent three year terms.  None of our directors have resigned or declined to stand for re-election due to a disagreement on any matter relating to our operations, policies or practices.



Officers are elected annually by our board of directors and, subject to existing employment agreements, serve at the discretion of our board.



20

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Committees of the Board of Directors



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



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act), requires the Companys officers and directors, and persons who own more than ten percent of a registered class of the Companys equity securities, to file reports of ownership and changes in ownership of equity securities of the Company with the Securities and Exchange Commission (SEC).  Officers, directors, and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file.



Except as set forth below, based solely upon a review of Forms 3 and Forms 4 submitted to the Company pursuant to Rule 16a-3 under the Exchange Act during its most recent fiscal year and Forms 5 with respect to its most recent fiscal year, the number of (i) late reports, (ii) transactions that were not reported on a timely basis during the fiscal year ended March 31, 2003, and (iii) any known failure to file a required report by officers, directors and beneficial owners of more than 10% of the Companys common stock is as follows: James K.T. Lu: three late reports and four transaction not reported on a timely basis.  Such late reports have subsequently been filed to report the transactions not timely reported.



Code of Ethics for Chief Executive Officer and Senior Financial Officers



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





ITEM 10.  EXECUTIVE COMPENSATION



The following table sets  forth aggregate compensation earned by each Executive Officer for services rendered in all capacities during the year ended March 31, 2004, 2003 and 2002.



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 (#)       ($)             ($)

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

James K.T. Lu (1) President,         2004       150,000         0           0               0               21,731

Co-Chief Executive Officer and       2003        30,000         0           0               0               35,326

Secretary                            2002       150,000         0           0               0               28,060





Jeffrey I. Schillen (2)              2004       150,000         0           0               0               11,486

Co-CEO, Executive Vice               2003       150,000         0           0               0               14,942

President of Sales and               2002       120,000         0           0               0               15,813

Marketing



(1)   Mr. Lus annual salary was $150,000 during the fiscal year ended March 31, 2004.   His annual salary during the fiscal year ended March 31, 2003 was $30,000, as a result of his leave of absence.  Mr. Lus annual salary was $150,000 during the fiscal year ended March 31,2002 and he elected to defer a substantial portion of his salary for this period. During the fiscal years ended March 31, 2004, 2003 and 2002, Mr. Lu was paid salaries totaling $140,625, $30,000, and $68,846, respectively.



(2)   Mr. Schillen's annual salary was $150,000 during the fiscal years ended March 31, 2004 and 2003. His annual salary was $120,000 during the fiscal year ended March 31, 2002.  He elected to defer a substantial portion of his salary the year ended March 31, 2004, 2003 and 2002. During the fiscal years ended March 31, 2004, 2003 and 2002, Mr. Schillen was paid salaries totaling $82,500, $15,000 and $50,646 respectively.



21

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OPTION/SAR GRANTS



The following table sets forth certain information with respect to the options granted and canceled during the year ended March 31, 2004, 2003 and 2002, for the persons named in the Summary Compensation Table (the "Named Executive Officers"):





Percent of Total

Options/SARs

Number of Securities        Granted to

Underlying Options/SARs     Employees in      Exercise or Base

Name               Year     Granted (Canceled)         Fiscal Year        Price ($/Sh)    Expiration Date

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



James K.T. Lu           2004                   --                   --                 --                --

Jeffrey I. Schillen     2004                   --                   --                 --                --



James K.T. Lu           2003           (2,000,000)               (2.6%)            $0.005           3/31/03

Jeffrey I. Schillen     2003                   --                   --                 --                --



James K.T. Lu           2002           20,000,000                26.3%             $0.006           7/12/04

James K.T. Lu           2002              600,000                  .8%             $0.005           4/22/04

James K.T. Lu           2002            2,000,000                 2.6%             $0.005           3/31/03

James K.T. Lu           2002            3,000,000                 3.9%             $0.005           3/31/05

James K.T. Lu           2002            3,500,000                 4.6%             $0.005           5/24/04

