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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 AMENDMENT NO. 1
                                       TO
                                  FORM 10-KSB/A

[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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                                 AMENDMENT NO. 1
                  TO THE ANNUAL REPORT ON FORM 10-KSB FILED BY
             BRILLIANT DIGITAL ENTERTAINMENT, INC. ON APRIL 1, 2002

     The  following  amends the Annual  Report on Form 10-KSB filed by Brilliant
Digital  Entertainment,  Inc.  (the  "Company")  on April  1,  2002  (the  "Form
10-KSB"),  as  permitted  by  the  rules  and  regulations  promulgated  by  the
Securities  and Exchange  Commission.  The Form 10-KSB is hereby  amended as set
forth herein.

                                     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  unilaterally  decided to discontinue its distribution.  We
commercialize  our  advertising  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  during the first quarter of 2001 to offer  advertisers  and web
sites an alternative to the current Graphics Interchange Format, or GIF, banners
that are prevalent on web sites today.  Rich media  advertising  banners are web
site banner ads that have full audio and motion  animation.  We believe that our
animated 3D banner  advertisements  perform better than GIF banners because they
include motion animation and full audio,  which is more engaging to a viewer. 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 operate a  peer-to-peer-based  content distribution network that allows
Altnet to securely and efficiently  distribute a content  owner's music,  video,
software and other digital files to computer users.  Using internally  developed
and licensed technology, we intend to create a private, or "closed" peer-to-peer
network,  which allows us to  centrally  control the  distribution  of a digital
file,  which has been  authorized by its owner,  directly from one computer user
(peer) to another  (peer).  Our ability to control  which files are  distributed
over our private network,  as well as our use of widely available digital rights
management (or DRM) technologies from Microsoft Corporation, TryMedia and others
to protect  against  copyright  infringement,  will prevent the  distribution of
unauthorized files over our network and help to protect against the unauthorized
use of a digital  file  distributed  over our network  once it resides on an end
user's  computer.  We intend to exploit  Altnet by  partnering  with third party
operators of web sites and other Internet  applications to enable users of those
web sites and  applications  to search for and download  digital  files from the
Altnet network. We own 51% of the outstanding capital stock of Altnet and manage
all of its day-to-day operations, and the remaining 49% is owned by Joltid, Ltd.
(formally  known as  Blastoise,  Ltd.),  the  company  from  whom we  license  a
substantial portion of Altnet's peer-to-peer technology.


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     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  which  employed a team of  animators  and
programmers  dedicated to animation  production.  We discontinued  operations at
Digital  Hip  Hop  based  on the  limited  prospects  of  additional  web  video
production work. We discontinued  operations at Brilliant Interactive Ideas Pty.
Ltd.  because  of the under  utilization  of  animators  and  programmers  which
occurred following the termination of our production agreement with Warner Bros.
Online and the  closing of Digital  Hip Hop.  The  cessation  of  operations  at
Brilliant  Interactive  Ideas Pty. Ltd. and Digital Hip Hop has reduced costs in
business segments that were not generating,  and which we concluded did not have
the potential to generate,  significant  revenues.  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.

     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.  Specifically,  we tested the same
advertised product in two banner ads; one produced as a Brilliant Banner and the
other as a 2D, GIF banner.  The  click-through  percentages  (the  percentage of
users who saw the ad and then  clicked the  banner),  which we used to determine
the effectiveness of the ads, were 3.3% for the Brilliant Banner ad and 0.2% for
the 2D GIF ad, on a total of  approximately  2 million  banner  ads  served.  We
believe that, based on this test, our rich media animated, 3D banner ads perform
better than GIF banners  because they include  motion  animation and full audio,
which is more  engaging to a viewer.  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.


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     Our  proprietary,  copyright-protected,  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 have also used our
tools to create our  MultipathTM  Movies and  animated  music  videos,  with the
intent that users would desire to view this engaging b3d content. We believe the
demand by users for b3d-produced content would cause a demand for our tools from
producers of such content, and thus make our tools the de facto standard for the
production,  distribution  and viewing of 3D animation  over the Internet.  This
strategy  however  has been met with  little  success,  and  given  our  limited
financial resources, our ability to continue this strategy has been diminished.

     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.

