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, 2001

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

                           Commission File No. 0-17953

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

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

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

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

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

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

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

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

The issuer's revenue for the fiscal year ended March 31, 2001 totaled
$3,181,091.

The aggregate market value of registrant's Common Stock held by non-affiliates
based upon the closing bid price on June 08, 2001, as reported by the OTC
Bulletin Board, was approximately $638,716.

As of June 08, 2000, there were 81,180,648 shares of the registrant's Common
Stock outstanding.

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

<PAGE>


                           FORWARD LOOKING INFORMATION

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

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

General

            Diamond Entertainment Corporation d/b/a e-DMEC (the "Company" or
"e-DMEC")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 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.

            The Company markets and sells a variety of videocassette and DVD
(Digital Video Disc) titles to the budget home video and DVD markets. The
Company also purchases and distributes general merchandise including children's
toy products.

         The Company's videocassette and DVD titles includes certain public
domain programs and certain licensed programs. Public domain programs are video
titles that are not subject to copyright protection. Licensed programs are
programs that have been licensed by the Company from a third party for
duplication and distribution, generally on a non-exclusive basis. The Company
markets its video programs to national and regional mass merchandisers,
department stores, drug stores, supermarkets and other similar retail outlets.
They generally sell the Company's products to the public at retail prices
ranging from $1.99 to $9.99 per videocassette and $4.99 to $12.99 per DVD
program packs. The Company's video and DVD products are also offered by
consignment arrangements through one large mail order catalog company and one
retail chain. The Company is 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.

                                       1
<PAGE>

         During fiscal 2001, the Company moved towards transforming its product
mix to become a company specializing in "disc" distribution. Adding to its
traditional product distribution, the Company, through third party suppliers, is
now handling a complete spectrum of disc product and related services which
include CD replication and packaging, CD-R distribution, CD-ROM business card
replication, DVD replication and packaging and DVD-ROM replication. The Company,
has entered into a strategic alliance with a company located in Hong Kong,
through which the Company expects to introduce new products during fiscal 2002,
such as DVD tickets, DVD ID card and DVD credit card implanted with a smart
chip.

          In May 1997, the Company acquired a company, now a wholly owned
subsidiary known as Jewel Products International, Inc. ("JPI"). JPI is in the
business of manufacturing and distributing one toy product, purchasing various
other children's toy products from U.S.-based importers or directly from Asia
for distribution, and distributing toys to mass merchandisers in the United
States.

         During September 1998, the Company entered into an exclusive
distribution agreement with a licensing and distribution company which granted
to the Company exclusive distribution rights for a new product line called
CineChrome(TM), which is a trademarked product line utilizing classic images of
licensed properties from film, music, sport, fine art and fine photography.
During fiscal year 2000 and 2001, the Company had minimal sales of this line and
there can be no assurances that the Company will be successful in marketing this
product line.

         The Company introduced its completely new re-designed web-site in May
of 2001, which included features to improve ease of use, as well as the addition
of new product lines and promotional programs. The Company plans to implement
aggressive marketing and sales programs on its web-site during fiscal 2002, to
fully capitalize on its web-site products using its new promotional campaigns to
increase its revenue and profit margins.


Product Lines
-------------

         VIDEO PROGRAM LINE

         The Company's video program inventory consists of a total of nearly 748
titles appealing to all age groups. The programs include cartoons, horror films,
science fiction, dramas, adventure stories, mysteries, musicals, comedies, fairy
tale adaptations, educational programs, sports highlights, and
computer-literacy. Public domain programs account for approximately 473 titles,
and licensed programs account for approximately 275 titles of the Company's
program inventory.

         Motion Pictures - Public Domain. The Company offers a total of 106
feature motion picture titles including many film classics, biblical tales, and
a large collection of favorite performers. Titles include "Love Affair", "Milton
Berle" and "Herod the Great".

                                       2
<PAGE>

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

         Educational Programs - Licensed. The Company licenses approximately 68
educational videos with titles which instructs preschoolers and school age
children on topics such as learning numbers, telling time, simple mathematics,
color identification and other practical skills.

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

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

         TV Episodes - Public Domain. The Company TV episodes include such
favorites as Red "Skelton" and "Andy Griffith"


         DVD PROGRAM LINE

         The DVD program inventory currently consist of 49 titles, which are
public domain feature films and television episodes.

         Motion Pictures - Public Domain. The Company's offers titles in DVD
format covering many film classics in various categories including drama,
horror, westerns, action, and comedy.

         Television Episodes - Inventory currently consist of 6 public domain
titles.

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

         The costs associated with the Company's film masters (used for
duplicating) and artwork (for packaging and advertising) include the purchase
cost of masters, initial fee for rights to duplicate, shooting costs and
developing costs. During the year ended March 31, 2001, the Company acquired
approximate 49 new titles.

                                       3
<PAGE>

         As of March 31, 2001, the net book value of the Company's film masters
and artwork was approximately $145,817. The Company believes that its film
masters and artwork are significant assets since the Company derives the
majority of its revenue from their use.


         CONTRACT REPLICATION AND DUPLICATION SERVICES

         In January 2001, the Company commenced offering its replication and
packaging services to corporate customers for the following disc products: DVD,
CD, CD-R, CD-ROM business card, and video/audio tape duplication services. There
can be no assurance that the Company will be able to market and distribute
successfully its contract replication and duplication services to corporate
customers or to its other customers.


         TOY PRODUCT

               At the time of its acquisition, JPI's sole line of business was
the manufacture and sale of its patented Woblong(R) Double Wing Flier, a bi-wing
aerodynamic flying toy. The Woblong, subsequently renamed the Zoombie(R), is a
game of catch intended to compete directly with Frisbee(R), Aerobie(R) and
Whoosh(TM). During the year ended March 31, 2001, the Zoombie was primarily sold
through the Company's web-site. The Company is continuing to seek additional
products for its general merchandise line to replace or add to its existing
inventory.


         GREETING CARD PRODUCT

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

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

                                       4
<PAGE>

         The Company is continuing to explore new channels to distribute the
CineChrome(TM) product line worldwide. The currently existing product in the
CineChrome(TM) product line is made up of 20 "Saturday Evening Post" holiday and
special occasion gift cards. Two sets of ten cards have been made into gift sets
and cards can also be sold separately. There can be no assurance that the
Company will be able to continue to market and distribute successfully the
CineChrome(TM) products on its web-site or to its other customers.


Suppliers
----------

         Video/DVD Products

         The Company's video programs are duplicated using high speed sprinters
by two duplicators located in the United States. The Company's DVD disc products
are replicated by either two local replicators or 2 other replicators in Asia.
Generally, the Company arranges with these firms to duplicate or replicate
Company-supplied masters and the product is labeled, packaged, and
shrink-wrapped by the Company at its Walnut, California plant. The Company
submits its orders and instructions by purchase order with terms payable within
60 days of delivery. For the year ended March 31, 2001, the video and DVD
product business of the Company had purchases from three suppliers that amounted
to approximately 58% of net purchases. During such period, the percentage of net
video/DVD product purchases made from such suppliers were 26%, 19% and 13%,
respectively. Management believes that, if for any reason it could not rely on
or retain the services of any of its current suppliers, duplicators or
manufacturers, other suppliers would be available in the marketplace.
         Toy Products

              For the year ended March 31, 2001, the Company made purchases from
one U.S. supplier. Purchases from this supplier accounted for 100% of the
Company's purchases for the year ended March 31, 2001.


         Greeting Card Product

         The Company has two sources for its CineChrome(TM) products. The
supplier in Carlsbad, California who owns the patented print technology,
KromeFX(TM) and another supplier in West Bend, WI, who utilizes its own
proprietary technology which is similar to KromeFX(TM) process. During fiscal
2001, the Company did not purchase any CineChrome(TM)products.



                                       5
<PAGE>

Markets and Customers
---------------------

         Video/DVD Products

         The Company markets its program inventory to large retail chain outlets
and provides each retail chain operator with brochures, advertising materials
and literature describing and promoting the Company's program inventory. The
Company's products are sold through more than ten mass merchandisers such as
Musicland, Walgreen and Best Buy, primarily in the Northeast, the South and the
East Coast. These outlets sell the Company's products to the general public at
retail prices ranging from approximately $1.99 to $9.99 per videocassette and
$4.99 to $12.99 per DVD program packs. For the years ended March 31, 2001 and
2000, the Company derived revenue from its video and DVD products of
approximately $3,155,000 and $3,563,000, respectively. For the year ended March
31, 2001, the Company had net sales to 2 customers, individually of more than
10% of the Company's revenues, of approximately $1,443,000. For the year ended
March 31, 2000, the Company had sales to two customers of more than 10% of the
Company's revenue, at approximately $1,003,000. The loss one of these customers
would have a material adverse effect on the financial condition and results of
operations of the Company.

         The Company's marketing strategy of distributing directly to retail
chain outlets has allowed the Company to market its products at all consumer
levels. In particular, the Company seeks to attract retail customers in
department, drug, discount, electronic, music, toy and book stores as well as
supermarkets and convenience stores. The Company is continuing to improve the
name recognition of the Company as a video and DVD company specializing in
educational, children and film classic video and DVD titles. In addition,
through its sales program, the Company seeks to place increased focus on the
promotion of sales to major mass merchandising companies which would increase
the delivery of high volume orders. In addition to using independent sales
representatives in certain geographical marketing areas, the Company has
revamped its web-site in May of 2001 to enable it to sell its video/DVD and
other products to its current customer base and directly to the retail customer.

         The Company derives approximately 54% of its gross revenue from sales
to mass merchandisers and other retail outlets. Approximately 27% of gross
revenue is derived from sales through consignment arrangements with a catalog
company and retail company under which the Company delivers product to their
distribution centers. The Company only books 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 or telemarketing.


                                       6
<PAGE>

         Toy Products

            The Company marketed its toy products using outside sales personnel
and manufacturer representatives and utilized independent manufacturer's
representatives to reach its customers. During fiscal year 2000, the Company
began shipping its Zoombie flying toy for sale by certain Target stores and
during fiscal 2001, the Zoombie toy product was placed for sale on the Company's
web-site and also purchased by a Fortune 500 company to be included in its
employee catalog.


Seasonality
-----------

         Video and DVD Products

         The Company generally experiences higher sales of its video and DVD
programs from September through January due to increased consumer spending
around the year-end holidays. During the year ended March 31, 2001, the Company
derived approximately 49% of its gross revenue from sales during those five
months, with approximately 51% of revenue generated in the other seven months of
the year.

         Toy Products

            The Company's revenues are very seasonal and are currently generated
during the period from June to September.


License Arrangements - Video and DVD Products
---------------------------------------------

         The Company enters into license agreements under which it acquires from
licensors the right to duplicate and distribute a licensed 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, the Company pays certain advance payments or guarantees
and also pays royalties. Royalty payments under license agreements typically are
credited against any advances paid. Generally, the Company's licenses are for a
term of between three and seven years. While the Company's efforts to
renegotiate and renew its license agreements have generally been successful,
there can be no assurance that such licenses will be renegotiated or renewed in
the future. The programs that the Company has acquired under license contain
limitations from the licensors regarding the geographic areas to which the
Company can distribute its products and are usually restricted to distribution
and sales in the United States and Canada.

         The various licensing agreements that the Company has entered into with
licensors provide for advance payments ranging from $1,500 to $100,000 and
subsequent royalty payments based upon either a per video sold fee or a
percentage of wholesale price fee. During the year ended March 31, 2001, the
Company incurred royalty expenses of approximately $24,000 under its licensing
agreements.

                                       7
<PAGE>


Competition
-----------

         Video and DVD Products

         The Company competes with other distributors who sell budget priced
videotapes and DVD's. The Company also competes with other video duplicators and
DVD replicators. The Company has been able to compete based on offering low
pricing and superior packaging designs. Most of the companies with which the
Company competes are better established, have broader public and industry
recognition, have financial resources substantially greater than those of the
Company and have manufacturing and distribution facilities better than those
which now or in the foreseeable future will become available to the Company.

         Toy Products

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

         Greeting Card Product

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


AMERICAN TOP REAL ESTATE

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

                                       8
<PAGE>

         Upon sale or development of land, proceeds are used to repay all
related loans and other obligations, with the remaining balance distributed
among the shareholders of ATRE pro rata based on their interests. ATRE has
interests in two real estate parcels.

         On September 19, 2000, ATRE closed the sale for one parcel of the
remaining acres for $550,000. The net proceeds of this sale was applied against
ATRE'S outstanding mortgage loan which was collateralized by the property sold.
As the result of the sale, the Company recorded approximately $15,000 as its
share of income from equity investment for the period ended March 31, 2001.

         ATRE believes the remaining parcels will be sold and continues to list
the properties with its real estate agent. Future sales are contingent on market
conditions and there can be no assurance that ATRE will sell the remaining
parcels within the next one to three years.