James K.T. Lu           2002           (  600,000)               ( .8%)            $0.250           7/24/01

James K.T. Lu           2002           (2,000,000)               (2.6%)            $0.100           7/24/01

James K.T. Lu           2002           (3,000,000)               (3.9%)            $0.100           7/24/01

James K.T. Lu           2002           (1,000,000)               (1.3%)            $0.005           7/24/01

James K.T. Lu           2002           (2,500,000)               (3.3%)            $0.050           7/24/01

James K.T. Lu           2002           14,500,000                19.1%             $0.006          11/15/06



Jeffrey I. Schillen     2002           10,000,000                13.2%             $0.006           7/12/04

Jeffrey I. Schillen     2002              400,000                 0.5%             $0.005           4/22/04

Jeffrey I. Schillen     2002              750,000                 1.0%             $0.005           3/31/05

Jeffrey I. Schillen     2002            1,000,000                 1.3%             $0.005           5/24/04

Jeffrey I. Schillen     2002           (  400,000)               ( .5%)            $0.250           7/24/01

Jeffrey I. Schillen     2002           (  750,000)               (1.0%)            $0.100           7/24/01

Jeffrey I. Schillen     2002           (  500,000)               (0.7%)            $0.100           7/24/01

Jeffrey I. Schillen     2002           (  500,000)               (0.7%)            $0.050           7/24/01







AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END

OPTION/SAR VALUES



The following table sets forth certain information with respect to options exercised during the fiscal year ended March 31, 2004 by the Named Executive Officers and with respect to unexercised options held by such persons at March 31, 2004





Number of Securities Underlying     Value of Unexercised

Shares                        Unexercised Options/SARs      In-the-Money Options/SARs

Acquired On        Value               At FY-End (#)                 at FY-End ($)

Name            Exercise (#)   Realized ($)     Exercisable     Unexercisable  Exercisable    Unexercisable

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

James K.T. Lu             0               0              100,000        43,500,000      $1,500         $652,500

Jeffrey I. Schillen       0               0           12,150,000                 0                     $182,250





Employment Agreements



In 1991, we entered into employment agreement with each of Messrs. Lu and Schillen for annual compensation of $150,000 and $90,000, respectively; both provide for annual adjustments in accordance with the consumer price index.   However, effective fiscal years 1996 and 2003, Mr. Schillen's annual compensation was increased to $120,000 and $150,000, respectively. Consequently, contracted salary levels are at $150,000 for Mr. Lu and Mr. Schillen. Both employment agreements were extended in July 2000 for a period of five years terminating on December 31, 2005. See "Summary Compensation Table" above, and the notes thereto.



22

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On April 23, 1996 we agreed to reserve 1,000,000 shares of common stock for distribution to Messrs. Lu and Schillen.  Such shares could be purchased for $.25 per share, in installment payments with a five year promissory note with interest at 6% per annum. On July 24, 2001, our Board of Directors approved the lowering of the exercise rate per share to $.005 to purchase such shares and extended the expiration date of such options to April 22, 2004. As of March 31, 2004 such officers had not purchased any of such shares.



In September 1997 as consideration for each of Messrs. Lu and Schillen agreeing to defer up to 90% of their salaries through March 31, 1998, we issued 3,000,000 shares of common stock and warrants to purchase 3,000,000 shares of common stock to Mr. Lu, and issued 750,000 shares of common stock and warrants to purchase 750,000 shares of common stock to Mr. Schillen. All of such warrants have an exercise price of $.10 per share. The warrants are fully vested and were exercisable until March 31, 1999. On July 24, 2001, we lowered the exercise price of such warrants to $.005 per share. In February 2002, we extended the term of the warrants until March 31, 2005.



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



None of the employment agreements which we have with any of our executives, indicated above, provides for any specific compensation to such individuals should their respective employment agreements be terminated prior to expiration

of their respective terms.