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.  Our b3d
products were made commercially  available as a download from our website in the
third quarter of 2001 and 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.


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     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 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


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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.  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.


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          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 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.


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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 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.


                                       7


<PAGE>


                       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 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 which
employed a team of animators and programmers  dedicated to animation production.
We discontinued  operations at Digital Hip Hop based on the limited prospects of
additional web video  production  work. We discontinued  operations at Brilliant
Interactive  Ideas Pty. Ltd.  because of the under  utilization of animators and
programmers which occurred following the termination of our production agreement
with Warner Bros.  Online and the closing of Digital Hip Hop.  The  cessation of
operations  at  Brilliant  Interactive  Ideas Pty.  Ltd. and Digital Hip Hop has
reduced  costs in  business  segments  that  were not  generating,  and which we
concluded did not have the potential to generate,  significant  revenues. 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:


                                       8


<PAGE>


     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:

     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.


                                       9


<PAGE>


     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  customers  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.

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).


                                       10


<PAGE>


     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.

     During the third quarter of 2001, we began marketing and  distributing  our
Digital Projector  through two large  peer-to-peer  networks,  Sharman Networks,
which operates the KaZaA network,  and StreamCast  Networks,  which operates the
Morpheus  network.  Both of these networks are public,  or "open"  networks that
allow any of their  respective  users to share  digital  files with other users.
Through our business  relationships with Sharman and StreamCast,  we perceived a
business opportunity to create a private, or "closed" peer-to-peer network which
would allow us to centrally control the distribution of digital files, which has
been authorized by files' owners, directly from one computer user to another.

     In February  2002, we formed  Brilliant P2P,  Inc.,  later renamed  Altnet,
Inc., to operate a  peer-to-peer-based  content distribution network that allows
Altnet to securely and efficiently  distribute a content  owner's music,  video,
software and other digital files to computer users.  Using internally  developed
and licensed  technology,  we intend to create a private peer-to-peer network to
centrally control the authorized distribution of digital files over the network.
Our ability to control which files are distributed over our private network,  as
well  as our  use  of  widely  available  digital  rights  management  (or  DRM)
technologies from Microsoft Corporation,  TryMedia and others to protect against
copyright infringement, will prevent the distribution of unauthorized files over
our network and help to protect against the  unauthorized  use of a digital file
distributed  over our  network  once it resides on an end  user's  computer.  We
intend to exploit Altnet by partnering  with third party  operators of web sites
and  other  Internet  applications  to  enable  users of  those  web  sites  and
applications  to search for and download  digital files from the Altnet network.
We own 51% of the  outstanding  capital  stock of Altnet  and  manage all of its
day-to-day operations,  and the remaining 49% is owned by Joltid, Ltd. (formally
known as  Blastoise,  Ltd.),  the  company  from whom we  license a  substantial
portion of Altnet's peer-to-peer technology.

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


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<PAGE>


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 which allows us to centrally control the
distribution of a digital file, which has been authorized by its owner, directly
from one computer user to another,  thus taking advantage of the excess computer
storage capacity and unused bandwidth of our network users.

     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
automatically  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.  Users that  download the KaZaA
Media Desktop are not given the opportunity to reject download of SecureInstall,
and these users are most likely not aware that  SecureInstall has been installed
on  their  computer.  The  basis  of  the  SecureInstall  is our  b3d  Installer
technology.  The Installer technology connects to file servers and P2P networks,
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 -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.

     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
KaZaA users who are  connected to the Internet to search for digital  files that
reside on both the KaZaA  network  and the Altnet  network by typing one or more
key words in a search box located on the KaZaA GUI. If the search query  matches
the description of one or more available  Altnet files,  the Altnet  application
will  display the identity of the  matching  Altnet files in the search  results
page of the KaZaA GUI. A KaZaA user will be able to download an Altnet file from
the Altnet network in substantially the same manner as the user would download a
digital file from the KaZaA network.

     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.

