SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                 FORM 10-KSB

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

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

      For the transition period from July 1, 1996 to December 31, 1996

                       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 513
                      Woodland Hills, California 91367
            (Address of Principal Executive Offices and Zip Code)

                               (818) 346-3653
              (Issuer's telephone Number, Including Area Code)

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

                                    None

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

                        Common Stock, $.001 par value

     Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.

          Yes   X        No

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB  [X]

     The issuer's revenues for the fiscal year ended December 31, 1996 were
$350,000.

     At March 27, 1997 the aggregate market value of the voting stock held by
non-affiliates of the issuer was $9,750,000.

     At March 27, 1997 the issuer had 7,200,001 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 Issuer's Proxy Statement with respect to its 1997 Annual Meeting
of Stockholders, currently scheduled to be held
May 22, 1997, are incorporated by reference into Part III of this Report.

Exhibit index is located on page 50.

<PAGE>

PART I

ITEM 1    DESCRIPTION OF BUSINESS

HISTORY AND PRIOR ACTIVITIES

     Brilliant Digital Entertainment, Inc. ("Brilliant" or the "Company") is
a production and development studio introducing a new generation of digital
entertainment to be distributed over the Internet, on CD-ROM, as television
programming and for home video.  The Company, headquartered in the United
States, was incorporated during July 1996.  The Company has been formed
through the combination of two businesses:  Brilliant Interactive Ideas, Pty.
Ltd. ("BII Australia"), an entertainment software developer and producer; and
Sega Australia New Developments ("SAND"), a research and development
operation for leading edge software tools. Since its founding in September
1993, BII Australia has developed and sold interactive education and
entertainment CD-ROM titles primarily for children.

BII Australia became a wholly-owned subsidiary of the Company through the
exchange of all 100,000 outstanding shares of BII Australia for 1,000,000
shares of Common Stock of the Company.  In addition, on September 30, 1996
the Company acquired SAND.  SAND was established during the second quarter of
1994 by Sega Ozisoft Pty., Limited ("Sega Ozisoft"), one of the largest
publishers and distributors of entertainment software products in Australia
and New Zealand.  Sega Ozisoft and BII Australia began working together
during November of 1994 to jointly continue the development of SAND's
software tools.  BII Australia provided consulting advice regarding
integration of individual tool components, the required functionality of the
tool suite and technical issues impacting the use of text, sound, graphics
and other special effects in the development of an interactive digital
entertainment product.  BII Australia and Sega Ozisoft formalized their
relationship on January 17, 1996 with an agreement through which BII
Australia provided continued technical assistance for the enhancement of
SAND's software tools and in the development of the first Multipath Movie
product, which is based on the Australian comic strip character "Cyberswine."

BUSINESS MODEL

GENERAL

     The Company is developing Multipath Movies which are three-dimensional
digitally animated stories, each with hundreds of plot alternatives, or
paths, leading to multiple distinct conclusions that are influenced by the
user.  The Company has the ability to produce Multipath Movies with seamless
interactivity where the plot and graphics are uninterrupted by the user's
decisions.  Furthermore, the Company believes that its studio can produce a
Multipath Movie in multiple formats in a single cost-efficient production
process.  The Company is developing a system that will permit real time
distribution of, and user interaction with, its Multipath Movies over the
Internet.  Under a three-year marketing agreement, the Company intends to
launch Internet distribution of the Multipath Movie through Packard Bell
NEC's Planet Oasis World Wide Web site by bundling Internet-enabled CD-ROMs
on up to six million PCs shipped by Packard Bell NEC.  Through additional
strategic relationships, the Company has secured quality content for its
Multipath Movies from a number of proven sources such as Morgan Creek
Productions, Crawford Productions and Bantam Doubleday Dell Books.

     The Company's Multipath Movies are designed to combine the best
qualities of traditional filmed entertainment--story and plot, with the best
of the traditional computer game--its interactivity.  The Company's Multipath
Movies are designed to appeal to the entire home PC and game console markets,
including both the core gamer and the much larger segment of PC users not
currently served by traditional game developers.  The Company plans to
produce a variety of Multipath Movies tailored to various demographic groups,
such as comedies, adventures, romances, science fiction stories and
children's stories.  The Company intends to release its first Multipath
Movie, Cyberswine, in the fall of 1997 through its distribution arrangement
with Packard Bell NEC.  The Company also is developing the Storyteller Series
of Multipath Movies in which an animated Storyteller will narrate engaging
interactive stories targeted at children eight to twelve years of age.  The
Storyteller Series will be based upon existing published children's fiction
books and original scripts, such as Bantam Doubleday Dell Books' popular
Choose Your Own Adventure series.

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     The Company plans to release certain of its Multipath Movies in
non-interactive format as television broadcast/cable programming and home
video features.  Towards that goal, the Company has entered into a production
joint venture with Crawford Productions, an Australian television production
company, through which the Company and Crawford Productions will jointly
develop and distribute broadcast and cable versions of two Multipath Movie
scripts in the United States and internationally.