Employee and Director Stock Option Plan



In July 24, 2001, we adopted the 2001 Stock Compensation Plan dated July 13, 2001 in order to attract and retain qualified personnel. The Plan authorized our Board of Directors to sell or award up to 50,000,000 shares and/or options of the Company's common stock, no par value at a purchase price of $0.006. On July 13, 2001, our Board of Directors granted an aggregate of 50,000,000 options to purchase shares of our Common Stock to our officers, directors, and employees. As of March 31, 2003, none of these options had been exercised.





Consulting Agreement with Director



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



Compensation of Directors



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













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ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth current information as of June 1, 2004, relating to the beneficial ownership of the outstanding shares of our common stock and preferred stock by (i) each person owning beneficially more than 5% of our common stock, (ii) each Director of the Company, (iii) each Named Executive Officer; and (iv) all Executive Officers and directors of the Company as a group. Unless otherwise indicated below, such individuals have the sole power to control the vote and dispose of such shares of capital stock.



Percentage of

Common Stock

Assuming

Common Stock   Percentage of      Preferred        Conversion of

Name (1)                    Owned       Common Stock   Stock Owned (2)  Preferred Stock (3)

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

James K. T. Lu (4)                      58,688,110         8.90%          209,287             8.96%

Diamond Entertainment Corporation

800 Tucker Lane

Walnut, CA  91789



Jeffrey I. Schillen (5)                 24,528,792         3.72%           36,282             3.73%

Diamond Entertainment Corporation

48 St. Lawrence Way

Marlboro, NJ  07746



Murray T. Scott (6)                      6,300,000          .96%           75,796              .98%

Diamond Entertainment Corporation

800 Tucker Lane

Walnut, CA  91789



American Top Real Estate Inc.           140,343,755       21.29%             0               21.29%

313 S.E. 199th Ave.

Camas, WA 98607



Stacey Stogner                           60,000,000        9.10%             0                9.10%

437 Mountain Ave.

Westfield, NJ 07090



Lu Li Chiu



60,000,000

9.10%             0               9.10%

Trident Chambers, Road Town

Tortola, BVI



All directors and executive officers

89,516,902        13.58%          321,365            13.67%

as a group(3 persons) (7)



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



(1)  Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, and is

generally determined by voting  and/or investment power with respect to securities. Unless otherwise noted, all shares of

common stock listed above are owned of record by each individual named as beneficial owner and such individual has sole

voting  and dispositive power with respect to the shares of common stock owned by each of them. Such person or entity's

percentage of ownership is determined by assuming that any options or convertible securities held by such person or entity

which are exercisable within 60 days from the date thereof exercised or converted as the case any be.



(2)  The preferred stock entitles the holder to 1.95 votes for each share owned and each share may be converted into 1.95 shares

of common stock.



(3)  Assumes conversion of shares of preferred stock beneficially owned.



(4)  Mr. Lu is President, Co-Chief Executive Officer, Secretary and a director.  Includes 37,500,000 shares of common stock

issuable upon exercise of warrants and options. .



(5)  Mr. Schillen is Co-Chief Executive Officer, Executive Vice President and a director. Includes  19,173,042 shares of

common stock issuable upon exercise  of warrants, options, convertible notes and unpaid interest.



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(6)  Mr. Scott is a director.  Includes 5,250,000 shares of common stock issuable upon exercise of warrants.



(7)  Represents 27,593,860 shares of common stock outstanding and 61,923,042 shares of common stock issuable upon

exercise of warrants, options or convertible notes and interest at such time the shareholders approve the increase in the

number of authorized shares of the Company



There are no agreements or other arrangements or understandings known to us concerning the voting of our common stock or otherwise concerning control of us which are not disclosed herein. There are no pre-emptive rights applicable to our securities.





ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



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



On September 1, 1997, we issued to each of Messrs. Lu and Schillen shares and granted warrants as consideration for agreeing to defer payment of their salaries. Mr. Lu was issued 3,000,000 shares of common stock and granted warrants to purchase an additional 3,000,000 shares of common stock at $0.10 per share through March 31, 1999. Mr. Schillen was issued 750,000 shares of common stock and granted warrants to purchase an additional 750,000 shares of common stock at $0.10 per share through March of 1999. The warrants are fully vested and were exercisable until March 31, 1999. In July of 2001, we extended the exercise periods of the warrants until March 31, 2005 and lowered the exercise price of the warrants from $0.10 to $0.005 per share.