Employees of the Company
------------------------
         As of March 31, 2001, the Company and its subsidiaries employed 22
full-time employees as compared to 19 full-time and 1 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
--------------------------------------
         The Company relies on a combination of common law trademark, copyright
and trade secret law to establish and protect the Company's property rights and
promote our reputation and the growth of the Company's business. In addition, 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, a design patent was issued on March 9, 1994 - D344,989.

         The Company licenses approximately 273 videocassette titles from
licensors for duplication and distribution, generally on a non-exclusive basis.
Such licensors could become subject to third party infringement claims which
could result in their inability or willingness to license these titles to us and
would impair our ability to provide such titles to our customers.


                                       9
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY.

         The Company leases approximately 20,000 square feet at 800 Tucker Lane,
Walnut, California under a lease that commenced January 6, 2000 and expires on
January 31, 2003, for use as executive offices and manufacturing and warehouse
facilities for a monthly rent of $10,500.00. In addition, the Company leased
approximately 22,080 square feet in Cerritos, California ("Cerritos Property")
for $9,274 per month which space was formerly used by the Company for executive
offices and warehousing. The Company sublet the Cerritos Property on January 1,
1999. The sublease required the unaffiliated subtenant to pay the Company $9,494
per month through February 2000, and $9,936 per month through the remaining term
of the sublease. The master lease and sublease obligations expired on March 31,
2001, when the Company returned the premises in good condition to the master
landlord. The Company's current lease agreement is with an unaffiliated parties.
The Company believes that it has sufficient space for operations for the next
twelve months.


ITEM 3.  LEGAL PROCEEDINGS.

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

         On February 15, 2000, one of the Company's suppliers brought legal
action against the Company to collect approximately $35,200 comprising of unpaid
invoices, interest, court costs and attorneys fees owed to the supplier. The
Company recorded the liability upon receipt of the goods and entered into a
monthly payment plan with the supplier to settle the amount owed. At March 31,
2001, the balance of the liability was $12,080.

         During March 2000, the Company's former lessor brought action against
the Company to recover delinquent rental payment and penalties arising from the
termination of the Company's building lease in Cerritos, California. The action
against the Company resulted in a stipulated judgement whereby the Company
agreed to pay $72,000.00 at 10% interest by paying $6,600.00 per month for
twelve consecutive months beginning April 1, 2000 through March 1, 2001. There
was a penalty clause for a failure to pay in a timely manner which increases the
total amount to $119,000 with immediate acceleration in the event of a default
under the stipulated judgement. All required payments through March 1 2001 were
made in a timely manner and the Company on June 5, 2001, received from the
lessor, an acknowledgment of full satisfaction of judgment.

            In April 2001, a former landlord, brought action against the Company
to recover $100,000 in damages, for additional rent for holding over, or not
vacating the premises, after the term expired, late fee penalty of 10% for late
payment of monthly rent and for removing the plaintiff's metal storage racks.
The Company believes that this complaint to be unmerited as all required rental
payments under the lease were made, as well as, those payments for the period it
stayed on the premises after the lease ended. The landlord waived all rights for
further rent or damages by endorsing the final rent payment check which had a
clause typed on the back of the check releasing the Company of further
obligations in connection with the lease.

                                       10
<PAGE>

            In June of 2001, the Company was named as a defendant by one of its
suppliers who filed bankruptcy under Chapter 7. The bankruptcy court brought
legal action against the Company to recover $100,000.00 the Company borrowed
from the supplier in April of 1999, plus applicable interest. In accordance with
the terms of the loan, the Company made four separate payments to the supplier
during April and May of 1999 totaling $101,166.67 in principal and interest. As
of June 18, 2001, the Company reflects one check in the amount of $25,116.67
still outstanding and has recorded this liability on its balance sheet as of
March 31, 2001.


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

         None.








                                       11
<PAGE>

                                     PART II

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

         The Company's Common Stock is quoted on the OTC Bulletin Board under
the symbol "DMEC.OB" The Company's shares of Preferred Stock are not listed on
any national securities exchange, or Nasdaq or quoted on the OTC Bulletin Board.

        The range of high and low bid information for the Company's Common Stock
for each full quarterly period during the Company's last two fiscal years, is as
follows:

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

Fiscal 2001
-----------
         1st quarter                  0.125                      0.045
         2nd quarter                  0.067                      0.024
         3rd quarter                  0.039                      0.009
         4th quarter                  0.020                      0.007


These quotations were obtained from OTC Bulletin Board quarterly quote
summaries, and reflect interdealer prices, without retail markup, markdown, or
commission and may not represent actual transactions. On June 8, 2001, the
closing bid price for the Company's Common Stock was $0.009 As of the same date,
there were 2,458 holders of record of the Company's Common Stock.

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

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


Sales of Unregistered Stock
---------------------------

         In March and June 1999, the Company issued callable convertible notes
for $50,000 and $100,000 to James Lu and Jeffrey I. Schillen, respectively. The
notes bear interest at 10% per year with principal and interest due on the first
anniversary of the date of issuance. The notes have been extended until March
22, 2002 and September 22, 2002, respectively. The notes also call for any
amount of the outstanding principal to be converted into restricted shares of
the Company's common stock at the option of the lenders at a conversion rate of
$0.05 per share.

                                       12
<PAGE>

         In March of 1999, the Company issued a convertible note for $100,000,
which bears interest at 10% with principal and interest due on the first
anniversary of the date of issuance. The note also call for any amount of the
outstanding principal to be converted into restricted shares of the Company's
common stock at the option of the lender at a conversion rate of $0.05 per
share. As of March 31, 2000, the outstanding balance of convertible notes was
$100,000, which the lender extended the due date to March 2002. On June 2, 1999,
the Company was advised by the convertible note holder of the $100,000 note to
waive receipt of bimonthly principal payments and to continue to receive the
bimonthly interest only payments. The note had not been converted as of March
31, 2001.

         On May 25, 1999, the Company's board of directors approved and the
Company issued to the Company's President, as a bonus, options to purchase
2,500,000 and 1,000,000 shares of the Company's common stock at $0.05 and $0.10
per share, respectively. The options expire on May 24, 2004. The options had an
aggregate fair market value at date of grant of approximately $681,000. Neither
options were exercised at March 31, 2001.

         On May 25, 1999, the Company's board of directors approved and the
Company issued to the Company's V.P. of Sales and Marketing, as a bonus, options
to purchase 500,000 and 500,000 shares of the Company's common stock at $0.05
and $0.10 per share, respectively. The options expire on May 24, 2004. The
options had an aggregate fair market value at date of grant of approximately
$194,000. The options had not been exercised at March 31, 2001.

         In July 1999, the Company engaged a consultant for a period of one year
to provide managerial and strategic planning for financial matters and expansion
of the Company. The consultant received an option to purchase 1,000,000 shares
of the Company's common stock exercisable at $0.10 per share in exchange for
services to be rendered and option shall expire on July 8, 2001. The option had
an aggregate fair value at date of grant of approximately 40,000 and had not
been exercised as of March 31, 2001.

          During the quarter ended December 31, 1999, Board of Directors of the
Company authorized the conversion of approximately $1,880,725 in related parties
payables into one year 7% Convertible Promissory Notes of $1,071,225 and
$809,500 each, both notes were extended for one year to September 30, 2001. The
terms of the new convertible notes allow the Company to make partial principal
and interest payments from time to time and the holders of the convertible notes
have the option to request such payments of the indebtedness evidenced by the
notes either in the lawful money of the United States or in an equivalent value
consisting of the Company's common stock, the number of shares, to be determined
by dividing the payment amount by the average twenty day bid price for the
Company's common stock during the twenty trading days prior to the date of such
payment. Also, during the quarter ended December 31, 1999, the related party to
which $1,071,225 in related parties payable was owed by the Company, transacted
a change in ownership of its common stock in which 100% of its outstanding
shares of common stock was sold to a non-related party. At March 31, 2001, the
balance of the Convertible Promissory note to the non-related party was
$1,049,775.

                                       13
<PAGE>

               On May 11, 2000, the Company entered into a Securities Purchase
Agreement ("Securities Purchase Agreement") with eight investors. Pursuant to
the Securities Purchase Agreement, the Company issued and sold 50 shares of
Series A Convertible Preferred Stock ("Series A Preferred Stock") for total
consideration of $500,000, or $10,000 per share. The May Davis Group, Inc. ("May
Davis"), acted as placement agent for the offering. May Davis received a
placement fee of $40,000 and the Company issued warrants to purchase 1,500,000
shares of Common Stock to May Davis and certain designees of May Davis and
warrants to purchase 25,000 shares of Common Stock to Butler Gonzalez, LLP,
counsel to May Davis. Such warrants are exercisable at a price of $.07 per
share.

               Commencing August 9, 2000, the Series A Preferred Stock is
convertible, at the investors' option, into shares of the Company's common Stock
and automatically converts into Common Stock on April 12, 2002. The conversion
price of the Series A Preferred Stock is the lower of $.08 per share or 80% of
the average of the closing bid prices of the Company's Common Stock on any five
trading days in the ten trading day period preceding the date of conversion. The
conversion price of the Series A Preferred Stock is also adjusted in the event
of stock dividends, stock splits, recapitalizations, reorganizations,
consolidations, mergers or sales of assets. The Series A Preferred stock also
provides for a dividend upon conversion of the Series A Preferred Stock at the
rate of 6% per annum payable in additional shares of the Company's Common Stock.
An accrual was recorded as a dividend expense for approximately $26,250 during
the period ended March 31, 2001. In no event can the Series A Preferred Stock be
converted into more than 11,875,000 shares of Common Stock.

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

               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 registration statement was declared
effective by the Securities and Exchange Commission at 10:00 AM on January 4,
2001. The Company is required to keep such registration statement effective
until all of such shares have been resold.


                                       14
<PAGE>

          In connection with the sale of the Company's Series A Convertible
Preferred Stock, the Company issued an aggregate of 1,500,000 warrants to
purchase our common stock to The May Davis Group, Inc., or its designees. May
Davis acted as placement agent for the offering of the Series A Convertible
Preferred Stock. The Company also issued an aggregate of 25,000 warrants to
Butler Gonzalez, LLP, counsel to May Davis. The warrants are exercisable for
five years from the date of issuance, and contain certain anti-dilution and
cashless exercise provisions. The warrants are exercisable at a price of $.07
per share for a period of five years.

               During January and February 2001, seven Series A Preferred
shareholders converted an aggregate of ten shares or $100,000.00 of the
Company's Series A Preferred Stock into the common stock of the Company at an
average conversion price of approximately $0.008. Upon conversion, the Company
issued in January and February 2001, an aggregate of 11,546,619 shares of its
common stock to the seven shareholders.

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

            On June 9, 2000, the Board of Directors of the Company adopted the
Company's 2000 Stock Compensation Plan ("Plan") for the purpose of providing the
Company with a means of compensating selected key employees (including
officers), directors and consultants to the Company and its subsidiaries for
their services rendered in connection with the development of Diamond
Entertainment Corporation through the issuance of shares of Common Stock of the
Company, which authorized the Board of Directors of the Company is authorized to
sell or award up to 13,000,000 shares and/or options of the Company's Common
Stock, no par value. The Plan is administered by the Board of Directors which
has the discretion to determine the grantees, the number of shares, the of each
grant, the consideration for the shares and such other terms and conditions as
the Board may determine. The Plan terminates on May 31, 2001. In June and July
of 2000, options in the aggregate amount of 7,300,000 shares were granted to
three consultants. At March 31, 2001, the balance of options remaining on the
Plan for future grants totaled 5,700,000 shares.


                                       15
<PAGE>

              On July 24, 2000, the Company engaged a consulting firm for a
period of one year to provide advice to undertake for and consult with the
company concerning management, marketing, consulting, strategic planning,
corporate organization and structure, financial matters in connection with the
operation of the businesses of the Company, expansion of services, acquisitions
and business opportunities, and shall review and advise the Company regarding
its overall progress, needs and conditions. The consulting firm was granted
options to purchase 600,000 shares of the Company's Common Stock with an
exercise price at $0.05 per share and the options shall expire on July 24, 2003.
These options were not exercised as of March 31, 2001.

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


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

Year Ended March 31, 2001 Compared with the Year Ended March 31, 2000
---------------------------------------------------------------------

Results of Operations
---------------------
The Company's net loss for the year ended March 31, 2001 was approximately
$915,000 as compared to a net loss of approximately $3,937,000 for the same
period last year. The primary reason for the net loss was the Company's
operating loss of approximately $555,000.

The Company's operating loss for the year ended March 31, 2001 was approximately
$555,000 as compared to an operating loss of approximately $3,576,000 for last
year. The decrease in the Company's operating loss of approximately $3,021,000
was the result primarily from increased gross profit of approximately $904,000
and decreased operating expenses of approximately $2,117,000.