     The Company develops Multipath Movies in a single process utilizing its
proprietary software tools in conjunction with the Company's digital
production and lay-up skills.  The Company has four proprietary software
tools: (i) ScripNav, a software tool that enables a script writer to write,
review and correct branching multipath scripts; (ii) LipSync, a software tool
used to synchronize facial expressions and mouth movements to voice
soundtracks automatically; (iii) SCuD Engine, a software system which
collects and integrates the output from all of the component tools to produce
the Multipath Movie; and (iv) DigitalProjector, the tool that contains all
the necessary elements to load and play a Multipath Movie.  Utilizing its
proprietary software tools, the Company can produce multiple formats from
each title in a single cost-efficient production process, enabling the
Company to amortize its production costs across the revenue streams from each
format.  In addition, the Company's LipSync tool allows for low-cost
modification of Multipath Movies to other languages without the awkward
appearance of dubbed movies.  The Company's proprietary software tools and
production process are designed to emulate traditional film writing and
production techniques and allow screenwriters, directors and producers to
develop Multipath Movies without any detailed knowledge of computer
programming or significant assistance from expensive programming teams.  As
an example, the Company has entered into an agreement through which Morgan
Creek Productions will provide the Company with certain creative, direction
and film development assistance on two motion picture scripts.  The Company
believes that the utilization of existing entertainment resources will enable
it to generate high-quality digital entertainment at a low cost.

THE DIGITAL ENTERTAINMENT MARKET

     Digital entertainment combines the best elements of filmed
entertainment, creative artistry and engaging plotlines, in a multimedia
format complete with high-quality stereo sound, graphics and animation to
produce a realistic experience.  Digital entertainment is created, stored and
can be distributed electronically.  Examples of current digital entertainment
products include high-end computer games, virtual reality attractions, and
computer-animated television programs and feature films.  Traditionally,
digital entertainment has been distributed on CD-ROM and game console
cartridges.  Leading edge digital entertainment products are now also being
released online to capitalize on the tremendous current interest in the
Internet and the World Wide Web.  In addition, digital entertainment products
have recently been released as broadcast television and cable programming,
home videos, and even full length feature movies, although on a limited
basis.

     TECHNOLOGY AND DIGITAL ENTERTAINMENT

     The market for digital entertainment evolved and has grown dramatically
with the increasing proliferation and sophistication of personal computers
and game playing consoles, and with the widespread use of the Internet.
Sales of personal computers to home users have increased in recent years as a
result of declining prices and increased functionality of PCs.  A large
market has also developed for interactive digital entertainment on a new
generation of 32-and 64-bit game consoles, including the Sega Saturn and Sony
Playstation, with advanced technical capabilities previously available only
on PCs.  In addition, technological advances have enabled millions of
consumers and businesses to utilize the Internet, particularly the World Wide
Web.  Widespread use of the Internet has become possible with technological
improvements in data transmission, such as the development of more powerful
data servers and faster modems.

     The Company believes that the demand for digital entertainment with
increasingly sophisticated features will continue to grow given the
increasing multimedia capability of today's PCs and game consoles, the
growing popularity of the Internet and the expected improvements in accessing
the Internet.  In addition, the Company believes that there is a significant
segment of the home PC user population that currently does not use
interactive PC-based entertainment

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products.  Much of PC-based and game
console digital entertainment to date has been developed and subsequently
enhanced for the dedicated computer game player, typically an eight to 21
year-old male with substantial free time and spending money.  The typical PC
user, however, is frustrated by the difficulty of many computer games and the
amount of scarce leisure time that is required to complete the experience.  A
well conceived game has also been expensive to produce, causing retail price
points to be high relative to competing entertainment products.  As a result
of the industry focus on the limited core gamer segment, the fundamentals of
interactive multimedia have remained relatively static over the past decade
and have been centered on game design characterized by arcade, adventure,
role playing, strategy and simulation themes.

     The Company's Multipath Movie represents a new genre of interactive
digital entertainment that can be experienced in less than two hours and will
utilize content intended to appeal to a wider audience than the traditional
gamer.  The Company plans to produce a variety of Multipath Movie titles
tailored to various demographic groups, such as comedies, adventures, science
fiction stories and children's stories.

BUSINESS STRATEGY

     The Company's objective is to become a leading producer of animated
digital entertainment by utilizing its proprietary technology base, strategic
relationships and experienced management team.  Specific elements of the
Company's strategy are to: (i) address market opportunities with a new genre
of digital entertainment; (ii) leverage the Company's proprietary software
development capabilities to produce low-cost, high-value, digital
entertainment products in multiple formats; (iii) utilize the existing
entertainment industry talent base for content development; (iv) maintain a
strong in-house research and development program; and (v) leverage
management's experience and continue building strategic relationships within
the entertainment and computer software industries.

