===============================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

                         COMMISSION FILE NUMBER 0-22250

                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                 (Name of Small Business Issuer In Its Charter)

               DELAWARE                                      95-4592204
     (State or Other Jurisdiction                         (I.R.S. Employer
   of Incorporation or Organization)                      Identification No.)

                    6355 TOPANGA CANYON BOULEVARD, SUITE 120
                        WOODLAND HILLS, CALIFORNIA 91367
              (Address of Principal Executive Offices and Zip Code)

                                 (818) 615-1500
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                                                  NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                      ON WHICH REGISTERED
          -------------------                     ---------------------
     COMMON STOCK, $.001 PAR VALUE               AMERICAN STOCK EXCHANGE

         Securities registered under Section 12(g) of the Exchange Act:

                                      NONE

     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 past 90 days.

                                 Yes X     No ___

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

     The issuer's revenues for the fiscal year ended December 31, 2001 were
$1,816,000.

     At March 22, 2002 the aggregate market value of the voting stock held by
non-affiliates of the issuer was $1,708,840.

     At March 22, 2002 the issuer had 22,615,097 shares of Common Stock, $0.001
par value, issued and outstanding.

     Transitional Small Business Disclosure Format (check one): Yes [ ]  No [X]

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the issuer's Proxy Statement with respect to its 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report.

===============================================================================


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                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS

                               CORPORATE OVERVIEW

        Brilliant Digital Entertainment, Inc. is a developer of rich media
advertising serving technologies, software authoring tools and content for three
dimensional, or 3D, animation on the World Wide Web. During the third quarter,
2001 we began marketing and distributing our player, the "Digital Projector"
(required for the playback of our rich media content and advertisements) through
two large peer-to-peer, or P2P, networks, Sharman Networks, which operates the
KaZaA network (formerly operated by Consumer Empowerment B.V.), and StreamCast
Networks, which operates the Morpheus network. Previously, our primary method of
distribution was through the bundling of the Digital Projector with our
animation content which we syndicated to third party web sites. At December 31,
2001, we estimate that our Digital Projector had been distributed to tens of
millions of users based on KaZaA's weekly downloads as reported on Download.com,
as additional P2P connected computers and other users have accessed the KaZaA
and Morpheus networks. Sharman Networks continues to distribute our player and
StreamCast Networks has discontinued its distribution. We commercialize our
technology in two primary ways. We license our rich media advertising server
technologies to websites to enable the selling and serving of our proprietary
rich media advertising format, and we license our rich media content authoring
tools - "b3d Studio" and "b3d Studio Pro" - to production studios.

        We launched our rich media 3D advertising banners - Brilliant Banners -
into the market to offer advertisers and web sites an alternative to the current
Graphics Interchange Format, or GIF, banners that are prevalent on web sites
today. With the decline of industry wide banner advertising revenues and click
through rates, we believe that our animated 3D banner advertisements perform
better than GIF banners and may help reinvigorate certain online advertising
campaigns. We have introduced the Brilliant Banner to our syndication partners,
other significant advertisers and websites, making the technologies available
for them to commence selling and serving this rich media advertising format.

        In February 2002, we formed Brilliant P2P, Inc., later renamed Altnet,
Inc., to create a private, peer-to-peer network utilizing existing, proven
technology to leverage the processing, storage and distribution power of a
peer-to-peer network comprised of tens of millions of users. Altnet intends to
license commercially available digital rights management technology to protect
against infringement of the proprietary rights of the owners of the content
distributed over the Altnet network. Altnet licensed the peer-to-peer technology
necessary to operate the network from Blastoise, Ltd. doing business as Joltid.
Pursuant to our agreement, Blastoise acquired 49% of the outstanding common
stock of Altnet.

        We have licensed some of the world's best known characters for the
production and web distribution of episodic animations, called MultipathTM
Movies, that include SUPERMAN, XENA: WARRIOR PRINCESS, KISS, and ACE VENTURA,
and have produced animated music videos of top selling artists including Ja
Rule, Ludacris, DMX and Li'l Romeo. These full-screen productions, developed
using our proprietary suite of b3d software tools, have small files for faster
download relative to full video files. Currently we distribute select animated
content through Internet syndication partners including Warner Bros. Online,
Roadrunner and selected sites from the Universal Music Group.

        In 2001, we substantially reduced our internal production and
syndication of 3D animation, which we used primarily to distribute our Digital
Projector, in order to reduce our costs and our cash burn rate. We have
discontinued operations at Digital Hip Hop, the joint venture we formed to
produce animated music videos for the World Wide Web, and have discontinued
operations at, and placed into liquidation, Brilliant Interactive Ideas Pty.
Ltd., our Australian-based production company. The reduction in our content
production and syndication activities has allowed us to focus our efforts and
allocate our resources to the further development and exploitation of our
advertising serving and authoring tools businesses, and to pursue the
development of a private, peer-to-peer network business through our Altnet
subsidiary.


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        We are a Delaware corporation that was incorporated in July 1996. We
were formed through the combination of two businesses: Brilliant Interactive
Ideas, Pty. Ltd., an Australian entertainment software developer and producer,
and Sega Australia New Developments, a research and development operation for
leading edge software tools. Our executive offices are located at 6355 Topanga
Canyon Boulevard, Suite 120, Woodland Hills, California 91367, and our telephone
number is (818) 615-1500. Information on our web sites, www.brilliantdigital.com
and www.b3d.com, does not constitute part of this Form 10-KSB.

                               TECHNOLOGY BUSINESS

        We license our rich media advertising server technologies to web sites
to enable advertisers and web sites to display our rich media 3D advertising
banners - Brilliant Banners - as an alternative to the current two dimensional,
or 2D, GIF banners that are prevalent on web sites today. Tests conducted by us
have shown that small advertising campaigns created and served in our
advertising format have generally provided click through rates higher than the
industry norm for static, 2D GIF banner ads. With the decline of industry wide
banner advertising revenues and click through rates during 2001, we believe that
our animated 3D banner ads may help reinvigorate online advertising campaigns.
We are also introducing our advertising format to third party ad serving
companies, making our technologies available for them to commence selling and
serving this new rich media advertising format. In November 2001, we became a
Rich Media Silver Vendor of DoubleClick, Inc. This rich media certification was
awarded after our technology passed the DoubleClick tests for functionality,
impression tracking and click tracking. We believe DoubleClick to be the
technological leader for ad serving on Web, and believe that having our rich
media ad serving technology certified by DoubleClick is a significant
achievement. According to a March 14, 2002 press release issued by DoubleClick,
"The DART rich media vendor certification program launched in October 2001,
provides confidence to any advertiser or publisher that the relevant technology
has passed stringent requirements. The certification is a seal of approval that
guarantees that rich media creatives meet the high standards of functionality
and reporting required of all DoubleClick technologies." At December 31, 2001,
we were one of only seven vendors to have received the Rich Media Silver Vendor
certification from DoubleClick.

        Our proprietary rich media authoring tools - B3D STUDIO and B3D STUDIO
PRO - were developed to be the optimal software for creating digital animation
that could be streamed easily and efficiently via the Internet. b3d Studio is
designed to work as a plug-in with Discreet's (a division of Autodesk, Inc.) 3D
STUDIO MAX and Alias|Wavefront's MAYA animation software. We have licensed our
software tools to other content developers and studios interested in creating
content for the Internet. We intend for our tools to proliferate and become the
de facto standard for the production, distribution and viewing of 3D animation
over the Internet.

        The primary components of our rich media technologies include:

            o   Digital Projector - a playback device used to view content
                created with our b3d software tools that is seamlessly
                downloaded and transparently installed to a user's computer.

            o   b3d Studio and b3d Studio Pro - the authoring tools used for the
                lay-up, directing, producing and editing of real time animation
                designed for output to the World Wide Web and other media.

            o   Brilliant Banner Ad Server - a technology that enables the
                serving of Brilliant Banner advertisements to third party web
                sites.

            o   b3d Installer - a technology that enables our Digital Projector
                and content to be installed without taking the user out of their
                Internet browser.

            o   b3d Reporting - a reporting technology used to analyze, in real
                time, the performance of content, particularly advertising
                banners, produced using b3d Studio.


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SALES, MARKETING AND DISTRIBUTION OF OUR TECHNOLOGY

        We have engaged the services of two outside consultants whose primary
responsibilities are to promote and sell our technology. Senior management is
also marketing and promoting the advantages of our b3d products. We are
marketing our rich media advertising solutions to advertising agencies, third
party advertising representative firms and directly to advertisers. We are also
marketing our content authoring tools to production companies, including those
that participated in a beta test of the tools during 2000. Animation content
generated using b3d Studio can be applied to the production of training,
artistic rendering, educational, architectural, engineering, e-commerce, and
other solutions that require animation. We believe that broad use of our tools
in the creation of animated content will encourage greater use of the Digital
Projector, and establish broader demand for our ad serving technologies.

        We generally charge a fee to our clients for the production of Brilliant
Banners, which we outsource to third party production firms at a cost that
generally equals the fee we receive from our client. Consequently, the
production of Brilliant Banners is not profitable for us. We also receive sales
commissions from the publishers of web sites on which we place Brilliant Banners
advertisements. Our long-term strategy, however, is to derive revenue by
licensing our ad-serving product, which is required to serve Brilliant Banners.
Our ability to derive significant licensing revenue, however, depends in part on
the market's acceptance of the Brilliant Banner as viable rich media advertising
solution.

CONTENT PRODUCTION TOOLS

        We have developed several integrated proprietary software tools that
enable us to produce Internet-ready, high-quality animated content.

        B3D STUDIO AND B3D STUDIO PRO. b3d Studio is the centerpiece of the
content development and production process. b3d Studio is an object-oriented
environment that collects and integrates source files from ScripNav and
TalkTrack with graphics, sound and animation, and makes them available for
lay-up, editing and final output. ScripNav was developed specifically for the
writing of complex, interactive 3D animated content, including our MultipathTM
Movies and interactive banner ad scripts. It is used to compose, edit and
finalize a script using a commercially available word processing package. It
provides for the insertion of various subplots into scenes in order to adapt the
script to the interactive format of the MultipathTM Movie, game or online banner
ad. TalkTrack automatically synchronizes a character's lip movements with
corresponding dialogue tracks. TalkTrack does this by examining wave files and
generating output files that contain references to the appropriate mouth shapes.
TalkTrack allows for low cost modification of the animated content to any
language without the awkward appearance of dubbed movies. b3d Studio provides a
multi-window editing environment in which the developer can preview, analyze and
edit the final product. b3d Studio includes a Shot Based Editing System that
enables movie "clips" to be incorporated into a scene. It also allows cuts and
edits to take place, as in a traditional film environment. For example, the
specific scene data (sets and props) can be loaded into memory and viewed from
different camera positions.

        b3d Studio, through its Data Compression Wizard, builds, integrates and
compresses the data files to create a b3d file to be played on our Digital
Projector. The Data Compression Wizard arranges, assembles and, using licensed
technology, compresses thousands of audio and bitmap files that are created
during the development of a MultipathTM Movie or other b3d animation in a manner
that optimizes the playing of the title. The Data Compression Wizard compresses
files allowing up to five hours of branching content to be captured in less than
60 megabytes of disk space, as compared with conventional technologies, which
presently would require at least one gigabyte of storage.

        DIGITAL PROJECTOR. The Digital Projector contains all the necessary
components to load and play b3d animations or any animation files that have been
designed using our b3d technology. The Digital Projector is the software engine
that the system uses to play everything from a Brilliant Banner to a music video
to a MultipathTM Movie, each produced in our b3d format, and is generally the
only software tool that we must continually modify to permit the b3d content to
be adapted to new platforms. The Digital Projector was


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developed exclusively for the PC. Presently, we have no intention of developing
the Digital Projector for use on other platforms.

        In addition to our proprietary software tools and engines, we and other
b3d content producers use certain commercially available sound and graphics
tools in the production process.

CONTENT TOOLS APPLICATIONS

        The b3d software tools suite allows for the creation of
three-dimensional objects that function within a three-dimensional environment
that can be updated in real time. Examples of the applications for the tools
suite include:

            o   Entertainment content delivered over the Internet, on
                traditional broadcast and cable television and on CD-ROM and DVD

            o   Internet advertisements

            o   Virtual storefronts with database enabled e-commerce

            o   Educational programming

            o   Sports instruction

            o   Personal online persona

            o   Virtual reality content applications and environment management

B3D STUDIO TOOLS ADVANTAGES

        We believe our b3d technology is one of only a few known methods for
creating high-quality linear and interactive programming for the Internet,
traditional television broadcasting, DVD and CD-ROM utilizing a single
production process. Our current b3d technology offers the following significant
advantages over competing rich media or 3D real time animation technologies:

        SMALLER DATA TRANSMISSION REQUIREMENTS. While certain media requires the
compression and transmission of each frame in a video image (there are 25 frames
per second of video image), our b3d technology requires only the transmission of
animation instructions, which consist of commands such as "move the left arm
upwards by 12 degrees." As a result, b3d files require much less data to be
transmitted, which allows b3d files to be streamed more easily over the
Internet.

        SMALL FILES AND FAST RENDERING. b3d files are highly compressed binary
images with simple command sets, requiring small files and resulting in fast
rendering.

        INTERACTIVITY. b3d files offer interactivity. We have developed a unique
pre-load system to enable story or interactive branching to take place
seamlessly and without interruption to the story or visual representations.

        STREAMING DURING PLAYBACK. b3d files allow content to begin playing
after only a portion of the program has been downloaded, with sound and
animation continuing to stream over the Internet while the content plays.
Competing formats generally require that the entire program be downloaded before
the user can begin to play the content.

        SCALABLE SCREEN SIZE. b3d files can scale from small thumbnails to
full-screen movies without degradation. Competing formats generally either
pixelate as users enlarge the screen, or are restricted to a partial screen.

        SCALES WITH INTERNET BANDWIDTH. Our Digital Projector can automatically
detect Internet bandwidth and selects the best-quality soundtrack and textures
that can be streamed within this bandwidth.


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This is superior to those competing products, which offer bandwidth scalability,
but generally require the user to manually select their bandwidth requirements.

        LOW SERVER IMPACT. The continuous stream of video data served on demand
to viewers worldwide continues to present a significant challenge. In contrast,
much of the data required to view b3d files resides on the user's computer.
Consequently, less data is required to be streamed to the user while the content
plays. In addition, b3d files compress to under 10% of a similar video
advertisement.

        SERVER-CLIENT SIDE CONTROL. b3d technology has evolved to enable control
over images delivered to the viewer in real time by the party responsible for
serving the image. Images related to 3D geometry or animation can be managed by
the host to be directly responsive to decisions, choices or the interaction of
the viewer. This enables the party serving the image to change the client's view
in real-time in accordance with demographic data and profiling intelligence. All
data on the client and server side is managed via the b3d file format.

        USER FRIENDLY. To achieve acceptance with the broadest possible
audience, we strive to make our products more user-friendly than those of our
competitors, as follows:

            o   VERSATILE PLAYABILITY. b3d files play with just a double-click
                of the mouse and in a number of different formats, such as on a
                web page, inside an e-mail, in a word processor document,
                spreadsheet or PowerPoint presentation. With self-contained b3d
                files, everything needed to view the animated content is
                contained in a single b3d file, eliminating the need for program
                installation.

            o   WEB SITE OPERATORS. b3d files do not require special server
                software with attendant license fees. b3d files can be placed on
                any HTTP web server without any special server requirements.
                Their ease of use and low bandwidth requirement appeal to web
                site operators.

            o   ANIMATORS. While using our b3d Studio plug-in for Maya and 3D
                Studio Max, animators using these popular 3D design packages can
                quickly and easily output their work as a small b3d file and
                play it on a web page in a full screen window with high clarity.

            o   ADVERTISERS. The current standard advertising mechanism features
                silent, animated Graphics Interchange Format (GIF) files. Our
                technology allows for the use of real-time, 3D-based banner
                advertisements with animated graphics and streaming sound. More
                significantly, b3d advertisements are interactive. We believe
                that interactive advertisements improve the likelihood that
                viewers will be interested in the ads, remember the product
                being advertised and are more likely to click on the ads. We
                believe that b3d created ads will be desirable to web site
                operators, who will encourage their use, because of the greater
                effectiveness of the ads.

            o   E-COMMERCE. b3d designers may program the files so that
                consumers can only play certain content from within a specific
                web site or only on one occasion, even though the viewer has
                already downloaded the data to their personal computer. Because
                b3d content is interactive, e-commerce can be integrated into
                the content to produce sales opportunities online. Furthermore,
                the capacity to control images on the viewers' personal computer
                enables product placement and responsive content to be created.

THE B3D INSTALLER

        We have developed installation technology that enables our Digital
Projector and content to be installed without taking the user out of their
Internet browser. The installer works in conjunction with encrypted installation
scripts and a backend database to manage objects on the user's PC and to
synchronize assets on the user's PC with those on the server. This will enable
the future integration of e-commerce components into content and enable content
to be updated on a regular basis. For instance, in a virtual shopping
application, with each visit to the virtual supermarket, the Installer will
detect objects


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and automatically update the user's PC with the files required to display items
in the order pre-determined by the vendor.

PENDING PATENTS

        The technology involved in creating and maintaining a state-of-the-art
tools suite represents a significant barrier to entry for new and less
technologically advanced competitors. We have eight pending patents with respect
to our tools suite, which, if issued, will include the following subject areas:

            o   Streaming Internet Data -- This patent application describes a
                method of streaming data over the Internet for real time
                playback of 3D animated interactive movies.

            o   Automated Lip Sync -- This patent application describes how
                mouth shapes are created by lip sync recognition algorithms and
                applied to 3D objects as gestures.

            o   Controlling 3D Object Gestures -- This patent application
                describes a method of assigning and applying gestures to 3D
                animated objects.

            o   Preloading, Caching and Look Ahead of Internet Streamed Data --
                This patent application describes a method of storing multiple
                files within a single file for interactive streaming of 3D
                animation data.

            o   Real Time Scalability of Real Time 3D Graphics -- This patent
                application describes the method of creating and playing back
                animated content such that the content scales with available
                playback CPU power and available Internet bandwidth.

COMPETITION FOR OUR RICH MEDIA AD FORMAT AND SOFTWARE TOOLS

        The market for products and services in the online advertising industry
is very competitive. We expect this competition to continue to increase because
there are low barriers to entry as well as expected industry consolidation. We
believe that our ability to compete depends on many factors, some of which are
beyond our control, including the following:

            o   Enhancements to existing ad serving solutions developed either
                by us or our competitors;

            o   New ad serving solutions developed by our competitors with
                superior attributes;

            o   Our ability to provide adequate support for our customers;

            o   Our sales and marketing efforts;

            o   Patents granted to competitors which may limit our ability or
                our partners' ability to compete in certain ad markets or to use
                certain techniques;

            o   Market acceptance of our Brilliant Banner; and

            o   General improvement in the online advertising environment.

        There are a number of companies that provide ad serving services,
including many which are focused on establishing their format as the de facto
standard for ad serving on the Web, including DoubleClick, Inc., Engage, Inc.
(through its Accipiter product), and Real Media (a unit of 24/7 Real Media).

        We compete for Internet advertising revenues with large Web publishers
and Web portals, such as AOL Time Warner, Microsoft Corporation and Yahoo!. We
also compete with the traditional advertising media of television, radio, cable
and print for a share of advertisers' total advertising budgets. We also
encounter competition from a number of other sources, including content
aggregation companies, companies


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engaged in advertising sales networks, advertising agencies and other companies
that facilitate Internet advertising.

        We expect the market for rich media advertising technologies to grow
given that consumer response to, and thus the value to advertisers of, two
dimensional, static GIF banner ads on the Internet has declined rapidly. The
decline in value of 2D GIF advertisements has caused both large and small web
advertisers to seek viable alternatives. Rich media alternatives, including
Brilliant Banners, are being considered by advertisers and web site operators as
solutions to 2D GIF banner advertisements, where the standard click through has
declined to less than one half of one percent. We believe our principal
competitors in the delivery of rich media advertisements are those vendors whose
technologies, like ours, have received the Rich Media Silver Vendor
certification from DoubleClick, Inc. These vendors include Enliven, Unicast,
eyeblaster, eyeReturn and Poindexter. We are at a competitive disadvantage to
many of our competitors because their rich media advertisements can be viewed
without special software programs, unlike our Brilliant Banners, which can only
be viewed by users who have previously downloaded our Digital Projector. Given
that Brilliant Banners and other forms of rich media advertisements are
performing much better than 2D GIF advertisements, we believe additional
competitors will enter the rich media advertisement market.

        The markets for our content production software tools are competitive
and subject to rapid change characterized by both the constant demand for new
product features at reduced prices and the pressure to accelerate the release of
new features and tool enhancements. Companies competing in this market include
established companies like Macromedia, Inc., Adobe Systems, Inc., Pulse
Entertainment, Inc. and Viewpoint Corporation. Certain of our competitors are
focused on two-dimensional technologies as can be seen in the Macromedia FLASH
toolset, while others offer three dimensional animation. We expect additional
competitors to enter the market as the demand for Internet-ready content
increases.

                       CONTENT PRODUCTION AND SYNDICATION

        We built our content production and syndication businesses and
associated technologies in part to increase the use and availability of our
Digital Projector. Viewers watch Brilliant Banners, music videos, animations,
MultipathTM Movies (movies produced with multiple endings, depending on the
"path" chosen by the user) and other b3d-produced content using the Digital
Projector, which resides on a user's hard drive. Increasing the installed base
of Digital Projectors increases the number of users who are able to view
b3d-produced content, such as Brilliant Banners, which makes b3d content more
appealing to advertisers as well as content developers who may be inclined to
license our tools.

