UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                              Washington D.C. 20549
                                    ---------

                                   FORM 10-QSB

                Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

For the quarter ended     September 30, 1997    Commission File Numbe
    0-17953

                        DIAMOND ENTERTAINMENT CORPORATION
             (Exact name of registrant as specified in its charter)

                 New Jersey                                 22-2748019
            (State or other jurisdiction of              (I.R.S. Employer
            incorporation or organization)              Identification No.)

            16818 Marquardt Avenue
                     Cerritos, California                     90703
            (Address of principal executive offices)        (Zip code)

Registrant's telephone number, including area code           (562) 921-3999
                                                      -------------------------


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the  Securities  and  Exchange Act of 1934
during the preceding 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


Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common  stock.  As of November 19, 1997 there were  22,411,864  shares of common
stock outstanding.


<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
------------------------------------------------------------------------------


INDEX TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------




Item 1: Financials

  Balance Sheet as of September 30, 1997 [Unaudited]................ 1.....2

  Statements of Operations for the three and six months ended
  September 30, 1997 and 1996 [Unaudited]........................... 3.....

  Statements of Stockholders' Equity for the six months
  ended September 30, 1997 [Unaudited].............................. 4.....

  Statements of Cash Flows for six months ended September 30, 1997
  and 1996 [Unaudited].............................................. 5.....6

  Notes to Financial Statements [Unaudited]......................... 7.....17

Item 2: Management's Discussion and Analysis of Financial Condition and
        Results of Operations.......................................18.....21

Signature...........................................................22




                          .   .   .   .   .   .   .   .




<PAGE>



Item 1:   Financials

DIAMOND ENTERTAINMENT CORPORATION
------------------------------------------------------------------------------


BALANCE SHEET AS OF SEPTEMBER 30, 1997.
[UNAUDITED]
------------------------------------------------------------------------------




Assets:
Current Assets:
  Cash                                                              $   468,189
  Accounts Receivable - Net                                           2,286,716
  Inventory                                                           2,819,168
  Prepaid Expenses and Deposits                                         103,765
  Related Party Receivable                                                7,111
                                                                    -----------

  Total Current Assets                                                5,684,949
                                                                    -----------
Property and Equipment:
  Leasehold Improvements                                                 28,258
  Furniture, Fixtures and Equipment                                     946,521
                                                                    -----------
  Total - At Cost                                                       974,779
  Less:  Accumulated Depreciation                                       604,643
                                                                    -----------
  Property and Equipment - Net                                          370,136
                                                                    -----------

Film Masters and Artwork                                              4,437,431

Less:  Accumulated Amortization                                       3,915,343
                                                                    -----------
  Total Film Masters and Artwork - Net                                  522,088
                                                                    -----------

Other Assets:
  Accounts Receivable - ATRE                                          1,623,688
  Investment in ATRE                                                     50,000
  Related Party Receivable                                               87,457
  Other Assets                                                          100,801
                                                                    -----------

  Total Other Assets                                                  1,861,946
                                                                    -----------
  Total Assets                                                      $ 8,439,119
                                                                    ===========


The Accompanying Notes are an Integral Part of These Financial Statements.


                                         1

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
------------------------------------------------------------------------------


BALANCE SHEET AS OF SEPTEMBER 30, 1997.
[UNAUDITED]
------------------------------------------------------------------------------





Liabilities and Stockholders' Equity:
Current Liabilities:
  Accounts Payable                                                  $ 4,649,558
  Convertible Promissory Notes Payable                                  957,075
  Notes Payable                                                       1,861,478
  Lease Obligations Payable                                               6,755
  Accrued Expenses                                                      550,670
  Customer Deposit                                                        3,000
  Related Party Payable                                                  96,901
                                                                    -----------

  Total Current Liabilities                                           8,125,437
                                                                    -----------
Long-Term Liabilities:
  Notes Payable                                                          63,241
  Lease Obligations Payable                                              12,475
                                                                    -----------
  Total Long-Term Liabilities                                            75,716
                                                                    -----------
  Total Liabilities                                                   8,201,153
                                                                    -----------
Commitments and Contingencies [5]                                            --
                                                                    -----------
Stockholders' Equity:
  Convertible  Preferred  Stock - No Par  Value,  5,000,000  Shares  Authorized,
   483,251 Issued [of which 172,923 are held in Treasury] 376,593

  Common Stock - No Par Value, 100,000,000 Shares
   Authorized; 22,411,864 Shares Issued and Outstanding              10,204,614

  Additional Paid-in Capital                                         (1,210,231)

  Retained Earnings [Deficit]                                        (8,928,527)
                                                                    -----------
  Sub-Total                                                             442,449
  Less: Treasury Stock [Preferred] - At Cost                            (48,803)
        Deferred Costs [5D] [5I]                                       (155,680)
                                                                    -----------
  Total Stockholders' Equity                                            237,966
                                                                    -----------
  Total Liabilities and Stockholders' Equity                        $ 8,439,119
                                                                    ===========



The Accompanying Notes are an Integral Part of These Financial Statements.


                                         2

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
------------------------------------------------------------------------------


STATEMENTS OF OPERATIONS
[UNAUDITED]
------------------------------------------------------------------------------
<TABLE>





                                   Three months ended          Six months ended
                                      September 30,               September 30,
                                      -------------               -------------
                                 1 9 9 7        1 9 9 6      1 9 9 7       1 9 9 6
                                 -------        -------      -------       -------

<S>                             <C>          <C>           <C>          <C>        
Sales - Net                     $2,356,894   $ 1,708,898   $4,565,683   $ 3,139,119

Cost of Sales                    1,798,362     1,061,158    3,054,536     1,969,280
                                ----------   -----------   ----------   -----------

  Gross Profit                     558,532       647,740    1,511,147     1,169,839
                                ----------   -----------   ----------   -----------

Operating Expenses:
  Selling Expenses                 336,951       381,712      586,038       725,422
  General and Administrative
   Expenses                        273,765       484,180      723,220     1,131,391
  Factoring Fees                       327       111,606          327       236,290
  Bad Debt Expense                  30,000        30,000       60,000        60,208
                                ----------   -----------   ----------   -----------

  Total Operating Expenses         641,043     1,007,498    1,369,585     2,153,311
                                ----------   -----------   ----------   -----------

  Operating [Loss] Income          (82,511)     (359,758)     141.562      (983,472)
                                ----------   -----------   ----------   -----------

Other Expenses [Income]:
  Interest Expense                  75,122        63,734      139,927        86,089
  Interest Income - Related Party  (31,809)      (42,508)     (63,391)      (80,916)
  Other Income                    (135,412)           --     (135,848)           --
                                ----------   -----------   ----------   -----------

  Other [Income] Expenses - Net    (92,099)       21,226      (59,312)        5,173
                                ----------   -----------   ----------   -----------

  Net [Loss] Income             $    9,588   $  (380,984)  $  200,874   $  (988,645)
                                ==========   ===========   ==========   ===========

  Net [Loss] Per Share          $       --   $      (.03)  $      .01   $      (.07)
                                ==========   ===========   ==========   ===========

  Weighted Average Number of
   Shares Outstanding           19,909,048    13,837,280   19,150,716    13,837,280
                                ==========   ===========   ==========   ===========


</TABLE>


The Accompanying Notes are an Integral Part of These Financial Statements.