ADDRESS MARKET OPPORTUNITIES WITH THE MULTIPATH MOVIE--A NEW GENRE OF DIGITAL
ENTERTAINMENT

     The Company believes that its Multipath Movies will have wide appeal to
the PC user and also serve as television broadcast/cable programming and home
video features.  The Company is designing its Multipath Movies to capitalize
on underserved segments of the home PC market with stories that can be
experienced in less than two hours and utilize content intended to appeal to
a wider audience than the traditional gamer.  The Company plans to produce a
variety of Multipath Movies tailored for various demographic groups,
including comedies, adventures, romances, science fiction stories and
children's stories.  Through its integrated production process for Multipath
Movies, the Company has the ability to produce three 30-minute episodes for
the broadcast/cable television market and a 90-to 120-minute  animated
feature for the home video market.  The Company believes that its low-cost
integrated production process will enable the Company to offer
broadcast/cable television programming and home video features at attractive
prices.

LEVERAGE PROPRIETARY SOFTWARE TOOLS AND PRODUCTION CAPABILITIES TO DEVELOP
LOW-COST, HIGH-VALUE, DIGITAL ENTERTAINMENT PRODUCTS IN MULTIPLE FORMATS

     The Company intends to maximize the product output of each Multipath
Movie.  Utilizing its proprietary software tools and object-oriented
production process, the Company believes that it can produce Multipath Movies
in multiple delivery formats, including CD-ROM, the Internet, television
broadcast/cable programming and home video.  By managing the specific sound,
graphics, layup and other production elements associated with each format on
an integrated basis from the beginning, the Company can produce multiple
formats from each title during one production process.  This enables the
Company to amortize its production costs across the revenue stream associated
with each format.  Consequently, the Company believes that it will be able to
offer high-quality digital entertainment at competitive prices.  In addition,
the Company's proprietary lip synchronization software tool allows for
low-cost modification of the Multipath Movies to any language without the
awkward appearance of dubbed movies.  The Company also believes that its
proprietary software tools and object-oriented production process enable it
to inexpensively develop digital entertainment content that is readily
adaptable for a variety of different hardware platforms, such as the PC and
Sega Saturn game console.  Accordingly, the Company expects to have greater
flexibility in commercializing its products without being constrained by
consumer platform choices.

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UTILIZE THE EXISTING ENTERTAINMENT INDUSTRY TALENT BASE FOR CONTENT
DEVELOPMENT

     The Company has designed its proprietary software tools and
object-oriented production process with the objective of emulating
traditional film writing and production techniques.  In addition to being in
greater supply, and therefore often available at lower cost than typical game
programmers, entertainment industry professionals possess the creativity,
maturity and experience needed to produce plot-based interactive
entertainment.  The Company believes that its technology will allow
screenwriters, directors and producers retained by the Company to develop
Multipath Movies without any detailed knowledge of computer programming or
significant assistance from expensive programming teams.

     MAINTAIN A STRONG IN-HOUSE RESEARCH AND DEVELOPMENT PROGRAM

     The Company intends to maintain its strong in-house technology
development programs in order to be on the leading edge of technologies for
the production and delivery of digital entertainment.  The Company has a core
group of software tool developers in Australia exclusively dedicated to
continually enhancing existing and developing additional software tools and
their applications, and intends to build upon this base with a continued
investment in research and development.  The Company anticipates that online
distribution will become increasingly important in the digital entertainment
industry as faster modems and other new technologies improve online access
and decrease latency or "lag time." An important element of the Company's
strategy is to  continue to adjust to changing technological conditions to
stay at the forefront of content delivery.

LEVERAGE MANAGEMENT'S EXPERIENCE AND CONTINUE BUILDING STRATEGIC
RELATIONSHIPS WITHIN THE ENTERTAINMENT AND COMPUTER SOFTWARE INDUSTRIES

     The Company's management team has built and operated a number of
successful businesses in industries that are strategically related to
developing digital entertainment, including PC sales, CD-ROM publishing, and
entertainment software development.  Over the past 14 years, the Company's
management team has developed a broad range of relationships with content
developers, game console manufacturers, motion picture production companies,
film and television distributors and software distributors.  Management has
capitalized upon these relationships by forming strategic arrangements with
Packard Bell NEC, Morgan Creek Productions and Crawford Productions.  The
Company believes that these arrangements will provide the Company with
significant content development and distribution advantages.

PRODUCTS

     ANIMATED DIGITAL MULTIPATH MOVIES

     The Multipath Movie is a three-dimensional, digitally animated story
with many plot alternatives, or paths, that are influenced by user
interaction throughout the story.  The Company is targeting a larger market
than users of traditional computer games for its Multipath Movie products;
Multipath Movies will be less than two hours long so that users can enjoy
them within a single sitting and will utilize content that is designed to
appeal to a wide variety of audiences.

     The Multipath Movie is unlike any other entertainment product known to
the Company.  In contrast to existing compressed video interactive movies,
the action of a Multipath Movie does not stop while a user makes decisions.
A user's decisions are implemented seamlessly because the Company's
proprietary DigitalProjector that plays the movie on the screen has the
technical ability to form and manipulate streams of complex three-dimensional
animated images in real time sequentially for the duration of the movie.  A
Multipath Movie provides the user with hundreds of plot branches leading to a
number of different conclusions.  Users interact with Multipath Movies by
responding with a mouse, joystick, keyboard or remote control device to
prompts that manipulate the moods and personality profiles of the main
characters, which in turn produce new plot directions and story lines.  A
typical Multipath Movie  will prompt users for a decision approximately every
30 to 45 seconds.  Users' responses to prompts determine a character's
actions and affect

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the character's "mood," thereby influencing its future
decisions.  If the user elects not to respond at any given prompt, the
collective impact of the user's previous responses on the character's mood
will drive subsequent branching decisions.  For instance, if a user elects
aggressive options in response to prompts, subsequent branching decisions
will be made automatically as if an aggressive response was given by the
user.