        Historically, our Digital Projector distribution strategy has been to
create appealing entertainment content, such as our MultipathTM Movies and music
videos, and syndicate that content to third party web sites for viewing by
computer users. The initial viewing of the content would initiate a download of
our Digital Projector. This strategy was only moderately successful, requiring
expensive and time consuming production of entertainment content and resulting
in approximately four to five million actively installed Digital Projectors at
June 30, 2001. Commencing in September 2001, we changed our Digital Projector
distribution strategy and began bundling our Digital Projector with downloads of
Sharman Networks' KaZaA Media Desktop and StreamCast Network's Morpheus network.
Due to the popularity of these file-sharing networks, at December 31, 2001, we
estimate that our Digital Projector had been distributed to tens of millions of
users as additional P2P connected computers and other users have accessed the
KaZaA and Morpheus networks. Sharman Networks continues to distribute our player
and StreamCast Networks has discontinued its distribution. The weekly downloads
of the KaZaA Media Desktop and, consequently, our Digital Projector continued to
average approximately two million during January and February 2002, and can be
initiated from both the home page, www.kazaa.com, and from the web site
www.download.com, operated by CNET Networks, Inc. Due to the success of this
distribution channel, as well as the fact that our internal content production
facilities were operating on a negative cash flow basis, we are no longer
pursuing content production and syndication as a primary means for distribution
of our Digital Projector.

        We also pursued our content production and syndication business to
generate revenue by sharing advertising revenues with syndication partners
displaying our content. Because of the significant decline in


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advertising revenues generated by "content only" web sites, who were our primary
syndication partners, we have also discontinued pursuing this business.

        Due to these changes in our business strategies, in 2001 we eliminated
our internal production of 3D animation and substantially reduced our
syndication of existing content. We have discontinued operations at Digital Hip
Hop, the joint venture we formed to produce animated music videos for the World
Wide Web, and have discontinued operations at, and placed into liquidation,
Brilliant Interactive Ideas Pty. Ltd., our Australian-based production company.
We now outsource the production of b3d content, primarily Brilliant Banners, to
a number of facilities in the United States and overseas that have already
licensed our tools. It is our intention to expand the number of third parties
capable of creating Brilliant Banners, including the production departments of
advertising agencies.

CONTENT PRODUCTION

        Historically, we developed a broad range of b3d animation designed to
appeal to a variety of viewer demographics. We placed greater emphasis on using
characters from familiar licensed content in order to aid our online technology
distribution efforts. Some of our previous production efforts included the
development of titles in the following categories:

        MUSIC. Through our Digital Hip Hop venture, we produced animated, online
music videos for top selling artists from Island Def Jam (a subsidiary of
Universal Music Group), Priority Records and DreamWorks Music, some of which may
still be viewed at web sites operated by these companies.

        MULTIPATHTM WEBISODES. Our MultipathTM Movie webisode series, including
SUPERMAN, ACE VENTURA, XENA: WARRIOR PRINCESS and KISS IMMORTALS, among others,
were made available by our syndication partners. Warner Bros. Online continues
to make available the Superman series, which may generate future revenue for us
depending on the success of Warner's internal sales team to sell the available
advertising space.

        CHOOSE YOUR OWN NIGHTMARE SERIES. The CHOOSE YOUR OWN NIGHTMARE series
of MultipathTM Movies were targeted to children, eight to twelve years of age.
All of these titles are based upon Bantam Doubleday Dell's popular children's
book series, CHOOSE YOUR OWN ADVENTURE and CHOOSE YOUR OWN NIGHTMARE.

        MULTIPATHTM MOVIES FOR KIDS. MultipathTM Movies for Kids were targeted
to children three to twelve years of age. The first title we developed was QUEST
FOR THE WOOLLY MAMMOTH, followed by THE SUNKEN TREASURE and THE RESCUE, all
featuring Popeye.

        We are now focused on the production of rich media advertising banners,
primarily through outsource agreements with third party production companies
which have already licensed our software tools. We believe that the superior
performance of rich media advertisements as compared to traditional 2D GIF
advertisements will drive the demand for our Brilliant Banners. The rich media
components of our Brilliant Banners include sound and high quality animation,
which serve to increase click through rates and increase the efficiency of the
advertising message being delivered, making Brilliant Banners significantly more
saleable and at higher prices than 2D GIF advertisements.

        We announced in July 2001 that Warner Bros. Online ordered an additional
30 webisodes of The MultipathTM Adventures of SUPERMAN. In December 2001,
however, the production agreement with Warner Bros. was terminated after the
delivery of the first 12 additional webisodes, which Warner Bros. began making
available on Warner Bros. Online in February 2002. This brings the total number
of SUPERMAN webisodes ordered and delivered to Warner Bros Online to 57.

CONTENT DISTRIBUTION

        Historically, we distributed our MultipathTM Movies, animated music
videos and other entertainment content through a network of syndication
partners, including:


                                     Page 8
<PAGE>


        WARNER BROS. ONLINE. Warner Bros. Online continues to feature our
content. Our SUPERMAN MultipathTM Movie Webisodes are on the Warner Bros. Online
website. Previously Warner Bros. Online also displayed some of the other
selected MultipathTM Movie content, including KISS IMMORTALS, XENA: WARRIOR
PRINCESS and the CHOOSE YOUR OWN NIGHTMARE series, as well as hosted some of the
web videos we produced including Li'l Romeo.

        YAHOO!. We entered into a content distribution and promotional agreement
with Yahoo! Inc. Through the agreement, we provided 3D animated programming
based on, and co-produced in conjunction with, the popular rock band KISS as
part of our KISS IMMORTALS series. In addition to making the KISS Webisodes
available on Yahoo! Entertainment, we developed a customized, co-branded version
of our 3-D Digital Projector, which linked to other properties on the Yahoo!
network, including Yahoo! Shopping and Yahoo! Music.

        STUDIOS USA. We entered into an agreement with Studios USA to place 3D
animated content on their Web sites including SCIFI.COM, USANetwork.com and
StudiosUSA.com. We shared in the advertising revenue generated by the Webisodes
placed on their sites and the other third party broadcast sites, if any, to
which Studios USA syndicated.

        VH1. We entered into a revenue share distribution agreement with VH1
whereby the KISS IMMORTALS series was featured on their website - VH1.com.

        ROAD RUNNER. We entered into a non-exclusive agreement with Road Runner,
the high-speed online service, whereby some of our content was distributed and
promoted to Road Runner subscribers. We also participated in Road Runner's
off-line marketing and promotions campaign, and our content was promoted within
the Road Runner Service.

        While we have ceased to produce new entertainment content, some existing
content is still available on some syndication partner web sites, including
SUPERMAN, and XENA: WARRIOR PRINCESS, as well as the animated music videos of
artists JA RULE, DMX, LI'L ROMEO and REDMAN/LADY LUCK. This content is available
on web sites operated or controlled by Warner Bros. Online, Roadrunner and
Universal Music Group. Revenue, if any, is split with the distribution partner
according to various deal structures, many of which are traffic dependent.

DIGITAL HIP HOP

        We entered into an agreement with Russell Simmons and Stan Lathan that
provided for the formation of Los Angeles-based Digital Hip Hop, Inc., a joint
venture production studio headed by Stan Lathan. Digital Hip Hop produced and
distributed full screen animated music videos and other content primarily for
Internet and broadband distribution. Digital Hip Hop produced animated music
videos for top selling artists including JA RULE, SUM41, LUDACRIS, DMX,
REDMAN/LADY LUCK and LI'L ROMEO pursuant to production agreements with the
record labels (Island Def Jam, DreamWorks Records, Priority Records, and
others). As our internal costs typically exceeded the agreed upon production
fees, our strategy was to recapture the differential with our share of the ad
revenue, as well as gain an additional means of distributing our Digital
Projector. The distribution of our Digital Projector was only partially
successful, and our portion of the ad revenue fell short of our projections.

        During the fourth quarter of 2001, we discontinued operations at Digital
Hip Hop based on the limited prospects of additional web video production work.
Past clients, including the Universal Music Group and Priority Records, were
reluctant to make future commitments for incremental web videos at prices which
were higher than previously paid. We do not intend to actively market and
promote the production of animated music videos for the Web. However, to the
extent that previous partners request a quote for additional work or we are
approached to produce additional web videos, we intend to outsource the
production work to existing third party licensees of b3d Studio and b3d Studio
Pro, many of whom are currently producing Brilliant Banners, and charge a fee
for overseeing the project.


                                     Page 9
<PAGE>


SALES AND MARKETING OF OUR B3D CONTENT

        We have discontinued all sales and marketing of our MultipathTM Movies
and music videos, which historically were a primary focus of our sales and
marketing efforts. We continue to market Brilliant Banners with our ad serving
and b3d authoring tools. To facilitate the broad acceptance of our rich media
banners and software tools, we are pursuing a strategy that includes the
following elements:

        ADVERTISING. We are actively promoting advertising impressions, known as
inventory, for sale on Sharman Networks' KaZaA Media Desktop. We are promoting
this inventory through third party advertising rep firms such as Interep,
Advertising.com and DoubleClick's media division; directly to potential clients;
and to ad agencies which represent advertising clients. Our marketing position
is that Brilliant Banners perform better than regular 2D GIF banner ads and can
be sold at higher CPM prices. We are generally charging a fee for the banner ads
and coordinating their production. These fees are offset by the expenditures to
the outside production firms actually doing the work, and as such, the
production is not profitable for us. Long term, we intend to derive our revenue
through the licensing of our ad serving product, which is required for the
serving of Brilliant Banners. We are also receiving a sales commission from the
web publishers, including KaZaA, if advertising is placed on their web sites due
to our direct efforts (which we are doing as an additional means of promoting
our Brilliant Banner rich media ad format).

        DVD RETAIL CHANNEL. We began a limited release of selected MultipathTM
Movie titles to the DVD market in the fourth quarter of 2000 pursuant to a March
1999 agreement with SlingShot, Inc., a special purpose DVD publisher and
distributor. Additional titles may be released into the market in 2002, however
it is unlikely that other DVDs will be developed in the future, as our DVD title
have met with very limited success in the market.

OUR OTHER DIGITAL ANIMATION AND INTERNET BUSINESSES

        E-BRILLIANT. In February 2000, we entered into a joint venture with
e-New Media Company Limited, a Hong Kong-based telecommunications, information
services and Internet company. Pursuant to our agreement, e-New Media opened and
agreed to fund a 3D animation studio in Singapore, known as e-Brilliant Pty.
Limited, which was dedicated to the creation of interactive animated content for
the converging multi-media markets in Asia. In November, 2001 e-Brilliant ceased
operations due, in part, to e-New Media's decision to stop funding the studio.

        THE AUCTION CHANNEL. In July 1999, we acquired Trojan Television
Limited. Trojan Television Limited was a London-based company doing business as
The Auction Channel. Founded in 1996, The Auction Channel integrated live
satellite, cable TV and Web broadcasts of auction events conducted by auction
houses, allowing participants to watch events on television and the Internet,
and use the Internet or their telephone to bid simultaneously with people
actually present at the auction house. In late 2000, we decided to sell The
Auction Channel. The Auction Channel has been accounted for as a discontinued
operation in fiscal 2001 pursuant to Management's formal adoption on December
31, 2000 of a plan to dissolve the business unit. On April 30, 2001, we sold
substantially all of the assets of The Auction Channel to Metro Channels, LLC
and closed The Auction Channel's New York and London offices.

                                  ALTNET, INC.

        In February 2002, we formed Brilliant P2P, Inc., later renamed Altnet,
Inc., to create a private, secure, peer-to-peer network utilizing existing,
proven technology to leverage the processing, storage and distribution power of
a peer-to-peer network comprised of tens of millions of users. Altnet intends to
license commercially available digital rights management technology to protect
against infringement of the proprietary rights of the owners of the content
distributed over the Altnet network. Altnet licensed the peer-to-peer technology
necessary to operate the network from Blastoise, Ltd. doing business as Joltid.
Blastoise is owned and operated by the developers of the FastTrack P2P
technology, the underlying technology which operates the KaZaA and Grokster P2P
networks. Blastoise owns the rights to the FastTrack technology. Pursuant to our
agreement, Blastoise acquired 49% of the outstanding common stock of Altnet.


                                    Page 10
<PAGE>


CREATION OF THE ALTNET NETWORK

        Peer-to-peer computing is the sharing of computer resources and services
by direct exchange between computer systems, and not through a central server.
Peer-to-peer computing applications include the exchange of digital files and
other information, processing cycles (the cycles by which data is processed in
the central processing unit of a computer), cache storage (temporary storage of
files in the central processing unit of a computer), and disk storage.
Peer-to-peer computing takes advantage of existing desktop computing power and
networking connectivity, allowing users to access the collective power of
individual computers to benefit the entire enterprise. Millions of computers are
logged onto the Internet at any given time, each with excess processing power,
excess storage capacity and unused bandwidth. Through Altnet, we intend to
create a private peer-to-peer network to enable our clients to access and
utilize this excess processing power, storage capacity and unused bandwidth for
multiple applications.

        To develop the Altnet private peer-to-peer network, each computer that
comprises the network must be equipped with a software program. To distribute
the program, we bundled it in a package, that we call ALTNET SECUREINSTALL, with
our Digital Projector. Pursuant to an agreement with Sharman Networks,
SecureInstall, along with the Digital Projector, is being downloaded as part of
Sharman Networks KaZaA Media Desktop, which has consistently been averaging in
excess of two million downloads per week since we began bundling our software in
the fall, 2001. The basis of the SecureInstall is our b3d Installer technology.
The Installer technology connects to file servers, P2P networks and ad servers,
via "connectors", for the purpose of distributing files across the network.
These "connectors" consist of small amounts of JavaScript code plus small,
encrypted install scripts used by the Installer. These components help
facilitate the delivery of files - ad banners, music files, documents, software
files, etc. - across the network. Apart from facilitating Altnet SecureInstall
connectivity, the Installer is a full-fledged software installation system, with
key features including file compression, file patching and file encryption. The
file compression reduces download sizes, the file patching allows software
updates to be made available as 'patches' rather than full downloads, and file
encryption provides protection from tampering for files on the network, even if
they are on the hard drives of thousands of user's PCs connected to a P2P
network.

        To maximize the efficiency of the Altnet network, selected users with
higher than average processing power, significant free space on their hard
drives and broadband connectivity to the Internet, will first be engaged by
Altnet to become main hubs on the network. We refer to each of these hubs as a
qualified PC, or QPC. We intend to enter into an end user agreement with the
owner of each QPC pursuant to which we will compensate the owner for access to
and use of their computers while logged onto the Internet. We have yet to
finalize the terms of compensation, however we anticipate it will be a
combination of non-cash components, which may include gift certificates,
products and/or access to video content, and we expect to initiate this process
some time in Q2 2002. QPCs will also be segmented based on geographic region and
functionality to balance the demands on the network, thereby spreading evenly
across the network the services to be provided.

        A significant feature of the Altnet network is its ability to
communicate with FastTrack technology already installed on desktops worldwide.
Tens of millions of search requests each day are being made on the FastTrack
Network via the KaZaA Graphical User Interface (GUI). These search requests can
be intercepted by Altnet and returned to the FastTrack Network and displayed in
the KaZaA GUI such that secure content provided via Altnet can be made visible
to KaZaA users. Altnet has reached an agreement with Sharman Networks to allow
Altnet search results to propagate in the KaZaA GUI and Sharman Networks has
indicated its intent to work with Altnet and Altnet's customers to highlight
secure search results so as to increase the popularity of the underlying
content.

        Our longer-term goal is for Altnet, through multiple client
relationships, to be the next advancement in distributed bandwidth, storage and
computing. Currently, distributed storage and computing companies, such as
Akamai, operate as content delivery network service providers, whereby their
services improve the speed, quality, reliability and scalability of Websites by
delivering the Web content and applications of their customers, through a
distributed worldwide network of servers, to a server geographically closer to
end users. Altnet intends to go the next step, which is directly to the end user
in a private, peer-to-peer network.


                                    Page 11
<PAGE>


ALTNET SERVICES

        We intend to market Altnet's peer-to-peer services in three main areas:
Network Services, Distributed Storage and Distributed Processing.

        NETWORK SERVICES - Altnet's Network Services will be marketed as money
saving, enterprise solutions to companies that spend significant amounts on
Internet bandwidth and infrastructure for the following applications:

            o   File downloads from web sites or servers;

            o   Content distribution, including "push" (where content such as
                music, movies, news, sports or weather, is automatically
                "pushed" to the user) and cached on their PC;

            o   Ad serving;

            o   Content backup; and

            o   Video messaging/conferencing.

        An example of Network Services is ad serving. When a user opens a new
Web page, and the banner ad which appears on that page is delivered by a third
party ad serving company, such as DoubleClick, the third party ad serving
company incurs infrastructure, management, bandwidth and processing costs for
every single banner ad which gets served. Often times, the same ad gets "served"
millions of times each month. Using Altnet's proposed solutions, all of those
ads could be delivered to the users via the Altnet network, thereby saving costs
for third party ad serving companies.

        Users of the network will benefit because QPCs, acting as hubs, will
reduce latency and increase processing performance by having the files requested
by one user delivered by another user who (a) already has the file, and (b) is
geographically located close to the requesting user. Similar to companies that
have a worldwide, distributed network of servers, we intend to utilize
intelligent load balancing traffic management instructions to spread the file
distribution demands on the network and not overload any one particular region.
Additionally, the network will utilize commercially available digital rights
management (DRM) software (software which provides the means of protecting audio
and video files by encrypting the files and only allowing users to play the
files after they have obtained a license key) to enhance the safety, security
and legitimacy of Altnet's users. Copyright and trademark protection will be
central to the Altnet service and we will not launch the network for commercial
purposes until the DRM software we choose is satisfactory to our users and fully
protects the rights of the file owners.

        DISTRIBUTED STORAGE - Distributed storage services include the storage,
management, protection and sharing of electronic information used for electronic
commerce, data warehousing and transaction processing. Altnet's Distributed
Storage services will be marketed to companies that are currently servicing
these markets. Altnet does not intend to develop the expertise to compete with
companies in these sectors, rather Altnet will focus its efforts on servicing
companies that have a requirement to access P2P networks in order to carry out
their storage applications. Some of the better-known companies in this industry
are Scale Eight, Zambeel, EMC, Brocade and X-Drive. Other more advanced projects
like "Ocean Store" point to particular solutions based around Nomadic Data
concepts that reflect a potentially promising future for massively scaleable
redundant networks like Altnet. By leveraging the excess storage capacity on the
Altnet network, we believe, in certain storage market segments, Altnet can
generate significant storage cost savings for its clients, a portion of which
may be earned by Altnet as consideration for its services.

        DISTRIBUTED PROCESSING - Distributed processing services work by taking
large tasks and dividing them into many smaller tasks, all of which are
disseminated to many computers running simultaneously via a network such as a
private corporate network, or the Internet. After the tasks are processed via
individual computers, the data is transmitted back to a central server, which
assembles the results. Altnet's Distributed Processing services will be marketed
to companies currently in the high performance computing field, as well as the
performance testing/measurement areas. Altnet does not intend to develop the
expertise to compete with companies in these sectors, rather Altnet will focus
its efforts on servicing companies that have a requirement to access P2P
networks in order to carry out their services. The leaders in this space are
IBM,


                                    Page 12
<PAGE>


Parabon and United Devices. Similar to Altnet's Distributed Storage business,
Altnet intends to earn a portion of the cost savings realized by its customers
as consideration for its Distributed Processing services.

SALES AND MARKETING OF ALTNET'S SERVICES

        We currently intend to market Altnet's services by first engaging
consultants to approach current providers of network services whom we have
targeted as potential clients. Revenue may be derived from several key areas,
with the initial focus on companies wishing to distribute files to large volumes
of people at very low bandwidth costs. These customers include content owners
using the Internet to promote movies (trailers), samplers and demo or freeware
products. In addition, potential clients include ad serving companies, such as
DoubleClick, and companies that specialize in providing streaming and caching
services, such as Akamai and Inktomi Corporation. The same consultants will
ultimately approach a target list of clients in the distributed processing and
distributed storage markets such as Scale Eight, Zambeel, Data Synapse, United
Devices, X-Drive and Brocade. Our overall sales and marketing strategy is to
approach the leaders in their respective industries and promote Altnet as a
potential money saving service. Provided we have success with using consultants,
we intend to recruit and hire a small, dedicated sales staff.

COMPETITION FOR ALTNET'S SERVICES

        There are a number of peer-to-peer, file sharing companies in existence,
and several have either launched or are planning to launch business competitive
with the services to be offered by Altnet, however widespread distribution
remains a significant barrier to success. These companies include Red Swoosh,
Blue Falcon, Kontiki, Evernet, Uprizer and numerous others. Additionally in the
file sharing market, StreamCast Networks, iMesh, Bear Share, Lime Wire, Grokster
and KaZaA are all potential competitors to the services Altnet plans to
introduce. Further, there are a number of companies in the distributed computing
market, many which are well known and well capitalized. Specifically, in the ad
serving sector of Network Services, DoubleClick, Inc. and 24/7 Real Media
provide ad serving services, have a much longer operating history than Altnet
and each have sufficient capital to continue operating. Companies in the
streaming/caching industry include Inktomi and Akamai, both of which have longer
operating histories than Altnet and adequate capital to continue operating. In
the Distributed Processing services industry, the leader is IBM, the well-known,
blue-chip corporation. Others include United Devices, Data Synapse and Parabon.
In the Distributed Storage field, the most notable competitors may be EMC and
Brocade. In the event that Altnet is successful in its initial efforts, we
anticipate that some or all of these companies will increase their respective
capital development expenditures to protect their position in their respective
industries. Each of these companies either has adequate capital reserves or
access to the capital markets to fund an expansion or initiative that would
protect its position. Additionally, industry consolidation is expected. As such,
if one or more of these companies were to merge, their collective resources
would significantly exceed Altnet's and would allow them to pursue positions,
which may be to the detriment of Altnet.