SALES AND MARKETING OF ALTNET'S SERVICES

     We  currently  intend  to engage  outside  consultants  to market  Altnet's
peer-to-peer  file  distribution  services to content owners.  These consultants
will  negotiate  with content owners to obtain from them the right to distribute
and sell their music, movie clips, movie trailers,  full-length movies, computer
games,  software  products,  and other  digital  files on  Altnet.  We intend to
approach as many content  owners as our resources  permit to promote Altnet as a
distribution  and  selling  partner.  We intend  to rely on sales and  marketing
consultants until our operations  generate  sufficient cash flow to permit us to
hire an internal sales staff.


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<PAGE>


     We intend to enter into  agreements  with  content  owners to obtain  their
express  permission to include their digital files on the Altnet network,  to be
distributed  and, if the owner  desires,  sold to users of the network.  We will
also  partner  with  third  party  operators  of web sites  and  other  Internet
applications  to enable users of those web sites and  applications to search for
and  download  the  content  owners'  digital  files  from the  Altnet  network.
Initially,  we intend to partner  with  Sharman  Networks to make  Altnet  files
available to users of the KaZaA Media Desktop.

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.  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. 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  peer-to-peer  file distribution  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 new  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. We have been able to
leverage our relationship with Sharman Networks,  distributor of the KaZaA Media
Desktop,  to quickly  and  efficiently  install  our Altnet  software on tens of
millions of computers  worldwide.  Our  competitors may not be able to achieve a
similar   installed   based  of  their  software   application  as  quickly  and
cost-effectively as Altnet.  Additionally,  Altnet's ability to communicate with
FastTrack  technology,  which  runs  the  KaZaA  Media  Desktop  and is  already
installed  on desktops  worldwide,  also  presents a  significant  advantage  by
allowing our content owners the  opportunity to distribute and sell their secure
content to the tens of millions of users who perform  search  requests  each day
via the KaZaA GUI.

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. Additionally, our limited financial resources
may not allow  Altnet to compete  effectively  against  companies  with  greater
financial resources or greater access to capital necessary for grow. Its success
will depend, in part, on the following:

          o    acceptance by content owners 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.


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<PAGE>


                            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.

                                  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.


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<PAGE>


ITEM 3.  LEGAL PROCEEDINGS

     We are not involved in any material litigation.

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

     None


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                                    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:

                                                            HIGH          LOW
                                                            ----          ---
     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

     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  (better known as "KaZaA")  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  KaZaA  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 similar to the financing we conducted in May 2001 and involved one of
the same  investors.  In the December  2001


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<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.


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<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  during the first quarter of 2001 to offer  advertisers  and web
sites an alternative to the current Graphics Interchange Format, or GIF, banners
that are prevalent on web sites today.  Rich media  advertising  banners are web
site banner ads that have full audio and motion  animation.  We believe that our
animated 3D banner  advertisements  perform better than GIF banners because they
include motion animation and full audio,  which is more engaging to a viewer. 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.


                                       18


<PAGE>


     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.

     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  which  employed a team of  animators  and
programmers  dedicated to animation  production.  We discontinued  operations at
Digital  Hip  Hop  based  on the  limited  prospects  of  additional  web  video
production work. We discontinued  operations at Brilliant Interactive Ideas Pty.
Ltd.  because  of the under  utilization  of  animators  and  programmers  which
occurred following the termination of our production agreement with Warner Bros.
Online and the  closing of Digital  Hip Hop.  The  cessation  of  operations  at
Brilliant  Interactive  Ideas Pty. Ltd. and Digital Hip Hop has reduced costs in
business segments that were not generating,  and which we concluded did not have
the potential to generate,  significant  revenues.  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  customers  request a quote for  additional  work or we are
approached  to  produce  additional  web  videos,  we  intend to  outsource  the


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<PAGE>


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  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.

     Our  critical   accounting   policies  are  described  in  Note  2  to  the
consolidated  financial  statements  included in Item 7 of this Form 10-KSB.  We
believe our most critical accounting policies include revenue  recognition,  the
corresponding  accounts receivable and our use of the consolidation  method when
accounting for our subsidiaries.  We believe the following  critical  accounting
policies affect our more significant judgments and estimates used in preparation
of our consolidated financial statements.