The Company's sales for the years ended March 31, 2001 and 2000, were $3,181,090
and $3,828,261 respectively. The Company's sales decreased by approximately
$647,000 from the prior year with decreased video, toy product sales and custom
duplication sales of approximately $760,000, $216,000 and $618,000,
respectively, offset by increased DVD product sales of approximately $970,000.
The Company recorded minimal toy product and custom duplication sales during the
year ended March 31, 2001. The lower video product sales for the year ended

                                       16

<PAGE>

March 31, 2001, were primarily the result of the Company shifting its video
product sales to DVD product sales and to the lower demand for video products
from our major customers. The lower toy product sales when compared to the prior
year were primarily attributed to lower volume purchases from the Company's
major toy customer. Sales of the Company's products are generally seasonal
resulting in increased sales starting in the third quarter of the fiscal year.
The Company expects the sales to increase in fiscal year ending March 31, 2002
resulting from increased DVD product sales. The Company's sales for the quarter
ended March 31, 2001, were approximately $788,000 as compared to the prior two
quarters which averaged approximately $899,000 a quarter. The decrease in the
last quarter was primarily attributable to seasonal slow down.

Cost of sales for the years ended March 31, 2001 and 2000 were approximately
$1,797,000 and $3,348,000 or 57% and 88% of sales, respectively. The decrease in
cost of sales of approximately $1,551,000 was primarily due to lower sales
volume of video, toy products and custom duplication sales partially offset by
increased sales volume of DVD product. Also contributing significantly to the
decrease in the cost of sales percentage to sales of approximately 31% when
compared the same period a year earlier, was the change in the sales product
mix, whereby the Company shifted its sales from higher cost video, toy product,
and custom duplication sales to lower cost DVD products.

During the year ending March 31, 2001, the Company recorded minimal toys and
custom duplication sales. The previous years toy products sales of approximately
$223,000 were sold at approximately 43% below cost which contributed to the
higher cost of sales for fiscal year 2000. Also contributing to the higher cost
of sales for fiscal year 2000 were custom duplication sales of approximately
$618,000 which had a cost of sales percentage of 89% when compared to the such
sales for the period.

For the years ended March 31, 2001 and 2000, video product cost of sales
percentages when compared to sales were 64% and 77%, respectively. Contributing
to the Company's reduction in video cost of sales percentage of 13%, were the
higher average sales prices charged to customers and the lower write-downs of
slow moving inventory during fiscal year 2001.

Gross profit for the years ended March 31, 2001 and 2000 were approximately
$1,384,000 and $480,000, or 43% and 12% of sales, respectively. The significant
increase in the gross profit as a percentage of sales was primarily result of
the Company shifting its sales to higher profit margins DVD product line from
lower margin video, toy product and custom duplication sales. The Company had
minimal lower margin toy product and custom duplication sales for the year ended
March 31, 2001. The gross profit as a percentage to sales for Video Products and
DVD products for the period ended March 31, 2001 and 2000, were 36% and 61%,
respectively.

Selling and general and administrative expenses for the years ended March 31,
2001 and 2000 were approximately $1,939,000 and $4,056,000, respectively. The
decrease of approximately $2,117,000 was primarily the result of decreases in
non-cash expenses in connection with the issuance of equity instruments as
compensation and other fees of approximately $1,089,000, and lower selling and
general administrative expenses of approximately $1,028,000.

                                       17

<PAGE>

Selling expenses for the years ended March 31, 2001 and 2000 were approximately
$454,000 and $709,000, respectively. The decrease in selling expenses of
approximately $255,000 was attributable mainly to lower expense levels in
freight costs, royalty, and sales promotion related expenses.

General Administrative expenses for the years ended March 31, 2001 and 2000 were
approximately $1,485,000 and $3,347,000, respectively. The decrease in general
administrative expenses of approximately $1,862,000 was primarily the result of
lower expense levels of non-cash expenses in connection with the issuance of
equity instruments as compensation and other fees of approximately $1,089,000
and lower expense levels of approximately $773,000 primarily in office rent,
legal expenses, salaries, consulting expense and general corporate expenses.

Interest expense for the years ended March 31, 2001 and 2000 were approximately
$456,000 and $419,000 respectively. The increase in interest expense in fiscal
2001 over fiscal 2000 of approximately $37,000 was primarily the result of
higher interest rates on accounts receivable financing and other loans. As of
March 31, 2001, the outstanding debt of the Company was approximately $3,312,000
of which approximately $150,000 is classified as long term.

Other income for the year ended March 31, 2001, of approximately $80,000 consist
of management income in connection with its real estate investment and other
miscellaneous income of approximately $96,000 and $10,000, respectively, offset
by dividend expense of approximately $26,000.

The Company's auditors issued a going concern report for the year ended March
31, 2001. There can be no assurance that management's plans to reduce operating
losses will continue or the Company's efforts to obtain additional financing
will be successful. Management's plans are discussed under "Liquidity and
Capital Resources - Operations."


Liquidity and Capital Resources
-------------------------------

The Company's working capital deficit at March 31, 2001 was $3,658,000 as
compared with working capital deficit of $3,531,000 at March 31, 2000. This
increase in the working capital deficit of approximately $97,000 is primarily
the result of the Company's higher levels of accounts payable and accrued
expenses offset by reduced debt obligations.

Operations
----------

For the year ended March 31, 2001, cash utilized for operations was
approximately $202,000 as compared to $398,000 for the year ended March 31,
2000. Net cash provided by financing activities during the year ended March 31,
2001 and 2000 were approximately $437,000 and $483,000 respectively.


                                      18
<PAGE>

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

In fiscal year 2001 the Company continued to operate at a loss and its working
capital was substantially reduced. The Company's during fiscal 2001, distributed
its product directly to primarily retail chain outlets and mass merchandisers.
To improve its operations, the Company initiated a marketing strategy to attract
more retail customers in department, drug, electronic music, toy and book stores
and shift its traditional video cassette product line towards DVD program
format. The Company's primary goals are to generate an operating profit in
fiscal 2002 and to be recognized primarily as a DVD and related product company
specializing in educational, children and film classic titles, as well as,
providing contract replication and packaging service by utilizing its strategic
alliance company.

To mitigate the effects of the uncertainties, the Company has implemented a plan
to increase its overall market share of its core business and to expand into the
contract replication, duplication and packaging business. The Company expect
reach positive cash flow at the end of its second fiscal quarter has implemented
the following goals and strategies to achieve its plan: 33

Retailers and Mass Merchandisers

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

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

o    Attain leadership in pricing and packaging innovations.

o    Maintain efficiency in quick turnaround of product shipments.

o    Continue to build the reputation as a leader in the high quality budget
     priced arena to have other potential second and third tier customers
     emulate the purchasing habits of our national chain stores and mass
     merchandisers.

o    Continue to acquire new videocassette and DVD titles for distribution.



                                       19
<PAGE>

Internet e-Commerce

o    Maintain and improve our service through fast turnaround.

o    Keep our pricing competitive.

o    Maintain and improve customer service procedures.

o    Complete thorough search for the most effective marketing and promotional
     tools and methods for our web-site.

o    Continuously maintain and update our web-site to keep up with current
     products.

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


Contract Replication and Contract Packaging Service

o    Establish a reputation of being most efficient and speedy provider of DVD
     high quality replication and packaging services and becoming a leader in
     this market segment, by selling to large corporate accounts.

o    Capitalize on the experience and know-how of our alliance company, to
     deliver the highest quality replication service available on a consistent
     basis.

o    Use our association with our alliance company to penetrate this market
     segment by broadcasting to our potential contract customers the unique
     capabilities, experience and consistency of production capabilities
     provided.

The Company believes it has adequate cash resources to sustain its operations
through the second quarter of fiscal 2002, 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 and to convert debt to equity. The principal objective of the
Company is to implement the above items in fiscal 2002, which will lead to a
profitable operation if the items are successfully implemented, and subject to
market and other conditions. Although the Company believes that the outlook is
favorable, there can be no assurance that market conditions will continue in a
direction favorable to the Company.


Investing
---------

For the years ended March 31, 2001 and 2000, investments in masters and artwork
were $118,866 and $64,419, respectively. Management continues to seek to acquire
new titles to enhance its product lines.

                                       20
<PAGE>

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

Upon sale or development of land, proceeds are used to repay all related loans
and other obligations, with the remaining balance distributed among the
shareholders of ATRE pro rata based on their interests.
ATRE has interests in two real estate parcels.

Parcel 1 consists of approximately 20 undeveloped acres purchased in two
transactions, in 1989 and 1997. ATRE has a 70% interest in Parcel 1, located in
Clark County, Washington. The total cost of Parcel 1, including financing
expenses and taxes, was approximately $2,300,000, additionally ATRE incurred
development costs of approximately $4,500,000 through March 31, 2001.

Parcel 2 consists of 5.5 acres of undeveloped property, also in Clark County,
Washington. ATRE's interest in Parcel 2 is 25%. Parcel 2 was purchased in 1989
for $717,000. Approximately 2.5 acres of Parcel 2 were sold in 1996.

The Company in June 1998 borrowed approximately $809,500 from ATRE to finance
certain purchases of toy products. During the quarter ended December 31, 1999,
the Board of Directors of the Company authorized the conversion of the amount
borrowed of $809,500 into a one year 7% Convertible note. At March 31, 2001, the
note was still outstanding and is due on September 30, 2001.

On June 2, 1999, ATRE entered into a real estate sale agreement for
approximately $600,000 and in September 1999, entered into a sales agreement for
another parcel of the remaining acres for approximately $550,000. During June
2000, the sales agreement for $600,000 entered into on June 2, 1999 was canceled
by the buyer who forfeited the $25,000 purchase deposit to ATRE. On September
19, 2000, ATRE closed the sale for one parcel of the remaining acres for
$550,000. The net proceeds of this sale was applied against ATRE'S outstanding
mortgage loan which was collateralized by the property sold. As the result of
the sale, the Company recorded approximately $15,000, as its share of income
from equity investment for the period ended March 31, 2001.

ATRE had previously repaid the Company all past loans it borrowed from the
Company including all applicable interest and at March 31, 2001, the Company
owed ATRE $576,300 in accumulated loans it received consisting of proceeds from
ATRE's mortgage loans and partial proceeds from parcels previously sold less
management fees the Company charged ATRE in fiscal 2001 of approximately
$96,000. ATRE believes the remaining parcels will be sold and continues to list
the properties with its real estate agent. Future sales are contingent on market
conditions and there can be no assurance that ATRE will sell the remaining
parcels within the next one to three years.

                                       21
<PAGE>

Financing
---------

The Company financed its operation through i)its line of credit with its
financing company, ii) the issuance of its Series A Preferred Stock, iii) sales
of its common stock and iv) debt financing.

The Company in December 1997, established a financing arrangement with a
financial institution for a line of credit up to $2,500,000. This arrangement is
backed by pledged receivables and inventory. Cost is 1.5% discounted from
pledged invoices for every 30 days for the accounts receivable portion of the
line of credit. The portion of the line of credit backed by inventory is
determined by the lesser of $800,000, 25% of the clients finished toy inventory
or 55% of the clients finished videotape inventory. Interest is charged at
16.18% per annum on this portion of the debt. This was formalized with the
Company in June of 1998. Interest for this line of financing the years ended
March 31, 2001 and 2000 were approximately $117,000 and $110,000,respectively.

On May 11, 2000, the Company entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with eight investors. Pursuant to the
Securities Purchase Agreement, the Company issued and sold 50 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") for total consideration
of $500,000, or $10,000 per share. The May Davis Group, Inc. ("May Davis"),
acted as placement agent for the offering. May Davis received a placement fee of
$40,000 and the Company issued warrants to purchase 1,500,000 shares of Common
Stock to May Davis and certain designees of May Davis and warrants to purchase
25,000 shares of Common Stock to Butler Gonzalez, LLP, counsel to May Davis.
Such warrants are exercisable at a price of $.07 per share.

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

                                       22
<PAGE>

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

In connection with the sale of the Company's Series A Convertible Preferred
Stock, the Company issued an aggregate of 1,500,000 warrants to purchase our
common stock to The May Davis Group, Inc., or its designees. May Davis acted as
placement agent for the offering of the Series A Convertible Preferred Stock.
The Company also issued an aggregate of 25,000 warrants to Butler Gonzalez, LLP,
counsel to May Davis. The warrants are exercisable for five years from the date
of issuance, and contain certain anti-dilution and cashless exercise provisions.
The warrants are exercisable at a price of $.07 per share for a period of five
years.

During January and February 2001, seven Series A Preferred shareholders
converted an aggregate of ten shares or $100,000.00 of the Company's Series A
Preferred Stock into the common stock of the Company at an average conversion
price of approximately $0.008. Upon conversion, the Company issued in January
and February 2001, an aggregate of 11,546,619 shares of its common stock to the
seven shareholders.