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



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



25

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



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



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



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



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



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



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



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



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





26

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



(a)    Exhibits



Exhibit

Number

Description

3.1.1  (6)

Certificate of Incorporation of Trans-Atlantic Video, Inc. filed April 3, 1986.

3.1.2  (6)

Certificate of Amendment to Certificate of Incorporation of Trans-Atlantic Video filed October 12, 1988.

3.1.3  (6)

Certificate of Amendment to Certificate of Incorporation of Trans-Atlantic Video filed March 10, 1989.

3.1.4  (6)

Certificate of Amendment to Certificate of Incorporation of Trans-Atlantic Video filed June 9, 1989.

3.1.5  (6)

Certificate of Amendment to Certificate of Incorporation of Trans-Atlantic Video filed December 31, 1990.

3.1.6  (6)

Certificate of Amendment to Certificate of Incorporation of Trans-Atlantic Video filed July 17, 1991.

3.1.7  (6)

Certificate of Amendment to Certificate of Incorporation of Diamond Entertainment Corporation filed

November 16, 1993.

3.1.8  (6)

Certificate of Amendment to Certificate of Incorporation of Diamond Entertainment Corporation filed

March 3, 1994.

3.1.9  (6)

Certificate of Amendment to Certificate of Incorporation of Diamond Entertainment Corporation filed

October 15, 1996.

3.1.10 (3)

Certificate of Amendment to Certificate of Incorporation of Diamond Entertainment Corporation filed with

the State of New Jersey State Treasurer on May 11, 2000 (originally filed as Exhibit 3.1.2).

3.1.11 (3)

Certificate of Amendment to Certificate of Incorporation of Diamond Entertainment Corporation filed with

the State of New Jersey State Treasurer on July 6, 2000 (originally filed as Exhibit 3.1.3).

3.2    (1)

By-laws, as amended.

4.1    (1)

Certificate for shares of Common Stock.

10.1  (2)

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

Lu.

10.2   (2)

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

Schillen.

10.3   (3)

Securities  Purchase Agreement dated May 11, 2000 between the Company and eight investors  concerning

the issuance and sale of 50 shares of the Company's Series A Convertible Preferred Stock.

10.4   (3)

Registration Rights Agreement, dated May 11, 2000 between the Company and Anthony E. Rakos

concerning the issuance and sale of shares of the Company's Series A Convertible Preferred Stock.

10.6   (3)

Registration Rights Agreement, dated May 11, 2000 between the Company and Gerald Holland  concerning

the issuance and sale of shares the Company's Series A Convertible Preferred Stock.

10.7   (3)

Registration Rights Agreement, dated May 11, 2000 between the Company and Jeffrey Hrutkay, MD

concerning the issuance and sale of shares of the Company's Series A Convertible Preferred Stock.

10.8   (3)

Registration Rights Agreement, dated May 11, 2000 between Company and Charles and Jane Adkins

concerning the issuance and sale of shares of the Company's Series A Convertible Preferred Stock.



10.9   (3)

Registration Rights Agreement, dated May 11, 2000 between Company and Gordon D. Mogerley concerning

the issuance and sale of shares of the Company's Series A Convertible Preferred Stock.

10.10  (3)

Registration Rights Agreement, dated May 11, 2000 between the Company and Michelle  Levite  concerning

the issuance and sale of shares of the Company's Series A Convertible Preferred Stock.



10.11  (3)

Registration Rights Agreement, dated May 11, 2000 between the Company and Ralph Lowry concerning the

issuance and sale of shares of the Company's Series A Convertible Preferred Stock.

10.12  (3)

Registration Rights Agreement, dated May 11, 2000 between the Company and John Bolliger concerning the

issuance and sale of shares of the Company's Series A Convertible Preferred Stock.