                                         3

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
------------------------------------------------------------------------------


STATEMENTS OF STOCKHOLDERS' EQUITY
[UNAUDITED]
------------------------------------------------------------------------------
<TABLE>




                                   Convertible                                                    Treasury
                                 Preferred Stock      Common Stock       Additional    Retained     Stock                Total
                               Number of          Number of               Paid-in      Earnings  [Preferred] Deferred Stockholders'
                                 Shares   Amount   Shares      Amount     Capital      [Deficit]   At Cost     Costs    Equity

<S>                             <C>      <C>     <C>         <C>         <C>          <C>         <C>         <C>      <C>      
  Balance - April 1, 1997       483,251  376,593 15,390,941  10,013,334  (1,310,231)  (9,129,401)  (48,803)   (14,858)  (113,366)

Stock Issued for Acquisition of 
BDC                                  --       --  2,427,273      89,368          --           --        --         --     89,368

Deferred Consulting Costs            --       --         --          --     100,000           --        --   (100,000)        --

Shares Issued to Two Officers 
 for Deferral of Salary [5D]         --       --  3,750,000      75,000          --           --        --    (75,000)        -- 

Shares Issued to Employees for 
 Past Services [5D]                  --       --    550,000      11,000          --           --        --         --     11,000

Shares Issued to Consultant -
 Signing Bonus [5D]                  --       --    250,000       5,000          --           --        --         --      5,000

Consulting Expense                   --       --         --          --          --           --        --     15,428     15,428

Compensation Expense [5D]            --       --         --          --          --           --        --     18,750     18,750

Debt Converted                       --       --     43,650      10,912          --           --        --         --     10,912

Net Income for the six months
  ended September 30, 1997           --       --         --          --          --      200,874        --         --    200,874
                                ------- -------- ----------   --------- -----------   ----------  --------  ---------   --------

  Balance - September 30, 1997  483,251 $376,593 22,411,864 $10,204,614 $(1,210,231) $(8,928,527) $(48,803) $(155,680)  $237,966
                                ======= ======== ========== =========== ============ ===========  ========  =========   ========

</TABLE>


The Accompanying Notes are an Integral Part of These Financial Statements.


                                         4

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
------------------------------------------------------------------------------


STATEMENTS OF CASH FLOWS
[UNAUDITED]
------------------------------------------------------------------------------
<TABLE>


                                                              Six months ended
                                                                 September 30,
                                                             1 9 9 7       1 9 9 6
                                                             -------       -------

<S>                                                        <C>          <C>         
  Net Cash - Operating Activities                          $1,038,402   $(1,058,556)
                                                           ----------   -----------

Investing Activities:
  Advances to ATRE                                            (75,620)      (30,000)
  Proceeds by ATRE                                             40,000        80,600
  Advances to Officers                                       (131,541)           --
  Payment of Officers' Loans Receivable                       129,900       (38,448)
  Capital Expenditures                                         (3,953)      (18,609)
  Masters and Artwork                                        (101,993)     (175,604)
                                                           ----------   -----------

  Net Cash - Investing Activities                            (143,207)     (182,061)
                                                           ----------   -----------

Financing Activities:
  Net Payments - Notes Payable                               (259,365)     (183,468)
  Payments of Lease Payable                                    (9,895)       (3,870)
  Proceeds from Convertible Promissory Note Payable                --     1,257,988
  Cash Overdraft                                             (157,746)      169,967
                                                           ----------   -----------

  Net Cash - Financing Activities                            (427,006)    1,240,617
                                                           ----------   -----------

  Net Increase in Cash                                        468,189            --

Cash - Beginning of Periods                                        --            --
                                                           ----------   -----------

  Cash - End of Periods                                    $  468,189   $        --
                                                           ==========   ===========

Supplemental Disclosures of Cash Flow Information:
   Cash paid during the periods for:
     Interest                                              $   76,430   $   121,000
     Income Taxes                                          $       --   $        --
</TABLE>

Supplemental Schedule of Non-Cash Investing and Financing Activities:
   During the year ended  March 31,  1997,  the Company  entered  into a capital
lease agreements for equipment totaling $25,900.

   During 1997, $290,000 in convertible debt was converted into 1,450,000 shares
of common  stock.  During the year ended March 31,  1997,  46,000  options  were
exercised and the Company  received  $11,500 in  consulting  services in lieu of
cash for the exercise price. Additionally,  1,000,000 options were exercised and
the Company  received  $100,000 in advertising  services in lieu of cash for the
exercise price.

   In April 1997,  $10,912 in convertible  debt was converted into 43,650 shares
of common stock.

   In August 1997, the Company  granted  warrants in connection  with consulting
agreements and recorded $100,000 in deferred consulting costs.


The Accompanying Notes are an Integral Part of These Financial Statements.

                                         5

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
------------------------------------------------------------------------------


STATEMENTS OF CASH FLOWS
[UNAUDITED]
------------------------------------------------------------------------------




Supplemental Schedule of Non-Cash Investing and Financing Activities[Continued]:
  In  September  1997,  the two officers  agreed to defer 90% of their  salaries
until  further  notice,  but not beyond March 31, 1998.  As  consideration,  the
Company  granted a total of  3,750,000  shares of common  stock and  warrants to
purchase  3,750,000 shares of the Company's common stock at an exercise price of
$.10 per share.  The common shares  granted will be fully vested on December 31,
1997 and the warrants are exercisable over a two year period beginning March 31,
1997. The Company  recorded  $75,000 in deferred costs for the fair value of the
shares  granted and amortized  $18,750 in the quarter ended  September  1997. No
deferred  costs were recorded for the warrants  granted as the fair market value
of the underlying common shares was approximately equal to the exercise price.

  In September 1997, the Company  entered into  employment  agreements with nine
employees  holding key  positions.  The  agreements  provide for an aggregate of
550,000  shares of stock  with a fair  value of $11,000  for past  services  and
semi-monthly compensation of approximately $14,000. The agreements will continue
for an indefinite period of time.





The Accompanying Notes are an Integral Part of These Financial Statements.