ALTNET'S COMPETITIVE ADVANTAGE

        We believe that Altnet is well positioned to compete effectively with
companies currently providing distributed computing services. The software
necessary to operate Altnet's peer-to-peer network has been installed on tens of
millions of computers worldwide, and additional computers are added with each
successive download of the KaZaA Media Desktop, providing a competitive
advantage over other P2P competitors that have not achieved similar success in
mass distribution of their software application. Altnet intends to "turn on" the
network by first engaging, through end user licensing agreements, a critical
mass of users who will act as QPCs, then engaging other users with lesser
performing computers, ultimately accessing tens of millions of users. Altnet's
ability to communicate with FastTrack technology already installed on desktops
worldwide also presents a significant advantage by allowing content owners the
opportunity to associate their secure content with tens of millions of search
requests made each day via the KaZaA GUI.


                                    Page 13
<PAGE>


ALTNET'S UNPROVEN BUSINESS MODEL AND FINANCIAL RISKS

        Altnet is a new business that we are pursuing based upon our perceived
market opportunity; yet its business model is unproven. There are no guarantees
that the model will be successful. Its success will depend, in part, on the
following:

            o   our ability to establish relationships to formalize end user
                agreements with enough QPC owners to allow the network to work
                efficiently and effectively;

            o   acceptance by corporate customers of our services;

            o   the technical viability of the commercially available DRM
                software we employ to protect the proprietary content that will
                pass through the Altnet network and will reside on network
                computers;

            o   our underlying peer-to-peer technology; and

            o   our ability to raise the funding necessary to support the sales,
                marketing, research and development necessary to establish the
                business of Altnet.

                            RESEARCH AND DEVELOPMENT

        In fiscal years 2000 and 2001, we spent $3,855,000 and $1,892,000,
respectively, on research and development. The costs decreased by $1,963,000
primarily due to a decrease in web development costs, research and development
personal and overhead costs associated with our research and development
efforts. In December 2001, we commenced the liquidation of Brilliant Interactive
Ideas, Pty. Ltd., and formed Brilliant Digital Entertainment Pty. Ltd. for the
purposes of continuing our research and development efforts in Australia. The
result was we decreased the headcount in Sydney from 53 employees at December
31, 2000 to 7 employees at December 31, 2001.

        Presently, our research and development efforts are principally focused
on the following tasks:

            o   Developing technology to improve delivery and performance of
                Brilliant Banners;

            o   Developing new b3d Digital Projector features, including new
                transparency overlays that allow banner ads to move outside the
                banner ad space and animate over the entire web page or desktop,
                plus new anti-aliasing features to provide improved visual
                quality of product representations and text within rich-media
                ads;

            o   Enhancing the b3d tools suite, documentation and Digital
                Projector by increasing performance, and adding new
                interactivity features;

            o   Developing enhanced Internet delivery capabilities of our
                content, including new content serving techniques, reduction of
                content file sizes though new compression technology, and
                streaming of animation data;

            o   Providing a fully scalable reporting platform with
                multi-partner, multi-user login capability;

            o   Providing additional integration and compatibility between our
                statistics and reporting functions and the reporting packages of
                DoubleClick and others, with the goal of making it as easy for
                any advertiser or web site to run a Brilliant Banner as it is
                for them to run a regular GIF campaign; and

            o   Developing technology pursuant to our initiatives in the
                peer-to-peer market, through Altnet.

        We may determine to alter the course and scope of our research and
development efforts and to abandon any one or more of these projects. As is the
case with most research and development efforts, there can be no assurance that
our research will prove to be successful or result in commercially viable
developments.


                                    Page 14
<PAGE>


                                  OUR EMPLOYEES

        At December 31, 2001, we had 18 full-time employees, of which 7 were
engaged in research and development, 1 in production, 6 in general
administration and finance and 4 in sales, marketing and business development.
None of our employees are covered by a collective bargaining agreement. We
consider our relationship with our employees to be good. We currently utilize
the services of 6 independent consultants, 1 in software development, 3 in
administrative and business development roles and 2 in sales and marketing
pursuant to contractual relationships. Eleven employees, including the Chief
Executive Officer/President, and the Chief Operating Officer/Chief Financial
Officer are based in Woodland Hills, California. Seven employees operate out of
a facility located in Sydney, Australia.

ITEM 2.    DESCRIPTION OF PROPERTIES

        Our corporate offices are located in Woodland Hills, California, with
annual lease payments of approximately $83,000. Our research and development is
conducted in Australia from premises that are leased on a month-to-month basis.

ITEM 3.    LEGAL PROCEEDINGS

        We are not involved in any material litigation.

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

        None.


                                    Page 15
<PAGE>


                                     PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK

        Brilliant's Common Stock trades on the American Stock Exchange under the
symbol "BDE." The following table sets forth, for the periods indicated, the
high and low sales prices for the Common Stock as reported by the American Stock
Exchange:

<TABLE>
<CAPTION>

                                                        HIGH         LOW
                                                       ------       ------
          <S>                                          <C>          <C>
          YEAR ENDED DECEMBER 31, 2000
              First Quarter........................    $13.88       $ 4.00
              Second Quarter.......................     10.88         4.75
              Third Quarter........................      4.88         3.25
              Fourth Quarter.......................      3.25         0.69

          YEAR ENDED DECEMBER 31, 2001
              First Quarter........................     $2.12       $ 0.65
              Second Quarter.......................      1.00         0.55
              Third Quarter........................      0.82         0.23
              Fourth Quarter.......................      0.60         0.15
</TABLE>

        On March 22, 2002, the closing sales price of the Common Stock as
reported on the American Stock Exchange was $0.13 per share. As of March 22,
2002, there were 76 holders of record of our Common Stock.

RECENT SALES OF UNREGISTERED SECURITIES

        In October 2001, we agreed to issue to Consumer Empowerment B.V., a
company organized under the laws of The Netherlands (former operator of the
KaZaA network) warrants to purchase up to 150,000 shares of our common stock at
an exercise price per share of $0.2710, which is equal to the ten (10) day
volume weighted average price of our common stock for the ten (10) trading days
prior to October 2, 2001. The warrants have a term of 36 months. The warrants
will be issued to KaZaA in consideration for certain services provided by KaZaA
pursuant to an agreement between Consumer Empowerment B.V. and the Company. The
issuance and sale of these securities was exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended (the
"Securities Act") pursuant to Section 4(2) of the Securities Act as a
transaction not involving any public offering.

        As reported in our Quarterly Report on Form 10-QSB filed with the
Securities and Exchange Commission on August 14, 2001, in May 2001, we sold to
Harris Toibb, Europlay 1, LLC (an entity in which our Chairman has an ownership
interest) and Preston Ford, Inc. secured convertible promissory notes (the
"Original Notes") in the aggregate principal amount of $2,264,150 and three-year
warrants (the "Original Warrants") to purchase up to an aggregate of 2,850,393
shares of our Common Stock at exercise prices of $0.793 per share (with respect
to 2,792,118 shares) and $0.858 per share (with respect to 58,275 shares). We
sold these securities for an aggregate purchase price of $2,264,150. The
Original Notes have a term of eighteen months from the date of issuance and an
interest rate of 10% per annum, payable at maturity. The principal amount of the
Original Notes and, at the option of the holder, all accrued interest, may be
converted by the holder into shares of our Common Stock at a conversion price of
$0.706 per share. The Original Notes are secured by all of our assets and the
assets of our subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and
guaranteed by B3D, Inc. and Brilliant Studios, Inc. The Original Notes and the
Original Warrants were amended in our recent financing transaction, as described
below.

        On December 19, 2001, we entered into a financing transaction that was
structured similarly to the financing we conducted in May 2001 and involved one
of the same investors. In the December 2001


                                    Page 16
<PAGE>


financing transaction, we sold to Harris Toibb and Capel Capital Ltd. secured
convertible promissory notes (the "New Notes") in the aggregate principal amount
of $750,000 (the "Principal Amount") and warrants (the "New Warrants") to
purchase up to that number of shares of our Common Stock obtained by dividing
200% of the Principal Amount by the lesser of (i) $0.20, or (ii) the volume
weighted average price of a share of our Common Stock on the American Stock
Exchange, or any exchange on which the Common Stock is then traded, over any
five (5) consecutive trading days commencing on December 14, 2001 and
terminating at 5:00 p.m. (Pacific Standard Time) on November 10, 2002 (we refer
to items (i) and (ii) collectively as the "Conversion Price"). The New Warrants
are exercisable at a price per share equal to 1.125 times the Conversion Price.
The New Notes mature simultaneous with the Original Notes on November 10, 2002
and bear interest at the rate of 10% per annum. The principal amount of the New
Notes and, at the option of the holder, all accrued interest, may be converted
by the holder into shares of our Common Stock at the Conversion Price. As with
the May 2001 financing, the New Notes are secured by all of our assets and the
assets of our two subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and
guaranteed by B3D, Inc. and Brilliant Studios, Inc.

        As a condition to the New Notes financing transaction, the Original
Notes and the Original Warrants were amended to correspond to all the terms of
the New Notes financing transaction. As a consequence, Harris Toibb, Europlay 1,
LLC and Preston Ford, Inc. are able to convert the aggregate purchase price of
the Original Notes and all accrued interest into shares of our Common Stock at
the much lower Conversion Price for the New Notes. In addition, these original
investors are able to exercise the Original Warrants at a price per share equal
to 1.125 times the much lower Conversion Price.

        In connection with these transactions, Harris Toibb, Europlay 1, LLC,
Preston Ford, Inc. and Capel Capital each represented that they were an
"accredited investor" as that term is defined under Rule 501(a)(4) of Regulation
D promulgated by the SEC under the Securities Act. The issuance and sale of
these securities was exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act as a transaction not involving any public offering

DIVIDENDS

        We have never paid any dividends on our Common Stock. We intend to
retain any earnings for use in our business and do not intend to pay any cash
dividends on our Common Stock in the foreseeable future.


                                    Page 17
<PAGE>


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

        The following discussion and analysis should be read together with our
consolidated financial statements and the notes to the consolidated financial
statements included elsewhere in this Form 10-KSB.

        THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT DIGITAL ENTERTAINMENT, INC. FOR THE YEARS ENDED DECEMBER 31, 2001
AND DECEMBER 31, 2000. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED
IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE
BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE
FACTORS DESCRIBED BELOW UNDER THE CAPTION "CAUTIONARY STATEMENTS AND RISK
FACTORS."

OVERVIEW

        Brilliant Digital Entertainment, Inc. is a developer of rich media
advertising serving technologies, software authoring tools and content for three
dimensional, or 3D, animation on the World Wide Web. During the third quarter of
2001, we began marketing and distributing our player, the "Digital Projector"
(required for the playback of our rich media content and advertisements) through
two large peer-to-peer, or P2P, networks, Sharman Networks, which operates the
KaZaA network (formerly operated by Consumer Empowerment B.V.), and StreamCast
Networks, which operates the Morpheus network. Previously, our primary method of
distribution was through the bundling of the Digital Projector with our
animation content which we syndicated to third party web sites. At December 31,
2001, we estimate that our Digital Projector had been distributed to tens of
millions of users based on KaZaA's weekly downloads as reported on Download.com,
as additional P2P connected computers and other users have accessed the KaZaA
and Morpheus networks. Sharman Networks continues to distribute our player and
StreamCast Networks has discontinued its distribution. We commercialize our
technology in two primary ways. We license our rich media advertising server
technologies to websites to enable the selling and serving of our proprietary
rich media advertising format, and we license our rich media content authoring
tools - "b3d Studio" and "b3d Studio Pro" - to production studios and content
developers interested in creating content for the Internet.

        We launched our rich media 3D advertising banners - Brilliant Banners -
into the market to offer advertisers and web sites an alternative to the current
Graphics Interchange Format, or GIF, banners that are prevalent on web sites
today. With the decline of industry wide banner advertising revenues and click
through rates, we believe that our animated 3D banner advertisements perform
better than GIF banners and may help reinvigorate certain online advertising
campaigns. We license our rich media ad serving technologies, through our
wholly-owned subsidiary B3D, Inc., to high traffic websites, including the P2P
network, Sharman Networks, for the serving of Brilliant Banners. We are also
introducing our ad format to third party ad serving companies, making our
technologies available for them to commence selling and serving this new rich
media ad format. In November 2001, we became a Rich Media Silver Vendor of
DoubleClick, Inc. This rich media certification was awarded after our technology
passed the DoubleClick tests for functionality, impression tracking and click
tracking.

        In February 2002, we formed Brilliant P2P, Inc., later renamed Altnet,
Inc., to create a private, peer-to-peer network utilizing existing, proven
technology to leverage the processing, storage and distribution power of a
peer-to-peer network comprised of tens of millions of users. Altnet intends to
license commercially available digital rights management technology to protect
against infringement of the proprietary rights of the owners of the content
distributed over the Altnet network. Altnet licensed the peer-to-peer technology
necessary to operate the network from Blastoise, Ltd. doing business as Joltid.
Blastoise is owned and operated by the developers of the FastTrack P2P
technology, the underlying technology which operates the KaZaA and Grokster P2P
networks. Pursuant to our agreement, Blastoise acquired 49% of the outstanding
common stock of Altnet.

        Peer-to-peer computing is the sharing of computer resources and services
by direct exchange between computer systems, and not through a central server.
Peer-to-peer computing applications include


                                    Page 18
<PAGE>


the exchange of digital files and other information, processing cycles (the
cycles by which data is processed in the central processing unit of a computer),
cache storage (temporary storage of files in the central processing unit of a
computer), and disk storage. Peer-to-peer computing takes advantage of existing
desktop computing power and networking connectivity, allowing users to access
the collective power of individual computers to benefit the entire enterprise.
Millions of computers are logged onto the Internet at any given time, each with
excess processing power, excess storage capacity and unused bandwidth. Through
Altnet, we intend to create a private peer-to-peer network to enable our clients
to access and utilize this excess processing power, storage capacity and unused
bandwidth for multiple applications.

        We intend to commercialize Altnet through licensing agreements for
Altnet's three main services: Network Services, Distributed Storage and
Distributed Processing.

        We have licensed some of the world's best known characters for the
production and web distribution of episodic animations, called MultipathTM
Movies, that include SUPERMAN, XENA: WARRIOR PRINCESS, KISS, and ACE VENTURA,
and have produced animated music videos of top selling artists including Ja
Rule, Ludacris, DMX and Li'l Romeo. These full-screen productions, developed
using our proprietary suite of b3d software tools, have small files for faster
download relative to full video files. Currently we distribute our animated
content through Internet syndication partners including Warner Bros. Online,
Roadrunner and selected sites from the Universal Music Group.

        In 2001, we substantially reduced our internal production and
syndication of 3D animation, which we used primarily to distribute our Digital
Projector, in order to reduce our costs and our cash burn rate. We have
discontinued operations at Digital Hip Hop, the joint venture we formed to
produce animated music videos for the World Wide Web, and have discontinued
operations at, and placed into liquidation, Brilliant Interactive Ideas Pty.
Ltd., our Australian-based production company. The reduction in our content
production and syndication activities has allowed us to focus our efforts and
allocate our resources to the further development and exploitation of our
advertising serving and authoring tools businesses, and to pursue the
development of a private, peer-to-peer network business through our Altnet
subsidiary.

DIGITAL HIP HOP

        We entered into an agreement with Russell Simmons and Stan Lathan that
provided for the formation of Los Angeles-based Digital Hip Hop, Inc., a joint
venture production studio headed by Stan Lathan. Digital Hip Hop produced and
distributed full screen animated music videos and other content primarily for
Internet and broadband distribution. Digital Hip Hop produced animated music
videos for top selling artists including JA RULE, SUM41, LUDACRIS, DMX,
REDMAN/LADY LUCK and LI'L ROMEO pursuant to production agreements with the
record labels (Island Def Jam, DreamWorks Records, Priority Records, and
others). As our internal costs typically exceeded the agreed upon production
fees, our strategy was to recapture the differential with our share of the ad
revenue, as well as gain an additional means of distributing our Digital
Projector. The distribution of our Digital Projector was only partially
successful, and our portion of the ad revenue fell short of our projections.

        During the fourth quarter of 2001, we discontinued operations at Digital
Hip Hop based on the limited prospects of additional web video production work.
Past clients, including the Universal Music Group and Priority Records, were
reluctant to make future commitments for incremental web videos at prices which
were higher than previously paid. We do not intend to actively market and
promote the production of animated music videos for the Web. However, to the
extent that previous partners request a quote for additional work or we are
approached to produce additional web videos, we intend to outsource the
production work to existing third party licensees of b3d Studio and b3d Studio
Pro, many of whom are currently producing Brilliant Banners, and charge a fee
for overseeing the project.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles


                                    Page 19
<PAGE>


generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to reserves for bad debts. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Our use of estimates,
however, is quite limited, as we have adequate time to process and record actual
results from operations.

RESULTS OF OPERATIONS

        REVENUES. Production fees are paid by customers in exchange for our
development of animated content, including banner ads, in accordance with
customer specifications. The development agreements generally specify certain
"milestones" which must be achieved throughout the production process. As these
milestones are achieved, we recognize the portion of the development fee
allocated to each milestone.

        Revenues, which are earned from the sale or licensing of our software
tools, are recognized when the sales or licensing agreements are entered into.
If the agreement covers a period in excess of one year, the revenue associated
with this agreement is recognized on a straight-line basis over the life of the
agreement.

        Advertising revenues, which are earned revenues from the placing of our
content on third party web sites, are recognized when the third party accounts
to us. Ad server licensing revenues are recognized when we invoice the licensee,
which usually occurs after the terms of the advertising campaign insertion order
are fulfilled.

         We enter into distribution contracts under which we are entitled to
fixed minimum guaranteed payments. The minimum guaranteed payments are
recognized as revenue when the CD-ROM master is delivered to the distributor and
the terms of the sale are considered fixed. We have derived our revenues from
royalties, development fees and software sales. We license our traditional
CD-ROM products to publishers and distributors in exchange for non-refundable
advances and royalties based on product sales. Royalties based on product sales
are due only to the extent they exceed any associated non-refundable royalty
advance. Royalties related to non-refundable advances are recognized when the
CD-ROM master is delivered to the licensees. Royalty revenues in excess of
non-refundable advances are recognized upon notification by the distributor that
a royalty has been earned.

        Revenues increased 76% from $1,030,000 for the year ended December 31,
2000 to $1,816,000 for the year ended December 31, 2001. The increase is
primarily due to (i) the increase in production fees related to the production
of animated music videos by Digital Hip Hop, (ii) a full year of revenues
recognized through our distribution and technology agreements with e-New Media,
and (iii) an increase in advertising revenues. The increase was partially offset
by a decrease in software and DVD sales. Revenues for 2001 include $917,000
earned under a technology and distribution agreement with e-New Media,
advertising and other revenues of $518,000, and production revenues of $381,000
for digital animated music videos. Revenues for 2000 include $612,000 earned
under an agreement with e-New-media, advertising and development revenues of
$309,000, and software sales of $109,000.

        COST OF REVENUES. Cost of revenues consists primarily of the
amortization and write-down of capitalized movie software costs for previously
released titles, royalties to third parties and the direct costs, including
salaries and benefits, and manufacturing overhead required to produce content,
including MultipathTM Movies, animated music videos and banner ads, reproduce
and package software products. Cost of revenues increased from $268,000 for the
year ended December 31, 2000 to $463,000 for the year ended December 31, 2001.
This represents an increase of $195,000, or 73%, which is primarily due to the
development of animated music videos during 2001, at a cost of $352,000. This
increase is offset by a reduction in software and motion capture costs in 2001
as compared to the prior year. Also adding to this increase, in 2001, we
amortized $105,000 of royalty expense in connection with our licensing rights
compared to $53,000 in 2000. In 2000, we fully amortized the remaining
capitalized movie software costs of $158,000,


                                    Page 20
<PAGE>


for previously released titles, and incurred direct costs of $44,000 for
software sales, and other development costs of $41,000.

        SALES AND MARKETING. Sales and marketing expenses include primarily
costs for salaries and benefits, advertising, promotions, and travel. Sales and
marketing expenses decreased $812,000 or 49% from $1,651,000 for the year ended
December 31, 2000 to $839,000 for the year ended December 31, 2001. The decrease
is primarily attributable to the reduction in outside sales and marketing
consultants who had been retained to market the b3d tools. Also in 2001, we
elected not to participate in the Siggraph trade show, which cost $264,000 in
2000. In 2001, we incurred $426,000 expense for warrants issued in connection
with our agreement with Yahoo!, while incurring $596,000 in 2000.

        GENERAL AND ADMINISTRATIVE. General and administrative expenses include
primarily salaries and benefits of management and administrative personnel,
rent, insurance costs and professional fees. General and administrative expenses
increased $86,000 or 2% from $4,324,000 for the year ended December 31, 2000 to
$4,410,000 for the year ended December 31, 2001. Although there were cuts in
some areas, overall expenses increased due to the addition of Digital Hip Hop,
which contributed $572,000 to our general and administrative expenses.

        RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and benefits of personnel conducting research and development of
software products. Research and development costs also include costs associated
with creating our software tools used to develop MultipathTM Movies and other 3D
animated content. The costs decreased 51% from $3,855,000 for the year ended
December 31, 2000 to $1,892,000 for the year ended December 31, 2001 primarily
due to a decrease in web development costs, research and development personal
and overhead costs associated with research and development. We decreased the
headcount in Sydney from 53 employees at December 31, 2000 to 7 at December 31,
2001.

        DEPRECIATION AND AMORTIZATION. Depreciation expense relates to
depreciation of fixed assets such as computer equipment and cabling, furniture
and fixtures and leasehold improvements. These fixed assets are depreciated over
their estimated useful lives (up to five years) using the straight-line method.
Depreciation expense decreased 11% from $319,000 for the year ended December 31,
2000 to $284,000 for the year ended December 31, 2001. The decrease is
attributable to some fixed assets being fully depreciated and the disposal of
other fixed assets.