     The user can view the Multipath Movie from the perspective chosen by the
director or elect an almost infinite number of alternative camera angles.
The user can also control camera angles to search for information or clues
that might prove valuable in later scenes.  In addition, users or their
parents can select an appropriate age rating (such as "G," "PG," or "R") and
thereby limit certain camera angles or scenes.  Multipath Movies can also
include a feature enabling more than one user to interact with its
characters.

     The Company's first Multipath Movie in development is called
"CYBERSWINE," which is based on an Australian science fiction comic strip
series.  The Company currently intends to release CYBERSWINE in the fall of
1997 through a bundling relationship with Packard Bell NEC.  Packard Bell NEC
has agreed to "bundle" Multipath Movies on up to a total of six million of
its multimedia equipped computers shipped over a three-year period.  By
releasing CYBERSWINE through Packard Bell NEC, the Company believes it will
generate broad market exposure to the Multipath Movie format.  The Company
has certain royalty obligations on revenues derived from CYBERSWINE.

     Although the Company's first Multipath Movie is an action-oriented
science fiction drama, the Company plans to produce additional Multipath
Movies, such as comedies, adventures, romances, science fiction stories and
children's stories, in order to appeal to a wide variety of audiences.  The
Company intends to release additional titles during late 1997 following the
bundled introduction of the Company's first Multipath Movie title through
Packard Bell NEC.  The Company is considering various scripts to be used as
the basis of its late 1997 product introduction and marketing campaign.  The
Company has content agreements with Morgan Creek Productions and Crawford
Productions of Australia to provide the Company with scripts for additional
Multipath Movies.

     The Company is also developing the Storyteller Series, which is a series
of Multipath Movies targeting children eight to twelve years of age.  The
Storyteller Series will feature an animated Storyteller that will "morph" and

undergo voice changes appropriate to the story line and script of each
Storyteller title.  The Storyteller Series will be based upon published
children's books and original stories.  The Company has secured from Bantam
options to acquire exclusive rights to develop interactive products based
upon Bantam's popular children's series, CHOOSE YOUR OWN ADVENTURE, currently
comprised of over 150 titles, and CHOOSE YOUR OWN NIGHTMARE, currently
comprised of 15 titles.  Each of these book series is written in a branching
format, in which the reader will skip to different pages or chapters of the
book depending upon responses to questions posed in the story.  Because of
the branching nature of the CHOOSE YOUR OWN ADVENTURE and CHOOSE YOUR OWN
NIGHTMARE series, the Company believes that these stories are ideally suited
to the multipath format of the Storyteller Series.  The Company anticipates
introducing the Storyteller Series in late 1997.  The Company believes that
it will be able to obtain additional high-quality, suitably-priced children's
fiction for the continued development of Storyteller Series titles.

     The Company has commenced development of a Multipath Movie with a story
populated by characters from the POPEYE cartoon series for the children's
market.  The Company expects to release this multipath product in CD-ROM
format in late 1997.  The Company believes that CD-ROM products for the
childrens' market using the Company's multipath technology can be completed
within relatively low budgets generally not in excess of 150% of the average
cost of the Company's traditional CD-ROM products.  The Company believes that
children's Multipath movies such as the POPEYE title will introduce novel
functions and features to a market characterized by an abundance of
traditional CD-ROM titles with similar, but unimpressive functions and
features.

     The Company plans to release Multipath Movies in the following formats:

     CD-ROM TITLES.  The Company intends to produce each Multipath Movie in
traditional CD-ROM format for use on personal computers and game consoles.

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     CD-ROM TITLES WITH ONLINE CAPABILITY.  The Company is developing a
system that will enable users to interact in real time with Multipath Movies
over the Internet through various online delivery systems.  To date, low data
transmission rates have precluded real-time video viewing of digital
entertainment over the Internet.  The Company's system involves producing a
CD-ROM, which consumers would buy at retail locations or receive bundled with
hardware as in the Packard Bell NEC arrangement, containing a preview or
first episode of a Multipath Movie series.  The CD-ROM would also contain the
architecture necessary for accessing the Internet and future episodes of the
series would be purchased and downloaded over the Internet.  The CD-ROM will
also contain most of the data necessary for viewing the Multipath Movie and
future online sequels, including a library of characters, scenes, graphics,
sound and other components.  Accordingly, a low-bit rate data stream can be
delivered via the Internet to provide the animation and storyline for future
episodes.

     TELEVISION BROADCAST/CABLE PROGRAMMING AND HOME VIDEO.  The Company also
plans to release certain of its Multipath Movie titles, in non-interactive
format, as television broadcast/cable programming and as home videos.  The
Company intends to segment such Multipath Movies into three episodes for sale
into the 30-minute broadcast and cable series market.  By packaging together
thirteen episodes, the Company can create a season-length series.  Similarly,
the Company plans to produce features from certain Multipath Movies by
selecting a predetermined plot ending and to market these 90-to 120-minute
features to home video publishers.