                                         6

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
------------------------------------------------------------------------------



[1] Summary of Significant Accounting Policies

Organization  and Business - The Company is engaged in the distribution of video
tapes  for  the  budget  home  video  market  including   children's   cartoons,
educational  programs,  motion  picture,   television  programs,   instructional
computer  videos,  as well as  computer  software  and  principally  markets its
products to national and regional chain stores,  department stores, drug stores,
supermarkets and similar types of retail outlets.  Its products are sold through
national retail chains primarily in the northeast, the south and the east coast.
The Company has  licensing  agreements  with  numerous  entities and in addition
maintains products without licensing agreements.  The licensing agreements grant
the Company the right to  manufacture,  duplicate,  distribute and advertise the
video or computer  software.  Prior to August 21, 1990, the Company was known as
ATI Mark V Products,  Inc. On July 15, 1991, it completed a reverse  acquisition
with  Trans-Atlantic  Video,  Inc.  ["TAV"].  On April  13,  1995,  the Board of
Directors approved the spin-off of its custom duplication business.

Basis of Reporting - The accompanying  unaudited financial  statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-QSB and Item 310(b)
of Regulation S-B.  Accordingly,  they do not include all of the information and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  such statements include all
adjustments  which  are  considered  necessary  in  order  to make  the  interim
financial statements not misleading.

Revenue  Recognition  - Sales are  recorded by the  Company  when  products  are
shipped to customers and are shown net of returns and allowances.

Inventories -  Inventories  are stated at the lower of cost [under the first-in,
first-out method] or market.

Depreciation  - Property and equipment  are  presented at cost less  accumulated
depreciation.  Depreciation  is  computed  by the  straight-line  method for all
furniture,  fixtures,  and  equipment  over 5-10  years,  which  represents  the
estimated useful lives of the respective asset.

Leasehold  improvements  are being  amortized over the lesser of their estimated
useful lives or the remaining term of the lease.

Depreciation expense for the six months ended September 30, 1997 was $37,215.

On sale or retirement,  the asset cost and related accumulated  depreciation are
removed from the respective accounts,  and any related gain or loss is reflected
in income. Repairs and maintenance are charged to expense when incurred.

Film  Masters  and Artwork - The cost of film  masters  and  related  artwork is
capitalized and amortized using the individual-film-forecast  computation method
which  amortizes  costs  in the  ratio  that  current  gross  revenues  bear  to
anticipated total gross revenues over a period of up to three years. The Company
periodically  reviews its  estimates  of future  revenues for each master and if
necessary  a  revision  is made to  amortization  rates and a  writedown  to net
realizable  value may occur.  The net film masters and artwork are  presented on
the balance  sheet at the net  realizable  value for each  master.  Film masters
consist  of  original   "masters"   which  are  purchased  for  the  purpose  of
reproduction and sale.

Amortization  expense for the six months ended  September  30, 1997 and 1996 was
$134,710 and $192,508, respectively.

Advertising  Costs - Adverting cost are expensed as incurred.  Advertising costs
of $14,028 and $23,536,  were  expensed for the six months ended  September  30,
1997 and 1996, respectively.

                                        7

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
------------------------------------------------------------------------------



[1] Summary of Significant Accounting Policies [Continued]

Bad Debts - An allowance for doubtful  accounts is computed based on a review of
each  individual  account  receivable  and its  respective  collectibility.  The
allowance for doubtful accounts is $716,112 at September 30, 1997.

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

Stock Options Issued to Employees - The Company  adopted  Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation"
on April 1, 1996 for  financial  note  disclosure  purposes and will continue to
apply the intrinsic value method of Accounting  Principles Board ["APB"] Opinion
No. 25,  "Accounting  for Stock Issued to  Employees"  for  financial  reporting
purposes.

Deferred Taxes - There are no material temporary differences that will result in
taxable  amounts in future  years.  The Company has  sustained  losses in recent
years and has a large net operating  loss  carryforward.  No deferred  taxes are
reflected in these financial statements [See Note 9].

Concentrations of Credit Risk - Financial  instruments that potentially  subject
the Company to  concentrations  of credit risk are cash and cash equivalents and
accounts  receivable  arising from its normal business  activities.  The Company
routinely  assesses the  financial  strength of its  customers  and,  based upon
factors surrounding the credit risk,  establishes an allowance for uncollectible
accounts and, as a  consequence,  believes that its accounts  receivable  credit
risk exposure beyond such allowance is limited.  The Company places its cash and
cash equivalents with high credit quality financial institutions.  The amount on
deposit in any one institution that exceeds  federally insured limits is subject
to credit  risk.  The  Company had no  deposits  as of  September  30, 1997 with
financial institutions subject to a credit risk beyond the insured amount.

[2] Accounts Receivable

Accounts  receivable  at  September  30,  1997,  net of  allowance  for doubtful
accounts,  were  $2,286,716.  Substantially  all of the accounts  receivable  at
September 30, 1997,  have been pledged as collateral for the line of credit [See
Note 7B].

[3] Inventory

Inventory as of September 30, 1997 consists of:

Raw Materials                             $  169,626
Finished Goods                             2,649,542

  Total                                   $2,819,168

An  allowance  of  $280,576  has  been   established   for  idle   inventory  of
approximately $280,576.

[4A] Related Parties Receivables

At September 30, 1997, the Company owes $25,286 to the President of the Company 
for advances and loans.  Simple interest is accrued monthly at an annual rate of
10% on the outstanding balance.  This amount is due in March 1998.

                                        8

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #3
------------------------------------------------------------------------------


[4B] American Top Real Estate ["ATRE"]

Investment  - The  Company  paid  $50,000  for  a 50%  interest  in  ATRE.  This
investment is accounted for on the equity method.  The investee has not incurred
any significant earnings or losses to date, therefore,  this investment does not
reflect any adjustments for earnings and losses.

Sale of ATRE  Real  Estate  Parcel  - In May  1995,  ATRE  entered  into a sales
agreement for two acres of land for approximately $940,000. In December of 1995,
the sale for one parcel of land was closed and the Company received $48,475.  In
September  1996, the other parcel was sold and proceeds were retained for future
sewage  construction  needed for this 20 acre  property,  however,  the  Company
received $121,600 from ATRE.

As of September 30, 1997, ATRE is negotiating with two different  non-affiliated
entities for the sale of three  parcels of property.  The Company  believes that
contracts  will be  finalized  for  these  properties  and will  close  with net
proceeds of approximately $900,000 in 1998.

Accounts  Receivable - The Company has a receivable  [including  interest]  from
ATRE of  $1,623,688  as of September 30, 1997.  This balance  includes  interest
income of $30,000 for the six months ended  September 30, 1997 at an annual rate
of 10%.

[5] Commitments

[A]  Royalty  Commitments  -  The  Company  has  entered  into  various  royalty
agreements  for  exclusive  licensing  of titles for terms of one to five years.
Certain agreements include minimum guaranteed payments.