     Under SEC Staff Accounting Bulletin No. 101, generally we recognize revenue
when all of the  following  criteria  are met:  (1)  persuasive  evidence  of an
arrangement  exists,  (2) delivery has occurred or services have been  rendered,
(3)  the  seller's  price  to the  buyer  is  fixed  or  determinable,  and  (4)
collectibility  is  reasonably  assured.  In the case of each of our product and
service lines we establish a contract or insertion order with our customers with
specifics for requirements,  a fixed price, a delivery  schedule,  and terms for
payment. We also recognize revenue in accordance with the following with respect
to our specific products and services:  when we enter into development contracts
for our  MultipathTM  Movies  under  which  we are  entitled  to  fixed  minimum
guaranteed  payments,  in accordance  with AICPA Statement of Position 97-2 (SOP
97-2), the minimum guaranteed payments are recognized as revenue when the CD-ROM
master is delivered  to the  distributor,  the terms of the sale are  considered
fixed, and collectibility is probable.

     Unless cash is paid in advance,  our receivables are recorded as revenue is
earned.  We then  record  reserves  against  our  receivable  accounts  based on
historical  results.  If no  historical  results  are  available  at the  time a
receivable is booked, the general credit worthiness of the customer is evaluated
and an  appropriate  reserve  is  recorded,  if  any.  The  amount  of  reserves
ultimately required,  however, could differ materially from the amounts provided
for in the accompanying consolidated financial statements, which would result in
accounting adjustments recorded in future periods to reflect such difference. To
the extent the actual reserves are greater than the amount of reserve  recorded,
our financial statements will be negatively impacted.

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.


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<PAGE>


     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)  production  fees of $381,000 for the 2001 fiscal year related to the
production by Digital Hip Hop of animated music videos,  for which there were no
revenues for the 2000 fiscal year,  (ii) a full year of revenues of $917,000 for
the 2001 fiscal year from our distribution and technology  agreements with e-New
Media,  an increase  of 49.8% as  compared to revenues of $612,000  for the 2000
fiscal  year,  and (iii)  advertising  revenues of $509,000  for the 2001 fiscal
year,  an increase  of 70.2% as  compared  to revenues of $309,000  for the 2000
fiscal year, which increase was due to an increase in demand for our advertising
services. The increase in revenues for the 2001 fiscal year was partially offset
by a decrease in software  and DVD sales to $9,000 for the 2001 fiscal  year,  a
decrease of 92.4%, as compared to $109,000 for the 2000 fiscal year.

     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 due to the  development of
animated music videos during 2001, at a cost of $352,000, as compared to no cost
during 2000.

     This  increase in cost of revenues is  partially  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,  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,


                                       21


<PAGE>


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.

     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):

     ---------------------------------------------------------------------
     ACTIVITY:                                       2001            2000
     ---------------------------------------------------------------------
     Continuing Operations ................       $ (5,000)       $(16,000)
     Discontinuing Operations .............       $ (1,000)       $  5,000
     Investing ............................       $   --          $ (1,000)
     Financing ............................       $  3,000        $ 12,000
     ---------------------------------------------------------------------

     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


                                       22


<PAGE>


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 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:



               CONTRACTUAL                 TOTAL      LESS THAN       1-3
               OBLIGATIONS                             1 YEAR        YEARS

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


     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 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.


                                       23


<PAGE>


     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.

     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 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.

     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


                                       24


<PAGE>


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 and
reduce overhead significantly."

     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.

     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,


                                       25


<PAGE>


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  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


                                       26


<PAGE>


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.

     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


                                       27


<PAGE>


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  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


                                       28


<PAGE>


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 by the National Music Publishers  Association.  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 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.


                                       29


<PAGE>


     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  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


                                       30


<PAGE>


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 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


                                       31


<PAGE>


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  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


                                       32


<PAGE>


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.


                                       33


<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............................35

Consolidated Balance Sheet as of December 31, 2001............................36

Consolidated Statements of Operations for the years
   ended December 31, 2000 and 2001...........................................37

Consolidated Statements of Stockholders' Deficit
   for the years ended December 31, 2000 and 2001.............................38

Consolidated Statements of Cash Flows for the years
   ended December 31, 2000 and 2001...........................................39

Notes to Consolidated Financial Statements....................................41


                                       34


<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.