     TRADITIONAL CD-ROM PRODUCTS

     In addition to developing Multipath Movies, the Company historically has
developed and sold interactive CD-ROM titles primarily for children,
including the KidStory Series, and a number of other titles based on licensed
characters or content.

     KidStory Series titles are aimed at young learners between the ages of
three and seven.  These interactive stories are designed to help children
develop good motor and coordination skills, cognitive skills and reading and
spelling skills.  Children can either have a Kidstory Series title read to
them or move through the story at their own pace.  Each title also features a
series of games and activities, such as spelling bee; print, color and create
pages; annotation pages providing factual and educational information; "spot
the difference" puzzles in which the child must differentiate images;
jigsaws; memory games; and hidden word games.  This series includes The
Yukadoos, which received a 1996 Newsweek Editor's Choice Award.  The Company
has licensed the rights to over 40 additional books for development of
KidStory Series products.

     In addition to the KidStory Series, the Company has produced a number of
CD-ROM titles on a contract basis, including FLIPPER, based on the MCA
Universal film and 1960s television show; DREAM MACHINES AND DESIGNERS, based
on the award winning BEYOND 2000 television series; 101 WAYS TO SAVE THE
PLANET, also based on the BEYOND 2000 SERIES; and the CRAFTPAX Series.  The
FLIPPER CD-ROM title includes various interactive games and activities.  The
BEYOND 2000 Series is based upon the BEYOND 2000 weekly television
infotainment program made in Australia and viewed worldwide, including on the
Discovery Channel in the United States.  The CRAFTPAX Series is a unique and
informative collection providing children with simple but detailed
instructions for a wide range of craft activities.  In addition, the Company
recently acquired the interactive CD-ROM rights to POPEYE.

     The Company has perceived weakened demand for traditional interactive
CD-ROM games for the children's market, primarily resulting from an over-
abundance of products in this segment.  Currently, the Company is
reformatting and re-releasing four titles in the KidStory Series and expects
to complete the development of two titles on a work-for-hire basis.  The
Company has commenced the application of its multipath technologies to the
children's market served by the Company's traditional CD-ROM products.

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THE PRODUCTION OF MULTIPATH MOVIES

     THE MULTIPATH MOVIE PRODUCTION PROCESS

     The production process for Multipath Movies consists of eight phases:
scripting, creative design, voice and sound, model and world building,
texturing and lighting, blocking/camera editing, special effects animation
and the generation of rendered output.

     The production of a Multipath Movie is very similar to the production of
a traditional film.  Just as the traditional film director identifies
locations, builds sets and chooses actors, the digital Multipath Movie
developer builds "worlds" and "models."  In the same way that traditional
filmed entertainment directors give actors wardrobes and props, the Multipath
Movie developer "textures" the models.

     The Multipath Movie production process, however, differs from the
traditional movie process in three important ways.  First, the traditional
process is substantially more labor intensive, requiring large crews,
artisans and technicians to produce a final product.  Once scenes are filmed
and edited, any reshoots require the re-assembling of actors and crews, which
is not only costly but often not feasible.  Second, filming and editing in
the traditional film process are two separate functions that cannot be
performed simultaneously.  Through digital production, a scene, or group of
scenes, can be blocked, animated and edited at the same time.  As a result,
the producer can immediately view the scene and make any necessary changes
while avoiding substantial costs and logistical problems.  Finally, the
digital Multipath Movie process allows the producer to easily substitute
models and worlds, alter texturing and lighting, alter the blocking and
editing process and alter special effects.  By clicking the mouse, the
director/scriptwriter can preview entire scenes, add/delete characters and
plots, and automatically change the appearance of a character or object.
Because the characters and sets are all digitally produced and then animated
by the Company's tools, set components (such as language on storefronts and
vehicles) and personal features such as skin tone and hair color only need to
be changed once to effect the desired change throughout the Multipath Movie.

     TECHNOLOGY; BRILLIANT'S SOFTWARE TOOLS AND PRODUCTION CAPABILITIES

     The Company has developed four proprietary software tools that enable it
to produce high-quality Multipath Movies: (i) SCRIPNAV, which enables
scriptwriters to write complex multipath scripts; (ii) LIPSYNC, which
synchronizes a character's lip movements with the dialogue track; (iii) SCUD
ENGINE, which collects and integrates source files from the ScripNav,
graphics, sound and LipSync tools and then prepares them for layup and
editing; and (iv) DIGITALPROJECTOR, the tool that contains all the necessary
elements to load and play the final product.