[B] 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.

[C] Accounts  Payable - The Company is  currently  delinquent  on a  significant
amount of its accounts payable.

[D] Employment  Agreements - As of September 30, 1997,  there are two employment
agreements in effect 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 common  stock can be  purchased  in  installment
payments with a five year promissory note with interest at 6% per annum.

In September  1997, the two officers agreed to defer 90% of their salaries until
further  notice,  but not beyond March 31, 1998. As  consideration,  the Company
granted a total of  3,750,000  shares of common  stock and  warrants to purchase
3,750,000  shares of the Company's common stock at an exercise price of $.10 per
share.  The common shares  granted will be fully vested on December 31, 1997 and
the warrants are  exercisable  over a two year period  beginning March 31, 1997.
The Company  recorded $75,000 in deferred costs for the fair value of the shares
granted and amortized  $18,750 in the quarter ended  September 1997. No deferred
costs were  recorded  for the  warrants  granted as the fair market value of the
underlying common shares was approximately equal to the exercise price.

In September  1997, the Company  entered into  employment  agreements  with nine
employees  holding key  positions.  The  agreements  provide for an aggregate of
550,000  shares of stock  with a fair  value of $11,000  for past  services  and
semi-monthly compensation of approximately $14,000. The agreements will continue
for an indefinite period of time.

The Company also issued 250,000 shares of stock to a consultant in consideration
of entering into a two year consulting agreement. The Company recorded $5,000 as
a signing bonus to this consultant.

                                        9

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
------------------------------------------------------------------------------



[5] Commitments [Continued]

[E] Sale of Multi  Media  Assets - On May 8, 1995,  the  Company  closed a sales
agreement with a Mexican company, Central Video, for $750,000 by allowing credit
to the Company for future duplication  services.  The general manager of Central
Video is the former President of the Company.  The Company received  $750,000 of
duplication   services  and  surrendered   equipment  having  a  book  value  of
approximately $630,000. The Company guaranteed Central Video's general manager a
minimum of $2,500,000 a year of production  orders for three years and agreed to
pay Central Video's general manager a 3% commission on orders the Company places
with  Central  Video.  The Company  satisfied  this  obligation  in fiscal 1996,
however,  in 1997, the Company did not fulfill this obligation and is delinquent
in payments to Central Video.

[F] Termination of Employment - On December 21, 1995, an officer and director of
the Company resigned and terminated his employment agreement with the Company as
part of a settlement  agreement.  Effective  January 1, 1996 and ending December
31, 1996, the Company entered into a monthly $10,000  consulting  agreement with
this individual.  The individual  agreed to surrender 30,769 shares of preferred
stock and  10,000  shares of  common  stock  upon  execution  of the  settlement
agreement in  consideration  for 5% of net profits of the Company for the fiscal
years ended March 31, 1997 and 1998.

[G]  Duplication  Agreement/Line  of Credit - On January 3,  1996,  the  Company
entered into a two year Duplication  Agreement with a $200,000 revolving line of
credit with a non-affiliated  entity. The line of credit was unused at September
30, 1997.

[H]  Financial  Consultant  Commitments - In June of 1996,  the Company  engaged
three  consultants  for a period of two years.  The Company will  reimburse  the
consultants'  business  expenses  not to exceed  $750 per month.  The  financial
consultants  received a total of 1,000,000  warrants  with an exercise  price of
$.25 per share in exchange  for services to be  rendered.  The Company  recorded
deferred  consulting  costs of  $50,000  for the fair value of the  warrants  to
purchase the 1,000,000  shares of common stock and expensed $35,142 for the year
ended March 31, 1997. The fair value of the warrants was  determined  based upon
the fair value of services to be rendered by the consultant [See Note 13B].

In August of 1997, the Company  engaged a consulting  firm to provide  financial
advice for a period of six months.  The fee for services  includes a $7,500 cash
payment,  a two percent cash fee on refinancing  commitments and a five percent,
non-dilutive  equity  interest in the Company.  The consulting firm will also be
entitled to a five percent fee based on the  transaction  value of any concluded
merger or acquisition introduced by the consulting firm.

In August of 1997,  the Company  engaged  four  consultants  for a period of two
years to  provide  assistance  in  restructuring  and  designing  the  Company's
operations and long-term  strategic plan. The consultants  received  warrants to
purchase an  aggregate  2,050,000  shares of the  Company's  common  stock at an
exercise price of $.10 per share. The warrants expire at the end of the two year
consulting  period.  The Company recorded deferred  consulting costs of $100,000
for the fair value of the warrants and expensed  $8,000 for the six months ended
September 30, 1997. The fair value of the warrants was determined based upon the
fair value of services to be rendered by the consultant [See Note 13E].

                                       10

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
------------------------------------------------------------------------------



[5] Commitments [Continued]

[I] In October 1996, the Company entered into a joint venture  agreement with an
unrelated  party  whereby  the parties  distribute  each  others  catalogues  of
products  and  share  in the  profits  of any  such  distribution  equally.  The
agreement will expire in October 1997.

In connection with the joint venture agreement,  the Company loaned $18,000 at a
6% interest rate to the related  party.  The loan  receivable was due in January
1997 and remains  unpaid as of September  30,  1997.  This amount is included in
other receivables on the balance sheet.

[J]  Settlement  on  Licensing  Agreement - On July 25, 1996 the Company and Fun
Time, Inc. entered into a distribution agreement with Centre Entertainment, Inc.
relating  to a program  entitled "A Norman  Rockwell  Christmas  Story."  Centre
Entertainment,  Inc. claimed that the Company was in breach of the agreement and
on May 12, 1997 the parties participated in a non-binding  mediation relating to
the contractual  dispute.  As a result of the mediation,  the parties executed a
Memorandum  of  Understanding,   pursuant  to  which  the  parties  settled  the
contractual  dispute.  In June of 1997,  licenses for Norman Rockwell  Christmas
Story and celebration of Christmas were terminated.  As a result all masters and
inventory for these titles were returned to the licensor in June of 1997.

[6] Lease Commitments

[A] Operating Leases - The Company leases various office and storage facilities,
automobiles and equipment under operating leases expiring between 1996 and 2001.

The following  schedules  shows the  composition of total rental expense for all
operating  leases  except  those  with  terms of a month or less  that  were not
renewed:

                                                Years ended
                                                  March 31,
                                             1 9 9 7     1 9 9 6
                                             -------     -------

Minimum Rentals                           $  151,983  $  314,890
Less: Sublease Rentals                        15,000     143,087
                                          ----------  ----------

  Totals                                  $  136,983  $  171,803
  ------                                  ==========  ==========

The following is the approximate  aggregate  future minimum rentals for the next
five years for operating leases:

March 31,
  1998                                    $  155,438
  1999                                       155,673
  2000                                       128,664
  2001                                       119,231
  2002                                            --
                                          ----------

  Total Future Minimum Lease Payments     $  559,006
                                          ==========
The operating leases also provide for cost escalation payments.