        OTHER INCOME AND EXPENSE. Other income and expense includes interest
income and interest expense, gains and losses on foreign exchange transactions,
and export development grants paid to our subsidiary, Brilliant Interactive
Ideas Pty. Ltd., by the Australian Trade Commission for its participation in
certain export activities. Other income and expense decreased from income of
$179,000 in 2000 to a loss of $563,000 in 2001. The decrease is primarily due to
a non-cash debt discount expense of $467,000 and interest expense of $118,000 in
association with the financing agreement. Additionally, we wrote off $264,000
recorded as a loss on investment for the joint venture in Digital Hip Hop. This
expense is partially offset by the increase in the trade export grant of
$69,000.

        NET LOSS ON DISCONTINUED OPERATIONS. The Auction Channel has been
accounted for as a discontinued operation pursuant to Management's formal
adoption on December 31, 2000 of a plan to dissolve the business unit. Net
liabilities to be disposed of, at their expected realizable values, have been
separately classified in the accompanying balance sheet at December 31, 2000.

        The Company recognized a gain of $327,000 in 2001 due to the sale of
substantially all of the assets of The Auction Channel in April 2001.

LIQUIDITY, CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS

        As of December 31, 2001, our cash and cash equivalents totaled
approximately $185,000. This is a decrease of $3,216,000 as compared to December
31, 2000, resulting primarily from a net loss of $6,328,000.


                                    Page 21
<PAGE>


        We primarily satisfied our cash needs in 2001 through the sale of
Secured Convertible Promissory Notes and related Common Stock Purchase Warrants
in the aggregate principal amounts of $2,264,000 in May 2001, and $350,000 in
December 2001 with subsequent funding in 2002, of $400,000 tied to the December
financing agreement. A detailed description of these notes is provided below.
Also, see Notes 5, 7 and 14 to the Financial Statements.

        Cash flows from operating, financing and investing activities for the
years ended December 31, 2001 and 2000 are summarized in the following table
(dollars in thousands):

<TABLE>
<CAPTION>
            ACTIVITY:                              2001          2000
            -------------------------           -----------   ----------
            <S>                                 <C>           <C>
            Continuing Operations               $ ( 5,000)    $ (16,000)
            Discontinuing Operations            $ ( 1,000)    $   5,000
            Investing                           $      --     $  (1,000)
            Financing                           $   3,000     $  12,000
</TABLE>

        Net cash of $5,397,000 used in operating activities during the year
ended December 31, 2001 was primarily attributable to a net loss from continuing
operations of $6,635,000 partially offset by the sale of substantially all of
the assets of The Auction Channel and subsequent closure of the London and New
York offices. This is compared to a net use of cash in 2000 of $10,590,000
attributable primarily to a net loss of $21,916,000.

        Net cash used to purchase computer equipment amounted to $23,000 in 2001
as compared to $760,000 in 2000. In 2001, cash of $73,000 was used in financing
activities for the repayment of notes for the financing of office furniture and
computer equipment, and financing costs related to our Director's and Officer's
insurance. In 2000 we paid $76,000 on the repayment of notes for the financing
of office furniture and computer equipment.

        We have an obligation under our agreement with Morgan Creek to fund
entirely the development of two MultipathTM Movies, the first of which, ACE
VENTURA CD-ROM, was developed and shipped in the fourth quarter of 1998. The
second project has not been identified yet. We have an obligation under our
joint venture agreement with KISS Digital, LLC to fund 75% of the development of
a MultipathTM Movie up to $900,000. As of December 31, 2000 we had contributed
$917,000 to the project. We do not expect to contribute additional funds to this
project. We also are required as of December 31, 2001 to make minimum payments
of $37,000 under various licensing agreements.

        At December 31, 2001, we had rental commitments for our office facility
of $90,000 and two promissory notes for the financing of office furniture and
computer equipment in the amount of $54,000 and $31,000 payable over the next 2
years. Our contractual obligations are as follows:

<TABLE>
<CAPTION>
                        CONTRACTUAL          TOTAL       LESS THAN      1-3
                        OBLIGATIONS                       1 YEAR       YEARS
                  <S>                      <C>          <C>           <C>
                  Capital Leases            $85,000       $54,000     $31,000
                  Operating Lease           $90,000       $83,000     $ 7,000
                                           ----------   -----------   --------

                  Total Cash Obligations    $175,000     $137,000     $38,000
                                           ==========   ===========   ========
</TABLE>


        As reported in our Quarterly Report on Form 10-QSB filed with the
Securities and Exchange Commission on August 14, 2001, in May 2001, we sold to
Harris Toibb, Europlay 1, LLC (an entity in which our Chairman has an ownership
interest) and Preston Ford, Inc. secured convertible promissory notes (the


                                    Page 22
<PAGE>


"Original Notes") in the aggregate principal amount of $2,264,150 and three-year
warrants (the "Original Warrants") to purchase up to an aggregate of 2,850,393
shares of our common stock at exercise prices of $0.793 per share (with respect
to 2,792,118 shares) and $0.858 per share (with respect to 58,275 shares). We
sold these securities for an aggregate purchase price of $2,264,150. The
Original Notes have a term of eighteen months from the date of issuance and an
interest rate of 10% per annum, payable at maturity. The principal amount of the
Original Notes and, at the option of the holder, all accrued interest, may be
converted by the holder into shares of our common stock at a conversion price of
$0.706 per share. The Original Notes are secured by all of our assets and the
assets of our subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and
guaranteed by B3D, Inc. and Brilliant Studios, Inc. The Original Notes and the
Original Warrants were amended in our recent financing transaction, as described
below.

        On December 19, 2001, we entered into a financing transaction that was
structured similar to the financing we conducted in May 2001 and involved one of
the same investors. In the December financing transaction, we sold to Harris
Toibb and Capel Capital Ltd. secured convertible promissory notes (the "New
Notes") in the aggregate principal amount of $750,000 (the "Principal Amount")
and warrants (the "New Warrants") to purchase up to that number of shares of our
common stock obtained by dividing 200% of the Principal Amount by the lesser of
(i) $0.20, or (ii) the volume weighted average price of a share of our Common
Stock on the American Stock Exchange, or any exchange on which the Common Stock
is then traded, over any five (5) consecutive trading days commencing on
December 14, 2001 and terminating at 5:00 p.m. (Pacific Standard Time) on
November 10, 2002 (we refer to items (i) and (ii) collectively as the
"Conversion Price"). The New Warrants are exercisable at a price per share equal
to 1.125 times the Conversion Price. The New Notes mature simultaneous with the
Original Notes on November 10, 2002 and bear interest at the rate of 10% per
annum. The principal amount of the New Notes and, at the option of the holder,
all accrued interest, may be converted by the holder into shares of our Common
Stock at the Conversion Price. As with the May 2001 financing, the New Notes are
secured by all of our assets and the assets of our two subsidiaries, B3D, Inc.
and Brilliant Studios, Inc., and guaranteed by B3D, Inc. and Brilliant Studios,
Inc.

        As a condition to the December 2001 financing transaction, the Original
Notes and the Original Warrants were amended to correspond to all the terms of
the New Notes and New Warrants. As a consequence, Harris Toibb, Europlay 1, LLC
and Preston Ford, Inc. are able to convert the aggregate purchase price of the
Original Notes and all accrued interest into shares of our common stock at the
much lower Conversion Price for the New Notes. In addition, these original
investors are able to exercise the Original Warrants at a price per share equal
to 1.125 times the much lower Conversion Price from the December 2001 financing.

        In support of the December 2001 financing transaction, our Board of
Directors sought and received an opinion from a reputable financial advisory
firm that the financing transaction is fair to us and our stockholders from a
financial point of view.

        The issuance of the additional shares of Common Stock pursuant to the
terms of the 2001 financing transactions, if so issued, could result in a change
in control of the Company. As of December 19, 2001, upon conversion and exercise
of his notes and warrants, Harris Toibb would own approximately 68% of our
issued and outstanding common stock, assuming a Conversion Price of $0.20. As a
consequence, following the conversion and exercise by him of the promissory
notes and warrants, Mr. Toibb would own a majority of our voting securities and
would be able to approve any matter presented to the stockholders for approval
at a meeting, including the ability to elect all of the nominees for director
presented to the stockholders for election at each annual meeting. The Board of
Directors of the Company is divided into three classes, with each class to serve
a staggered term of three years. One class of the Board of Directors is elected
at each annual meeting of the stockholders. Accordingly, upon Mr. Toibb's
conversion and exercise of his promissory notes and warrants, he would have the
ability, within two annual meetings of stockholders, to elect a majority of the
Company's Board of Directors.

        On March 7, 2002, we entered into a Common Stock and Warrant Purchase
Agreement among us, Harris Toibb, a current investor, and MarKev Services, LLC,
an entity co-owned by our Chairman and our


                                    Page 23
<PAGE>


Chief Executive Officer and President (collectively, the "Purchasers"), whereby
we sold (i) 5,673,222 shares of our common stock at $0.1322 per share (the
"Purchase Price"), a price per share of our common stock based on the volume
weighted average price of a share of our common stock on the American Stock
Exchange over the five (5) consecutive trading days immediately preceding March
7, 2002, for an aggregate investment amount of $750,000, and (ii) warrants (the
"Warrants") to purchase in the aggregate up to 10,085,728 shares of our common
stock at an exercise price per share of $0.148725, which represents a price paid
per share equal to 1.125 times the Purchase Price. Each of the Purchasers
received "piggyback" registration rights with respect to the common stock they
purchased and with respect to the common stock issuable upon exercise of the
Warrants.

        In support of the March 2002 financing transaction, our Board of
Directors sought and received an opinion from a reputable financial advisory
firm that the financing transaction is fair to us and our stockholders from a
financial point of view.

        The March 2002 financing transaction, was unanimously approved by an
independent committee of the Board, as well as by the Board of Directors, with
only our Chairman and our Chief Executive Officer and President, who are also
Directors, abstaining because of their interest in the transaction. The Board
approved the sale of up to $1,250,000 worth of common stock.

        On March 20, 2002, we entered into a Common Stock and Warrant Purchase
Agreement between us and David Wilson, a current investor who controls Preston
Ford, Inc. and participated in the May 2001 financing, whereby we sold (i)
378,215 shares of our common stock at $0.1322 per share (the "Purchase Price"),
a price per share of our common stock based on the volume weighted average price
of a share of our common stock on the American Stock Exchange over the five (5)
consecutive trading days immediately preceding March 7, 2002, for an aggregate
investment amount of $50,000, and (ii) warrants (the "Wilson Warrants") to
purchase in the aggregate up to 672,382 shares of our common stock at an
exercise price per share of $0.148725, which represents a price paid per share
equal to 1.125 times the Purchase Price. Mr. Wilson received "piggyback"
registration rights with respect to the common stock he purchased and with
respect to the common stock issuable upon exercise of the Wilson Warrants.

        Our operations generated negative cash flow during the years ended
December 31, 2000 and 2001, and we expect a significant use of cash during the
upcoming 2002 fiscal year as we initiate the business opportunity for Altnet,
Inc., as well as continue to develop our software tools and continue our
marketing efforts for our tools and 3D rich media banners ads. We anticipate our
current cash reserves, plus our expected generation of cash from existing
operations, to fund our anticipated expenditures into the third quarter of 2002.
As such, we will require additional equity or debt financing during 2002, the
amount and timing depending in large part on our spending program. If additional
funds are raised through the issuance of equity securities, our stockholders may
experience significant dilution. Furthermore, there can be no assurance that
additional financing will be available when needed or that if available, such
financing will include terms favorable to our stockholders or us. If such
financing is not available when required or is not available on acceptable
terms, we may be unable to develop or enhance our products and services, take
advantage of business opportunities or respond to competitive pressures, any of
which could have a material adverse effect on our business, financial condition
and results of operations, and would most likely result in our having to file
for bankruptcy protection under the Internal Revenue Code. Please see
"Cautionary Statements and Risk Factors - IF WE ARE UNABLE TO RAISE ADDITIONAL
FUNDS, WE MAY BE REQUIRED TO DELAY IMPLEMENTATION OF OUR BUSINESS PLAN,
REDUCE OVERHEAD SIGNIFICANTLY OR SUSPEND OPERATIONS."

        The accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or settlement
values. The report of our Independent Certified Public Accountants for the
December 31, 2001 financial statements included an explanatory paragraph
expressing substantial doubt about our ability to continue as a going concern.


                                    Page 24
<PAGE>


        We are seeking additional funding and believe that, if we are successful
in raising additional capital, this may result in improved operating results.
There can be no assurance, however, that with any additional financing, higher
cash flows will be generated by operations.

ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES

        Our accounting policy follows Statement of Financial Accounting
Standards No. 86 ("SFAS No. 86"), which provides for the capitalization of
software development costs once technological feasibility is established. The
capitalized costs are then amortized beginning on the date the product is made
available for sale either on a straight-line basis over the estimated product
life or on a ratio of current revenues to total projected product revenues,
whichever results in the greater amortization amount. Prior to reaching
technological feasibility, we expense all costs related to the development of
both our software tools and MultipathTM Movie titles. The Company achieved
technological feasibility of its original Digital Projector during the third
quarter of 1997. Since the date of achieving technological feasibility, the
costs of developing MultipathTM Movies intended to be viewed on the original
projector have been capitalized in accordance with SFAS No. 86. We continue to
develop new Digital Projectors with enhanced functionality such as improved
compression technology. Costs incurred in the development of new Digital
Projectors are expensed until technological feasibility is reached. MultipathTM
Movies that are developed for new Digital Projectors that have not yet reached
technological feasibility are capitalized in accordance with SFAS No. 86 to the
extent that they are compatible with an existing Digital Projector. Amounts
incurred for MultipathTM Movies that are developed for new Digital Projectors
that are not compatible with an existing projector and would require substantial
revision in order to achieve compatibility are expensed as incurred.

ACCOUNTING GUIDANCE FOR REVENUE RECOGNITION FOR SOFTWARE TRANSACTIONS

        Software sales entered into prior to December 15, 1997 were accounted
for in accordance with AICPA Statement of Position ("SOP") 91-1, "Software
Revenue Recognition." For transactions entered into after December 15, 1997 the
Company recognizes revenue from the sale of software in accordance with SOP
97-2, "Software Revenue Recognition". SOP 97-2 provides guidance on when revenue
should be recognized and in what amounts for licensing, selling, leasing, or
otherwise marketing computer software.

NEW ACCOUNTING PRONOUNCEMENTS

        In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC.
Subsequently, the SEC released SAB 101B, which delayed the implementation date
of SAB 101 for registrants with fiscal years that begin between December 16,
1999 and March 15, 2000. We were required to be in conformity with the
provisions of SAB 101, as amended by SAB 101B, no later than October 1, 2000.
The adoption of SAB 101, as amended by SAB 101B, has not had a material adverse
effect on our financial position, results of operations or cash flows.

        In October 2000, we adopted the Financial Accounting Standards Board
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments embedded
in other contracts, be recorded in the balance sheet as either an asset or
liability, measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The adoption of SFAS No. 133 has not had a material
effect on our financial statements.

        In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, and Interpretation of APB
Opinion No. 25" (FIN. 44). The Interpretation is intended to clarify certain
problems that have arisen in practice since the issuance of APB No. 25,
"Accounting for Stock Issued to Employees." The effective date of the
interpretation was July 1, 2000. The


                                    Page 25
<PAGE>


provisions of the interpretation apply prospectively, but they will also cover
certain events occurring after December 15, 1998 and after January 12, 2000. The
adoption of FIN. 44 has not had a material adverse effect on our current or
historical consolidated financial statements, but may affect future accounting
regarding stock option transactions.

        In March 2000, EITF 00-2 "Accounting for Web Site Development Costs" was
released. EITF 00-2 provides guidance on how an entity should account for costs
involved in such areas as planning, developing software to operate the web site,
graphics, content, and operating expenses. EITF 00-2 is effective for web site
development costs incurred for fiscal quarters beginning after June 30, 2000. We
adopted EITF 00-2 during the year ending December 31, 2000, and all amounts
associated with our web sites were expensed in accordance with EITF 00-2.

        In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that we recognize acquired intangible assets apart from goodwill
if the acquired intangible assets meet certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires that, upon
adoption of SFAS 142, we reclassify the carrying amounts of intangible assets
and goodwill based on the criteria in SFAS 141.

        SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that we identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires us to complete a transitional goodwill impairment
test nine months from the date of adoption. We are also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.

        In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. We believe the adoption of this Statement will have no material
impact on our financial statements.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFASB 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFASB 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, are to be applied
prospectively. We believe the adoption of this Statement will have no material
impact on our financial statements.

CAUTIONARY STATEMENTS AND RISK FACTORS

        Several of the matters discussed in this document contain
forward-looking statements that involve risks and uncertainties. Factors
associated with the forward-looking statements that could cause actual results
to differ materially from those projected or forecast are included in the
statements below. In addition to other information contained in this report,
readers should carefully consider the following cautionary statements.


                                    Page 26
<PAGE>


        IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DELAY
IMPLEMENTATION OF OUR BUSINESS PLAN, REDUCE OVERHEAD SIGNIFICANTLY OR SUSPEND
OPERATIONS. We currently have a number of obligations that we are unable to meet
without generating additional revenues or raising additional capital. If we
cannot generate additional revenues or raise additional capital in the near
future, we may become insolvent. As of December 31, 2001, our cash balance was
approximately $185,000 and our outstanding accounts payable, accrued expenses
and current debt totaled approximately $1,814,000. Historically, we have funded
our capital requirements with debt and equity financing. Our ability to obtain
additional equity or debt financing depends on a number of factors including our
financial performance and the overall conditions in our industry. If we are not
able to raise additional financing or if such financing is not available on
acceptable terms, we may liquidate assets, seek or be forced into bankruptcy,
and/or continue operations but suffer material harm to our operations and
financial condition. These measures could have a material adverse affect on our
ability to continue as a going concern.

        WE HAVE A HISTORY OF LOSSES, A NEGATIVE NET WORTH AND MAY NEVER ATTAIN
PROFITABILITY. We have a limited operating history and have not attained
profitability. Since inception, we have incurred significant losses and negative
cash flow, and as of December 31, 2001 we had an accumulated deficit of $54.6
million. Additionally, as of the date of this report, our current liabilities
exceed our current assets. We have not achieved profitability and expect to
continue to incur operating losses for the foreseeable future as we fund
operating and capital expenditures in the areas of software tools development,
brand promotion, sales and marketing, administration, deployment of our Altnet
peer-to-peer network and operating infrastructure. Our business model assumes
that consumers and advertisers will be attracted to our rich media advertising
formats (Brilliant Banners), and that animators and those who produce banner
advertisements will use our b3d tools and technology in the development of other
b3d-produced content. Our business model also assumes that a significant portion
of our future revenues will be derived from our Altnet peer-to-peer business,
which is not operational. This business model is not yet proven and we cannot
assure you that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future or be inconsistent with the
expectations of the public market. Primarily as a result of our continued
losses, our independent public accountants modified the opinion on our December
31, 2001 financial statements to include an explanatory paragraph wherein they
expressed substantial doubt about our ability to continue as a going concern.

        IF WE BECOME INSOLVENT, WE WILL BE IN DEFAULT UNDER OUR SECURED
CONVERTIBLE PROMISSORY NOTES, WHICH COULD RESULT IN OUR OBLIGATION TO PAY
IMMEDIATELY ALL AMOUNTS THEN OUTSTANDING UNDER THE NOTES. If we generally do not
pay, or become unable to pay, our debts as such debts become due, we will
default under our outstanding Secured Convertible Promissory Notes, in the
aggregate principal amount of $3.0 million. If a default occurs, all amounts
owed to the holders of the notes would immediately become due and payable. If
the debt becomes due before its stated maturity in November 2002, we likely will
not have sufficient funds to repay the indebtedness, which will entitle the
holders of the notes to exercise all of their rights and remedies, including
foreclosure on all of our assets which we pledged as collateral to secure
repayment of the debt.

        ALTNET IS AN UNPROVEN BUSINESS VENTURE AND MAY REQUIRE SIGNIFICANT
CAPITAL TO BE SUCCESSFULLY IMPLEMENTED. Our Altnet peer-to-peer business is
unproven and we cannot guaranty that it will be successful. The success of the
business will depend, in part, on our ability to enter into end user agreements
with a sufficient number of qualified personal computer owners to allow the
network to work efficiently and effectively, acceptance by corporate customers
of our services, the technical viability of the commercially available DRM
software we employ to protect the proprietary content that will pass through the
Altnet network and reside on network computers, and our underlying peer-to-peer
technology. Additionally, we do not have sufficient capital to internally fund
Altnet's development and operations. Consequently, the capital necessary to
launch and fund Altnet will need to come from outside sources. We cannot make
assurances that sufficient capital will be available at all or on terms
acceptable to us to fund Altnet's development and operations.

        OUR BUSINESS MODEL CONTEMPLATES RECEIVING A SIGNIFICANT PORTION OF OUR
FUTURE REVENUES FROM RICH MEDIA INTERNET ADVERTISEMENTS DEVELOPED AND SERVED
USING OUR SOFTWARE TOOLS AND FROM INTERNET


                                    Page 27
<PAGE>


ADVERTISING SERVICES. INTERNET ADVERTISING IS DEPENDENT ON THE ECONOMIC
PROSPECTS OF ADVERTISERS AND THE ECONOMY IN GENERAL AND RECENTLY HAS EXPERIENCED
A SIGNIFICANT DECLINE. A CONTINUED DECREASE IN EXPENDITURES BY ADVERTISERS OR A
PROLONGED DOWNTURN IN THE ECONOMY COULD CAUSE US TO FAIL TO ACHIEVE OUR REVENUE
PROJECTIONS. We are increasing our emphasis on generating revenues from the sale
of our b3d tools for the creation of rich media Internet advertisements and from
the sale of technologies and services to Web publishers, third party advertising
representation firms, advertisers and agencies. In recent quarters, the market
for Internet advertising has experienced lower demand, lower prices for
advertisements and the reduction of marketing and advertising budgets. As a
consequence, expenditures for Internet advertisements have decreased. We cannot
be certain that future decreases will not occur and that spending on Internet
advertisement will return to historical levels. A continued decline in the
economic prospects of advertisers or the economy in general could cause us to
fail to achieve our advertising-related revenue projections.