     SCRIPNAV.  ScripNav was developed specifically for the writing of
complex Multipath Movie scripts.  A scriptwriter will use ScripNav to
compose, edit and finalize a script using a commercially available word
processing package.  Then, the scriptwriter will insert various subplots into
scenes in order to adapt the script to the Multipath Movie format; the
alternative subplots, or paths, are based upon different temperaments of the
lead character.  Once the script has been developed in the Multipath Movie
style, ScripNav enables the scriptwriter to read, review and correct the
script

     LIPSYNC.  LipSync automatically synchronizes a character's lip movements
with corresponding dialogue tracks by examining wave files and generating
output files that contain references to the appropriate mouth shapes.  The
Company believes that LipSync is a more efficient and cost effective way to
incorporate voice into Multipath Movies than other existing sound tools.  In
addition, LipSync allows for low cost modification of the Multipath Movies to
any language without the awkward appearance of dubbed movies.

     SCUD ENGINE.  SCuD Engine is the centerpiece of the Multipath Movie
development and production process.  SCuD Engine is an object-oriented
database environment that collects and integrates source files from ScripNav,
graphics, sound and LipSync tools and makes them available for layup and
editing.  SCuD Engine provides a multi-window editing environment in which
the developer can preview, analyze and edit the final product.  When a
previously unedited scene is opened, SCuD Engine retrieves the text for the
scene from the script text file of ScripNav

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and places the text in on-screen
blocks or slots.  The layup artist can then view the descriptive or dialogue
text while attaching imported graphics, sound and other source material to
that line of script.

     DIGITALPROJECTOR.  DigitalProjector contains all the necessary
components to load and play the final Multipath Movie product.
DigitalProjector is the software engine for any system that is being used to
play the Multipath Movie and is generally the only software tool that the
Company must modify to permit the Multipath Movie to be adapted to new
platforms.  The Company has developed DigitalProjector for IBM-compatible
PCs, is developing DigitalProjector for the Sega Saturn game console, and may
develop DigitalProjector for the Sony PlayStation, the Macintosh, and other
platforms.
     In addition to its proprietary software tools and engines, the Company
uses certain commercially available sound and graphics tools in the Multipath
Movie production process.  The Company's proprietary tools used in
conjunction with commercially available tools allow the developer to produce
a high quality Multipath Movie from the initial scripting stage to the
generation of title output.

SALES AND MARKETING

     The Company's sales and marketing efforts will be designed to broaden
product distribution, increase the number of first-time and repeat customers,
promote ongoing recognition of its products and properly position, package
and merchandise its products.  The Company will focus on three primary
channels in attempting to build broad distribution of its product formats:
(i) traditional software publishers and distributors for CD-ROM titles, (ii)
the Internet and online services, and (iii) television broadcast/cable
programming buyers and home video publishers.  To support sales through these
channels, the Company plans to utilize various sales and marketing techniques
designed to promote product awareness and maximize exposure, including
cooperative advertising, incentives, selective bundling arrangements, trade
show representation and other customary practices.  The Company believes that
its ability to produce quality digital entertainment products at low costs
will allow it to negotiate favorable deals with publishers, distributors and
buyers, create strong demand for its online products, and establish and
maintain a strong market position.  In addition, the Company believes that
its management's direct experience in related industries provides the Company
with a working knowledge of sales and distribution strategies and strong
relationships with key software publishing executives.

     CD-ROM TITLES.  The Company contracts to develop and produce traditional
CD-ROM titles for third parties on a fixed rate basis without retaining any
rights to the products.  In this situation, any future royalty streams to
which the Company may be entitled would be minimal.  From time to time, the
Company negotiates an affiliated publishing arrangement for a designated
title.  Under this type of arrangement, the Company covers all production
costs and costs of goods sold and then retains a certain percentage of the
gross revenues generated according to a predetermined pricing formula.  The
publisher retains a portion of gross revenues to cover downstream marketing
costs and distributor profit.  In both contract and affiliate publishing
arrangements, the publisher will broadly distribute the CD-ROM titles through
retail outlets such as software, computer and book stores.

     MULTIPATH MOVIE CD-ROM TITLES WITH ONLINE CAPABILITY.  The Company
anticipates that online users of its Multipath Movies distributed over the
Internet will either be billed a fee for each online Multipath Movie
downloaded or will be charged a fee based on online user time.  In the case
of the Company's first Multipath Movie launch through a bundling arrangement
with Packard Bell NEC, it is anticipated that the user will be charged a per
use fee by the Company through Packard Bell NEC's Planet Oasis Web Site.
Where the Multipath Movie is being distributed through an online service or
an independent Internet service provider, the Company will negotiate
individual billing arrangements with each such entity.  The Company is
exploring the possibility of establishing a proprietary web site through
which Multipath Movies can be promoted.  As part of its arrangement with the
Company, Packard Bell NEC has agreed to provide marketing for the Multipath
Movies on Packard Bell NEC's computer packaging, point-of-sale materials and
screen displays.

     One of the Company's principal sales and marketing initiatives will be
the formal launch of the Multipath Movie format, which will follow the
bundled introduction of the Company's first Multipath Movie through Packard
Bell NEC.  In order to introduce the new genre and generate the consumer
awareness necessary to promote sustained interest, the

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Company is developing
a sales and marketing campaign to begin during late 1997.  The Company
anticipates that this campaign will culminate in the commercial introduction
of selected Multipath Movies, which will be supported by various trade and
consumer promotional programs.  The Company expects that launch costs will be
covered through direct spending by the Company, promotional funds provided by
software publishers marketing the product and/or other sponsor-related sales
programs.