                                       11

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
------------------------------------------------------------------------------



[6] Lease Commitments [Continued]

[B] On January 3, 1996,  the  Company  entered  into a two year and three  month
sublease  agreement for  approximately  2,500 square feet with a  non-affiliated
duplicating  company  for  monthly  base rent of $1,500  to be  received  by the
Company. The lease was canceled in October 1996.

[C] The Company leases office space in Freehold,  New Jersey on a month-to-month
basis.

[7] Notes Payable

Notes payable consist of the following:
<TABLE>

                                                 S e p t e m b e r   30,  1 9 9 7
                           -------------------------------------------------------------------------------
                           Interest
  Type of Loan             Expense       Amount     Current   Long-Term   Rate       Due Date

<S>                         <C>        <C>          <C>         <C>        <C>     <C>  
Installment Loan (B)        $4,397     $122,117     $58,876     $63,241    10%     November 14, 1999
Notes Payable (C)               --      379,860     379,860          --            1997
Line of Credit (A)         108,339    1,382,742   1,382,742          --  Various   Revolving Line of Credit
Convertible Debenture (D)   25,560      957,075     957,075          --    10%     May 1997
Acquired Debt                   --       40,000      40,000          --
                            ------      -------     -------     -------

  Totals                  $138,296   $2,881,794  $2,818,553     $63,241
                          ========   ==========  ==========     =======
</TABLE>          

[A]  Private  Investor  - Line of  Credit - On  August  30,  1996,  the  Company
established  a line of credit up to  $2,500,000.  Of this amount,  $2,000,000 is
backed by pledged  receivables  and  inventory and $500,000 is guaranteed by the
Company's  President.  Interest,  billed quarterly,  is at Chemical Banks' prime
rate  plus 3%.  The prime  rate at March  31,  1997 was  8.5%.  The  Company  is
technically  in default on this loan  because it did not meet certain net income
criteria.  Their  line of credit  continues  to be  reduced  by  $2,500  per day
commencing May of 1997.

[B]  Installment  Loan - In March  1993 a loan was  renegotiated  for the sum of
$292,058  with  principal  payments of $5,000 per month with an interest rate of
10% per annum due November 14, 1999.

[C] Note  Payable  for  Equipment - On May 8, 1995,  the Company  closed a sales
agreement with a Mexican Company, for $750,000 by allowing credit to the Company
for  duplication  services  and  received  $750,000 of  duplication  services in
exchange for equipment having a book value of  approximately  $630,000 [See Note
5E]. The Company has classified the obligation warrants as notes payable.

[D]  Convertible  Promissory  Notes  Payable - During the quarter ended June 30,
1996,  the Company  issued  convertible  promissory  notes with 10% interest per
annum and a 7%  commission.  The principle  amount is convertible in whole or in
part into shares of the common stock of the Company at a conversion  price equal
to 65% of the average  closing bid price for the common  stock for five  trading
days immediately prior to the conversion. In no event shall the conversion price
be less than $.20 per share or more than $.75 per share. In conjunction with the
debentures, the Company granted 1,000,000 warrants exercisable at $.25 per share
to two consultants. Warrants for 46,000 shares were exercised for $11,500 during
the year ended March 31, 1997. The Company  recorded a financing cost of $25,000
for the fair value of the warrants  granted.  As of March 31, 1997,  convertible
promissory  notes of  $290,000  were  converted  into  1,450,000  shares  of the
Company's  common stock by several off shore  companies  under  Regulation S and
$967,988 of convertible  promissory  notes payable are outstanding and as of May
1997 are in default by the Company. Interest expense of $24,702 was recorded for
the year ended March 31, 1997.  The fair value of the  warrants  was  determined
based upon the fair value of services received by the Company in May and June of
1996.  Subsequent  to  September  30,  1997,  the Company  negotiated a one year
extension agreement and has agreed to add 15% to the note as a financing cost.

                                       12

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
------------------------------------------------------------------------------



[7] Notes Payable [Continued]

Following are maturities of debt for each of the next five years:

                         March 31,

Current                 $2,792,481
1999                        53,475
2000                        35,838
Thereafter                      --
                        ----------

  Total                 $2,881,794
                        ==========
[8] Capital Leases

The Company is the lessee of equipment  under capital leases expiring in various
years through 2000. The assets and liabilities under capital leases are recorded
at the lower of the  present  value of the  minimum  lease  payments or the fair
value of the assets.  The assets are depreciated over the lower of their related
lease terms or their estimated  productive  lives.  Depreciation of assets under
capital  leases is included  in  depreciation  expense for the six months  ended
September 30, 1997 and 1996.

Following  is a summary of property  held under  capital  leases as of March 31,
1997:

Furniture, Fixtures and Equipment   $   60,150
Less:  Accumulated Depreciation         32,385
                                    ----------
  Totals                            $   27,765
  ------                            ==========

Minimum  future lease payments under capital leases as of March 31,1997 for each
of the next five years and in the aggregate are:

Year Ending March 31,

1998                                            $   16,749
1999                                                 4,679
2000                                                 4,169
2001                                                 3,474
2002                                                 3,044
                                                ----------

Total Minimum Lease Payments                        32,115
Less:  Amount Representing Interest                  2,990
                                                ----------
  Present Value of Net Minimum Lease Payments   $   29,125
  -------------------------------------------   ==========

[9] Income Taxes

The Company has net operating loss  carryforwards  of  approximately  $7,613,000
which  expire  through the year 2011.  As a result of these  carryforwards,  the
Company has a deferred  tax asset of  approximately  $2,641,800,  which has been
offset by a valuation  allowance of $2,641,800  resulting in a deferred asset of
$-0-. Future tax benefits related to this loss have not been recognized  because
its realization is not assured.  No current or deferred  federal or state income
taxes have been provided for.

                                       13

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #8
[UNAUDITED]
------------------------------------------------------------------------------



[9] Income Taxes

As of March 31, 1997,  the  approximate  amount of the net operating loss income
tax carryforwards and their expiration dates are as follows:

 Expiration
in Years ending                 Net Operating Loss
  March 31,                        Carryforwards

   2007                             $1,317,000
   2008                              2,693,000
   2009                              2,015,000
   2010                                288,000
   2011                              1,300,000
                                    ----------

     Total                          $7,613,000
                                    ==========
[10] Capital Stock

[A] Stock  Subscription  Receivable - On April 23, 1996,  the Board of Directors
agreed to  cancel  the  existing  $86,636  stock  subscription  receivable  from
officers of the Company. The Company accepted services performed by the officers
of the  Company in lieu of cash in  collection  of the stock  subscription  and,
therefore, recorded the $86,636 as compensation expense.