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

On July 24, 2000, the Company engaged a consulting firm for a period of one year
to provide advice to undertake for and consult with the company concerning
management, marketing, consulting, strategic planning, corporate organization
and structure, financial matters in connection with the operation of the
businesses of the Company, expansion of services, acquisitions and business
opportunities, and shall review and advise the Company regarding its overall
progress, needs and conditions. The consulting firm was granted options to
purchase 600,000 shares of the Company's Common Stock with an exercise price at
$0.05 per share and the options shall expire on July 24, 2003. These options
were not exercised as of March 31, 2001.

                                       23
<PAGE>

In January 2001, the Company borrowed $80,000 as a short term loan from one of
its suppliers and the loan was retired in April 2001, when the Company made its
final weekly installment payment of $10,000. On June 6, 2001, the Company
received a new loan in the amount of $80,000 from the same supplier. This loan
bears no interest and is payable in sixteen (16)weekly installments beginning on
August 1, 2001. James Lu, the President of the Company, has personally
guaranteed the loan.


On June 4, 2001 and June 26, 2001 the Company borrowed $25,000 and $15,000,
respectively, from a consulting firm and issued a promissory note which is
payable on or before August 5, 2001 and August 25, 2001, respectively . The
notes bears interest at 2 1/2% per month and a loan fee of 5% of the principal
amount. The notes are personally guaranteed by James Lu.


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

Results of Operations
---------------------

The Company's net loss for the year ended March 31, 2000 was approximately
$3,937,000 as compared to a net loss of approximately $2,714,000 for the same
period last year. The primary reason for the net loss was the Company's
operating loss of approximately $3,576,000.

The Company's operating loss for the year ended March 31, 2000 was $3,576,000 as
compared to an operating loss of approximately $2,448,000 for last year. The
increase in the Company's operating loss of approximately $1,128,000 arose 21
primarily from reduced gross profit of approximately $959,000, and increased
non-cash expenses in connection with the issuance of equity instruments as
compensation and other fees of approximately $450,000, offset by a reduction in
other operating expenses of approximately $281,000.

The Company's sales for the years ended March 31, 2000 and 1999, were $3,828,261
and $4,373,303 respectively. The Company's sales significantly decreased by
approximately $545,000 from the prior year with decreased video and toy product
sales of approximately $351,000 and $194,000, respectively. The lower video
product sales for the year ended March 31, 2000, were primarily the result of
the Company suspending most of its acquisition of new video titles until January
of 2000, which the Company received favorable responses substantiating market
acceptance for certain video titles in DVD, and the cancellation of a
significant holiday order from a major chain store during October 1999. The lack
of new video titles and the cancellation of the major holiday order forced the
Company to sell its existing inventory at much reduced prices to generate cash
for its operation, which also contributed the lower sales dollar volume during
the fiscal year ended March 31, 2000. The lower toy product sales when compared
to the prior year were primarily attributed to lower volume purchases from the


                                       24
<PAGE>

Company's major toy customer and sales of slower moving toy products at sales
prices below previous year's market prices. Sales of the Company's products are
generally seasonal resulting in increased sales starting in the third quarter of
the fiscal year. The Company expects the sales to increase in fiscal year ending
March 31, 2001. The Company's sales for the quarter ended March 31, 2000, were
approximately $633,000 as compared to the prior two quarters which averaged
approximately $1,248,000 a quarter. This decrease in the last quarter was
primarily attributable to the lack of new video titles mentioned above and the
sale of video and toy product inventories at reduced selling prices.

Cost of sales for the years ended March 31, 2000 and 1999 were approximately
$3,348,000 and $2,934,000 or 88% and 67% of sales, respectively. The significant
increase in cost of sales as a percentage of sales of 21% was primarily the
result of lower sales prices charged to customers for video and toy products and
the reduction of certain video and slow moving toy inventory down to its net
realizable value. During fiscal year 2000, the Company generated custom
duplication sales of approximately $618,000 having cost of sales 89% of sales
which also contributed the increase in cost of sales as a percentage of sales.

Gross profit for the years ended March 31, 2000 and 1999 were approximately
$480,000 and $1,439,000, or 12% and 33% of sales, respectively. The significant
decrease in the gross profit as a percentage of sales was primarily due to the
Company reducing its selling prices on video and toy products, lower margin
custom duplication sales and the write-down of certain video and toy inventory.

Operating expenses for the years ended March 31, 2000 and 1999 were
approximately $4,056,000 and $3,887,000, respectively. This increase in
operating expenses of approximately $169,000 was primarily the result of
increases in non-cash expenses in connection with the issuance of equity
instruments as compensation and other fees of approximately $450,000, and offset
by lower selling and general administrative expenses of approximately $215,000
and $66,000, respectively. The lower general and administrative expenses of
approximately $66,000 was primarily the result of higher expense levels in
facility rent of approximately $147,000, offset by a decrease in bad debt of
approximately $213,000. The lower level of selling expenses of approximately
$215,000 was primarily attributable to lower expenses in marketing and sales
salaries and sales commissions of approximately $123,000 and $80,000,
respectively.

Bad debt expense for the years ended March 31, 2000 and 1999 were approximately
$99,000 and $312,000, respectively.

Interest expense for the years ended March 31, 2000 and 1999 were $418,524 and
$463,905, respectively. The decrease in interest expense in fiscal 2000 over
fiscal 1999 of approximately $45,000 was primarily the result of lower levels of
accounts receivable and asset based borrowings. As of March 31, 2000, the
outstanding debt of the Company was approximately $3,940,000 of which
approximately $282,000 is classified as long term.

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

                                       25
<PAGE>

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

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

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

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

                                       26
<PAGE>

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

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

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

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


Year 2000 Issue
---------------
As of the date of this report, the Company did not experience any disruption to
operations or any other problems relating to the Year 2000 issue.


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


ITEM 7.  FINANCIAL STATEMENTS.

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

                                       27
<PAGE>


               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000






                                    I N D E X
                                    ---------


                                                                       PAGE


INDEPENDENT AUDITORS' REPORT                                            F-2


CONSOLIDATED BALANCE SHEETS                                          F-3 to F-4


CONSOLIDATED STATEMENTS OF OPERATIONS                                    F-5


CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY                       F-6


CONSOLIDATED STATEMENTS OF CASH FLOWS                                F-7 to F-9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          F-10 to F-38







                                      F-1



<PAGE>



                          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, 2001 and 2000, and
the related consolidated statements of operations, stockholders' deficiency and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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, 2001 and 2000, 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.

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 recurring losses and
a negative cash flow from operations, as well as a working capital deficit which
raises 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.

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

Los Angeles, California
June 15, 2001

                                      F-2

<PAGE>


<TABLE>
<CAPTION>
               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS



                                                                               March 31,
                                                                -------------------------------
                                                                     2001               2000
                                                                -------------     -------------
<S>                                                             <C>               <C>
         ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                    $      29,900     $           -
   Accounts receivable, net of allowance for
     doubtful accounts of $144,542 and $137,750                       413,020           421,196
   Inventory                                                        1,088,951         1,094,878
   Due from related party                                             101,366                 -
   Prepaid expenses and other current assets                           45,714           116,456
                                                                -------------     -------------

     Total current assets                                           1,678,951         1,632,530

PROPERTY AND EQUIPMENT, less accumulated
   depreciation of $1,030,785 and $878,032                            199,487           266,570

FILM MASTERS AND ARTWORK, less accumulated
   amortization of $3,901,070 and $3,813,596                          145,817           114,424

INVESTMENT IN EQUITY SUBSIDIARY                                        60,725            45,275

OTHER ASSETS                                                           62,982            65,707
                                                                -------------     -------------

       TOTAL ASSETS                                             $   2,147,962     $   2,124,506
                                                                =============     =============
</TABLE>





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

                                       F-3


<PAGE>
<TABLE>
<CAPTION>
               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                                                                               March 31,
                                                                -------------------------------
                                                                     2001               2000
                                                                -------------     -------------
<S>                                                             <C>               <C>
         LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
   Bank overdraft                                               $     224,681     $      19,428
   Accounts payable and accrued expenses                            1,789,523         1,486,142
   Due to factor                                                      319,303           370,461
   Financing agreement payable                                        311,807           538,670
   Notes payable - current portion                                     42,576           125,762
   Related parties - notes and advances payable
     - current portion                                              1,478,233         1,543,841
   Convertible debentures - current portion                         1,142,675         1,050,775
   Capital lease obligations - current portion                         17,600            28,742
   Other current liabilities                                           10,057                 -
                                                                -------------     -------------
     Total current liabilities                                      5,336,455         5,163,821

   Notes payable, less current portion                                      -            63,872
   Related parties - notes and advances payable,
     less current portion                                             150,000           100,000
   Convertible debentures, less current portion                             -           100,000
   Capital lease obligations, less current portion                          -            17,912
                                                                -------------     -------------
       TOTAL LIABILITIES                                            5,486,455         5,445,605
                                                                -------------     -------------
COMMITMENTS AND CONTINGENCIES (Note 12)                                     -                 -

STOCKHOLDERS' DEFICIENCY
   Convertible preferred stock, no par value; 4,999,950
     and 5,000,000 shares authorized; 483,251 issued
    (of which 172,923 are held in treasury)                           376,593           376,593
   Series A convertible preferred stock, $10,000 per
     share stated value; 50 shares authorized;
     40 issued and outstanding                                        346,400                 -
   Common stock, no par value; 100,000,000 shares
     authorized; 81,180,648 and 62,334,029 issued
     and outstanding                                               14,552,635        14,001,535
   Accumulated deficit                                            (18,565,318)      (17,650,424)
   Treasury stock                                                 (    48,803)      (    48,803)
                                                                -------------     -------------
     TOTAL STOCKHOLDERS' DEFICIENCY                               ( 3,338,493)      ( 3,321,099)
                                                                -------------     -------------
       TOTAL LIABILITIES AND STOCKHOLDERS'
         DEFICIENCY                                             $   2,147,962     $   2,124,506
                                                                =============     =============
</TABLE>

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

                                       F-4
<PAGE>
<TABLE>
<CAPTION>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                            For the Year Ended
                                                     --------------------------------
                                                                 March 31,
                                                         2001               2000
                                                     ------------        ------------
<S>                                                  <C>                 <C>
SALES - net                                          $  3,181,079        $  3,828,261

COST OF GOODS SOLD                                      1,796,722           3,348,102
                                                     ------------        ------------

GROSS PROFIT                                            1,384,357             480,159

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            1,939,089           4,055,809
                                                     ------------        ------------

LOSS FROM OPERATIONS                                     (554,732)        ( 3,575,650)
                                                     ------------        ------------

OTHER INCOME (EXPENSE)
   Interest expense                                      (455,478)        (   418,524)
   Other income (expense)                                  80,316              61,091
   Income (loss) from equity investment                    15,000         (     4,275)
                                                     ------------        ------------
     Total other income (expense)                        (360,162)        (   361,708)
                                                     ------------        ------------
LOSS BEFORE PROVISION FOR INCOME TAXES                   (914,894)        ( 3,937,358)

PROVISION FOR INCOME TAXES                                      -                   -
                                                     ------------        ------------

NET LOSS                                             $   (914,894)       $( 3,937,358)
                                                     ============        ============
LOSS PER SHARE
   Basic                                             $   (   0.01)       $  (    0.07)
                                                     ============        ============
   Diluted                                           $   (   0.01)       $  (    0.07)
                                                     ============        ============
</TABLE>


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

                                       F-5
<PAGE>
<TABLE>
<CAPTION>

                                          DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
                                              FOR THE YEARS ENDED MARCH 31, 2001 AND 2000



                                                     Convertible            Series A Convertible
                                                   Preferred Stock            Preferred Stock               Common Stock
                                                 ----------------------     --------------------      -------------------------
                                                  Shares       Amount        Shares     Amount           Shares        Amount
                                                 --------    ----------     -------   ---------       ----------    -----------
<S>                                              <C>         <C>            <C>       <C>             <C>           <C>
Balance at March 31, 1999                         483,251    $  376,593           -   $      -        50,619,029    $ 11,935,760
   Exercise of common stock options:
     Cash                                               -            -            -          -         4,000,000         200,000
     Settlement of debt and interest                    -            -            -          -         7,225,000         376,875
     Settlement of accounts payable                     -            -            -          -           490,000          24,500
   Options issued for consulting services               -            -            -          -                 -         660,000
   Options issued for officers compensation             -            -            -          -                 -         620,000
   Interest for convertible debentures                  -            -            -          -                 -         184,400
   Net loss                                             -            -            -          -                 -               -
                                                 --------    ----------     -------   ---------       ----------    -----------

Balance at March 31, 2000                         483,251       376,593           -          -        62,334,029      14,001,535