        WE WILL NOT BE ABLE TO GENERATE REVENUES FROM OUR BRILLIANT BANNERS IF
THEY DO NOT ACHIEVE MARKET ACCEPTANCE. The success of our Brilliant Banner rich
media ad format and our ability to generate revenues through sale and serving of
these advertisements will be determined by consumer reaction and acceptance. To
generate revenues, we must develop advertisements that appeal to the advertising
community and the consumer, which is unpredictable. Additionally, our Brilliant
Banner advertisements face competition from other online advertising companies
like Unicast and Viewpoint. Other factors that influence our ability to generate
revenues from our Brilliant Banners include:

            o   Acceptance of the Brilliant Banner advertising format by
                websites;

            o   Performance of the Brilliant Banner versus other rich media
                advertising formats and traditional 2D advertisements; and

            o   Our ability to broadly disseminate our Digital Projector, which
                is necessary to view our Brilliant Banners.

        OUR FAILURE TO MAINTAIN STRATEGIC RELATIONSHIPS WITH DISTRIBUTION
PARTNERS COULD REDUCE THE NUMBER OF DIGITAL PROJECTORS WE ARE ABLE TO
DISSEMINATE TO CONSUMERS, WHICH WOULD REDUCE THE NUMBER OF USERS THAT ARE ABLE
TO VIEW OUR MEDIA CONTENT, DECREASE THE VALUE OF OUR BRILLIANT BANNERS TO
ADVERTISERS AND LIMIT THE NUMBER OF USER'S FOR OUR ALTNET PEER-TO-PEER BUSINESS.
We distribute our Digital Projector and the software necessary to create and run
our Altnet peer-to-peer business primarily by bundling it with Sharman Networks'
KaZaA Media Desktop. We rely on computer users' demand for the KaZaA Media
Desktop to increase the installed base of our (1) Digital Projector, which is
necessary to view b3d-produced content such as our Brilliant Banners, and (2)
Altnet software, which is necessary to connect users to our private peer-to-peer
network. Our business, results of operations and financial condition could be
materially adversely affected if we do not maintain our distribution
relationship with Sharman Networks on acceptable terms or if this relationship
does not achieve the projected distribution of our Digital Projector and Altnet
software. Additionally, a disruption in the distribution of the KaZaA Media
Desktop or a decrease in demand for the product by users would necessarily
impact the future distribution of our technology. The KaZaA Media Desktop, as
well as other peer-to-peer software products, is currently the subject of a
lawsuit; Metro-Goldwyn-Mayer Studios, Inc. et. al. v. Grokster, Ltd. et. al.,
filed in the United States District Court for the Central District of California
(Western Division) by twenty-eight entertainment companies claiming that, among
other things, the KaZaA Media Desktop facilitates, contributes to and encourages
copyright infringement. On November 18, 2001, there was an additional complaint
filed, Lieber et. al v. Consumer Empowerment B.V., et. al. To the extent that
Sharman Networks is precluded from distributing the KaZaA Media Desktop as a
result of this litigation, it would prevent the further distribution of the
Digital Projector and Altnet peer-to-peer software with the KaZaA product which
could have a material adverse affect on our business and financial condition.

        OUR STOCK PRICE MAY DECLINE SIGNIFICANTLY IF WE ARE DELISTED FROM THE
AMERICAN STOCK EXCHANGE. Our common stock currently is quoted on the American
Stock Exchange. For continued inclusion on the American Stock Exchange, we must
meet certain tests, including maintaining a sales price for


                                    Page 28
<PAGE>


our common stock above $1.00 per share, and net tangible assets of at least $4
million. We currently are not in compliance with both the bid price and net
tangible assets requirements.

        If we continue to fail to satisfy the listing standards on a continuous
basis, the American Stock Exchange may, at its sole discretion, delist our
common stock from the exchange. If this occurs, trading of our common stock may
be conducted on (i) the NASDAQ SmallCap Market, if we qualify for listing at
that time, which we currently do not, (ii) in the over-the-counter market on the
"pink sheets", or (iii) if available, the NASD's "Electronic Bulletin Board." In
any of those cases, investors could find it more difficult to buy or sell, or to
obtain accurate quotations as to the value of our common stock. The trading
price per share of our common stock likely would be reduced as a result.

        WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES THAT
OFFER SOFTWARE TOOLS AND SERVICES SIMILAR TO OURS. The markets for our software
tools are highly competitive and characterized by pressure to incorporate new
features and accelerate the release of new and enhanced products. A number of
companies currently offer content development products and services that compete
directly or indirectly with one or more of our tools sets. These competitors
include, among others, Macromedia, Inc., Adobe Systems, Inc. as well as Pulse
Entertainment, Inc. and Viewpoint Corporation. As we compete with larger
competitors such as Macromedia across a broader range of product lines and
different platforms, we may face increasing competition from such companies.

        WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH MICROSOFT, REAL NETWORKS
AND OTHER COMPANIES IN THE MEDIA DELIVERY MARKET. The market for software and
services for the delivery of media over the Internet is constantly changing and
highly competitive. Companies such as Microsoft Corporation and Real Networks,
Inc. have substantial penetration in the media delivery market, and
significantly greater resources than we do. More companies are entering the
market for, and expending increasing resources to develop, media delivery
software and services. We expect that competition will continue to intensify.
Because our b3d content, such as our Brilliant Banners, can only be viewed using
our Digital Projector, if we do not achieve a widespread distribution of our
media player, there will not be substantial demand for b3d-produced content or
our software tools.

        IF WE DO NOT IMPROVE OUR SOFTWARE TOOLS TO PRODUCE NEW, MORE ENHANCED 3D
ANIMATED CONTENT, OUR REVENUES WILL BE ADVERSELY AFFECTED. The software tools
that enable us to create 3D content, such as our Brilliant Banners, have been
developed over the past five years. Additional refinement of these tools is
necessary to continue to enhance the b3d format. If we cannot develop
improvements to these software tools, our Brilliant Banners and all other
b3d-produced content may not obtain or maintain market acceptance and our
revenues will be adversely affected.

        ERRORS OR DEFECTS IN OUR SOFTWARE TOOLS AND PRODUCTS MAY CAUSE A LOSS OF
MARKET ACCEPTANCE AND RESULT IN FEWER SALES OF OUR PRODUCTS. Our products are
complex and may contain undetected errors or defects when first introduced or as
new versions are released. In the past, we have discovered software errors in
some of our new products and enhancements after their introduction into the
market. Because our products are complex, we anticipate that software errors and
defects will be present in new products or releases in the future. While to date
these errors have not been material, future errors and defects could result in
adverse product reviews and a loss of, or delay in, market acceptance of our
products.

        TO DEVELOP PRODUCTS THAT CONSUMERS DESIRE, WE MUST MAKE SUBSTANTIAL
INVESTMENTS IN RESEARCH AND DEVELOPMENT TO KEEP UP WITH THE RAPID TECHNOLOGICAL
DEVELOPMENTS THAT ARE TYPICAL IN OUR INDUSTRY. The software market and the PC
industry are subject to rapid technological developments. To develop products
that consumers desire, we must continually improve and enhance our existing
products and technologies and develop new products and technologies that
incorporate these technological developments. We cannot be certain that we will
have the financial and technical resources available to make these improvements.
For instance, for the twelve months ended December 31, 2001, we reduced our
expenditures on research and development by $1.96 million as compared to the
same period in 2000, due primarily to our capital constraints. We must make
improvements to our technology while remaining competitive in terms of
performance and price. This will require us to make investments in research and
development, often times


                                    Page 29
<PAGE>


well in advance of the widespread release of the products in the market and any
revenues these products may generate.

        OUR STOCK PRICE AND TRADING VOLUME FLUCTUATE WIDELY AND MAY CONTINUE TO
DO SO IN THE FUTURE. AS A RESULT, WE MAY EXPERIENCE SIGNIFICANT DECLINES IN OUR
STOCK PRICE. The market price and trading volume of our common stock, which
trades on the American Stock Exchange, has been subject to substantial
volatility, which is likely to continue. This volatility may result in
significant declines in the price of our common stock. Factors that may cause
these fluctuations include:

            o   variations in quarterly operating results;

            o   the gain or loss of significant contracts;

            o   changes in management;

            o   announcements of technological innovations or new products by us
                or our competitors;

            o   recommendations by securities industry analysts;

            o   dilution to existing stockholders resulting from the issuance of
                additional shares of common stock; and

            o   short sales and hedging of our common stock.

        Additionally, the stock market has experienced extreme price and trading
volume fluctuations that have affected the market price of securities of many
technology companies. These fluctuations have, at times, been unrelated to the
operating performances of the specific companies whose stock is affected. The
market price and trading volume of our stock may be subject to these
fluctuations.

        IF OUR STOCK DOES NOT SUSTAIN A SIGNIFICANT TRADING VOLUME, STOCKHOLDERS
MAY BE UNABLE TO SELL LARGE POSITIONS IN OUR COMMON STOCK. In the past, our
common stock has not experienced significant trading volume on a consistent
basis and has not been actively followed by stock market analysts. The average
trading volume in our common stock may not increase or sustain its current
levels. As a result, we cannot be certain that an adequate trading market will
exist to permit stockholders to sell large positions in our common stock.

        FLUCTUATIONS IN OPERATING RESULTS MAY RESULT IN UNEXPECTED REDUCTIONS IN
REVENUE AND STOCK PRICE VOLATILITY. We operate in an industry that is subject to
significant fluctuations in operating results from quarter to quarter, which may
lead to unexpected reductions in revenues and stock price volatility. Factors
that may influence our quarterly operating results include:

            o   the introduction or enhancement of software products and
                technology by us and our competitors;

            o   the use by animators of our toolsets to create b3d-produced
                content;

            o   the market's acceptance of our 3D Brilliant Banner advertising
                format; and

            o   our ability to launch and operate our Altnet peer-to-peer
                business.

        Additionally, a majority of the unit sales for a product typically
occurs in the quarter in which the product is introduced. As a result, our
revenues may increase significantly in a quarter in which a major product
introduction occurs and may decline in following quarters.

        DECREASES IN THE PRICE OF OUR COMMON STOCK COULD INCREASE SHORT SALES OF
OUR COMMON STOCK BY THIRD PARTIES, WHICH COULD RESULT IN FURTHER REDUCTIONS IN
THE PRICE OF OUR COMMON STOCK. Our sales of common stock at a discount to the
market price of our common stock, which may be necessary to raise additional
capital to fund operations, could result in reductions in the market price of
our common stock. Downward pressure on the price of our common stock could
encourage short sales of the stock by third


                                    Page 30
<PAGE>


parties. Material amounts of short selling could place further downward pressure
on the market price of the common stock. A short sale is a sale of stock that is
not owned by the seller. The seller borrows the stock for delivery at the time
of the short sale, and buys back the stock when it is necessary to return the
borrowed shares. If the price of the common stock declines between the time the
seller sells the stock and the time the seller subsequently repurchases the
common stock, then the seller sold the shares for a higher price than he
purchased the shares and may realize a profit.

        WE WILL NOT BE ABLE TO GENERATE SIGNIFICANT REVENUES FROM OUR TECHNOLOGY
BUSINESS IF OUR B3D TOOLSET DOES NOT ACHIEVE MARKET ACCEPTANCE. Our b3d toolset
may have programming errors, may be incompatible with other software or hardware
products in the market, may face slow adoption in the marketplace and may face
competition from other toolmakers. Other factors that influence our ability to
generate revenues from our b3d toolset include:

            o   our marketing strategies;

            o   the quality of our products and competing products;

            o   critical reviews;

            o   the availability of alternative forms of entertainment and
                leisure time activities;

            o   our ability to sell advertising and sponsorships for the
                content;

            o   our ability to increase the installed base of our Digital
                Projector, which is necessary to view b3d-produced content;

            o   our b3d toolset may contain features, functionality or workflow
                conventions that may not be widely accepted by our target
                audience;

            o   our ability to continue to develop, enhance and deliver the
                toolset in accordance with established milestones; and

            o   the marketplace's reluctance to adopt a new toolset.

        WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT DEMAND FOR OUR PRODUCTS
VIEWED ON THE INTERNET UNLESS THERE IS A REDUCTION IN THE TIME IT TAKES TO
DOWNLOAD THE LARGE AMOUNTS OF DATA NECESSARY TO VIEW OUR PRODUCTS ON THE
INTERNET. Our revenue growth depends in part on our ability to distribute our
products for viewing on the Internet. We believe that without reductions in the
time to download animated content over the Internet, b3d-produced content may be
unable to gain wide consumer acceptance. This reduction in download time depends
in part upon advances in compression technology. We have previously experienced
delays in the development of compression technologies, which, we believe,
materially and adversely affected our online sales and results of operations. We
believe that large, time-consuming downloads for both our Digital Projector and
b3d content have previously deterred potential users of our products and have
reduced the effectiveness of our marketing campaigns. The development of these
technologies continues to be a significant component of our business strategy
and a primary focus of our research and development efforts.

        OUR PROPRIETARY TECHNOLOGY MAY NOT BE ADEQUATELY PROTECTED FROM
UNAUTHORIZED USE BY OTHERS, WHICH COULD INCREASE OUR LITIGATION COSTS AND
ADVERSELY AFFECT OUR SALES. Our ability to compete with other entertainment
software companies depends in part upon our proprietary technology. Unauthorized
use by others of our proprietary technology could result in an increase in
competing products and a reduction in our sales. We rely on trademark, patent,
trade secret and copyright laws to protect our technology, and require all
employees and third-party developers to sign nondisclosure agreements. We cannot
be certain, however, that these precautions will provide meaningful protection
from unauthorized use by others. We do not copy-protect our software, so it may
be possible for unauthorized third parties to copy our products or to reverse
engineer or otherwise obtain and use information that we regard as proprietary.
Our customers may take inadequate precautions to protect our proprietary
information. If we must pursue litigation in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others, we may not prevail and
will likely make substantial


                                    Page 31
<PAGE>


expenditures and divert valuable resources. In addition, many foreign countries'
laws may not protect us from improper use of our proprietary technologies
overseas. We may not have adequate remedies if our proprietary rights are
breached or our trade secrets are disclosed.

        IF OUR PRODUCTS INFRINGE ANY PROPRIETARY RIGHTS OF OTHERS, A LAWSUIT MAY
BE BROUGHT AGAINST US THAT COULD REQUIRE US TO PAY LARGE LEGAL EXPENSES AND
JUDGMENTS AND REDESIGN OR DISCONTINUE SELLING OUR PRODUCT. We believe that our
products, including our software tools, do not infringe any valid existing
proprietary rights of third parties. Any infringement claims, however, whether
or not meritorious, could result in costly litigation or require us to enter
into royalty or licensing agreements. If we are found to have infringed the
proprietary rights of others, we could be required to pay damages, redesign the
products or discontinue their sale. Any of these outcomes, individually or
collectively, could have a material adverse effect on our business and financial
condition.

        WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE
PRICE OF OUR COMMON STOCK. Our adoption of a stockholders' rights plan, our
ability to issue up to 700,000 shares of preferred stock and some provisions of
our certificate of incorporation and bylaws and of Delaware law could make it
more difficult for a third party to make an unsolicited takeover attempt of us.
These anti-takeover measures may depress the price of our common stock by making
third parties less able to acquire us by offering to purchase shares of our
stock at a premium to its market price. Our Board of Directors can issue up to
700,000 shares of preferred stock and determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by our stockholders. Our Board of Directors could
issue the preferred stock with voting, liquidation, dividend and other rights
superior to the rights of our common stock. The rights of holders of our common
stock will be subject to, and may be adversely affected by, the rights of
holders of the share purchase rights and of any preferred stock that may be
issued in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could make it more difficult for a third party to acquire a majority
of our outstanding voting stock.

        OUR RECENT CAPITAL RAISING EFFORTS HAVE RESULTED IN SUBSTANTIAL DILUTION
TO OUR STOCKHOLDERS AND OUR FUTURE CAPITAL NEEDS WOULD INCREASE THIS DILUTION.
During 2001, we raised $3.0 million through the sale of convertible promissory
notes and common stock purchase warrants. The promissory notes, which mature on
November 10, 2002, and accrued interest may be converted by the holders at any
time into a number of shares of our common stock determined by dividing the
amount due under the notes, including interest, by a price equal to the lesser
of $.20 and the lowest 5 day volume weighted average price of our common stock
as reported by the American Stock Exchange at any time during the term of the
notes. At March 22, 2002, the principal and interest outstanding under the Notes
could be converted by the holders into 26,624,194 shares of common stock, which
would represent 54.1% of our outstanding common stock immediately following the
conversion. The warrants have an expiration date of May 23, 2004 and entitle the
holders to purchase up to an aggregate of 200% of their invested capital in
shares of our Common Stock at a per share exercise price equal to 112.5% of the
conversion price. The exercise of the warrants would increase the number of
shares outstanding and result in further dilution to our other stockholders.
Additionally, during the first quarter of 2002, we raised an additional $800,000
through the sale of 6,051,437 shares of common stock and common stock purchase
warrants. These warrants have an expiration date of May 23, 2004 and entitle the
holders to purchase up to an aggregate of 10,758,110 shares of our Common Stock
at a per share exercise price of $0.148725. We anticipate that during remainder
of 2002, we will need to raise additional capital, as our current operations do
not generate positive cash flow. As such, any additional capital raising efforts
would cause further dilution to stockholders.


                                    Page 32
<PAGE>


ITEM 7.    FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----
CONSOLIDATED FINANCIAL STATEMENTS OF BRILLIANT DIGITAL ENTERTAINMENT, INC.

Report of Independent Certified Public Accountants...........................34

Consolidated Balance Sheet as of December 31, 2001...........................35

Consolidated Statements of Operations for the years ended
   December 31, 2000 and 2001................................................36

Consolidated Statements of Stockholders' Deficit for the
   years ended December 31, 2000 and 2001....................................37

Consolidated Statements of Cash Flows for the years
   ended December 31, 2000 and 2001..........................................38

Notes to Consolidated Financial Statements...................................40



                                    Page 33
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





To the Board of Directors and
Stockholders of Brilliant Digital Entertainment, Inc.:


        We have audited the accompanying consolidated balance sheets of
Brilliant Digital Entertainment, Inc. as of December 31, 2001 and the related
consolidated statements of income and comprehensive loss, stockholders' deficit,
and cash flows for each of the two years in the period ended December 31, 2001.
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 of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Brilliant
Digital Entertainment, Inc. at December 31, 2001 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.

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


/s/ BDO Seidman, LLP


Los Angeles, California
March 26, 2002.