                                       35


<PAGE>


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

                                                               DECEMBER 31, 2001
                                                               -----------------
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
                                                                       ========

                 See Notes to Consolidated Financial Statements


                                       36


<PAGE>


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

                                                                YEAR ENDED
                                                               DECEMBER 31,
                                                         ----------------------
                                                           2001          2000
                                                         --------      --------
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
                                                         ========      ========

                 See Notes to Consolidated Financial Statements


                                       37


<PAGE>


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

<TABLE>
<CAPTION>

                                           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


                                       38


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                         -----------------------
                                                           2001          2000
                                                         --------      --------
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
                                                         --------      --------

                 See Notes to Consolidated Financial Statements


                                       39


<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.


                                       40


<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 has 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.


                                       41


<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

     Under SEC Staff Accounting Bulletin No. 101, generally we recognize revenue
when all of the  following  criteria  are met:  (1)  persuasive  evidence  of an
arrangement  exists,  (2) delivery has occurred or services have been  rendered,
(3)  the  seller's  price  to the  buyer  is  fixed  or  determinable,  and  (4)
collectibility  is  reasonably  assured.  In the case of each of our product and
service lines we establish a contract or insertion order with our customers with
specifics for requirements,  a fixed price, a delivery  schedule,  and terms for
payment. We also recognize revenue in accordance with the following with respect
to our specific products and services.

     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. We recognize revenue from the sale or license of software
tools to end users at the time the end user  purchases and pays for the product.
For distribution agreements,  which cover a period of time in excess of one year
and are exclusive for a geographic territory,  the Company recognizes revenue on
a  straight-line  basis  over  the  life of the  agreement.  In the  case of our
distribution  and licensing  agreements with e-New Media,  e-New Media paid us a
non-refundable  advance  against  future  royalties  from sales of our  software
tools, and this advance is being recognized as revenue on a straight-line  basis
over the five and six year life of these agreements.

     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",  such as  completion of the script or
incorporation  of the music,  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.  In the case of music videos,
the  production  period  is 6 to 12  weeks  and the  customer  signs  off on the
milestones  as they are met,  and the  customer  is  invoiced  for that stage of
production.  In the case of banner ads, the  production  period is much shorter,
perhaps  two weeks,  so we  usually  require  50%  payment up front and 50% upon
completion. The revenue is recognized upon delivery of the file to the client.

     DEVELOPMENT  FEES:  The Company enters into  development  contracts for its
Multipath  Movies  under  which they are  entitled to fixed  minimum  guaranteed
payments.  In accordance with AICPA  Statement of Position 97-2 (SOP 97-2),  the
minimum guaranteed  payments are recognized as revenue when the CD-ROM master is
delivered to the  distributor,  the terms of the sale are considered  fixed, and
collectibility  is probable.  The Company has derived  revenues from  royalties,
development fees and software sales. The Company


                                       42


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


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 Multipath
Movie CD-ROM products to distributors in exchange for a  non-refundable  minimum
fixed fee and a percentage  of sales of the  products.  In  accordance  with SOP
97-2, revenue related to the non-refundable minimum fixed fee is recognized when
the  CD-ROM  master  is  delivered  to the  customer,  the terms of the sale are
considered fixed, and collectibility is probable. 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.  While the  Company  is not  obligated  to accept  returns  of its
Multipath Movie CD-ROM products,  the Company  infrequently grants returns,  and
thus  provides for  estimated  returns at the time revenue for  Multipath  Movie
CD-ROM sales is recognized.

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

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


                                       43


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


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".

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


                                       44


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


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.

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.


                                       45


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


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.

     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


                                       46


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


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.

4.   RELATED PARTY TRANSACTIONS

     The Company recognized $612,000 and $917,000 of revenue for the fiscal year
ended  December 31, 2000 and December  31,  2001,  respectively,  related to its
distribution and technology agreements with e-New Media. See Note 5.

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.


                                       47


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


     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,
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")


                                       48


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


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 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

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 connections 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


                                       49


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 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 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.


                                       50


<PAGE>


     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 (the "New Notes")
financing will only be finally  determined  upon  conversion of the notes.  (See
Footnote 5 SIGNIFICANT AGREEMENTS - Convertible Promissory Notes).

     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:

                                                NUMBER
                                              OF SHARES       OPTION PRICE
                                              ---------      --------------
     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


                                       51


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


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.