[B]  Authorized  Shares - The Board of  Directors  agreed  on April 23,  1996 to
increase  its  authorized  shares to  100,000,000  shares  of  common  stock and
5,000,000 shares of preferred  stock,  which was approved at the August 23, 1996
annual shareholders meeting.

[C]  Preferred  Stock - The  preferred  stock has no (i) dividend  rights,  (ii)
sinking  fund  provisions,  (iii)  rights  of  redemption,  (iv)  classification
provisions for voting,  (vi) preemptive rights,  (vi) liability to further calls
or to assessments by the Company, or (vii) any provision  discriminating against
any existing or prospective holder. Holders of shares of preferred stock are not
entitled to any dividend  preference.  In the event of  liquidation,  holders of
shares of preferred  stock shall be entitled to a preference  of $.01 per share,
and any other remaining  proceeds of liquidation shall be distributed shares and
shares  alike to  holders of all  capital  stock.  The  issued  and  outstanding
preferred stock are restricted and have not been registered.

[11] Earnings Per Share

Earnings  per share is based on the  weighted  average  number of common  shares
outstanding  as restated to include the number of shares  issued in the business
combination  with TAV reflecting  conversion for a preferred share of stock into
1.95 shares of common stock. The effect of warrants and options is included when
dilutive.



                                       14

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #9
[UNAUDITED]
------------------------------------------------------------------------------



[12] Major Supplier

For the six months ended  September 30, 1997, the Company had purchases from one
supplier that amounted to approximately $2,178,000 or 48% of net purchases.

Loss of these suppliers  would not  significantly  adversely  affect the company
because sufficient replacement vendors exist in the open market.

[13] Stock Options and Warrants

During 1997,  the Company  issued  3,000,000  stock options to  nonemployees  at
exercise  prices below market prices at the date of grant,  ranging from $.10 to
$.25,  and having a weighted  average  exercise price of $.20. Of these options,
1,000,000  options have a 2 year vesting period and 2,000,000  options vested at
date of grant.  The total cost of issuing  these stock  options to  nonemployees
during 1997 was  approximately  $100,000.  The entire amount is being  amortized
over the  aforementioned  respective  vesting  periods,  resulting  in a $85,142
charge to operations for the year ended December 31, 1997. The weighted  average
fair value of stock options  granted to consultants  during 1997 is estimated at
$.04 using the fair value of services at date of grant.

[A] 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. No stock options have been issued.

[B] In June 1996,  the Company  issued  1,000,000  common  stock  warrants at an
exercise price of $.25 per share as part of a consulting agreement entered into,
whose term ends June 1998. As of March 31, 1997,  625,000 of those  warrants are
vested.  Deferred  compensation  resulting from this transaction was recorded at
the fair market value of the services rendered [See Note 5I].

[C] In April 1996, in connection  with the convertible  debentures,  the Company
entered  into  two  separate  consulting  agreements.  As per the  terms of both
contracts,  the Company issued 1,000,000 common stock warrants [500,000 warrants
per contract] at an exercise price of $.25 per share [See Note 17E].

[D] On April 23, 1996,  the Company  engaged an entity to arrange either debt or
equity  financing  for the  Company  and  agreed  to grant a total of  1,000,000
options  exercisable  within three years of grant at $.10 per share. The Company
recorded a  financing  cost of $25,000 in June of 1996 for the fair value of the
options  granted.  The fair value of the options was  determined  based upon the
fair value of services  received  by the Company in May and June of 1996.  These
options were exercised in June of 1996 for a total of 1,000,000 shares of common
stock as a result of consulting services performed in 1996 by the consultant.

[E] In August 1997,  the Company  issued  2,050,000  common stock warrants at an
exercise price of $.10 per share as part of a consulting agreement entered into,
whose  term  ends  August  1999.  Deferred  compensation   resulting  from  this
transaction was recorded at the fair market value of the services  rendered [See
Note 5H].

                                       15

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #10
[UNAUDITED]
------------------------------------------------------------------------------



[14] Litigation

The  Company  has been named as  defendant  and  co-defendant  in various  legal
actions filed against the Company in the normal course of business.  The Company
believes that it has adequate  legal  defenses and intends to vigorously  defend
itself in these actions. The Company believes after consulting with counsel that
an adverse  decision in any one lawsuit would not have a material adverse impact
on the  Company,  however,  the  aggregate  affect of an adverse  decision  in a
majority of the lawsuits outstanding could have a material adverse impact on the
Company.

[15] Going Concern

The Company's  financial  statements  are prepared in conformity  with generally
accepted accounting principles, which contemplates the realization of assets and
settlements of liabilities in the normal course of business and  continuation of
the Company as a going  concern.  The Company  has  incurred  net losses for the
years ended March 31, 1997 and 1996 of $1,303,546 and $286,003, respectively and
has a working capital  deficit at March 31, 1997 of $2,722,958.  The Company has
also been experiencing  difficulties in paying its vendors on a timely basis and
is in default on the  convertible  debentures  and a production  agreement  [See
Notes 5E and 7B].  These  factors  create  uncertainty  whether  the Company can
continue as a going concern.  The Company's plans to mitigate the effects of the
uncertainties are (i) to continue to sell parcels of property owned by ATRE [50%
owned by the  Company]  located in  Vancouver,  WA, (ii) to further  upgrade and
increase its products  lines and thus reach a  consistently  higher gross profit
margin mix and realize  profitability  through a potential  merger with  another
entity,  (iii) to seek  another  asset base  lending  line of credit and (iv) to
continue to  negotiate  with several  reliable  investors to provide the Company
with debt and equity financing for working capital purposes.

Management believes that these plans can be effectively  implemented in the next
twelve months.  The Company will continue to seek additional  interim  financing
from private  sources to  supplement  its cash needs for the next twelve  months
during the implementation of these plans to achieve profitability. The Company's
ability to continue as a going  concern is dependent on the  implementation  and
success of these plans. The financial  statements do not include any adjustments
in the event the Company is unable to continue as a going concern.  There can be
no  assurance  that  management's  plans to  reduce  operating  losses or obtain
additional  financing  to fund  operations  will be  successful.  The  financial
statements do not include any  adjustments  relating to the  recoverability  and
classification  of  recorded  assets,  or  the  amounts  and  classification  of
liabilities  that might be necessary in the event the Company cannot continue in
existence.

[16] Major Customers

For the six months ended  September  30, 1997,  the Company had net sales to two
customers that amounted to approximately $1,067,080 or 40%.