                                    Page 34
<PAGE>


<TABLE>
<CAPTION>
                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                           CONSOLIDATED BALANCE SHEET
                      (In thousands, except per share data)

                                                                   DECEMBER 31,
                                                                      2001
                                                                   ------------
<S>                                                                <C>
ASSETS
Current assets:
    Cash and cash equivalents....................................   $     185
    Accounts receivable, net.....................................          69
    Accounts receivable, related party...........................           4
    Other assets, net............................................         278
                                                                   ------------
Total current assets.............................................         536
Property, plant and equipment, net (Note 9)......................         139
Other assets, net................................................         443
                                                                   ------------
Total assets.....................................................   $   1,118
                                                                   ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
    Accounts payable.............................................   $     387
    Accrued expenses (Note 10)...................................       1,032
    Deferred revenue (Note 5)....................................         917
    Notes payable, related parties...............................          27
    Capital financing, net of discount (Note 5)..................         194
    Current portion of note payable (Note 6).....................         174
                                                                   ------------
Total current liabilities........................................       2,731
Note payable, less current portion (Note 6)......................          32
Deferred Revenue (Note 5)........................................       2,554
Other long term liabilities......................................          50
                                                                   ------------
Total liabilities................................................       5,367
Commitments and contingencies (Note 13)
Stockholders' deficit:
    Preferred Stock ($0.001 par value; 1,000,000 shares
        authorized; no shares issued or outstanding) (Note 7)....          --
    Common Stock ($0.001 par value; 150,000,000 shares
        authorized; 16,463,288 shares issued and
           outstanding) (Note 7 & Note 14).......................          16
    Additional paid-in capital...................................      50,601
    Accumulated deficit..........................................     (54,577)
    Accumulated other comprehensive loss.........................        (289)
                                                                   ------------
Total stockholders' deficit......................................      (4,249)
                                                                   ------------
Total liabilities and stockholders' deficit......................   $    1,118
                                                                   ============
</TABLE>

                 See Notes to Consolidated Financial Statements


                                    Page 35
<PAGE>


<TABLE>
<CAPTION>
                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                      (In thousands, except per share data)

                                                                         YEAR ENDED
                                                                        DECEMBER 31,
                                                                 ------------------------------
                                                                     2001             2000
                                                                 -------------     ------------
<S>                                                              <C>               <C>
Revenues:
   Software sales...........................................        $        9      $      109
   Distribution and technology revenue from related party...               917             612
   Development fees and other revenues......................               890             309
                                                                 --------------    ------------
      Total revenues........................................             1,816           1,030

Cost of revenues:
   Software sales...........................................                --              44
   Development fees and other costs.........................               463             224
                                                                 --------------    ------------
      Total cost of revenues................................               463             268

Gross profit................................................             1,353             762
Operating expenses:
   Sales and marketing......................................               839           1,651
   General and administrative...............................             4,410           4,324
   Research and development.................................             1,892           3,855
   Depreciation and amortization............................               284             319
                                                                 --------------    ------------
      Total operating expenses..............................             7,425          10,149
                                                                 --------------    ------------
Loss from operations........................................            (6,072)         (9,387)
Other income (expense):
   Export market development grant..........................               185             116
   Gain on foreign exchange transactions....................                44              (1)
   Loss on disposal of equipment............................                (2)             --
   Loss on investment in joint venture......................              (264)           (100)
   Interest income..........................................               291             257
   Interest expense.........................................              (817)            (93)
                                                                 --------------    ------------
      Total other income (expense)..........................              (563)            179
                                                                 --------------    ------------
Loss from continuing operations.............................        $   (6,635)     $   (9,208)
Loss from discontinued operations (Note 2)..................              (317)        (12,708)
Gain on disposal of discontinued operations (Note 2 & Note 5)              624              --
                                                                 ---------------   ------------
Net Loss....................................................        $   (6,328)     $  (21,916)
Other comprehensive loss:
   Foreign currency translation adjustment..................              (123)            (15)
                                                                 --------------    ------------
Comprehensive loss..........................................        $   (6,451)     $  (21,931)
                                                                 ==============    ============

Basic and diluted continuing operations ....................        $    (0.41)     $    (0.62)
Basic and diluted for discontinued operations...............        $     0.02      $    (0.85)
Basic and diluted net loss per share........................        $    (0.39)     $    (1.47)
                                                                 ---------------   --------------
Weighted average number of shares used in computing
    Basic and diluted net loss per share....................            16,236          14,931
                                                                 ==============    ============
</TABLE>


                 See Notes to Consolidated Financial Statements



                                    Page 36
<PAGE>


<TABLE>
<CAPTION>
                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                        (In thousands, except share data)

                                       COMMON STOCK                                  ACCUMULATED
                                   --------------------  ADDITIONAL                     OTHER
                                     NO. OF               PAID-IN     ACCUMULATED   COMPREHENSIVE
                                     SHARES     AMOUNT    CAPITAL       DEFICIT          LOSS        TOTAL
                                   ----------  --------  -----------  -----------   --------------  ---------
<S>                                <C>         <C>       <C>          <C>           <C>             <C>
BALANCE AT DECEMBER 31, 1999....   12,598,874    $  12    $  31,908    $ (26,333)      $   (151)    $  5,436
   Grant of stock options.......           --       --        1,642           --             --        1,642
   Exercise of stock options
     and warrants...............      288,000       --        1,170           --             --        1,170
   Issuance of shares for
     joint venture investment...    2,554,589        3       11,087           --             --       11,090
   Shares issued for
     convertible debenture......      612,825        1        1,499           --             --        1,500
   Foreign exchange translation
     (net of tax of $0).........           --       --           --           --            (15)         (15)
   Net loss.....................           --       --           --      (21,916)            --      (21,916)
                                   ----------- --------  -----------  -----------     ----------    ---------
BALANCE AT DECEMBER 31, 2000....   16,054,288       16       47,306      (48,249)          (166)      (1,093)
   Grant of warrants............           --       --           42           --             --           42
   Issuance of shares to
     Investors..................      400,000       --          264           --             --          264
   Issuance of shares for
     services...................        9,000       --            6           --             --            6
   Beneficial conversion
     feature....................                              2,983           --             --        2,983
   Foreign exchange
     translation................           --       --           --           --           (123)        (123)
   Net loss.....................           --       --           --       (6,328)            --       (6,328)
                                   ----------- --------  -----------  -----------     ----------    ---------
BALANCE AT DECEMBER 31, 2001....   16,463,288    $  16    $  50,601    $ (54,577)      $   (289)    $ (4,249)
                                   =========== ========  ===========  ===========     ==========    =========
</TABLE>

                 See Notes to Consolidated Financial Statements


                                    Page 37
<PAGE>


<TABLE>
<CAPTION>
                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                                         YEAR ENDED
                                                                        DECEMBER 31,
                                                                  -------------------------
                                                                     2001         2000
                                                                  -----------  ------------
<S>                                                               <C>          <C>
OPERATING ACTIVITIES
Net loss........................................................    $ (6,328)    $ (21,916)
Adjustments to reconcile net loss to the net cash provided
   by (used in) operating activities:
     Depreciation and other amortization........................       1,182         2,404
     Loss on investment in joint venture........................         264           100
     Effect of stock options and warrants granted...............          --           849
     Gain on disposal of discontinued operations................        (624)           --
     Issuance of common stock for services......................           6            --
     Issuance of common stock for joint venture.................          42            --
     Loss on disposal of equipment..............................         125            --
     Changes in operating assets and liabilities:
       Accounts receivable......................................         101            61
       Other assets.............................................         691        (1,341)
       Accounts payable and accruals............................         455          (183)
       Deferred revenue.........................................        (917)        4,357
                                                                   ----------   -----------
Net cash used in continuing activities..........................      (5,003)      (15,669)
Net cash (used) provided in discontinued activities.............        (394)        5,079
                                                                   ----------   -----------
Net cash used in operating activities...........................      (5,397)      (10,590)

INVESTING ACTIVITIES
Investment in joint venture.....................................          --          (100)
Purchases of equipment..........................................         (23)         (760)
                                                                   ----------   -----------
Net cash used in investing activities...........................         (23)         (860)

FINANCING ACTIVITIES
Proceeds from issuance of shares................................          --        12,222
Proceeds from capital financing.................................       2,614            --
Repayments of notes.............................................         (73)          (76)
                                                                   ----------   -----------
Net cash provided by financing activities.......................       2,541        12,146
NET INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS.............................................      (2,879)          696

Translation adjustments.........................................        (123)          (15)
Cash and cash equivalents at beginning of period................       3,187         2,506
                                                                   ----------   -----------
Cash and cash equivalents at end of period......................    $    185     $   3,187
                                                                   ----------   -----------
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
     Interest...................................................    $     20     $      63
                                                                   ----------   -----------
</TABLE>

                 See Notes to Consolidated Financial Statements


                                    Page 38
<PAGE>


SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

        We issued 200,000 shares of our common stock to each of Russell Simmons
and Stan Lathan for an increased ownership in Digital Hip Hop, raising our
ownership percentage in Digital Hip Hop from 50% to 75%.

        We issued 9,000 shares of our common stock during the year in connection
with a consulting agreement and incurred $6,000 in consulting expense.

        In May 2001, we issued $2,264,150 of Secured Convertible Promissory
Notes (the "Original Notes") with warrants to purchase shares of our common
stock. A beneficial conversion feature of $1,056,000 was recorded in connection
with this transaction, which is being amortized on a straight-line basis over
the life of the Original Notes. We incurred a beneficial conversion feature
expense of $10,690 for the second quarter 2001. In the third and fourth quarters
2001 each, we expensed $176,000 in connection with the amortization of the
beneficial conversion feature. This will continue in future quarters through
November 10, 2002.

        In December 2001, we issued another $350,000 of Secured Convertible
Promissory Notes as part of an overall financing of $750,000, the balance of
which was funded in 2002 (the "New Notes"), with warrants to purchase shares of
our common stock. A beneficial conversion feature of $295,000 was recorded in
connection with this transaction, which is being amortized on a straight-line
basis over the life of the New Notes. We incurred a beneficial conversion
feature expense of $13,400 for the fourth quarter 2001. The remaining balance
will be amortized in future quarters through November 10, 2002.

        Also in December 2001, the conversion feature and warrants issued in
connection with the Original Notes were adjusted to the same terms as the New
Notes. As such, an additional beneficial conversion feature of $1,632,000 was
recorded and will also be amortized on a straight-line basis over the remaining
life of the Original Notes.

        In the first half of 2001, the Company issued 120,000 warrants in
consideration for consulting services for three outside consultants and expensed
$42,000 in the 2nd Quarter of 2001.


                                    Page 39
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001

1.      DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

        Brilliant Digital Entertainment, Inc. ("Brilliant" or the "Company") is
a developer of rich media advertising serving technologies, software authoring
tools and content for three dimensional, or 3D, animation on the World Wide Web.
During the third quarter, 2001 the Company began marketing and distributing its
player, the "Digital Projector" (required for the playback of our rich media
content and advertisements) through two large peer-to-peer, or P2P, networks,
Sharman Networks, which operates the KaZaA network (formerly operated by
Consumer Empowerment B.V.), and StreamCast Networks, which operates the Morpheus
network. Previously, the Company's primary method of distribution was through
the bundling of the Digital Projector with its animation content which was
syndicated to third party web sites. At December 31, 2001, the Company estimated
that its Digital Projector had been distributed to tens of millions of users
based on KaZaA's weekly downloads as reported on Download.com, as additional P2P
connected computers and other users have accessed the KaZaA and Morpheus
networks. Sharman Networks continues to distribute our player and StreamCast
Networks has discontinued its distribution. Brilliant commercializes its
technology in two primary ways: they license their rich media advertising server
technologies to websites to enable the selling and serving of their proprietary
rich media advertising format, and they license their rich media content
authoring tools - "b3d Studio" and "b3d Studio Pro". In July 1996, the Company
incorporated in the State of Delaware and, in August 1996, issued an aggregate
of 1,000,000 shares of its Common Stock in exchange for all of the capital stock
of Brilliant Interactive Ideas, Pty. Ltd., a company incorporated in the State
of New South Wales, Australia ("BII Australia") and Sega Australia New
Developments ("SAND") a division of Sega Ozisoft Pty. Ltd., which was the
Australian subsidiary of Sega of Japan ("SEGA"). Historically, BII Australia
produced and marketed interactive multimedia titles for the education and
entertainment markets. SAND had developed and owned the rights to proprietary
software tools, which were designed to allow the Company to both develop a new
genre of digital entertainment products, and to cost effectively, produce
ancillary products. In exchange for the issue of common stock in the Company,
SEGA transferred the intellectual property rights for the software tools to the
Company, which continued to develop the technology using the funding raised
through its listing on the American Stock Exchange.

        In 2001, the Company substantially reduced its internal production and
syndication of 3D animation. The Company discontinued operations at Digital Hip
Hop, the joint venture formed to produce animated music videos for the World
Wide Web, and has discontinued operations at, and placed into liquidation, BII
Australia. The reduction in the content production and syndication activities
has allowed the Company to focus its efforts and allocate its resources to the
further development and exploitation of its ad serving and authoring tools
businesses, and to pursue the development of a private, peer-to-peer network
business through its Altnet subsidiary.

GOING CONCERN UNCERTAINTY

        The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The carrying amounts of assets and liabilities presented in
the financial statements do not purport to represent realizable or settlement
values. However, the Company has suffered recurring operating losses and at
December 31,2001 had negative working capital of approximately $2,200,000 and a
stockholders' deficit of approximately $4,200,000. These factors raise
substantial doubt about the Company's ability to continue as a going concern.

        The Company is seeking additional funding and believes that this will
result in improved operating results. There can be no assurance, however, that
the Company will be able to secure additional funding, or that if such funding
is available, whether the terms or conditions would be acceptable to the
Company.


                                    Page 40
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


2.      SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements of the Company include the
accounts of Brilliant and its subsidiaries after intercompany balances and
transactions have been eliminated.

DISCONTINUED OPERATIONS

        The Auction Channel was accounted for as a discontinued operation
pursuant to Management's formal adoption on December 31, 2000 of a plan to
dissolve the business unit. The Company sold substantially all of the net assets
on April 1, 2001, closed the London and New York offices and is now dissolved.

        Brilliant Interactive Ideas Pty. Ltd, the wholly owned Australian
subsidiary was placed into voluntary administration in December 2001, and has
subsequently been put into liquidation.


REVENUE RECOGNITION

        SOFTWARE SALES: The Company receives revenue from the sale or licensing
of its software tools, including the granting of exclusive distribution rights
in specified territories. For such distribution agreements, which cover a period
of time, are exclusive for a geographic territory and exceed one year in term,
the Company recognizes revenue on a straight-line basis over the life of the
agreement.

        PRODUCTION FEES: The Company receives production fees in exchange for
the development of animated content, including banner ads and animated music web
videos, in accordance with customer specifications. The development agreements
generally specify certain "milestones" which must be achieved throughout the
production process. As these milestones are achieved, the Company recognizes the
portion of the development fee allocated to each milestone.

        DEVELOPMENT FEES: The Company enters into development contracts under
which they are entitled to fixed minimum guaranteed payments. The minimum
guaranteed payments are recognized as revenue when the CD-ROM master is
delivered to the distributor and the terms of the sale are considered fixed. The
Company has derived revenues from royalties, development fees and software
sales. The Company licenses its traditional CD-ROM products to publishers and
distributors in exchange for non-refundable advances and royalties based on
product sales. Royalties based on product sales are due only to the extent they
exceed any associated non-refundable royalty advance. Royalties related to
non-refundable advances are recognized when the CD-ROM master is delivered to
the licensees. Royalty revenues in excess of non-refundable advances are
recognized upon notification by the distributor that a royalty has been earned.

        DISTRIBUTION FEES: The Company grants distribution rights to its CD-ROM
products to distributors in exchange for a non-refundable minimum fixed fee and
a percentage of sales of the products. Revenue related to the non-refundable
minimum fixed fee is recognized when the CD-ROM master is delivered to the
customer and the other criteria of AICPA Statement of Position 97-2 are met.
Additional revenue, related to the percentage of sales, is recognized upon
notification by the distributor that a royalty has been earned by the Company.
Software sales resulting from the Company selling completed software products
are recognized upon the shipment of the product. It is the Company's policy to
provide for estimated returns at the time software sales revenue is recognized
and for bad debts.

        At December 31, 2001 the Company had a provision for bad debts of
$25,000.


                                    Page 41
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


COST OF REVENUES

        Cost of revenues consists primarily of royalties to third parties,
amortization of capitalized movie software costs, the direct costs required to
reproduce and package software products, and productions costs for music videos,
advertising banners and MultipathTM movie, including direct salaries and
benefits.

RESEARCH AND DEVELOPMENT COSTS

        The Company incurs research and development costs relating to the
development of its three dimensional authoring tools, development of its Digital
Projector, ad serving software and traditional CD-ROM software tools, which
provide the technical infrastructure for the production of MultipathTM Movies
and CD-ROM titles. The Company incurred research and development costs of
$3,855,000 and $1,892,000, including web development costs for the year ended
December 31, 2000 and the year ended December 31, 2001, respectively. The
Company accounts for web development costs in accordance with the EITF 00-2,
"Accounting for Web site Development Costs."

MOVIE SOFTWARE COSTS

        Movie software costs consist of the costs of development and production
of digitally animated MultipathTM Movies including labor, material and
production overhead. These costs were fully amortized in 2000.

        The Company's accounting policy follows Statement of Financial
Accounting Standards No. 86 ("SFAS No. 86"), which provides for the
capitalization of software development costs once technological feasibility is
established. The capitalized costs are then amortized beginning on the date the
product is made available for sale either on a straight-line basis over the
estimated product life or on a ratio of current revenues to total projected
product revenues, whichever results in the greater amortization amount. Prior to
reaching technological feasibility, the Company expenses all costs related to
the development of both its software tools and MultipathTM Movie titles. The
Company achieved technological feasibility of its original Digital Projector
during the third quarter of 1997. Since the date of achieving technological
feasibility, the costs of developing MultipathTM Movies intended to be viewed on
the original projector have been capitalized in accordance with SFAS No. 86. The
Company continues to develop new Digital Projectors with enhanced functionality
such as improved compression technology. Costs incurred in the development of
new Digital Projectors are expensed until technological feasibility is reached.
MultipathTM Movies that are developed for new Digital Projectors that have not
yet reached technological feasibility are capitalized in accordance with SFAS
No. 86 to the extent that they are compatible with an existing Digital
Projector. Amounts incurred for MultipathTM Movies that are developed for new
Digital Projectors that are not compatible with an existing projector and would
require substantial revision in order to achieve compatibility are expensed as
incurred. To the extent capitalized movie software costs are attributable to
titles which have begun to ship, they are subject to amortization. Amortized
amounts of $158,000 are included in costs of revenues for the year ended
December 31, 2000.

CASH EQUIVALENTS

        The Company considers all highly liquid investments with maturity of
three months or less when acquired to be "cash and cash equivalents".


                                    Page 42
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over estimated useful
lives or lease life ranging up to five years.

INCOME TAXES

        The Company uses the asset and liability method to account for income
taxes as required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rules and laws that will be in effect when the differences are expected to
reverse.

FOREIGN CURRENCY TRANSLATION

        The functional currency of BII Australia is its local currency,
Australian dollars. Assets and liabilities of BII Australia are translated into
U.S. dollars (the reporting currency) using a current exchange rate ($0.5117 at
December 31, 2001), and revenues and expenses are translated into U.S. dollars
using an average exchange rate ($0.5819 for the year ended December 31, 2000 and
$0.5163 for the year ended December 31, 2001).

        The effects of foreign currency translation adjustments are deferred and
included as "other comprehensive loss" as a component of stockholders' deficit,
on an accumulated basis.

        Foreign currency transaction gains and losses result from the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency. Foreign currency transaction losses are included in the
statements of operations.

NET LOSS PER SHARE

        SFAS No. 128 "Earnings Per Share", revised the computation,
presentation, and disclosure requirements of earnings per share. Principal among
computation revisions is the replacement of primary earnings per share with
basic earnings per share, which does not consider common stock equivalents. In
addition, SFAS No. 128 modifies certain dilutive computations and replaces fully
diluted earnings per share with diluted earnings per share. Common equivalent
shares from stock options and warrants (using the treasury stock method) have
been included in this computation when dilutive. Options and warrants
representing common shares of 2,820,000 and 5,974,000 were excluded from the
average number of common and common equivalent shares outstanding in the diluted
EPS calculation for the years ended December 31, 2000 and 2001, respectively,
because they were anti-dilutive.

STOCK OPTIONS

        The Company accounts for employee stock options or similar equity
instruments in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS
No. 123 defines a fair-value-based method of accounting for employee stock
options or similar equity instruments. This statement gives entities a choice to
recognize related compensation expense by adopting the new fair-value method or
to measure compensation using the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25, the former standard. If the former
standard for measurement is elected, SFAS No. 123 requires supplemental
disclosure to show the effect of using the new measurement criteria. The Company
uses the intrinsic value method prescribed by APB Opinion No. 25. See Note 7 for
supplemental disclosure.


                                    Page 43
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


CONCENTRATION OF CREDIT RISK

        Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents and
accounts receivable. The Company has investment policies that limit investments
to short-term investment grade securities. Accounts receivable are principally
from distributors and retailers of the Company's products. The Company performs
credit evaluations and generally does not require collateral.

        The Company maintains the majority of its cash and cash equivalents in
one bank and with one brokerage house. The account at the bank is guaranteed by
the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December
31, 2001, the Company had approximately $145,000 at a bank, which was in excess
of the FDIC insurance limit.

USE OF ESTIMATES

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that materially affect the amounts reported in the financial
statements and accompanying notes. Actual results could materially differ from
those estimates.

IMPAIRMENT OF LONG-LIVED ASSETS

        Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,"
establishes guidelines regarding when impairment losses on long-lived assets,
which include plant and equipment, should be recognized and how impairment
losses should be measured. The Company periodically reviews such assets for
possible impairments and expected losses, if any, are recorded currently.

        In 2000, the Company decided to sell its subsidiary, The Auctionchannel,
Inc. The Company estimated the fair value of the business held for sale based on
discussions with prospective buyers and adjusted the value, taking into
consideration the selling costs. The Company reduced its carrying value of
goodwill by $4,189,000 to record assets held for sale at the fair value. The
Auctionchannel, Inc. was sold on April 1, 2001 and the New York and London
offices were closed.

3.      NEW ACCOUNTING PRONOUNCEMENTS

        In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC.
Subsequently, the SEC released SAB 101B, which delayed the implementation date
of SAB 101 for registrants with fiscal years that begin between December 16,
1999 and March 15, 2000. The Company was required to be in conformity with the
provisions of SAB 101, as amended by SAB 101B, no later than October 1, 2000.
The Company believes the adoption of SAB 101, as amended by SAB 101B, has not
had an adverse effect on the Company's financial position, results of operations
or cash flows.

        In October 2000, the Company adopted the Financial Accounting Standards
Board SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability, measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The adoption of SFAS No. 133
has no effect on the Company's financial statements.


                                    Page 44
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


        In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, and Interpretation of APB
Opinion No. 25" (FIN. 44). The Interpretation is intended to clarify certain
problems that have arisen in practice since the issuance of APB No. 25,
"Accounting for Stock Issued to Employees." The effective date of the
interpretation was July 1, 2000. The provisions of the interpretation apply
prospectively, but they will also cover certain events occurring after December
15, 1998 and after January 12, 2000. The Company believes the adoption of FIN.
44 has not had a material adverse effect on the Company's current or historical
consolidated financial statements, but may affect future accounting regarding
stock option transactions.

        In March 2000, EITF 00-2 "Accounting for Web Site Development Costs" was
released. EITF 00-2 provides guidance on how an entity should account for costs
involved in such areas as planning, developing software to operate the web site,
graphics, content, and operating expenses. EITF 00-2 is effective for web site
development costs incurred for fiscal quarters beginning after June 30, 2000.
The Company adopted EITF 00-2 during the year ending December 31, 2000, and all
amounts associated with the Web Site were expensed in accordance with EITF 00-2.

        In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires that, upon adoption of SFAS 142, the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

        SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test nine months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.

        In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The Company believes the adoption of this Statement will have no
material impact on its financial statements.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFASB 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFASB 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, are to be applied
prospectively. The Company believes the adoption of this Statement will have no
material impact on its financial statements.