     The following table summarizes stock option activity:

                                                    NUMBER
                                                  OF SHARES       OPTION PRICE
                                                  ---------      ---------------
      Outstanding at December 31, 1999........    1,441,000      $1.50 -- $3.94
      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

     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


                                       52


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


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:

                                           YEAR ENDED             YEAR ENDED
                                        DECEMBER 31, 2001      DECEMBER 31, 2000
                                        -----------------      -----------------

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)


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:


                                       53


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


                                                                YEAR ENDED
                                                               DECEMBER 31,
                                                             --------------
                                                              2001     2000
                                                             -----    -----

     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%
                                                             =====    =====

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,
of the Company by geographic area:


                                       54


<PAGE>


                      BRILLIANT DIGITAL ENTERTAINMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001


                                              UNITED                   UNITED
                                              STATES     AUSTRALIA     KINGDOM
                                            ----------   ----------   ----------
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         --
                                            ==========   ==========   ==========


     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  subsidiary  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:


                                       55


<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.


                                       56


<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 Index.

     (b)  Reports on Form 8-K.

          None.


                                       57


<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

                                   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.

        SIGNATURE                        TITLE                         DATE
        ---------                        -----                         ----

            *                   Chairman of the Board          February 28, 2003
--------------------------      of Directors
        Mark Dyne

            *                   Chief Executive Officer,       February 28, 2003
--------------------------      President and Director
     Kevin Bermeister

   /S/ ROB CHMIEL               Chief Financial Officer        February 28, 2003
--------------------------      (Principal Financial and
        Rob Chmiel               Accounting Officer) and
                                Chief Operating Officer

            *                   Director                       February 28, 2003
--------------------------
       Mark Miller

            *                   Director                       February 28, 2003
--------------------------
     Russell Simmons

            *                   Director                       February 28, 2003
--------------------------
        Ray Musci

            *                   Director                       February 28, 2003
--------------------------
      Garth Saloner

            *                   Director                       February 28, 2003
--------------------------
     Jeff Scheinrock

            *                   Director                       February 28, 2003
--------------------------
         Abe Sher

* By:  /S/ ROB CHMIEL
       -------------------
       Rob Chmiel
       As Attorney-In-Fact


                                       58


<PAGE>


                        Certification of CEO Pursuant to
                 Securities Exchange Act Rules 13a-14 and 15d-14
                             as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Kevin Bermeister, certify that:

         1. I have  reviewed  this annual  report on Form  10-KSB/A of Brilliant
Digital Entertainment, Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
annual report; and

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report.

Date:    February 28, 2003

                                           /S/ KEVIN BERMEISTER
                                           -----------------------
                                           Kevin Bermeister
                                           Chief Executive Officer


                                       59


<PAGE>


                        Certification of CFO Pursuant to
                 Securities Exchange Act Rules 13a-14 and 15d-14
                             as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert Chmiel, certify that:

         1. I have  reviewed  this annual  report on Form  10-KSB/A of Brilliant
Digital Entertainment, Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
annual report; and

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report.

Date:    February 28, 2003

                                           /S/ ROBERT CHMIEL
                                           -----------------------
                                           Robert Chmiel
                                           Chief Financial Officer


                                       60


<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      [Intentionally Omitted]

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.]

10.8      [Intentionally Omitted]

10.9      [Intentionally Omitted]

10.10     [Intentionally Omitted]

10.11     [Intentionally Omitted]


                                       61


<PAGE>


10.12     [Intentionally Omitted]

10.13     [Intentionally Omitted]

10.14     [Intentionally Omitted]

10.15     [Intentionally Omitted]

10.16     [Intentionally Omitted]

10.17     [Intentionally Omitted]

10.18     [Intentionally Omitted]

10.19     [Intentionally Omitted]

10.20     [Intentionally Omitted]

10.21     [Intentionally Omitted]

10.22     [Intentionally Omitted]

10.23     [Intentionally Omitted]

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     [Intentionally Omitted]

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 I, 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.


                                       62


<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 ad consent
          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.*


                                       63


<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.*

99.1      Certificate of our Chief Executive Officer and Chief Financial Officer
          pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


  *       Previously reported on Form 10-KSB.


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