   Exercise of common stock options:
     Cash                                               -            -            -          -         6,157,143         215,500
     Settlement of debt and interest                    -            -            -          -           285,714          10,000
     Settlement of accounts payable                     -            -            -          -           857,123          30,000
   Options issued for consulting services               -            -            -          -                 -         209,000
   Options issued for officers compensation             -            -            -          -                 -
   Interest for convertible debentures                  -            -            -          -                 -
   Issuance of Series A convertible
    preferred stock                                     -            -           50     500,000                 -              -
   Offering costs                                       -            -            -     (67,000)                -              -
   Conversion of Series A convertible
    preferred stock to common stock                     -            -          (10)    (86,600)      11,546,619          86,600
   Net loss                                             -            -            -          -                 -              -
                                                 ---------   ----------      -------  ---------       ----------    ------------
 Balance at March 31, 2001                         483,251   $  376,593          40   $ 346,400       81,180,628    $ 14,552,635
                                                 =========   ===========     =======  =========       ==========    ============
</TABLE>

(Table continued on following page)

                                      F-6a
<PAGE>

(Table continued from previous page)

<TABLE>
<CAPTION>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
               CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
                  FOR THE YEARS ENDED MARCH 31, 2001 AND 2000


                                                      Total
                                                   Accumulated    Treasury       Stockholders'
                                                     Deficit       Stock          Deficiency
                                                   ------------   ------------   -------------
<S>                                                <C>            <C>            <C>
Balance at March 31, 1999                          $(13,713,066)  $(    48,803)  $( 1,449,516)
   Exercise of common stock options:
     Cash                                                     -              -        200,000
     Settlement of debt and interest                          -              -        376,875
     Settlement of accounts payable                           -              -         24,500
   Options issued for consulting services                     -              -        660,000
   Options issued for officers compensation                   -              -        620,000
   Interest for convertible debentures                        -              -        184,400
   Net loss                                         ( 3,937,358)              -   ( 3,937,358)
                                                   ------------   ------------   -------------

Balance at March 31, 2000                           (17,650,424)   (    48,803)   ( 3,321,099)

   Exercise of common stock options:
     Cash                                                     -              -        215,500
     Settlement of debt and interest                          -              -         10,000
     Settlement of accounts payable                           -              -         30,000
   Options issued for consulting services                     -              -        209,000
   Options issued for officers compensation                  -              -
   Interest for convertible debentures                       -              -
   Issuance of Series A convertible
    preferred stock                                           -              -        500,000
   Offering costs                                             -              -        (67,000)
   Conversion of Series A convertible
    preferred stock to common stock                           -              -              -
   Net loss                                         (   914,894)             -    (   914,894)
                                                   ------------   ------------   ------------
 Balance at March 31, 2001                         $(18,565,318)  $  (  48,803)  $( 3,338,493)
                                                   ============   ============   ============
</TABLE>



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

                                      F-6b


<PAGE>

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

                                                                For the Year Ended
                                                                     March 31,
                                                          ---------------------------------
                                                               2001               2000
                                                          -------------       -------------
<S>                                                       <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                               $    (914,894)      $ ( 3,937,358)
     Adjustments to reconcile net loss to net cash
       used in operating activities
       Depreciation and amortization                            240,264             279,038
       Provision for doubtful accounts                            6,792         (    51,205)
       Inventory reserve                                              -             176,386
       Issuance of note payable for settlement                        -              72,000
       Issuance of equity instruments as compensation
         and other fees                                         239,000           1,464,400
       (Income) loss from equity investment                    ( 15,450)        (    42,500)
       Changes in assets and liabilities
       (Increase) decrease
        Due from related party                                 (101,366)                  -
        Accounts receivable                                       1,384             189,240
        Inventory                                                 5,927             977,527
        Prepaid expenses and other current assets                70,742         (    30,096)
        Other assets                                              2,725             230,020
       Increase (decrease)
        Due to factor                                          ( 51,158)                  -
        Accounts payable and accrued expenses                   303,381             244,141
        Accrued interest                                              -              29,997
        Other                                                    10,057                   -
                                                          -------------       -------------
NET CASH USED IN OPERATING ACTIVITIES                          (202,596)        (   398,410)
                                                          -------------       -------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of property and equipment                          ( 85,707)        (    18,506)
   Purchase of film masters and artwork                        (118,867)        (    66,420)
                                                          -------------       -------------
NET CASH USED IN INVESTING ACTIVITIES                          (204,574)        (    84,926)
                                                          -------------       -------------
</TABLE>

(table continued on following page)

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

                                      F-7
<PAGE>
<TABLE>
<CAPTION>
               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                                                                For the Year Ended
                                                                     March 31,
                                                          ---------------------------------
                                                               2001               2000
                                                          -------------       -------------
<S>                                                       <C>                 <C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Increase (decrease) in bank overdraft                        205,253          (   85,475)
   Issuance of stock for settlement of debt and interest         10,000                   -
   Net repayments of financing agreement                       (226,863)         (  267,796)
   Proceeds from notes payable                                        -             194,146
   Payments of notes payable                                   (147,058)         (  350,270)
   Proceeds from notes payable (related party)                        -             784,341
   Payments of notes payable (related party)                   ( 15,608)                  -
   Proceeds from convertible debentures                               -              50,000
   Payment of convertible debentures                           (  8,100)         (   16,370)
   Payments on capital leases                                  ( 29,054)         (   25,240)
   Proceeds from the exercise of options                              -             200,000
   Proceeds from issuance of common stock                       302,100                   -
   Proceeds from issuance of Series A Preferred Stock           346,400                   -
                                                          -------------       -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                       437,070             483,336
                                                          -------------       -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                        29,900                   -

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                         -                   -
                                                          -------------       -------------

CASH AND CASH EQUIVALENTS - END OF YEAR                   $      29,900       $           -
                                                          =============       =============

SUPPLEMENTAL INFORMATION

  CASH PAID FOR:
     Interest                                             $     148,500       $     237,000
                                                          =============       =============
     Income taxes                                         $           -       $           -
                                                          =============       =============
Non-Cash Investing and Financing Activities:
  Conversion of preferred stock to common stock           $      86,600       $           -
  Stock issued for settlement of debt and interest        $      10,000       $     376,875
  Interest for convertible debentures                                 -             184,400
  Stock issued for settlement of accounts payable         $      30,000       $      24,500

</TABLE>

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

                                       F-8

<PAGE>


                DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

For the year ended March 31, 2001, the Company issued the following equity and
security instruments:

    Granted options to consultants to purchase 7,300,000 shares of its common
    stock, in connection with consulting agreements and officer compensation.
    The Company has recognized consulting expense of $209,000.

    Issued 285,714 shares of its common stock for the conversion of debt.

    Converted $30,000 of accounts payable to related parties into 857,123 shares
of its common stock.

    Converted 10 shares of its Series A convertible preferred stock into
11,546,619 shares of its common stock.

For the year ended March 31, 2000, the Company issued the following equity and
security instruments:

    Granted options to consultants to purchase 14,465,000 shares of its common
    stock, in connection with consulting agreements and officer compensation.
    The Company has recognized consulting expense of $1,535,000.

    Issued 7,225,000 and 490,000, respectively, shares of its common stock for
    the conversion of $376,875 of principal balance and accrued interest and
    $24,500 of accounts payable, respectively.

    Converted $1,860,275 of accounts payable to related parties into two
    separate convertible debentures for i) $1,050,775 issued to an unrelated
    third party, and ii) $809,500 issued to a related party.

    Issued a $72,000 promissory note in settlement for the 2000 termination of
    an operating lease.







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

                                       F-9

<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 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 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,
          2001 and 2000, the Company's management evaluated its operations by
          two separate product lines to assess performance and the allocation of
          resources. These product lines have been reflected as two reportable
          segments, video products and general merchandise, described as
          follows:

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

               GENERAL MERCHANDISE
               The Company, through its wholly owned subsidiary, JPI, purchases
               and distributes toy products to mass merchandisers in the U.S.,
               which commenced in fiscal 1999. The Company offers the toy
               products for limited sales periods and as demand for products
               change, the Company switches to newer and more popular products.


                                      F-10
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

          Reclassification
          ----------------
          As of March 31, 2001, certain prior year amounts have been
          reclassified to conform with current presentation.

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

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

          Concentrations of Credit Risk
          -----------------------------
          Financial instruments that potentially subject the Company to
          concentrations of credit risk are cash and cash equivalents and
          accounts receivable arising from Company's normal business activities.
          The Company routinely assesses the financial strength of its customers
          and, based upon factors surrounding the credit risk, establishes an
          allowance for uncollectible accounts and, as a consequence, believes
          that its accounts receivable credit risk exposure beyond such
          allowance is limited. The Company places its cash with high quality
          financial institutions and at times may exceed the FDIC $100,000
          insurance limit. The Company had no deposits as of March 31, 2001 and
          2000, 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-11
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 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.

          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.

          Offering Costs
          --------------
          Offering costs consist primarily of professional fees. These costs are
          charged against the proceeds of the sale of Series A convertible
          preferred stock in the periods in which they occur.

                                      F-12

<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Advertising Costs
          -----------------
          Advertising costs are expensed as incurred. Advertising costs were
          approximately $20,891 and $44,500 for the years ended March 31, 2001,
          and 2000, respectively.

          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 No. 25 ("APB 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 Statement of Financial Accounting Standards
          ("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.

                                      F-13
<PAGE>


               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Net Loss Per Share
          ------------------
          SFAS No. 128, "Earnings Per Share" requires presentation of basic loss
          per share ("Basic LPS") and diluted loss per share ("Diluted LPS").
          The computation of basic loss per share is computed by dividing loss
          available to common stockholders by the weighted average number of
          outstanding common shares during the period. Diluted loss per share
          gives effect to all dilutive potential common shares outstanding
          during the period. The computation of diluted LPS does not assume
          conversion, exercise or contingent exercise of securities that would
          have an anti-dilutive effect on losses. As of March 31, 2001 and 2000,
          the weighted average common shares outstanding would have been
          increased 12,500,000 and 19,004,000 shares if the issued and
          exercisable stock options would have been dilutive.

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


                                                            March 31,
                                          -----------------------------
                                             2001                 2000
                                           ----------          ----------
              Basic                        69,359,016          59,375,234
                                           ==========          ==========
              Diluted                      69,359,016          59,375,234
                                           ==========          ==========

          Comprehensive Income
          --------------------
          SFAS No. 130, "Reporting Comprehensive Income" establishes standards
          for the reporting of comprehensive income and its components in the
          financial statements. As of March 31, 2001 and 2000, the Company has
          no items that represent comprehensive income and, therefore, has not
          included a schedule of comprehensive income in the accompanying
          consolidated financial statements.

          Recent Accounting Pronouncements
          --------------------------------
          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. The Company adopted SFAS No. 131 during 1999.

                                      F-14
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Recent Accounting Pronouncements (continued)
          --------------------------------------------

          SFAS No. 132, "Employers' Disclosures about Pension and Other Post
          Employment Benefits," was issued in February 1998 and specifies
          amended disclosure requirements regarding such obligations. SFAS No.
          132 does not effect the Company as of March 31, 2001 and 2000.

          In June 1998 and June 1999, the Financial Accounting Standards Board
          (FASB) issued Statement of Financial Accounting Standards (SFAS) No.
          133, "Accounting for Derivative Investments and Hedging Activities,"
          and SFAS No. 137, which delayed the effective date of SFAS No. 133. In
          June 2000, the FASB issued SFAS No. 138, which provided additional
          guidance for the application of SFAS NO. 133 for certain transactions.
          Although, the Company has adopted the statement in January 2001, SFAS
          No. 133 does not apply to its current operations and management does
          not expect the adoption of this statement to have a material impact on
          the Company's financial position or results of operations.

          In December 1999, the Securities and Exchange Commissions (SEC) issued
          Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB
          No. 101 provides additional guidance on the recognition, presentation
          and disclosure of revenue in financial statements. The Company has
          reviewed this bulletin and believes that its current recognition
          policy is consistent with the guidance of SAB No. 101.


NOTE 2 - GOING CONCERN

          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. 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.

                                      F-15
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 2 - GOING CONCERN (Continued)

          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:

          To mitigate the effects of the uncertainties, the Company has
          implemented a plan to increase its overall market share of its core
          business and to expand into the contract replication, duplication and
          packaging business. The Company expects to reach positive cash flow at
          the end of its second fiscal quarter has implemented the following
          goals and strategies to achieve its plan:

          Retailers and Mass Merchandisers

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

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

          -    Attain leadership in pricing and packaging innovations.

          -    Maintain efficiency in quick turnaround of product shipments.

          -    Continue to build the reputation as a leader in the high quality
               budget priced arena to have other potential second and third tier
               customers emulate the purchasing habits of our national chain
               stores and mass merchandisers.

          -    Continue to acquire new videocassette and DVD titles for
               distribution

          Internet e-Commerce

          -    Maintain and improve our service through fast turnaround.

          -    Keep our pricing competitive.

          -    Maintain and improve customer service procedures.