                                    Page 45
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


4.      RELATED PARTY TRANSACTIONS

        There were no related party purchase and sales transactions during the
years ended December 31, 2000 and December 31, 2001. See Note 5 for related
party financing transactions.

5.      SIGNIFICANT AGREEMENTS

E-NEW MEDIA

        In February 2000, the Company entered into an agreement with e-New Media
Digital Entertainment Limited ("e-New Media"), a wholly owned subsidiary of
e-New Media Company. The agreement with e-New Media provides for a Distribution
Agreement, a Production Joint Venture Agreement, a Technology License Agreement
and an Investment Agreement.

        The Distribution Agreement stipulates that e-New Media will have
Internet distribution rights to English and Asian language versions of the
Company's MultipathTM Movie webisodes in selected Asian territories, with
exclusive rights to the Asian language versions. e-New Media has paid the
Company a fee of $2,500,000 for these rights. The revenue will be recognized
over a 6-year period, which commenced in the 2nd quarter of 2000. e-New Media is
entitled to a distribution fee of 20% of gross revenues generated under the
Distribution Agreement. During the year ended December 31, 2001 the Company
recognized $417,000 of this fee in revenues. Deferred revenue includes $417,000
in current and $1,388,000 in long term.

        The Production Joint Venture Agreement provides for the formation of a
joint venture studio, known as e-Brilliant, to create new content using the
Company's b3d technology for distribution in the Asian territories for which
e-New Media has distribution rights. These projects, developed by the joint
venture, will be fully funded by e-New Media. The joint venture is owned in
equal parts by e-New Media and Brilliant Digital Entertainment. As of December
31, 2001, the Company has not received any revenue from this part of the
agreement, and in November 2001 e-Brilliant ceased operations due, in part, to
e-New Media's decision to stop funding the studio.

        The Technology Licensing Agreement provides for the Company to grant to
the joint venture, owned equally by e-New Media and Brilliant, a 5-year
exclusive alpha license to the Company's b3d technology for exploitation by the
joint venture in those Asian territories where e-New Media has distribution
rights. e-New Media has paid the Company a fee of $2,500,000 for this license.
The revenue will be recognized over a 5-year period, and commenced in the 2nd
quarter of 2000. The Company is also entitled to a 10% royalty on all joint
venture revenues. During the year ended December 31, 2001, the Company
recognized $500,000 in revenue. Deferred revenue includes $500,000 in current
and $1,166,000 in long term. The Company has not received any royalties yet from
this joint venture.

        Pursuant to the Investment Agreement in 2000, e-New Media acquired
666,667 shares of the Company's common stock at $6.00 per share, for aggregate
proceeds to the Company of $4,000,000.

        On September 9, 2000 e-New Media purchased an additional 1,130,000
shares of the Company's common stock at $4.28 per share for proceeds of
$4,837,000.

DIGITAL HIP HOP

        In August 2000, the Company entered into a joint venture agreement to
produce music videos for the Internet. The investment required an initial
contribution of technology and $100,000 for a 50% ownership. In the fiscal year
2000, the loss incurred reduced the investment to a zero balance. In May 2001,


                                    Page 46
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


the Company acquired an additional 25% of Digital Hip Hop by issuing 400,000
shares of the Company's common stock to the other two partners in Digital Hip
Hop. Digital Hip Hop also received from the Company's wholly-owned subsidiary,
B3D, Inc., a 5-year exclusive Alpha level license to its b3d production tool
suite for the production of hip hop content for non-Asian markets.

        During the fourth quarter of 2001, the Company discontinued operations
at Digital Hip Hop based on the limited prospects of additional web video
production work. Past clients, including the Universal Music Group and Priority
Records, were reluctant to make future commitments for incremental web videos at
prices that were higher than previously paid. The Company does not intend to
actively market and promote the future production of animated music videos for
the Web.

CONVERTIBLE PROMISSORY NOTES

        In May 2001, the Company sold to Harris Toibb, Europlay 1, LLC (an
entity in which the Company's Chairman has an ownership interest) and Preston
Ford, Inc. secured convertible promissory notes (the "Original Notes") in the
aggregate principal amount of $2,264,150 and three-year warrants (the "Original
Warrants") to purchase up to an aggregate of 2,850,393 shares of the Company's
Common Stock at exercise prices of $0.793 per share (with respect to 2,792,118
shares) and $0.858 per share (with respect to 58,275 shares). These securities
were sold for an aggregate purchase price of $2,264,150. The Original Notes have
a term of eighteen months from the date of issuance and an interest rate of 10%
per annum, payable at maturity. The principal amount of the Original Notes and,
at the option of the holder, all accrued interest, may be converted by the
holder into shares of the Company's Common Stock at a conversion price of $0.706
per share. The Original Notes are secured by all of the Company's assets and the
assets of the Company's subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and
guaranteed by B3D, Inc. and Brilliant Studios, Inc. In connection with the
Original Notes, the Company recorded a beneficial conversion feature of
$1,056,000, which is being amortized on a straight-line basis over the life of
the Original Notes. The Original Notes and the Original Warrants were amended in
the December 2001 financing transaction, as described below.

        On December 19, 2001, the Company entered into a financing transaction
that was structured similarly to the financing conducted in May 2001, and
involved one of the same investors. In the December financing transaction, the
Company sold to Harris Toibb and Capel Capital Ltd. secured convertible
promissory notes (the "New Notes") in the aggregate principal amount of $750,000
(the "Principal Amount") and warrants (the "New Warrants") to purchase up to
that number of shares of the Company's Common Stock obtained by dividing 200% of
the Principal Amount by the lesser of (i) $0.20, or (ii) the volume weighted
average price of a share of the Company's Common Stock on the American Stock
Exchange, or any exchange on which the Common Stock is then traded, over any
five (5) consecutive trading days commencing on December 14, 2001 and
terminating at 5:00 p.m. (Pacific Standard Time) on November 10, 2002 (items (i)
and (ii) hereinafter referred to collectively as the "Conversion Price"). The
New Warrants are exercisable at a price per share equal to 1.125 times the
Conversion Price. The New Notes mature simultaneous with the Original Notes on
November 10, 2002 and bear interest at the rate of 10% per annum. The principal
amount of the New Notes and, at the option of the holder, all accrued interest,
may be converted by the holder into shares of the Company's Common Stock at the
Conversion Price. As with the Original Notes, the New Notes are secured by all
of the Company's assets and the assets of the two subsidiaries, B3D, Inc. and
Brilliant Studios, Inc., and guaranteed by B3D, Inc. and Brilliant Studios, Inc.
In connection with the New Notes, the Company recorded a beneficial conversion
feature of $295,000, which is being amortized on a straight-line basis over the
life of the New Notes.

        As a condition to the December 2001 financing transaction, the Original
Notes and the Original Warrants were amended to correspond to all the terms of
the New Notes and New Warrants. As a consequence, Harris Toibb, Europlay 1, LLC
and Preston Ford, Inc. are able to convert the aggregate purchase price of the
Original Notes and all accrued interest into shares of the Company's Common
Stock at the much lower Conversion Price for the New Notes. In addition, these
original investors are able to exercise


                                    Page 47
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


the Original Warrants at a price per share equal to 1.125 times the much lower
Conversion Price from the December 2001 financing. Pursuant to this amendment to
the Original Notes and Original Warrants, the Company recorded an additional
beneficial conversion feature of $1,632,000, which is being amortized on a
straight-line basis over the remaining life of the Original Notes.

        In support of the May 2001 financing transaction and the December 2001
financing transaction, the Company sought and received an opinion from a
reputable financial advisory firm that the financing transactions were each fair
to the Company and its stockholders from a financial point of view at the time
the respective financings closed.

THE AUCTION CHANNEL

        On April 30, 2001 the Company sold substantially all of the assets of
The Auction Channel to Metro Channels, LLC, a division of Rainbow Media
Holdings, Inc. The Auction Channel and the Company's London based subsidiary,
Trojan Television, Ltd., has ceased operations. In connection with the disposal
of the assets and discontinuance of the related operations, the Company realized
a gain of $624,000.

6.      NOTES PAYABLE

        On July 17, 1998, the Company entered into a Senior Secured Promissory
Note (the "Note"). The original principal amount of $103,893, plus interest at a
rate of 15.18%, is due in 60 equal monthly payments plus one final payment equal
to 10% of the original principal amount. The Note is collateralized by office
furniture and equipment. At December 31, 2001 the balance due was $31,385, of
which $27,702 is classified as short term.

        On October 3, 2000, the Company entered into a capital lease agreement
with Crocker Capital Inc. The principal amount of the lease obligation is
$58,421 plus interest of $19,081 due in 36 monthly payments of $2,152. A final
payment of $100 will buy out the lease obligation, which is collateralized by
computer equipment used as a web server, and is located at Exodus, a third party
web hosting facility. At December 31, 2001 the balance due was $53,536, of which
$25,834 is classified as short term.

        Additionally, the Company has an obligation to fund a Directors and
Officers insurance policy, with total premiums of $163,401 and financing charges
of $5,222. The policy was renewed in November 2001 with 12 months coverage. The
balance due on the policy at December 31, 2001 was $120,175, which is classified
as short term.

7.      STOCKHOLDERS' EQUITY

COMMON STOCK

        The holders of Common Stock are entitled to one vote for each share held
of record on all matters on which the holders of Common Stock are entitled to
vote. The holders of Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors out of funds legally available therefore.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled, subject to the rights of holders of
Preferred Stock issued by the Company, if any, to share ratably in all assets
remaining available for distribution to them after payment of liabilities, and
after provision is made for each class of stock, if any, having preference over
the Common Stock.

        In March 1998, the Company adopted a stockholder's rights plan and, in
connection therewith, distributed one preferred share purchase right for each
outstanding share of the Company's Common Stock outstanding on April 2, 1998.
Upon the occurrence of certain events, each purchase right not owned by


                                    Page 48
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


certain hostile acquirers will entitle its holder to purchase shares of the
Company's Series A Preferred Stock, which is convertible into Common Stock, at a
value below the then current market value of the Common Stock. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of the share purchase rights and of any Preferred
Stock that may be issued in the future.

        The holders of Common Stock have no preemptive or conversion rights and
they are not subject to further calls or assessments by the Company. There are
no redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are fully paid and non-assessable.

        We issued 9,000 shares of our Common Stock during the year in connection
with a consulting agreement and incurred $6,000 in consulting expense.

PREFERRED STOCK

        The Company is authorized to issue 1,000,000 shares of Preferred Stock,
par value $0.001 per share. As of December 31, 2000, no shares were issued or
outstanding. The Board of Directors has the authority to issue the authorized
and unissued Preferred Stock in one or more series with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights, which may adversely affect the voting power or other
rights of the holders of the Company's Common Stock.

WARRANTS

        On February 17, 2000, the Company issued 307,692 warrants exercisable at
$6.50 per share to e-New Media as partial consideration for a licensing and
distribution agreement. The warrants are being expensed over the 6 year-period
of the agreements. The warrants expired in November 2000. The Company recognized
$82,000 expense in 2001 with the balance of the value, $342,000, recorded in
Other Assets, of which $260,000 is classified as a long term asset, with the
balance classified as a short term asset.

        On March 1, 2000, warrants, exercisable at $6.00 per share, were issued
to a consultant for 30,000 shares of Common Stock. The warrants vested
immediately upon issuance and expire on February 28, 2002. The Company incurred
$96,000 of expense in connection with the issuance.

        On May 23, 2000, the Company issued 350,076 warrants at $6.29 per share
as partial consideration for an agreement with Yahoo! These warrants, valued at
$1,022,222, are currently exercisable at $6.29 and expired in May 2001. The
Company recognized $596,295 of warrant expense in 2000, with the remaining value
of $425,927 expensed in the first half of 2001.

        On May 23, 2001, the Company issued, in connection with Secured
Convertible Promissory Notes (the "Original Notes"), to Harris Toibb, Europlay
1, LLC and Preston Ford, Inc. (the "Investors") warrants to purchase 2,850,393
shares of Common Stock at exercise prices of $0.793 per share (with respect to
2,792,118 shares) and $0.858 per share (with respect to 58,275 shares). The
number of shares underlying each warrant issued to each Investor is equal to
100% of the principal amount of the note acquired by that Investor divided by
112.5% of the average closing sales price of the Company's Common Stock on the
American Stock Exchange over the 10 trading days prior to execution by the
Investor of a note purchase agreement. In December 2001, the terms of the
Original Notes were amended such that the number of warrants to be issued to the
Investors relative to the Original Notes and the warrants issued in connection
with Secured Convertible Promissory Notes pursuant to the December 2001
financing (the "New Notes") will only be finally determined upon conversion of
the notes. (See Footnote 5 SIGNIFICANT AGREEMENTS - CONVERTIBLE PROMISSORY
NOTES).


                                    Page 49
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


        In connection with the issuance of warrants from the Original Notes, a
beneficial conversion feature of $1,056,000 was recorded and is being amortized
on a straight-line basis over the life of the Original Notes. The Company
incurred a beneficial conversion feature expense of $10,690 for the second
quarter 2001. In the third and fourth quarters 2001 each, the Company expensed
$176,000 in connection with the beneficial conversion feature. This will
continue in future quarters through November 10, 2002.

        In connection with the December 2001 issuance of warrants from the New
Notes, a beneficial conversion feature of $295,000 was recorded and is being
amortized on a straight-line basis over the life of the New Notes. The Company
incurred a beneficial conversion feature expense of $13,400 for the fourth
quarter 2001. The remaining balance will be amortized in future quarters through
November 10, 2002.

        Also in December 2001, the conversion feature and warrants issued in
connection with the Original Notes were adjusted to the same terms as the New
Notes. As such, an additional beneficial conversion feature of $1,632,000 was
recorded and will also be amortized on a straight-line basis over the remaining
life of the Original Notes.

        In the first half of 2001, the Company issued 120,000 warrants in
consideration for consulting services for three outside consultants and expensed
$42,000 in the 2nd Quarter of 2001.

        The following table summarizes warrant activity:

<TABLE>
<CAPTION>
                                                           NUMBER
                                                         OF SHARES       OPTION PRICE
                                                         -----------    ---------------
                <S>                                      <C>            <C>
                Outstanding at December 31, 1999.....       805,000     $4.00 -- $ 8.00
                Granted..............................       698,000     $5.94 -- $ 6.50
                Exercised............................      (250,000)    $4.00 -- $ 5.50
                Forfeited............................      (548,000)    $5.00 -- $ 8.00
                -----------------------------------------------------------------------
                Outstanding at December 31, 2000.....       705,000     $4.00 -- $ 6.50
                Granted..............................     2,960,000     $4.00 -- $ 6.50
                Exercised............................            --     $0.00 -- $ 0.00
                Forfeited............................      (660,000)    $4.00 -- $ 6.29
                -----------------------------------------------------------------------
                Outstanding at December 31, 2001.....     3,005,000     $0.75 -- $ 5.50
</TABLE>


1996 STOCK OPTION PLAN

        The Company adopted a Stock Option Plan (the "1996 Plan"), which became
effective on September 13, 1996. Each director, officer, employee or consultant
of the Company or any of its subsidiaries is eligible to be considered for the
grant of awards under the 1996 Plan. The maximum number of shares of Common
Stock that may be issued pursuant to awards granted under the 1996 Plan is
3,500,000, subject to certain adjustments to prevent dilution. Any shares of
Common Stock subject to an award, which for any reason expires or terminates
unexercised are again available for issuance under the 1996 Plan. The maximum
number of shares of Common Stock with respect to which options or rights may be
granted under the 1996 Plan to any executive or other employee during any fiscal
year is 100,000, subject to certain adjustments to prevent dilution. Although
any award that was duly granted may thereafter be exercised or settled in
accordance with its terms, no shares of Common Stock may be issued pursuant to
any award made after September 13, 2006. Options granted generally have a term
of 10 years and usually vest over 4 years at the rate of 25% per year beginning
on the first day in the year subsequent to the year of the grant.


                                    Page 50
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


        The following table summarizes stock option activity:

<TABLE>
<CAPTION>
                                                           NUMBER
                                                         OF SHARES       OPTION PRICE
                                                         -----------    ---------------
                <S>                                      <C>            <C>
                Outstanding at December 31, 1999.....     1,441,000     $1.50        --
                Granted..............................       915,000     $4.81 -- $ 7.00
                Exercised............................       (38,000)    $1.50 -- $ 3.94
                Forfeited............................      (203,000)    $1.50 -- $ 7.00
                ------------------------------------------------------------------------
                Outstanding at December 31, 2000.....     2,115,000     $1.50 -- $ 7.00
                Granted..............................     1,681,000     $2.62 -- $ 0.16
                Exercised............................            --
                Forfeited............................      (827,000)    $5.94 -- $ 0.65
                ------------------------------------------------------------------------
                Outstanding at December 31, 2001.....     2,969,000     $5.94 -- $ 0.16
                Exercisable at December 31, 2001.....       862,000
</TABLE>


        As discussed in Note 2, the Company has adopted the disclosure-only
provisions of SFAS No. 123, which requires the use of an option valuation model
to provide supplemental information regarding options granted after 1994. Pro
forma information regarding net loss and loss per share shown below was
determined as if the Company had accounted for its employee stock options using
the fair value method pursuant to SFAS No. 123.

        The fair value of the options as examined at the date of grant is based
on a Black-Scholes option pricing model with the following weighted-average
assumptions for 2001 and 2000, respectively: interest rates of 5.5% and 5.5%;
dividend yields of 0% for both years; volatility factors of the expected market
price of the Company's common stock of 75.0% and 75.0%; and expected life of the
options of 3 years for both years. These assumptions resulted in a weighted
average fair value of $1.66 and $2.95 per share for stock options granted in
2001 and 2000, respectively.

        The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee stock
options have not been traded. In addition, the assumptions used in option
valuation models are highly subjective, particularly the expected stock price
volatility of the underlying stock. Because changes in these subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options.

        These pro forma amounts may not be representative of future disclosures
since the estimated fair value of the options is amortized to expense over the
options' vesting periods. The pro forma effect on net loss for 2001 and 2000 is
not representative of the pro forma effect on net loss in future years because
it reflects expense for only one year's vesting. Pro forma information in future
years will also reflect the amortization of any stock options granted in
succeeding years. The Company's pro forma information is as follows:


                                    Page 51
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


<TABLE>
<CAPTION>
                                                 YEAR ENDED         YEAR ENDED
                                              DECEMBER 31, 2001  DECEMBER 31, 2000
                                              -----------------  -----------------
<S>                                           <C>                <C>
Net loss, as reported........................      $(6,328,000)      $(21,916,000)
Net loss, pro forma..........................      $(6,686,000)      $(22,893,000)
Basic and diluted loss per share, as reported           $(0.39)            $(1.47)
Basic and diluted loss per share, pro forma..           $(0.41)            $(1.53)
</TABLE>


8.      INCOME TAXES

        The Company has adopted the asset and liability method of accounting for
income taxes. Income tax expense shown in the statements of operations is
calculated on the operating profit before tax, adjusted for items, which, due to
treatment under income tax legislation, create permanent differences between
accounting profit and taxable income. Deferred income taxes under FAS No. 109
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.

        At December 31, 2001 the Company had cumulative tax losses resulting in
a net operating loss ("NOL") carry forward of approximately $36,131,000. The
losses will begin to expire in the year 2011. No tax benefit has been recorded
for these NOL's.

        The significant components of the net deferred tax assets and
liabilities recorded in the accompanying consolidated balance sheet as of
December 31, 2001 are as follows:

                                                              DECEMBER 31,
                                                                   2001
                                                              -------------
Deferred tax assets:

   Net operating losses.....................................    6,001,000
   Temporary differences....................................      327,000
                                                              -------------
   Total deferred tax assets................................    6,328,000
   Valuation allowance......................................   (6,328,000)
                                                              -------------
Net deferred tax assets (liabilities) ......................  $        --
                                                              =============


        The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:


                                    Page 52
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


<TABLE>
<CAPTION>
                                                      YEAR ENDED
                                                     DECEMBER 31,
                                                   2001        2000
                                                -----------  ----------
<S>                                             <C>          <C>
Federal income tax rate.......................        34%          34%
Foreign and U. S. tax effect attributable
   to foreign operations......................        --           --
Effect of net operating loss and net
   operating loss carry forward...............       (34)         (34)
Effective income tax rate.....................         0%           0%
                                                 ==========  ==========
</TABLE>

9.      PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment consists of the following:

                                              DECEMBER 31,
                                                 2001
                                             --------------
Computers and equipment...................      $1,322,000
Leasehold improvements....................         185,000
Furniture and fixtures....................         123,000
                                             --------------
                                                 1,630,000
Less accumulated depreciation.............      (1,491,000 )
                                             --------------
                                                  $139,000
                                             ==============


10.     ACCRUED EXPENSES

        Accrued expenses consist of the following:

                                                               DECEMBER 31,
                                                                   2001
                                                               --------------
                  Employee compensation.....................        $825,000
                  Accrued Payroll Expenses..................         143,000
                  Licensing.................................          37,000
                  Other ....................................          27,000
                                                               --------------
                                                                  $1,032,000
                                                               ==============

        The employee compensation includes an accrual for the chairman and for
the president and chief executive officer of $825,000.