10.13  (3)

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

10.14  (3)

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

10.15  (3)

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



27

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10.16  (4)

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

Schillen.

10.17  (4)

Registration Rights Agreement, dated May 11, 2000 between the Company and Anthony E. Rakos

concerning the issuance and sale of shares of our Series A Convertible Preferred Stock.

10.18  (4)

Registration Rights Agreement, dated May 11, 2000 between the Company and Gerald Holland concerning

the issuance and sale of shares our Series A Convertible Preferred Stock.

10.19  (4)

Registration Rights Agreement, dated May 11, 2000 between the  Company and Jeffrey Hrutkay, MD

concerning the issuance and sale of shares of our Series A Convertible Preferred Stock.

10.20  (4)

Registration Rights Agreement, dated May 11, 2000 between the Company and Charles and Jane Adkins

concerning the issuance and sale of shares of our Series A Convertible Preferred Stock.

10.21  (4)

Registration Rights Agreement, dated May 11, 2000 between the Company and Gordon D. Mogerley

concerning the issuance and  sale of shares of our Series A Convertible Preferred Stock.

10.22  (4)

Registration Rights Agreement, dated May 11, 2000 between the Company and Michelle Levite concerning

the issuance and sale of shares of our Series A Convertible Preferred Stock.

10.23  (4)

Registration Rights Agreement, dated May 11, 2000 between the Company and Ralph Lowry concerning the

issuance and sale of shares of our Series A Convertible Preferred Stock.

10.24  (4)

Registration Rights Agreement, dated May 11, 2000 between the Company and John Bolliger concerning the

issuance and sale of shares of our Series A Convertible Preferred Stock.

10.25  (4)

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

10.26  (4)

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

10.27  (4)

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

10.28  (4)

2000 Stock Option Plan dated June 9, 2000.

10.29  (5)

Stonestreet Convertible Series B Preferred Stock Purchase Agreement, November 2001

10.30  (5)

Stonestreet LP Warrant Agreement, November 2001

10.31  (5)

Stonestreet Corp Warrant Agreement, November 2001

10.32  (5)

Stonestreet Registration rights Agreement November 2001

10.33  (5)

Filter International Convertible Series B Preferred Stock Purchase Agreement, November 2001

10.34  (5)

Filter International Warrant Agreement, November 2001

10.35  (5)

Filter International Registration rights Agreement November 2001

10.36  (5)

Kaufman Convertible Series B Preferred Stock Purchase Agreement, November 2001

10.37  (5)

Kaufman Warrant Agreement, November 2001

10.38  (5)

Kaufman Registration rights Agreement November 2001

10.39  (5)

Alpha Capital Convertible Series B Preferred Stock Purchase Agreement, January 2002

10.40  (5)

Alpha Capital Warrant Agreement, January 2002

10.41  (5)

Alpha Capital and Balmore S.A Registration rights Agreement January 2002

10.42  (5)

Balmore S.A. Convertible Series B Preferred Stock Purchase Agreement, January 2002

10.43  (5)

Balmore S.A Warrant Agreement, January 2002

10.44  (3)

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

10.45  (6)

Lease dated January 6, 2000.

10.46  (8)

Bi-Coastal Common Stock Purchase Warrant dated March 26, 2004

10.47  (8)

Securities Purchase Agreement dated March 31, 2004, between four sellers and two buyers of our Series B

Preferred Stock.

10.48   (8)

Longview Fund, LP Subscription Agreement dated April 1, 2004.

10.49   (8)

James Lu Subscription Agreement dated April 1, 2004.

10.50   (8)

Jeff Schillen Subscription Agreement dated April 1, 2004.



14.1      (8)

Diamond Entertainment Corporation Code of Ethics dated August 29, 2003



21.1     (8)

Subsidiaries of the Registrant.



31.1    (8)

Certification of President and Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2    (8)

Certification of Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350 as Adopted Pursuant to Section

302 of the Sarbanes-Oxley Act of 2002.