     TELEVISION BROADCAST/CABLE PROGRAMMING AND HOME VIDEO.  The Company
currently anticipates that it will begin to market its Multipath Movies as
television programming and home video features in 1998.  Following the launch
of the Multipath Movie genre during late 1997, and assuming that the Company
has acquired the necessary television or video rights for any of its
underlying content, the Company anticipates preparing certain Multipath Movie
content for these markets.  In the television broadcast/cable market, the
Company will work to prepare series product primarily for direct placement in
the syndicated television market or with one of the various cable channels.
Cable and syndicated programming is typically marketed to domestic and
international buyers during January of each year at the National Association
of Television Program Executives trade show.  With respect to the home video
market, the Company anticipates that it will market home video features
through established distribution channels.

INTERNATIONAL SALES AND MARKETING

     The Company's international sales and marketing strategy will be managed
from the United States and will be executed through a combination of domestic
and offshore efforts.  The majority of the Company's sales of traditional CD-
ROM products are currently in the United States but management anticipates
increased penetration in various international markets.  In addition to U.S.
sales, the KidStory Series product line currently is sold through various
arrangements in Australia, New Zealand and parts of Asia and Europe.
Recently, the Company entered into an agreement with Fujitsu pursuant to
which titles within the KidStory Series are being adapted for output in
Japanese.

     With respect to both traditional and Multipath Movie CD-ROM products,
the Company's strategy for international distribution is to utilize exclusive
arrangements for specific countries or dedicated territories with
distributors, which in management's opinion, are best suited to direct the
commercial launch and ongoing marketing support of products in that country
or territory.  The Company believes that it will be able to continue to
capitalize on management's extensive network of international relationships
and background in the international distribution of CD-ROM products.  The
Company does not currently foresee establishing operations in foreign
territories to oversee or manage international sales and marketing efforts.

     Given the global nature of the World Wide Web, the Company believes that
international markets represent a significant opportunity for its Multipath
Movies delivered over the Internet.  Utilizing its proprietary LipSync
technology, the Company believes it can deliver Multipath Movies in foreign
languages without significant logistical or cost issues.


RESEARCH AND DEVELOPMENT

     The Company's research and development program primarily is focused on
enhancing the Company's software tools and developing enhanced Internet
delivery capabilities for Multipath Movies.  The Company's research and
development program includes plans to commence development of a proprietary
object-oriented database, known as "Rodeo," which is intended to give
Multipath Movie producers ready access to the Company's database of objects,
such as sets, props and characters, and thereby increase production
efficiencies.  The Company is expending substantial resources in its research
and development program in Australia, where it maintains a staff in a
separate facility devoted exclusively to advancing the Company's technology
and software tools.

     The Company intends to continue to improve the look and feel of the
Multipath Movies with the objective of achieving the look and feel of motion
pictures.  The realization of this objective will be dependent upon the
development of narrowband and broadband technologies as well as increases in
microprocessor speed.  The Company will work to continuously enhance its
software tools to take advantage of these new technologies.

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     The Company incurred research and development costs in connection with
the development and improvement of the Company's traditional CD-ROM software
tools of $183,000, $174,000 and $1,877,000 for the fiscal years ended June
30, 1995 and 1996 and the six months ended December 31, 1996, respectively.
The amount for the six months ended December 31, 1996 includes $1,350,000 of
in-process research and development costs in connection with the acquisition
of SAND.  (Through the date of the SAND Acquisition, SAND had incurred
research and development costs in connection with the development of the
Multipath Movie software tools of $1,563,000.)

STRATEGIC RELATIONSHIPS

     The Company has entered into various strategic relationships to assist
in the development, production and distribution of Multipath Movies.  It is
anticipated that strategic relationships will be an integral element in the
execution of the Company's business strategy.

     PACKARD BELL NEC.  The Company has entered into an agreement with
Packard Bell NEC for Packard Bell NEC to bundle CD-ROM software for a
Multipath Movie title with 80% of the first 7.4 million multimedia equipped
personal computers shipped by Packard Bell NEC in the United States, the
United Kingdom, Australia, New Zealand and South Africa over a three-year
period (the "Shipping Period") beginning when the Company ships and Packard
Bell NEC accepts a master CD-ROM for a Multipath Movie.  The disk will allow
the user to download Multipath Movies from an Internet site to be established
by the Company.  The disk will contain a brief preview of a Multipath Movie
title, which is initially anticipated to be the CYBERSWINE title.  The
Company has the ability to periodically substitute other Multipath Movie
titles for the title initially bundled by Packard Bell NEC.  For a period
ending two years following the expiration of the Shipping Period, Packard
Bell NEC has agreed to provide promotional support for the Multipath Movies
distributed through Packard Bell NEC, and to facilitate the viewing of a
preview of the Multipath Movie and the purchase of an entire Multipath Movie.

Under the terms of the agreement, the Company will be entitled to all
revenues that are derived from Multipath Movies distributed pursuant to the
Agreement.  Packard Bell NEC has received warrants to purchase 600,000 shares
of the Company's Common Stock.