11.    GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

        The Company's 2001 operations consist of the operations of BII Australia
in Australia, and Brilliant in the United States. The Auction Channel was the
United Kingdom. The following schedule sets forth the revenues and long-lived
assets, including those of the discontinued operations of The Auction Channel
and of the Company by geographic area:


                                    Page 53
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


<TABLE>
<CAPTION>
                                                 UNITED                      UNITED
                                                 STATES       AUSTRALIA     KINGDOM
                                               ------------  ------------  -----------
<S>                                            <C>           <C>          <C>
YEAR ENDED DECEMBER 31, 2000
   Revenues from unaffiliated customers...        $301,000      $117,000     $280,000
   Revenues from affiliated customers.....         612,000            --           --
                                               ------------  ------------  -----------
   Total revenues.........................        $913,000      $117,000     $280,000
                                               ============  ============  ===========
YEAR ENDED DECEMBER 31, 2001:
   Revenues from unaffiliated customers...        $873,000       $26,000           --
   Revenues from affiliated customers.....         917,000            --           --
                                               ------------  ------------  -----------
   Total revenues.........................      $1,790,000       $26,000           --
                                               ============  ============  ===========
LONG-LIVED ASSETS AS OF:
   December 31, 2001......................        $793,000       $53,000           --
                                               ============  ============  ===========
</TABLE>


        For each of the periods shown above, the movie software costs, a portion
of the operating expenses and most of the research and development costs of the
Company were incurred and paid in Australia. The production costs associated
with the web music videos, duplication and packaging, royalties due to third
parties, a major portion of the sales and marketing costs, and certain corporate
expenses were incurred and paid in the United States.

        For the year ended December 31, 2001, e-New Media represented 51% of the
revenues with distribution and licensing rights of $917,000. Digital Hip Hop
earned 21% ($381,000) of the revenues through the production of music videos
primarily for Island Def Jam. Warner Bros. Online contributed 12% ($226,000) of
the revenues, while Warner Bros. site "Entertaindom" contributed advertising
revenues of 3% ($59,000). Infogrames contributed 6% ($100,000) in advertising
revenues. For the year ended December 31, 2000, e-New Media represented 59% of
revenues with distribution and licensing rights of $612,000. Slingshot provided
DVD revenues of 11% ($116,000) and Warner Bros. contributed 9% ($88,000) in
advertising revenues.

12.     SEGMENT INFORMATION

        With the discontinuation of The Auction Channel, the Company has one
operating segment: digital animation. Brilliant Digital Entertainment, in the
United States, together with its subsidiaries in Australia, is a production and
development studio that uses its proprietary software tool set to create digital
entertainment for distribution over the Internet, on CD-ROM and DVD, as
television programming and for home video. Brilliant Digital Entertainment also
offers for sale its proprietary authoring tools, b3d Studio and b3d Studio Pro.
The Altnet business is not yet operational.


13.     COMMITMENTS AND CONTINGENCIES

        At December 31, 2001, the Company was obligated under certain licensing
agreements to make additional payments totaling $37,000 for use of certain
properties and characters in development of its products through August 2003.

        The Company has two fixed asset financing notes (Note 6) with future
minimum payments as of December 31, 2001 under these leases are as follows:


                                    Page 54
<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


                               YEAR                           AMOUNT
                           --------------                  -----------
                               2002                            54,000
                               2003                            31,000
                                                           -----------
                                                              $85,000
                                                           ===========

        The Company leases its facilities under an operating lease agreement
expiring in 2003. Future minimum payments as of December 31, 2001 under the
lease are as follows:

                               YEAR                          AMOUNT
                           --------------                  -----------
                               2002                            83,000
                               2003                             7,000
                                                           -----------
                                                              $90,000
                                                           ===========

        Rent expense was $728,000 and $176,000 for the year ended December 31,
2000 and the year ended December 31, 2001, respectively.

14.     SUBSEQUENT EVENT

        The Company completed a financing round and has raised $800,000 in a
private placement of its common stock to Harris Toibb, MarKev Services LLC and
David Wilson, all investors in the Company prior to the closing of this
financing. The Company sold $750,000 to Harris Toibb and MarKev Services LLC on
March 7, 2002, and sold $50,000 to David Wilson on March 20, 2002. Pursuant to
the terms of certain Common Stock and Warrant Purchase Agreements, the Company
sold 6,051,437 shares of its common stock at a price per share equal to $0.1322,
which represents the volume weighted average price of a share of the Company's
common stock on the American Stock Exchange over the five consecutive trading
days immediately preceding March 7, 2002, the date the Company entered into the
Purchase Agreement with Harris Toibb and MarKev Services LLC. In addition, the
purchasers in the transaction received warrants to purchase an additional
10,758,110 shares of the Company's Common Stock at a purchase price equal to
$0.148725, which represents a price paid per share equal to 1.125 times the
price paid per share in this transaction. These warrants will expire on May 23,
2004.

        On February 22, 2002, the Company filed a Certificate of Amendment which
amended its Amended and Restated Certificate of Incorporation to increase the
number of shares of Common Stock, par value $0.001, authorized to be issued from
30,000,000 to 150,000,000.


                                    Page 55
<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

        Information required by this Item 9 will appear in the proxy statement
for the 2002 Annual Meeting of Stockholders, and is incorporated herein by
reference.

ITEM 10. EXECUTIVE COMPENSATION

        Information regarding executive compensation will appear in the proxy
statement for the 2002 Annual Meeting of Stockholders, and is incorporated
herein by reference.

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

        Information regarding security ownership of certain beneficial owners
and management will appear in the proxy statement for the 2002 Annual Meeting of
Stockholders, and is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        Information regarding certain relationships and related transactions
will appear in the proxy statement for the 2002 Annual Meeting of Stockholders,
and is incorporated by this reference.

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

        (a)    Exhibits:

               See attached Exhibit List.

        (b)    Reports on Form 8-K.

               Current Report on Form 8-K filed on December 21, 2001, reporting
               under Items 1, 5 and 7 the completion of a financing transaction
               that could result in a change in control of Registrant and the
               amendment to Registrant's Rights Agreement, dated March 30, 1998,
               as amended.


                                    Page 56
<PAGE>


                                   SIGNATURES

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

                                    BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                    By:    /S/ ROBERT CHMIEL
                                           ------------------------------------
                                           Robert Chmiel
                                    Its:   Chief Financial Officer (Principal
                                           Financial and Accounting Officer)
                                           and Chief Operating Officer


                                POWER OF ATTORNEY

        Each person whose signature appears below constitutes and appoints Mark
Dyne and Robert Chmiel, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-KSB and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.

                                   SIGNATURES

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

<TABLE>
<CAPTION>
       SIGNATURE                               TITLE                         DATE
<S>                              <C>                                      <C>

     /S/ MARK DYNE               Chairman of the Board of Directors       March 29, 2002
--------------------------
      Mark Dyne


  /S/ KEVIN BERMEISTER           Chief Executive, President and           March 29, 2002
--------------------------       Director
   Kevin Bermeister


    /S/ROBERT CHMIEL             Chief Financial Officer (Principal       March 29, 2002
--------------------------       Financial and Accounting Officer)
     Robert Chmiel               and Chief Operating Officer


    /S/ MARK MILLER              Director                                 March 29, 2002
--------------------------
      Mark Miller


   /S/ RUSSELL SIMMONS           Director                                 March 29, 2002
--------------------------
    Russell Simmons


     /S/ RAY MUSCI               Director                                 March 29, 2002
--------------------------
      Ray Musci


   /S/ GARTH SALONER             Director                                 March 29, 2002
--------------------------
    Garth Saloner


   /S/ JEFF SCHEINROCK           Director                                 March 29, 2002
--------------------------
    Jeff Scheinrock


      /S/ ABE SHER               Director                                 March 29, 2002
--------------------------
       Abe Sher
</TABLE>



                                    Page 57
<PAGE>


                                  EXHIBIT INDEX

  EXHIBIT
  NUMBER                        EXHIBIT DESCRIPTION
  -------                       -------------------
   3.1     Amended and Restated Certificate of Incorporation of Registrant.

   3.2     Amended and Restated Bylaws of Registrant. Incorporated by
           reference to Exhibit 3.2 to Form S-1 filed on September 17,
           1996, and the amendments thereto.

   3.3     Certificate of Designation of Rights, Preferences and Privileges
           of Preferred Stock. Incorporated by reference to Exhibit A to
           the Rights Agreement filed as Exhibit 4.1 to Current Report on
           Form 8-K filed as of April 6, 1998.

   4.1     Specimen Stock Certificate of Common Stock of Registrant.
           Incorporated by reference to Exhibit 4.1 to Form S-1 filed on
           September 17, 1996, and the amendments thereto.

   4.2     Rights Agreement, dated as of March 30, 1998, between Registrant
           and U.S. Stock Transfer Corporation as Rights Agent.
           Incorporated by reference to Exhibit 4.1 to Current Report on
           Form 8-K filed as of April 6, 1998.

   4.3     Form of Rights Certificate. Incorporated by reference to Exhibit
           B to the Rights Agreement filed as Exhibit 4.1 to Current Report
           on Form 8-K filed as of April 6, 1998.

   10.1    Registrant's Second Amended and Restated 1996 Stock Option Plan.
           Incorporated by reference to Exhibit 10.1 to Form 10-KSBfor the
           year ended December 31, 2000.

   10.2    Form of Registrant's Stock Option Agreement (Non-Statutory Stock
           Option). Incorporated by reference to Exhibit 10.2 to Form S-1
           filed on September 17, 1996, and the amendments thereto.

   10.3    Form of Registrant's Stock Option Agreement (Incentive Stock
           Option). Incorporated by reference to Exhibit 10.3 to Form S-1
           filed on September 17, 1996, and the amendments thereto.

   10.4    Memorandum of Agreement, dated September 5, 1996, by and between
           Registrant and Bantam Doubleday Dell Books For Young Readers.
           Incorporated by reference to Exhibit 10.9 to Form S-1 filed on
           September 17, 1996, and the amendments thereto. [Portions of
           this Exhibit have been deleted and filed separately with the
           Securities and Exchange Commission pursuant to a grant of
           Confidential Treatment.]

   10.5    Form of Registrant's Indemnification Agreement. Incorporated by
           reference to Exhibit 10.28 to Form S-1 filed on September 17,
           1996, and the amendments thereto.

   10.6    Form of Registrant's Employee Confidential Information and
           Non-Solicitation Agreement. Incorporated by reference to Exhibit
           10.29 to Form S-1 filed on September 17, 1996, and the
           amendments thereto.

   10.7    Standard Form Lease Agreement, dated May 16, 1997, between
           Topanga & Victory Partners L.P. and Registrant. Incorporated by
           reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB for
           the quarter ended June 30, 1997. [Portions of this Exhibit have
           been deleted and filed separately with the Securities and
           Exchange Commission pursuant to a grant of Confidential
           Treatment.]


                                    Page 58
<PAGE>


   10.8    Warrant Agreement, dated November 4, 1997, between Chloe
           Holdings, Inc. and Registrant. Incorporated by reference to
           Exhibit 10.43 to Form SB-2 filed on November 5, 1997, and the
           amendments thereto.

   10.9    Lease Agreement between Daiwa Real Estate Co. Ltd. And BII
           Australia. Incorporated by reference to Exhibit 10.45 to Annual
           Report on Form 10-KSB for the fiscal year ended December 31,
           1997.

   10.10   Warrant, dated July 16, 1998. Incorporated by reference to
           Exhibit 10.2 to Amendment No. 1 to Quarterly Report on Form
           10-QSB/A for the quarter ended September 30, 1998.

   10.11   Debenture and Warrant Purchase Agreement, dated as of April 21,
           1999, between Registrant and Roseworth Group, Ltd. Incorporated
           by reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB
           for the quarter ended March 31, 1999.

   10.12   4% Convertible Debenture Due April 27, 2000 of Registrant, in
           the principal amount of $1,000,000, dated as of April 27, 1999.
           Incorporated by reference to Exhibit 10.2 to Quarterly Report on
           Form 10-QSB for the quarter ended March 31, 1999.

   10.13   Registration Rights Agreement, dated as of April 21, 1999,
           between Registrant and Roseworth Group, Ltd. Incorporated by
           reference to Exhibit 10.3 to Quarterly Report on Form 10-QSB for
           the quarter ended March 31, 1999.

   10.14   Agreement for the sale and purchase of share capital of Trojan
           Television Limited, dated July 1, 1999, between SF International
           Limited and Others and Registrant. Incorporated by reference to
           Exhibit 10.1 to Current Report on Form 8-K filed as of July 14,
           1999.

   10.15   Option Agreement, dated March 11, 1999, by and among Registrant,
           Tim Helfet, Brent Cohen and SF International Ltd. acting for
           itself or as nominee for Commtel Services Ltd, HL International
           Ltd and Kai Schuermann, as amended by the First Amendment to
           Option Agreement, dated April 12, 1999, by and among Registrant,
           Tim Helfet, Brent Cohen and SF International Ltd. acting for
           itself or as nominee for Commtel Services Ltd, HL International
           Ltd and Kai Schuermann, as further amended the Second Amendment
           to Option Agreement, dated April 29, 1999, by and among
           Registrant, Tim Helfet, Brent Cohen and SF International Ltd.
           acting for itself or as nominee for Commtel Services Ltd, HL
           International Ltd and Kai Schuermann. Incorporated by reference
           to Exhibit 10.2 to Current Report on Form 8-K filed as of July
           14, 1999.

   10.16   Nontransferable Redeemable Warrant Agreement, dated July 1,
           1999, by and between Registrant and IBidLive, N.V. Incorporated
           by reference to Exhibit 10.38 to Form SB-2 filed on May 19,
           1999, and the amendments thereto.

   10.17   Nontransferable Redeemable Warrant Agreement, dated July 1,
           1999, by and between Registrant and IBidLive, N.V. Incorporated
           by reference to Exhibit 10.39 to Form SB-2 filed on May 19,
           1999, and the amendments thereto.

   10.18   Securities Purchase Agreement, dated as of March 29, 1999,
           between Registrant and St. Annes Investments, Ltd. Incorporated
           by reference to Exhibit 10.52 to Annual Report on Form 10-KSB
           for the fiscal year ended December 31, 1998.

   10.19   Registration Rights Agreement, dated as of March 29, 1999,
           between Registrant and St. Annes Investments, Ltd. Incorporated
           by reference to Exhibit 10.53 to Annual Report on Form 10-KSB
           for the fiscal year ended December 31, 1998.


                                    Page 59
<PAGE>


   10.20   Debenture and Warrant Purchase Agreement, dated as of October
           29, 1999, between Registrant and Roseworth Group, Ltd.
           Incorporated by reference to Exhibit 10.1 to Form S-3 filed on
           November 24, 1999, as amended.

   10.21   4% Convertible Debenture Due October 29, 2000 of the Registrant,
           in the principal amount of $1,000,000, dated as of October 29,
           1999. Incorporated by reference to Exhibit 10.2 to Form S-3
           filed on November 24, 1999, as amended.

   10.22   Warrant, dated October 29, 1999, granted to Roseworth Group,
           Ltd. Incorporated by reference to Exhibit 10.4 to Form S-3 filed
           on November 24, 1999, as amended.

   10.23   Registration Rights Agreement, dated as of October 29, 1999,
           between Registrant and Roseworth Group, Ltd. Incorporated by
           reference to Exhibit 10.5 to Form S-3 filed on November 24,
           1999, as amended.

   10.24   Securities Purchase Agreement closed as of September 19, 2000,
           by and between Registrant and e-New Media Digital Entertainment
           Limited. Incorporated by reference to Exhibit 99.1 to Form 8-K
           filed on September 27, 2000.

   10.25   Stock Purchase Agreement, dated as of January 1, 2000, between
           Registrant and Continental Capital & Equity Corporation.
           Incorporated by reference to Exhibit 10.1 to Form S-3 filed on
           April 14, 2000, as amended.

   10.26   Strategic Partner Agreement, dated as of February 17, 2000,
           between Registrant and e-New Media Digital Entertainment
           Limited. Incorporated by reference to Exhibit 10.1 to Quarterly
           Report on Form 10-QSB for the quarter ended December 31, 1998.

   10.27   Nontransferable Redeemable Warrant Agreement, dated February 28,
           2000, between Registrant and e-New Media Digital Entertainment
           Limited. Incorporated by reference to Exhibit 10.2 to Quarterly
           Report on Form 10-QSB for the quarter ended December 31, 1998.

   10.28   Executive Employment Agreement, dated as of December 18, 2000,
           by and between Registrant and Robert Chmiel. Incorporated by
           reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB for
           the quarter ended March 31, 2001.

   10.29   Executive Employment Agreement, dated as of January 1, 2001, by
           and between Registrant and Kevin Bermeister. Incorporated by
           reference to Exhibit 10.2 to Quarterly Report on Form 10-QSB for
           the quarter ended March 31, 2001.

   10.30   Asset Purchase Agreement, dated as of March 16, 2001, by and
           among Registrant, The Auction Channel, Inc., Trojan Television
           Limited and Metro Channel, LLC, as amended by the Amendment,
           dated April 27, 2001, as further amended by the Amendment, dated
           April 30, 2001. Incorporated by reference to Exhibit 10.1 to
           Current Report on Form 8-K filed as of May 15, 2001.

   10.31   Note and Warrant Purchase Agreement, dated as of April 19, 2001,
           between Registrant and Europlay 1, LLC. Incorporated by
           reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB for
           the quarter ended June 30, 2001.

   10.32   Note and Warrant Purchase Agreement, dated as of April 19, 2001,
           between Registrant and Harris Toibb. Incorporated by reference
           to Exhibit 10.2 to Quarterly Report on Form 10-QSB for the
           quarter ended June 30, 2001.


                                    Page 60
<PAGE>


   10.33   Note and Warrant Purchase Agreement, dated as of April 26, 2001,
           between Registrant and Preston Ford, Inc. Incorporated by
           reference to Exhibit 10.3 to Quarterly Report on Form 10-QSB for
           the quarter ended June 30, 2001.

   10.34   Amendment to Note and Warrant Purchase Agreements, dated as of
           May 23, 2001, between Registrant and Harris Toibb and
           acknowledged and consented to by Europlay 1, LLC and Preston Ford,
           Inc. Incorporated by reference to Exhibit 10.4 to Quarterly
           Report on Form 10-QSB for the quarter ended June 30, 2001.

   10.35   Form of Secured Convertible Promissory Note of Registrant, dated
           May 23, 2001. Incorporated by reference to Exhibit 10.5 to
           Quarterly Report on Form 10-QSB for the quarter ended June 30,
           2001.

   10.36   Form of Warrant to Purchase Common Stock of Registrant, dated
           May 23, 2001. Incorporated by reference to Exhibit 10.6 to
           Quarterly Report on Form 10-QSB for the quarter ended June 30,
           2001.

   10.37   Security and Pledge Agreement, dated May 23, 2001, made by
           Registrant, B3D, Inc., and Brilliant Studios, Inc. in favor of
           Harris Toibb, as agent. Incorporated by reference to Exhibit
           10.7 to Quarterly Report on Form 10-QSB for the quarter ended
           June 30, 2001.

   10.38   Guaranty, dated May 23, 2001, made by B3D, Inc. and Brilliant
           Studios, Inc. in favor of Harris Toibb, as agent. Incorporated
           by reference to Exhibit 10.8 to Quarterly Report on Form 10-QSB
           for the quarter ended June 30, 2001.

   10.39   Rights Agreement Amendment, dated as of May 9, 2001, between
           Registrant and U.S. Stock Transfer Corporation, as Rights Agent.
           Incorporated by reference to Exhibit 4.1 to Current Report on
           Form 8-K filed as of December 21, 2001.

   10.40   Technology Bundle License Agreement, dated as of October 2,
           2001, by and between Registrant and Consumer Empowerment B.V., a
           company organized under the laws of The Netherlands. [Portions
           of this Exhibit have been omitted and filed separately with the
           Securities and Exchange Commission pursuant to a request for
           confidential treatment by Registrant.]

   10.41   Note and Warrant Purchase Agreement, dated December 10, 2001, by
           and between Registrant and Harris Toibb.

   10.42   Note and Warrant Purchase Agreement, dated December 10, 2001, by
           and between Registrant and Capel Capital Ltd.

   10.43   Secured Convertible Promissory Note, dated December 19, 2001, in
           favor of Harris Toibb.

   10.44   Secured Convertible Promissory Note, dated December 19, 2001, in
           favor of Capel Capital Ltd.

   10.45   Common Stock Purchase Warrant, dated December 19, 2001, by and
           between Registrant and Harris Toibb.

   10.46   Common Stock Purchase Warrant, dated December 19, 2001, by and
           between Registrant and Capel Capital Ltd.

   10.47   Amendment Number Two to Note and Warrant Purchase Agreements,
           dated December 19, 2001, by and between Registrant and Harris
           Toibb.


                                    Page 61
<PAGE>


   10.48   Amendment Number One to Secured Convertible Promissory Notes,
           dated December 19, 2001, in favor of Harris Toibb.

   10.49   Amendment No. 1 to Warrant to Purchase Common Stock, dated
           December 19, 2001, by and between Registrant and Harris Toibb.

   10.50   Amendment No. 1 to Warrant to Purchase Common Stock, dated
           December 19, 2001, by and between Registrant and Europlay 1,
           LLC.

   10.51   Amendment No. 1 to Warrant to Purchase Common Stock, dated
           December 19, 2001, by and between Registrant and Preston Ford,
           Inc.

   10.52   Amendment Number One to Security and Pledge Agreement, dated as
           of December 19, 2001, by and between Registrant, B3D, Inc., and
           Brilliant Studios, Inc. in favor of Harris Toibb, as agent.

   10.53   Security and Pledge Agreement, dated as of December 19, 2001,
           made by Registrant, B3D, Inc., and Brilliant Studios, Inc. in
           favor of Harris Toibb, as agent.

   10.54   Investor Rights Agreement, by and between Registrant, Harris
           Toibb, Europlay 1, LLC, Preston Ford, Inc. and Capel Capital
           Ltd.

   10.55   Guaranty, dated December 19, 2001, made by B3D, Inc. and
           Brilliant Studios, Inc. in favor of Harris Toibb, as agent.

   10.56   Acknowledgement, Consent and Reaffirmation, dated December 19,
           2001, by Brilliant Studios, Inc. and B3D, Inc.

   21.1    List of Subsidiaries.

   23.1    Consent of BDO Seidman, LLP.

   24.1    Power of Attorney (included on signature page).


                                    Page 62