32.1    (8)

Certification of President and Co-Chief Executive Officer Pursuant to Rule 13-14 or Rule 15-14 of The

Securities and Exchange Act of 1934 as adopted pursuant to Section 906 of The Sarbanes-Oxley act of 2002.

32.2    (8)

Certification of Chief Financial Officer Pursuant to Rule 13-14 or Rule 15-14 of The Securities and

Exchange Act of 1934 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.



28

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

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



(2)  Incorporated by reference to Registrant's exhibits to the Annual Report on  Form 10-KSB for the year ended March 31,

1999, filed July 14, 1999, File  Number 0-17953 and Annual Report on Form 10-KSB/A for the year March 31, 1999, filed

August 23, 1999, File Number 0-17953.



(3)  Incorporated by reference to Registrant's exhibits to the Annual Report on Form 10-KSB for the year ended March 31,

2000, filed August 21, 2000, File Number 0-17953.



(4)  Incorporated by reference to Registrant's exhibits to the Annual Report on Form 10-KSB/A for the year ended March 31,

2000, filed October 26, 2000 (File No. 0-17953)



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

No. 333-86570).



(6)  Incorporated by reference to Registrant's exhibits to the Annual Report on Form 10-KSB for the year ended March 31,

2002, filed July 16, 2002, File Number 0-17953.



(7)  Incorporated by reference to Registrant's exhibits to the Annual Report on Form 10-KSB for the year ended March 31,

2003, filed March 15, 2004, File Number 0-17953.



(8)  Filed herewith.





(b)   Reports on Form 8-K



None.





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ITEM 14.       Principal Accounting Fees and Services.



The following is a summary of the aggregate fees billed to Registrant by its principal accountant(s) for professional services rendered for the fiscal years ended March 31, 2004 and 2003.



|Fee Category         |  | Fiscal 2004 Fees
($) |  | Fiscal 2003 Fees
($)
|-------------------- |  | -------------------- |  | --------------------
|Audit Fees 1         |  | 36,000               |  | 74,500              
|Audit-Related Fees 2 |  | 0                    |  | .0                  
|Tax Fees 3           |  | 3,500                |  | 4,300               
|All Other Fees 4     |  | 0                    |  | 0                   
|Total Fees           |  | 39,500               |  | 78,800              



_____________

1.

Audit Fees.    Consists of fees billed for professional services rendered for the audits of Registrants financial statements for the fiscal years ended March 31, 2004 and 2003, and for review of the financial statements included in Registrants Quarterly Reports on Form 10-QSB for those fiscal years.



2.

Audit-Related Fees.    Consists of fees billed for services rendered to Registrant for audit-related services, which generally include fees for audit and review services in connection with a proposed spin-off transaction, separate audits of employee benefit and pension plans, and ad hoc fees for consultation on financial accounting and reporting standards.



3.

Tax Fees.    Consists of fees billed for services rendered to Registrant for tax services, which generally include fees for corporate tax planning, consultation and compliance.



4.

All Other Fees.    Consists of fees billed for all other services rendered to Registrant, which generally include fees for consultation regarding computer system controls and human capital consultations. No services were performed related to financial information systems design and implementation for the fiscal years ended March 31, 2004 and 2003.



None of the "audit-related," "tax" and "all other" services in 2004 and 2003, as defined above, were approved by an Audit Committee in reliance on the de minimus exception to the pre-approval requirements under federal securities laws and regulations.















































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SIGNATURES



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



DIAMOND ENTERTAINMENT CORPORATION





Dated:  June 29, 2004

By:   /s/ James K.T. Lu



James K.T. Lu



President and Co-Chief Executive Officer





Dated:  June 29, 2004

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 below 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, Co-Chief Executive

June 29, 2004

-----------------                  Officer, Secretary and

James K.T. Lu               Director





/s/ Jeffrey I. Schillen     Co-Chief Executive Officer,

June 29, 2004

-----------------------           Executive Vice President and

Jeffrey I. Schillen          Director





/s/ Murray T. Scott        Director

June 29, 2004

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

Murray T. Scott



























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