          -    Complete thorough search for the most effective marketing and
               promotional tools and methods for our web-site.

                                      F-16
<PAGE>


               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 2 - GOING CONCERN (Continued)

          -    Continuously maintain and update our web-site to keep up with
               current products.

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

          Contract Replication and Contract Packaging Service

          -    Establish a reputation of being most efficient and speedy
               provider of DVD high quality replication and packaging services
               and becoming a leader in this market segment, by selling to large
               corporate accounts.

          -    Capitalize on the experience and know-how of our alliance
               company, to deliver the highest quality replication service
               available on a consistent basis.

          -    Use our association with our alliance company to penetrate this
               market segment by broadcasting to our potential contract
               customers the unique capabilities, experience and consistency of
               production capabilities provided.

          The Company believes it has adequate cash resources to sustain its
          operations through the second quarter of fiscal 2002, 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 and to convert
          debt to equity. The principal objective of the Company is to implement
          the above items in fiscal 2002, which will lead to a profitable
          operation if the items are successfully implemented, and subject to
          market and other conditions. Although the Company believes that the
          outlook is favorable, there can be no assurance that market conditions
          will continue in a direction favorable to the Company.



                                      F-17
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 3 - ACCOUNTS RECEIVABLE

          Accounts receivable as of March 31, 2001 and 2000, net of allowance
          for doubtful accounts were approximately $413,020 and $421,196,
          respectively. Substantially all of the accounts receivable as of March
          31, 2001 and 2000 have been factored and pledged as collateral under a
          factoring agreement (see Note 8).

          The Company reviews accounts receivable periodically during the year
          for collectability. An allowance for bad debt is established for any
          receivables whose collection is in doubt or for returns and a reserve
          is also established for an estimate of the remaining accounts.

          As of March 31, 2001 and 2000, the Company had an allowance for
          doubtful accounts of $144,542 and $137,750, respectively.

NOTE 4 - INVENTORY

          Inventory consisted of the following as of:

                                                                 March 31,
                                                       2001               2000
                                                  -------------     -----------
             Raw materials                        $     944,215     $   525,209
             Finished goods                             844,895       1,246,055
                                                  -------------     -----------
                                                      1,789,110       1,771,264
             Less: valuation allowance                 (700,159)       (676,386)
                                                  -------------     -----------
             Inventory, net                       $   1,088,951     $ 1,094,878
                                                  =============     ===========

          Allowance
          ---------
          An allowance has been established for inventory of $700,159 and
          $676,386 as of March 31, 2001 and 2000. This reserve is primarily for
          the anticipated reductions in selling prices (which are lower than the
          carrying value) for inventory which has been:

               (a)  restricted to specified distribution territories as a result
                    of legal settlements; and

               (b)  inventory, which has passed its peak selling season.

NOTE 5 - DUE FROM RELATED PARTIES

          As of March 31, 2001, the Company advanced $101,366 to an officer of
          the Company. Simple interest is accrued monthly at an annual rate of
          10% on the outstanding balance. The loan is due in December 2002.


                                      F-18
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 6 -      PROPERTY AND EQUIPMENT

          Property and equipment consisted of the following as of:

                                                             March 31,
                                                 -----------------------------
                                                     2001              2000
                                                 ------------      -----------
           Furniture and equipment               $  1,165,610      $ 1,079,941
           Automobile                                  24,487           24,487
           Leasehold improvements                      40,175           40,174
                                                 ------------      -----------
                                                    1,230,272        1,144,602
           Less:  accumulated depreciation
             and amortization                      (1,030,785)      (  878,032)
                                                 ------------      -----------
           Furniture and equipment, net          $    199,487      $   266,570
                                                 ============      ===========

          Depreciation expense for the years ended March 31, 2001 and 2000 was
          approximately $153,000 and $89,000, respectively.

NOTE 7 - 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"). Since
          the Company does not have greater than a 50% investment or exercise
          control in the day to day operations, this investment is accounted for
          using the equity method. The operations of ATRE are not considered to
          be significant to the Company's operations; therefore the Company has
          not included a summary of ATRE's assets and liabilities.

          For the years ended March 31, 2001 and 2000, investment income (loss)
          from ATRE was $15,500 and $(4,275).

          As of March 31, 2001 and 2000, the investment in ATRE totaled $60,725
          and $45,725, respectively.

NOTE 8 - 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.

                                      F-19
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 8 - DUE TO FACTOR/FINANCING AGREEMENT PAYABLE (Continued)

          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 portion of the borrowings is determined
          by the lesser of i) $800,000, ii) 25% of the client's finished toy
          inventory or iii) 55% of the clients finished videotape inventory. The
          cost of funds for the inventory portion of the borrowings is at 1.4%
          per month on the average loan balance each month. The agreement
          stipulated an $8,000 per week payment against the asset-based note
          payable, which was modified on June 5, 2000, to $4,000 per week. The
          term of asset-based note was extended to November 15, 2001. The
          Company paid interest of approximately $117,000 and $110,000 for the
          years ended March 31, 2001 and 2000, respectively. The financing
          agreement and factor advances were as follows:

                                                          March 31,
                                              -----------------------------
                                                   2001             2000
                                              -------------     -----------
          Due to factor payable               $     319,303     $   370,461
          Financing agreement payable -
            inventory                               311,807         538,670
                                             --------------    ------------
                                              $     631,110     $   909,131
                                              =============     ===========

NOTE 9 - NOTES PAYABLE

          Notes payable represents the following as of:
                                                           March 31,
                                              -----------------------------
                                                   2001             2000
                                              -------------     -----------
          a) Mount Vernon Properties          $         -       $    72,000
          b) Waring Investments                       4,585          27,500
          c) Automobile                               5,905          12,214
          d) Other                                   32,086          77,920
                                               -------------     -----------
                                                     42,576         189,634
          Less current                              (42,576)       (125,762)
                                              -------------     -----------
          Long term                           $           -     $    63,872
                                              =============     ===========


                                      F-20
<PAGE>
               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 9 - NOTES PAYABLE (Continued)

          a) Mount Vernon Properties
          --------------------------
          During March 2000, the Company entered into a legal settlement with
          its prior landlords for unpaid rent. The Company agreed to a note
          payable for $72,000 bearing interest at the rate of 10% interest per
          annum payable in twelve monthly installments of principal and interest
          of $6,600. As of March 31, 2001 and 2000, the balance was $-0- and
          $72,000, respectively.

          b) Waring Investments
          ---------------------
          Note payable bearing interest at the rate of 16% per annum with twelve
          monthly installments of principal of $2,292. This note is guaranteed
          by the President of the Company and is subordinated to the financing
          agreement payable. Since, the Company did not pay-off the note on the
          scheduled maturity date, the lender has extended the maturity date and
          assessed an additional interest charge of 20% per annum as a penalty
          on the unpaid balance each month. As of March 31, 2001 and 2000, the
          balance of $4,585 and $27,500 is due and payable May 2001.

          c) Automobile
          -------------
          The Company has a vehicle financing agreement with monthly payments of
          $562 for principal and interest at 9.75% per annum. The balance as of
          March 31, 2001 and 2000 was $5,905 and $12,214 respectively.

          d) Other
          --------
          As of March 31, 2001 and 2000, the Company had various payables
          aggregating $32,085 and $77,920, due on demand.

NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE

          Related parties - notes and advances payable consists of the following
          as of:
                                                             March 31,
                                                       2001             2000
                                                   ------------     -----------
           a) Convertible note payable - ATRE      $    809,500     $   809,500
           b) Note payable - ATRE                       576,300         478,900
           c) Note payable - Jeffrey Schillen            71,300          90,000
           d) Convertible note payable -
               Jeffrey Schillen                         100,000         100,000
           d) Convertible note payable - James Lu        50,000          50,000
           e) Note payable - James Lu                         -          46,208
           f) Note payable - Golden Gulf                 21,133          69,233
                                                    ------------     -----------
                                                      1,628,233       1,643,841
           Less:  current portion                      (150,000)       (100,000)
                                                   ------------     -----------
           Long term                               $  1,478,233     $ 1,543,841
                                                   ============     ===========

                                      F-21
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE (Continued)

     a)   Convertible Note Payable - ATRE
          -------------------------------
          As of March 31, 1999, the Company had $809,500 due to a related party
          for payment of trade payables. In October 1999, the outstanding
          balance was converted into a convertible debenture at 7% per annum due
          and payable on or before September 30, 2000. At the option of the
          lender all or part of the balance can be paid with shares of the
          Company's common stock. The number of shares is determined by dividing
          the principal being converted by the average twenty-day bid price,
          prior to the date of such payment request, for the Company's common
          stock. As of March 31, 2001 and 2000, the outstanding balance was
          $809,500.

     b)   Note Payable - ATRE
          -------------------
          As of March 31, 2001 and 2000, the Company was advanced $576,300 and
          $478,900, from ATRE (see Note 7), bearing interest at the rate of 14%
          per annum, and due on demand.

     c)   Note Payable - Jeffrey Schillen
          -------------------------------
          As of March 31, 2001 and 2000, the Company has a $71,300 and $90,000
          note payable, due to an officer, bearing interest at the rate of 10%
          per annum, and due on demand.

     d)   Convertible Debentures - Related Parties
          ----------------------------------------
          During March and June 1999, the Company entered into two convertible
          debentures for $50,000 and $100,000, respectively. The debentures bear
          interest at 10% per year with principal and interest due on the first
          anniversary of the date of issuance. Each note has been extended for
          an additional year. The notes also call for any amount of the
          outstanding principal to be converted into restricted shares of the
          Company's common stock at the option of the lender's at a conversion
          rate of $0.05 per share. As of March 31, 2001 and 2000, neither of the
          debentures were converted. Since the debentures are convertible into
          restricted shares of the Company's common stock at a rate below
          market, the first 20% of the below market amount was attributed to the
          lack of tradability of the shares due to restriction on sale and the
          remainder was attributed to additional interest. The additional amount
          of financing costs for the year ended March 31, 2000 was calculated to
          be $184,400, of which each amount was expensed.

     e)   Note Payable - James Lu
          -----------------------
          As of March 31, 2001 and 2000, the Company has a $-0- and $46,208 note
          payable, due to an officer, bearing interest at the rate of 0%, and
          due on demand.

                                      F-22
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE (Continued)

    f)   Note Payable - Golden Gulf
          --------------------------
          As of March 31, 2001 and 2000, the Company has a $21,133 and $69,233
          note payable, due to Golden Gulf Capital Group, bearing interest at
          the rate of 0%, and due on demand.

NOTE 11 - CONVERTIBLE DEBENTURES

          Convertible debentures consisted of the following as of:

                                                           March 31,
                                                ----------------------------
                                                    2001              2000
                                                -----------       ----------
          a)  Balmore Funds                     $   100,000       $  100,000
          b)  GJ Products Corporation             1,042,675        1,050,775
                                                -----------       ----------
                                                  1,142,675        1,150,775
          Less:  Current                         (1,142,675)        (100,000)
                                                -----------       ----------
          Long Term                             $         -       $1,050,775
                                                ===========       ==========

     a)   During February and March 1999, the Company entered into convertible
          debentures for $175,000 and $100,000, respectively. The debentures
          bear interest at 10% with principal and interest due on the first
          anniversary of the date of issuance. The notes also call for any
          amount of the outstanding principal to be converted into restricted
          shares of the Company's common stock at the option of the lender at a
          conversion rate of $0.05 per share. As of March 2000, one investor
          converted the $175,000 note into 3,500,000 shares of the Company's
          common stock. As of March 31, 2001 and 2000, the outstanding balance
          of convertible debentures was $100,000, for which the lender extended
          the due date to March 2001.

     b)   As of March 31, 1999, the Company had $1,118,425 due to a related
          party for payment of trade payables. In October 1999, the Company
          ceased to have a relationship with the party, so the outstanding
          balance of $1,050,775 was converted into a convertible debenture. The
          debenture bears interest at 10% with principal and interest due on the
          first anniversary of the date of issuance. At the option of the
          holder, all or part of the balance can be paid with shares of the
          Company's common stock. The number of shares is determined by dividing
          the principal being converted by the average twenty-day bid price,
          prior to the date of such payment request, for the Company's common
          stock. As of March 31, 2001 and 2000, the outstanding balance was
          $1,042,675 and $1,050,775, respectively.

                                      F-23
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 12 - COMMITMENTS AND CONTIGENCIES

          Royalty Commitments
          -------------------
          The Company has entered into various royalty agreements for licensing
          of titles with terms of one to seven years. Certain agreements include
          minimum guaranteed payments. For the years ended March 31, 2001 and
          2000, royalty expense was $23,607 and $103,841, respectively, pursuant
          to these agreements.