[17] New Authoritative Pronouncements

The Financial Accounting Standards Board ["FASB"] has issued Statement of 
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and 
Servicing of Financial Assets and Extinguishment of Liabilities."  SFAS No. 125 
is effective for transfers and servicing of financial assets and extinguishment 
of liabilities occurring after December 31, 1996.  Earlier application is not 
allowed. The provisions of SFAS No. 125 must be applied prospectively; 
retroactive application is prohibited. Adoption on January 1, 1997 is not 
expected to have a material impact on the Company.  The FASB deferred some 
provisions of SFAS No. 125, which are not expected to be relevant to the 
Company.

                                       16

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, Sheet #11
[UNAUDITED]
------------------------------------------------------------------------------




[17] New Authoritative Pronouncements [Continued]

The  FASB  issued  SFAS No.  128,  "Earnings  Per  Share,"  and  SFAS  No.  129,
"Disclosure of Information  about Capital  Structure" in February 1997. SFAS No.
128  simplifies  the  earnings  per  share  ["EPS"]  calculations   required  by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the  presentation  of primary EPS with a presentation of basic EPS.
SFAS No. 128  requires  dual  presentation  of basic and diluted EPS by entities
with complex capital structures.  Basic EPS includes no dilution and is computed
by dividing  income  available to common  stockholders  by the  weighted-average
number of common  shares  outstanding  for the period.  Diluted EPS reflects the
potential  dilution of securities that could share in the earnings of an entity,
similar  to the  fully  diluted  EPS of APB  Opinion  No.  15.  SFAS No.  128 is
effective for financial  statements issued for periods ending after December 15,
1997,  including  interim periods;  earlier  application is not permitted.  When
adopted,  SFAS No. 128 will require  restatement  of all  prior-period  EPS data
presented;  however,  the Company has not sufficiently  analyzed SFAS No. 128 to
determine  what effect SFAS No. 128 will have on its  historically  reported EPS
amounts.

SFAS No. 129 does not change any previous  disclosure  requirements,  but rather
consolidates existing disclosure requirements for ease of retrieval.

The FASB has issued SFAS No. 130, "Reporting Comprehensive Income."  SFAS No. 
130 is effective for fiscal years beginning after December 15, 1997.  Earlier 
application is permitted.  Reclassification of financial statements for earlier 
periods provided for comparative purposes is required.  SFAS No. 130 is not 
expected to have a material impact on the Company.

The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise 
and Related Information."  SFAS No. 131 changes how operating segments are 
reported in annual financial statements and requires the reporting of selected 
information about operating segments in interim financial reports issued to 
shareholders.  SFAS No. 131 is effective for periods beginning after 
December 15, 1997, and comparative information for earlier years is to be 
restated.  SFAS No. 131 need not be applied to interim financial statements in 
the initial year of its application.  SFAS No. 131 is not expected to have a 
material impact on the Company.

[18] Acquisition

In May of 1997, the Company entered into an agreement and plan of merger between
BDC Acquisition,  Inc., a newly formed  wholly-owned  subsidiary of the Company,
and Beyond Design Corporation ["BDC"]. The Company's subsidiary has acquired all
of the issued and  outstanding  stock of BDC for the issuance of an aggregate of
2,427,273  shares of the  Company's  common stock and the  assumption of certain
outstanding  obligations  of BDC.  The  book  value of the net  assets  acquired
approximates  the  fair  value  of the  shares  issued  in  connection  with the
acquisition [See Note 7G]. This acquisition was deemed immaterial for accounting
purposes.






                    .  .  .  .  .  .  .  .  .  .  .  .  .  .

                                       17

<PAGE>



Item 2:

DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
------------------------------------------------------------------------------



Six months ended September 30, 1997 compared with the six months ended September
30, 1996

Results of Operations

The Company's  operating  income for the six months ended September 30, 1997 was
$141,562 as compared to an  operating  loss of $983,472 for the same period last
year.  This  decrease in the  operating  loss of  approximately  $1,125,000  was
primarily  attributable to an increase in gross profit of approximately $340,000
and a reduction in expenses of approximately $785,000.

The  Company's  sales for the six months ended  September 30, 1997 and 1996 were
$4,565,683 and $3,139,119, respectively. Management believes its sales are up as
a result of its acquisition of Beyond Design Corporation.

Cost of sales  for the six  months  ended  September  30,  1997  and  1996  were
$3,054,536 and $1,969,280 or 67% and 63% of sales, respectively.

Gross  profit  for the six  months  ended  September  30,  1997  and  1996  were
$1,511,147 and $1,169,839, or 33% and 37% of sales, respectively.  Gross profit,
as a percentage of sales,  decreased to 24% for the three months ended September
30, 1997  compared to 38% for the three months  ended  September  30, 1997.  The
decrease  was  primarily  due to an increase  in total  sales of products  which
produce a lower gross profit percentage.

Operating  expenses  for the six months ended  September  30, 1997 and 1996 were
$1,369,585 and $2,153,311, respectively.

Interest  expense  for the six  months  ended  September  30,  1997 and 1996 was
$139,927 and $86,089,  respectively.  As of September 30, 1997, the  outstanding
debt of the  Company  was  approximately  $2,901,000  primarily  all of which is
classified as current.

The Company's  auditors  issued a going concern  report for the year ended March
31, 1997. There can be no assurance that management's  plans to reduce operating
losses will continue or obtain additional financing will be successful.

Liquidity and Capital Resources

The Company's  working capital  [deficit] at September 30, 1997 was $(2,440,488)
as compared with a working capital  [deficit] of $(2,722,958) at March 31, 1997.
This  decrease in the working  capital  [deficit] of  approximately  $280,000 is
primarily the result of the Company's net income of  approximately  $200,100 and
non-cash adjustments to the net income.

Operating Activities

For the six months ended  September 30, 1997, cash generated from operations was
$1,038,402 as compared to $1,058,556 of cash utilized for operations for the six
months ended  September 30, 1996. The Company  intends to utilize future debt or
equity  financing  or debt  to  equity  conversions  to help  satisfy  past  due
obligations and to pay down its debt obligations.



                                       18

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
------------------------------------------------------------------------------



Six months ended September 30, 1997 compared with the six months ended September
30, 1996

Liquidity and Capital Resources [Continued]

Operating Activities [Continued]

During fiscal year end March 31, 1997, the Company did engage various  financial
consultants  to assist the Company with its debt  financing.  These  consultants
were issued options as consideration for partial payment of these services.

In May of 1997, the Company entered into an agreement and plan of merger between
BDC Acquisition,  Inc., a newly formed  wholly-owned  subsidiary of the Company,
and Beyond Design Corporation ["BDC"]. The Company's subsidiary has acquired all
of the issued and  outstanding  stock of BDC for the issuance of an aggregate of
2,427,273  shares of the  Company's  common stock and the  assumption of certain
outstanding  obligations of BDC. The Company is pursuing moving all locations to
one premises which will enable the Company to further reduce expenses.