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

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

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


                                      F-24
<PAGE>

              DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 12 - COMMITMENTS AND CONTIGENCIES, continued

          Lease Commitments, continued
          ---------------------------
          The Company's future minimum annual aggregate rental payments for
          capital and operating leases that have initial or remaining term in
          excess of one year are as follows:

                                                       Capital      Operating
                                                       Leases        Leases
                                                     ----------    ----------
            Year Ending March 31,:
            2002                                     $  18,900     $  126,000
            2003                                             -        105,000
                                                     ---------     ----------
            Total minimum lease payments                18,900     $  231,000
                                                                    =========
            Less: amount representing interest         ( 1,300)
                                                     ---------
            Present value of minimum lease payments     17,600
            Less:  current portion                     (17,600)
                                                     ----------
            Long-term portion                        $       -
                                                     =========


          Rent expense for the years ended March 31, 2001 and 2000 was
          approximately $142,000 and $154,000, respectively.

          The following is a summary of property held under the capital leases
          as of March 31, 2001:

            Furniture and equipment                               $    87,081
            Less: accumulated depreciation                            (45,500)
                                                                  ------------
              Total                                               $    41,581
                                                                  ===========

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



                                      F-25
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 13 - STOCKHOLDERS' EQUITY

          Common Stock
          ------------
          During the year ended March 31, 2001, the Company amended its Articles
          of Incorporation to increase the number of authorized shares of common
          stock from 100,000,000 shares to 600,000,000 shares.

          During the year ended March 31, 2001, the Company had the following
          significant issuances of its common stock:

          As of March 31, 2001, 11,546,619 shares of common stock were issued
          for the conversion of Series A convertible preferred stock (see Series
          A Convertible Preferred Stock).

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

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

          o    4,000,000 shares for the exercise of options for cash proceeds of
               $200,000

          o    The Company recorded $184,400 of additional financing costs
               related to convertible debentures, convertible into the Company's
               common stock at a rate below market, the first 20% of the below
               market amount was attributed to the lack of tradability of the
               shares due to restriction on sale and the remainder was
               attributed to additional financing. The additional amount of
               financing expense for the year ended March 31, 2000 was
               calculated to be $184,400.

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

          The per unit weighted-average fair value of unit options granted on
          June 1, 2000 was $0.029 at the date of grant using the Black-Scholes
          option pricing model with the following weighted-average assumptions:
          weighted-average risk-free interest rates of 5.86; dividend yields of
          0%; weighted-average volatility factors of the expected market price
          of the Company's common stock of 178%; and a weighted average expected
          life of the option was 2 months.

                                      F-26
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 13 - STOCKHOLDERS' EQUITY (Continued)

          Common Stock (continued
          -----------------------
          During June and July of 2000, the Company received $215,500 in cash
          for the issuance of the 6,157,143 shares of common stock upon the
          exercise of these options and the remaining options of 1,142,857 were
          exercised for consulting services incurred and owed by the Company to
          one of the consultants totaling $30,000 and from the cancellation of
          an obligation totaling $10,000 in principal and interest, owed to the
          same consultant.

          Convertible Preferred Stock
          ---------------------------
          As of March 31, 2000, the Company had authorized 5,000,000 shares of
          no par value, convertible preferred stock. The preferred stock has:

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

          ii)  conversion 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.

          As of March 31, 2001, the Company had authorized 4,999,950 shares as
          discussed below.

          Series A Convertible Preferred Stock
          ------------------------------------
          On May 11, 2000, the Company amended its articles of incorporation to
          authorize the issuance 50 shares of no par value, Series A 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.

          On May 11, 2000, the Company entered into a Securities Purchase
          Agreement ("Securities Purchase Agreement") with eight investors.
          Pursuant to the Securities Purchase Agreement, the Company issued and
          sold 50 shares of Series A Convertible Preferred Stock for total
          consideration of $500,000, or $10,000 per share.


                                      F-27
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 13 - STOCKHOLDERS' EQUITY (Continued)

          Series A Convertible Preferred Stock (continued)
          ------------------------------------------------
          Commencing August 9, 2000, 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
          required to keep such a registration statement effective until all of
          such shares have been resold.

          As of March 31, 2001, 10 shares of Series A Convertible Preferred
          Stock with a stated value of $10,000 per share were converted into
          11,546,619 shares of common stock at a price per share equaling 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 prices ranged from $0.00832 to $0.00920.

                                      F-28
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 13 - STOCKHOLDERS' EQUITY (Continued)

          Warrants
          --------
          The May Davis Group, Inc. ("May Davis"), acted as placement agent for
          the offering. May Davis received a placement fee of $40,000 and the
          Company issued warrants to purchase 1,500,000 shares of Common Stock
          to May Davis and certain designees of May Davis and warrants to
          purchase 25,000 shares of Common Stock to Butler Gonzalez, LLP,
          counsel to May Davis. Such warrants are exercisable at a price of $.07
          per share.

NOTE 14 - COMMON STOCK OPTIONS

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

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

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

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


                                      F-29
<PAGE>


               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 14 - COMMON STOCK OPTIONS (Continued)

          o    The Company's board of directors approved and the Company issued
               to the Company's President, as a bonus, options to purchase
               2,500,000 and 1,000,000 shares of the Company's common stock at
               $0.05 and $0.10 per share, respectively. The options expire on
               May 24, 2004. Since the options are accounted for under APB 25
               and the exercise price is below market, the Company has expensed
               the aggregate intrinsic value at date of grant of approximately
               $486,400.

          o    The Company's board of directors approved and the Company issued
               to the Company's V.P. of Sales and Marketing, as a bonus, options
               to purchase 500,000 and 500,000 shares of the Company's common
               stock at $0.05 and $0.10 per share, respectively. The options
               expire on May 24, 2004. Since the options are accounted for under
               APB 25 and the exercise price is below market, the Company has
               expensed the aggregate intrinsic value at date of grant of
               approximately $133,600.

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

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



                                      F-30
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 14 - COMMON STOCK OPTIONS (Continued)

          2000 Stock Compensation Plan
          ----------------------------
          On June 9, 2000, the Board of Directors of the Company approved the
          Company's 2000 Stock Compensation Plan ("Plan") for the purpose of
          providing the Company with a means of compensating selected key
          employees (including officers), directors and consultants to the
          Company and its subsidiaries for their services rendered in connection
          with the development of Diamond Entertainment Corporation with shares
          of Common Stock of the Company. The plan authorizes the Board of
          Directors of the Company to sell or award up to 13,000,000 shares
          and/or options of the Company's Common Stock, no par value. For the
          fiscal year ended March 31, 2001, the Company had the following Common
          Stock option transactions under this Plan:

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

          The per unit weighted-average fair value of unit options granted on
          June 1, 2000 was $0.029 at the date of grant using the Black-Scholes
          option pricing model with the following weighted-average assumptions:
          weighted-average risk-free interest rate of 5.86; dividend yield of
          0%; weighted-average volatility factor of the expected market price of
          the Company's common stock of 178%; and a weighted average expected
          life of the option was 2 months. In June and July of 2000, the Company
          received $215,500 in cash for the issuance of the 6,157,143 shares
          upon the exercise of these options and the remaining options of
          1,142,857 were exercised for consulting services incurred and owed by
          the Company to one of the consultants totaling $30,000 and from the
          cancellation of an obligation of $10,000 in principal and interest
          owed to the same consultant. The options had an aggregate fair value
          at the date of grant of approximately $209,000.


                                      F-31
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 14 - COMMON STOCK OPTIONS (Continued)

          2000 Stock Compensation Plan, continued
          ---------------------------------------
          On July 24, 2000, the Company engaged a consulting firm for a period
          of one year to provide advice to undertake for and consult with the
          company concerning management, marketing, consulting, strategic
          planning, corporate organization and structure, financial matters in
          connection with the operation of the businesses of the Company,
          expansion of services, acquisitions and business opportunities, and
          shall review and advise the Company regarding its overall progress,
          needs and conditions. The consulting firm was granted options to
          purchase 600,000 shares of the Company's Common Stock with an exercise
          price at $0.05 per share and the options shall expire on July 24,
          2003. These options were not exercised as of March 31, 2001, and the
          Company believes the firm has not performed under the agreement.

          The  following   summarizes   the  common  stock  options  issued  for
          consulting services for the years ended March 31, 2001 and 2000:

                                                                      Weighted
                                                                      Average
                                                                      Exercise
                                            Employees    Consultants    Price
                                           ----------    -----------  ---------
     Options outstanding, March 31, 1999    7,000,000     3,454,000   $   0.10
     Granted                                4,500,000     9,965,000   $   0.06
     Exercised                                      -    (8,215,000)  $   0.05
     Expired/cancelled                              -    (1,000,000)  $   0.25
                                           ----------    -----------

     Options outstanding, March 31, 2000   11,500,000     4,204,000   $   0.10
     Granted                                        -     7,900,000   $   0.35
     Exercised                                      -    (7,300,000)  $   0.35
     Expired/cancelled                              -             -          -
                                           ----------    -----------
     Options outstanding, March 31, 2001   11,500,000     4,804,000   $   0.35
                                           ==========    ===========

          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 $209,000 and $1,280,000 for the years ended March 31, 2001
          and 2000, respectively.

                                      F-32
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 14 - COMMON STOCK OPTIONS (Continued)

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

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

                                                                        Weighted
                                                                         Average
                                                       Stock Options    Exercise
                                                        Outstanding       Price
                                                       -------------    --------
            Options Outstanding, March 31, 1999           550,000       $  0.10
            Granted                                       300,000       $  0.10
            Expired                                     ( 550,000)      $  0.10
                                                       ----------       -------
            Options, Exercisable and Outstanding,
               March 31, 2000                             300,000       $  0.10
            Granted                                             -             -
            Expired                                             -             -
                                                       ----------       -------
            Options, Exercisable and Outstanding,
               March 31, 2001                             300,000       $  0.10
                                                       ==========       =======

          The weighted average remaining contract lives of stock options
          outstanding are 1.42 years.


                                      F-33
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 14 - COMMON STOCK OPTIONS (Continued)

          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. If the Company had
          elected to recognize compensation expense based upon the fair value at
          the grant date for awards vested under the plan consistent with the
          methodology prescribed by SFAS 123, the Company's net loss would be
          increased by $0 and $279,504 for the years ended March 31, 2001 and
          2000, respectively, to the pro forma amounts indicated below.

                                                   2001                2000
                                               -----------         -----------
                  Net Loss:
                    As Reported                $ (914,894)         $(3,937,358)
                                               ===========         ===========
                    Pro forma                  $ (914,894)         $(4,216,862)
                                               ===========         ===========

          The fair value for these options was estimated at the date of grant
          using a Black-Scholes option pricing model with the following
          weighted-average assumptions for years ended March 31, 2000: weighted-
          average risk-free interest rates of 5.5%; dividend yields of 0%;
          weighted-average volatility factors of the expected market price of
          the Company's common stock of 178%; and a weighted average expected
          life of the option of 2.5 years.


NOTE 15 - MAJOR CUSTOMERS

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

          For the year ended March 31, 2001, the Company had net sales to 2
          customers that amounted to approximately 28.3% and 17.1%,
          respectively.


                                      F-34
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 16 - INCOME TAXES

                                                      For The Years Ended
                                                            March  31,
                                               --------------------------------
                                                    2001                2000
                                               -------------     --------------
           Current Tax Expense
              U.S. federal                     $          -      $           -
              State and local                             -                  -
                                              --------------     --------------
           Total Current                                  -                  -
                                              --------------     --------------

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

          The reconciliation of the effective income tax rate to the Federal
          statutory rate is as follows for the years ended March 31, 2001 and
          2000:

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



                                      F-35
<PAGE>

               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 16 - INCOME TAXES (Continued)

          At March 31, 2001 and 2000, the Company had net carryforward losses of
          approximately $18,565,318 and $17,650,424, 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, 2001 and 2000, increased by approximately
          $311,000 and $491,000, respectively.

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

                                                            March  31,
                                                  -----------------------------
                                                     2001              2000
                                                  -----------       -----------
              Deferred Tax Assets
                 Loss carryforwards               $ 6,312,000       $ 6,001,000
                 Less:  valuation allowance        (6,312,000)       (6,001,000
                                                  -----------       -----------
              Net Deferred Tax Assets             $         -       $         -
                                                  ===========       ===========

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

NOTE 17 - SEGMENT INFORMATION

          The following financial information is reported on the basis that is
          used internally for evaluating segment performance and deciding how to
          allocate resources. During 2001 and 2000, the Company operated in two
          principal industries;

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

                                      F-36
<PAGE>


               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 17 - SEGMENT INFORMATION (Continued)

                                                        Year Ended March 31,
                                                 ------------------------------
                                                      2001             2000
                                                 -----------        -----------
Revenues:
   Video programs and other licensed products    $ 3,174,029        $ 3,605,343
   Merchandise                                         7,050            222,918
                                                 -----------        -----------
                                                 $ 3,181,079        $ 3,828,261
                                                 ===========        ===========
 Loss before taxes:
   Video programs and other licensed products    $  (664,204)       $(3,414,811)
   Merchandise                                      (250,690)        (  522,547)
                                                 -----------        -----------
                                                 $  (914,894)       $(3,937,358)
                                                 ===========        ===========

   Depreciation and amortization:
   Video programs and other licensed products    $   168,205        $    242,976
   Merchandise                                        72,059              36,062
                                                 -----------        -----------
                                                 $   240,264        $    279,038
                                                 ===========        ===========
 Segment assets:
   Video programs and other licensed products    $ 1,103,356        $ 1,813,567
   Merchandise                                     1,044,606            310,939
                                                 -----------        -----------
                                                 $ 2,147,962        $ 2,124,506
                                                 ===========        ===========
 Expenditure for segment assets:
   Video programs and other licensed products    $   204,574        $    84,926
   Merchandise                                             -                  -
                                                 -----------        -----------
                                                 $   204,574        $    84,926
                                                 ===========        ===========


                                      F-37
<PAGE>


               DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2000

NOTE 18 - SUBSEQUENT EVENTS

          In January 2001, the Company borrowed $80,000 as a short term loan
          from one of its suppliers and the loan was retired in April 2001, when
          the Company made its final weekly installment payment of $10,000. On
          June 6, 2001, the Company received a new loan in the amount of $80,000
          from the same supplier. This loan bears no interest and is payable in
          sixteen (16) weekly installments beginning on August 1, 2001. James
          Lu, the President of the Company, has personally guaranteed the loan.

          On June 4, 2001 and June 26, 2001 the Company borrowed $25,000 and
          $15,000, respectively, from a consulting firm and issued a promissory
          note which is payable on or before August 5, 2001 and August 25, 2001,
          respectively. The note bears interest at 2-1/2% per month and a loan
          fee of 5% of the principal amount. The notes are personally guaranteed
          by James Lu.











                                      F-38
<PAGE>




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

            None



                                    PART III

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

         The Company's directors and officers are as follows:

Name                           Age     Title
----                           ---     -----
James K.T. Lu.............     54      Chairman of the Board, President, Chief
                                       Executive Officer, Secretary and Director

Jeffrey I. Schillen.......     55      Executive Vice President, Sales and
                                       Marketing and Director

Murray T. Scott...........     79      Director


Fred U. Odaka.............     64      Chief Financial Officer


Background of Executive Officers and Directors

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

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


                                       28
<PAGE>

Business Administration (MBA) from California State University in 1981. Mr. Lu
entered into a plea and cooperation agreement with the Office of the United
States Attorney for the Eastern District of New York. The agreement involved Mr.
Lu pleading guilty to one count of Conspiracy to Launder Money and one count of
violation of the Travel Act. The conduct for which Mr. Lu pled guilty had no
relationship to the Company's business or his activities as an officer of the
Company. It is not anticipated that Mr. Lu will be sentenced for approximately
two years during which time the government will evaluate his performance under
the agreement to cooperate.

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

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

         Fred U. Odaka. Mr. Odaka has been 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.


                                       29
<PAGE>

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

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


Committees of the Board of Directors

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


Section 16(a) Beneficial Ownership Reporting Compliance

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

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

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


                                       30
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION.

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

<TABLE>
<CAPTION>
                                   Summary Compensation Table

                                                  Annual Compensation              Long Term Compensation
                                               ------------------------  ------------------------------------------
                                                                           Awards                Payouts
                                                                         ------------ -----------------------------
                                                                         Securities                     All Other
                                                                         Underlying   LTIP Payouts    Compensation
Name and Principal Position          Year      Salary ($)    Bonus ($)   Options (#)       ($)             ($)
--------------------------------     ----      ----------- ------------  ------------ -------------- --------------
<S>                                   <C>      <C>           <C>          <C>          <C>            <C>
James K.T. Lu (1)                    2001        50,000         0             0             0            26,739
  President, Chief Executive         2000        37,500         0             0             0            27,606
  Officer and Secretary              1999       120,000         0             0             0            89,983


Jeffrey I. Schillen (2)              2001        40,000         0             0             0            17,148
  Executive Vice President of        2000        50,000         0             0             0            15,618
  Sales and Marketing                1999       100,000         0             0             0            13,036
</TABLE>


(1) Mr. Lu's annual salary is $150,000 during the fiscal year ended March 31,
2001. and he has elected to defer a substantial portion of his salary for this
period. During March 2000, Mr. Lu waived all of his deferred salary owed as of
March 31, 1999 and as of the date of this report, Mr. Lu continues to defer a
substantial portion of his salary.

(2) Mr. Schillen's annual salary is $120,000 during the fiscal year ended March
31, 2001 and he elected to defer a substantial portion of his salary for this
period. During March 2000, Mr. Schillen waived all of his deferred salary owed
as of March 31, 1999, and as of the date of this report, Mr. Schillen continues
to defer until August 2000, a substantial portion of his salary.






                                       31
<PAGE>


Option/SAR Grants in Last Fiscal Year
-------------------------------------
         The following table sets forth certain information with respect to the
options granted during the year ended March 31, 2001, for the persons named in
the Summary Compensation Table (the "Named Executive Officers"):

                        Number of    Percent of Total
                        Securities     Options/SARs
                        Underlying      Granted to       Exercise
                       Options/SARs    Employees in      or Base     Expiration
Name                    Granted (#)     Fiscal Year     Price($/Sh)     Date
----                   ------------  ----------------   -----------  ----------
James K.T. Lu                0              --               --          --
Jeffrey I. Schillen          0              --               --          --



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

         The following table sets forth certain information with respect to
options exercised during the year ended March 31, 2001 by the Named Executive
Officers and with respect to unexercised options held by such persons at the end
of fiscal year 2001.

<TABLE>
<CAPTION>
                                                         Number of Securities
                                                        Underlying Unexercised           Value of Unexercised
                                                           Options/SARs               In-the-Money Options/SARs
                             Shares                      At FY-End (#)                     at FY-End ($)
                         Acquired On    Value        ---------------------------   ---------------------------
Name                     Exercise (#) Realized ($)  Exercisable    Unexercisable   Exercisable   Unexercisable
-----------              ------------  -----------  -------------  -------------   -----------   -------------
<S>                      <C>           <C>          <C>            <C>             <C>           <C>
James K.T. Lu              0              0          9,100,000        0                   0              0
Jeffrey I. Schillen        0              0          2,150,000        0                   0              0
</TABLE>


Employment Agreements

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

                                       32
<PAGE>

         On April 23, 1996 the Board of Directors agreed to reserve 1,000,000
shares of common stock for distribution to Messrs. Lu and Schillen. Such shares
can be purchased for $.25 per share, in installment payments with a five year
promissory note with interest at 6% per annum. As of March 31, 2001 such
officers had not purchased any of such shares.

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

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

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

2000 Stock Compensation Plan

            On June 9, 2000, the Board of Directors of the Company adopted the
Company's 2000 Stock Compensation Plan ("Plan") for the purpose of providing the
Company with a means of compensating selected key employees (including
officers), directors and consultants to the Company and its subsidiaries for
their services rendered in connection with the Company's development through the
issuance of shares of Common Stock of the Company. The Company is authorized to
sell or award up to 13,000,000 shares and/or options of the Company's Common
Stock, no par value. The Plan is administered by the Board of Directors which
has the discretion to determine the grantees, the number of shares, the date of
each grant, the consideration for the shares and such other terms and conditions
as the Board may determine. The Plan terminates on May 31, 2001. In June and
July of 2000,options in the aggregate amount of 7,900,000 shares were granted to
four consultants. At March 31, 2001, the balance of options remaining under the
Plan for future grants totaled 5,100,000 shares.

                                       33
<PAGE>

Director Compensation

         The Board of Directors of the Company do not receive directors'
compensation.


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

         The following table sets forth information as of March 31, 2001, with
respect to the beneficial ownership of the outstanding shares of the Company's
Common Stock and Preferred Stock by (i) each person known by the Company to be
the beneficial owner of more than 5% of the Common Stock, (ii) each director of
the Company, (iii) each Named Executive Officer of the Company; and (iv) all
directors and executive officers as a group. Unless otherwise indicated below,
such individuals have the sole power to control the vote and dispose of such
shares of capital stock.

<TABLE>
<CAPTION>
                                                                                         Percentage
                                                                                         of Common
                                                                                        Stock Assuming
                                       Common Stock   Percentage of     Preferred       Conversion of
 Name (1)                                  Owned       Common Stock   Stock Owned (2)  Preferred Stock (3)
 ----                                  ------------   -------------   ---------------  -------------------
<S>            <C>                     <C>             <C>            <C>              <C>
 James K.T. Lu (4)                     16,444,960        7.00%         209,287            7.12%
 Diamond Entertainment Corporation
 800 Tucker Lane
 Walnut, CA 91789

 Jeffrey I. Schillen (5)                7,005,750        2.28%          36,282            2.30%
 Diamond Entertainment Corporation
 48 St. Lawrence Way
 Marlboro, NJ 07746

 Murray T. Scott (6)                    1,300,000         .42%          75,796             .47%
 Diamond Entertainment Corporation
 800 Tucker Lane
 Walnut, CA 91789

 All directors and officers as a       24,750,710        9.69%         321,365            9.89%
 group (3 persons) (7)
</TABLE>



                                       34
<PAGE>

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

(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Security Exchange Act of 1934, as amended, and is generally determined by voting
and/or investment power with respect to securities. Unless otherwise noted, all
shares of common stock listed above are owned by each individual named as
beneficial owner and such individual has sole voting and disposition power with
respect to the shares of common stock owned by each of them. Such person or
entity's percentage of ownership is determined by assuming that any options,
warrants or convertible securities held by such person or entity which are
exercisable or convertible within 60 days from the date hereof have been
exercised or converted as the case any be.

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

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

(4) Mr. Lu is President, Chief Executive Officer, Secretary and a director of
the Company. Includes 10,100,000 shares of Common Stock issuable upon exercise
of warrants, options and convertible notes

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

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

(7) Represents 10,250,710 shares of Common Stock outstanding and 14,500,000
shares of Common Stock issuable upon exercise of outstanding warrants and
options.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


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

                                       35
<PAGE>

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

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

         In March and June 1999, the Company issued callable convertible notes
for $50,000 and $100,000 to James Lu and Jeffrey I. Schillen, respectively. The
notes bear interest at 10% per year with principal and interest due on the first
anniversary of the date of issuance. Each note has been extended for an
additional year. The notes also call for any amount of the outstanding principal
to be converted into restricted shares of the Company's common stock at the
option of the lenders at a conversion rate of $0.05 per share. As of March 31,
2001, neither of the notes had been converted.

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

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

         During the quarter ended December 31, 1999, the Board of Directors of
the Company authorized the conversion of approximately $1,880,725 in related
parties payables into one year 7% convertible promissory notes of $1,071,225 and
$809,500 each. The due dates of both notes were extended to September 30, 2001.
The terms of the new convertible notes allow the Company to make partial
principal and interest payments from time to time and the holders of the
convertible notes have the option to request such payments of the indebtedness


                                       36
<PAGE>

evidenced by the notes either in lawful money of the United States or in an
equivalent value consisting of the Company's common stock, the number of shares
to be determined by dividing the payment amount by the average twenty day bid
price for the Company's common stock during the twenty trading days prior to the
date of such payment. Also, during the quarter ended December 31, 1999, the
related party to which $1,071,225 in related parties payable was owed by the
Company, transacted a change in ownership of its common stock in which 100% of
its outstanding shares of common stock was sold to a non-related party. At March
31, 2001, the balance of the convertible promissory note to the non-related
party was $1,049,775.


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

     (a) Exhibits

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

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

3.1.2  (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

3.1.3  (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.

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.


                                       37
<PAGE>

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

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

10.10  (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.

10.16  (3)     2000 Stock Option Plan dated June 9, 2000

21.1   (3)     Subsidiaries of the Registrant.



--------------
(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


    (b) Reports on Form 8-K

           None.


                                       38
<PAGE>


                                   SIGNATURES

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

                               DIAMOND ENTERTAINMENT CORPORATION


Dated:  June 29, 2001              By:     /s/ James K.T. Lu
                                   --------------------------------------
                                   James K.T. Lu
                                   President and Chief Executive Officer


Dated:  June 29,2001               By:    /s/ Fred U. Odaka
                                   ---------------------------------------
                                   Fred U. Odaka
                                   Chief Financial Officer, Principal Financial
                                   Officer and Principal Accounting Officer


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

         Signature                          Title                      Date


/s/ James K.T. Lu                President, Chief Executive     June 29, 2001
----------------------------       Officer, Secretary and
James K.T. Lu                      Director

/s/ Jeffrey I. Schillen          Executive Vice President       June 29, 2001
----------------------------      and Director
Jeffrey I. Schillen


/s/ Murray T. Scott              Director                       June 29, 2001
----------------------------
Murray T. Scott


                                       39