Investing Activities

For the six months ended September 30, 1997 and 1996, investments in masters and
artwork were $101,993 and $175,604,  respectively.  Management continues to seek
to acquire new titles to enhance its product lines.

In May  1995,  ATRE  entered  into a sales  agreement  for two acres of land for
approximately $940,000. In December of 1995, the sale for one parcel of land was
closed and the Company received $48,475. In September 1996, the other parcel was
sold and proceeds were retained for future sewage  construction  needed for this
20 acre property, however, the Company received $121,600 from ATRE.

As of September 30, 1997, ATRE is negotiating with two different  non-affiliated
entities for the sale of three  parcels of property.  The Company  believes that
contracts  will be  finalized  for  these  properties  and will  close  with net
proceeds of approximately $900,000 in 1998.

Financing Activities

On August 30, 1996,  the Company  obtained an asset based lending credit line of
$2,500,000 at interest  rate of 3% above prime rate.  The Company used this line
to repay a revolving credit line provided by a private lender.  The Company owes
approximately $2,000,000 on the line of credit. This amount is backed by pledged
the  Company's  receivables  and  inventory  and $500,000 is  guaranteed  by the
Company's president.  The Company is technically in default on this loan because
it did not meet  certain net income  criteria.  The line of credit is reduced by
$2,500 per day  commencing  May of 1997.  The Company  believes  that  achieving
improved debt financing,  sales growth and obtaining profitability could provide
the means of financial and  operational  support for the next twelve months.  If
any of these factors are not  achieved,  adverse  effects  could result.  Should
these adverse effects materialize,  management intends to seek additional equity
financing from  unaffiliated  individuals in private  offerings and to secure an
additional line of credit until operations generate a positive cash flow. If the
Company is unsuccessful in obtaining  additional  equity or debt financing,  the
Company's liquidity and capital resources could be adversely affected. There can
be no guarantee that the Company will be successful in these efforts.

                                       19

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
------------------------------------------------------------------------------



Six months ended September 30, 1997 compared with the six months ended September
30, 1996

Liquidity and Capital Resources [Continued]

Financing Activities [Continued]

During fiscal 1997, the Company negotiated convertible promissory notes with 10%
interest per annum and a 7% commission.  The principal  amount is convertible in
whole or in part into shares of the common  stock of the Company at a conversion
price  equal to 65% of the average  closing  bid price for the common  stock for
five trading days  immediately  prior to the  conversion.  In no event shall the
conversion  price be less than $.20 per  share or more than $.75 per  share.  In
conjunction  with  the  debentures,   the  Company  granted   1,000,000  options
exercisable  at $.25 per  share  to two  consultants.  The  Company  recorded  a
financing cost of $25,000 for the fair value of the options granted. As of March
31, 1997,  debentures of $290,000 were converted  into  1,450,000  shares of the
Company's  common stock by several off shore  companies  under  Regulation S and
$967,988 of convertible  promissory notes payable are outstanding and in default
as of May 1997.  Interest  expense of $24,702  was  recorded  for the year ended
March 31, 1997. The fair value of the options was determined based upon the fair
value of services received by the Company. Subsequent to September 30, 1997, the
Company  negotiated a one year extension  agreement and has agreed to add 15% to
the note as a financing cost.

New Authoritative Pronouncements

The Financial Accounting Standards Board ["FASB"] has issued Statement of 
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and 
Servicing of Financial Assets and Extinguishment of Liabilities."  SFAS No. 125 
is effective for transfers and servicing of financial assets and extinguishment 
of liabilities occurring after December 31, 1996.  Earlier application is not 
allowed. The provisions of SFAS No. 125 must be applied prospectively; 
retroactive application is prohibited. Adoption on January 1, 1997 is not 
expected to have a material impact on the Company.  The FASB deferred some 
provisions of SFAS No. 125, which are not expected to be relevant to the 
Company.



                                       20

<PAGE>



DIAMOND ENTERTAINMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
------------------------------------------------------------------------------



Six months ended September 30, 1997 compared with the six months ended September
30, 1996

New Authoritative Pronouncements [Continued]

The  FASB  issued  SFAS No.  128,  "Earnings  Per  Share,"  and  SFAS  No.  129,
"Disclosure of Information  about Capital  Structure" in February 1997. SFAS No.
128  simplifies  the  earnings  per  share  ["EPS"]  calculations   required  by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the  presentation  of primary EPS with a presentation of basic EPS.
SFAS No. 128  requires  dual  presentation  of basic and diluted EPS by entities
with complex capital structures.  Basic EPS includes no dilution and is computed
by dividing  income  available to common  stockholders  by the  weighted-average
number of common  shares  outstanding  for the period.  Diluted EPS reflects the
potential  dilution of securities that could share in the earnings of an entity,
similar  to the  fully  diluted  EPS of APB  Opinion  No.  15.  SFAS No.  128 is
effective for financial  statements issued for periods ending after December 15,
1997,  including  interim periods;  earlier  application is not permitted.  When
adopted,  SFAS No. 128 will require  restatement  of all  prior-period  EPS data
presented;  however,  the Company has not sufficiently  analyzed SFAS No. 128 to
determine  what effect SFAS No. 128 will have on its  historically  reported EPS
amounts.

SFAS No. 129 does not change any previous  disclosure  requirements,  but rather
consolidates existing disclosure requirements for ease of retrieval.

The FASB has issued SFAS No. 130, "Reporting Comprehensive Income."  SFAS No. 
130 is effective for fiscal years beginning after December 15, 1997.  Earlier 
application is permitted.  Reclassification of financial statements for earlier 
periods provided for comparative purposes is required.  SFAS No. 130 is not 
expected to have a material impact on the Company.

The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise 
and Related Information."  SFAS No. 131 changes how operating segments are 
reported in annual financial statements and requires the reporting of selected 
information about operating segments in interim financial reports issued to 
shareholders.  SFAS No. 131 is effective for periods beginning after 
December 15, 1997, and comparative information for earlier years is to be 
restated.  SFAS No. 131 need not be applied to interim financial statements in 
the initial year of its application.  SFAS No. 131 is not expected to have a 
material impact on the Company.

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.

                                       21

<PAGE>


                                    SIGNATURE


  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated:  Anaheim, California
        December 10, 1997
                                       DIAMOND ENTERTAINMENT CORP.


                                       By: /s/ James K.T. Lu
                                           James K.T. Lu
                                           Chairman of the Board,
                                           Chief Executive Officer;
                                           President; Secretary and
                                           Director

                                       By: /s/ Thomas Sung
                                           Thomas Sung
                                           Principal Financial Officer and
                                           Treasurer

                                       22

<PAGE>