     MORGAN CREEK PRODUCTIONS.  The Company has entered into an agreement to
form a joint venture with Morgan Creek Interactive ("Morgan Creek"), a
subsidiary of Morgan Creek Productions.  Morgan Creek is a principal
developer and distributor of feature films; past features include "ACE
VENTURA: PET DETECTIVE," and ACE VENTURA: WHEN NATURE CALLS." The agreement
provides that Morgan Creek will contribute to the joint venture a
nonexclusive license to two motion picture scripts for use in the development
of Multipath Movies to be distributed on CD-ROM for the IBM-compatible,
Macintosh and game console platforms and over the Internet.  The rights
granted by Morgan Creek under the agreement do not extend to broadcast/cable
television programming.  Morgan Creek also will provide certain creative,
direction and film development assistance to the Company.  The Company will
be responsible for all development costs of the Multipath Movies but will be
entitled to recover such costs before Morgan Creek will participate in any
revenues generated from the Multipath Movies created by the joint venture.
The Company will also contribute to the joint venture a nonexclusive license
to the Company's DigitalProjector software tool solely for use in connection
with two Multipath Movies to be produced by the joint venture.  In exchange
for the contribution of development content, Morgan Creek will receive,
following the Company's recovery of production costs and the Company's
recovery of its investment in the joint venture, a designated percentage of
the joint venture's revenues as well as warrants to purchase 85,000 shares of
the Company's Common Stock.  The agreement provides that Morgan Creek will
own all intellectual property related to the content used in the Multipath
Movies created by the joint venture and will have the right to exploit such
content for other uses without any royalty obligation to the joint venture or
the Company, although the Company will retain all rights to the licensed
software tool.

     CRAWFORD PRODUCTIONS.  The Company has entered into a production joint
venture with Crawford Productions Pty., Ltd. ("Crawfords"), an Australian
television and production company, to develop two Multipath Movies.  The
Company anticipates that each of the two Multipath Movies will have
production budgets of up to $790,000.  Pursuant to the joint venture,
Crawfords and the Company will each fund one-half of the development budget
of the joint venture.  Crawfords will be responsible for distributing
broadcast and cable versions of the two Multipath Movies and the Company will
distribute the Multipath Movies in interactive computer-based formats.
Crawfords and the Company will equally divide all proceeds from exploitation
of the two Multipath Movies created by the joint venture.

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     BANTAM DOUBLEDAY DELL BOOKS FOR YOUNG READERS.  The Company has entered
into an agreement (the "Bantam Agreement") with Bantam providing the Company
with an option to acquire exclusive worldwide interactive rights to Bantam's
"CHOOSE YOUR OWN NIGHTMARE" and "CHOOSE YOUR OWN ADVENTURE" series of
interactive books.  The Company's option covers over 170 titles, plus any
additional titles in each series published by Bantam.  The Company's rights
include rights to adapt the licensed titles to interactive format only and to
deliver the products on CD-ROMs and via the Internet.  By exercising its
option, the Company will be required to acquire no less than 18 titles during
the seven-year term of the Bantam Agreement.  Bantam will be entitled to
receive a portion of the net proceeds from sales of the licensed titles.
Upon the Company's election of each of the first 16 titles, in batches of 4
titles, the Company is required to pay Bantam a non-refundable advance
against which  royalties will be applied.

COMPETITION

     The markets for the Company's digital entertainment products are
intensely competitive, subject to rapid change and characterized by constant
demand for new product features at reduced prices and pressure to accelerate
the release of new products and product enhancements.  The primary
competitive areas for the Company are identified below.

     The Company expects to compete with computer graphics special effects
firms (including Pixar, Industrial Light and Magic, Inc. ("ILM"), an
affiliate of Lucasfilm Ltd. ("Lucasfilm"), Digital Domain, Sony ImageWorks,
Pacific Data Images, Rhythm & Hues and Boss Film Studios, Inc.) companies
offering entertainment software and related products (including Broderbund
Software, Inc. ("Broderbund"), 7th Level, Inc. ("7th Level"), GT Interactive
Software, Inc. ("GT Interactive"), Electronic Arts, Softkey International,
Inc. ("Softkey") and Sierra On-Line, Inc. ("Sierra On-Line")) and traditional
movie studios (including Disney, Warner Bros., Inc. ("Warner Bros.")
Twentieth Century Fox Film Corporation ("Twentieth Century Fox"), Paramount
Pictures ("Paramount"), Sony Pictures, Inc. ("Sony"), Lucasfilm, Universal
City Studios, Inc. ("MCA Universal") and MGM/UA).  Most of the special
effects firms, entertainment software producers and movie studios with which
the Company will compete have significantly greater name recognition and
significantly greater financial, technical, creative, marketing, and other
resources than does the Company.  Due to their substantially greater
resources, these movie competitors likely will be able to enter into more
favorable distribution arrangements and to promote their products more
successfully than the Company.

     In response to all of these competitive forces, the Company will be
required to make a high level of investment in content and tool development,
marketing and customer service and support.  There can be no assurance that
the Company will have sufficient resources to make such investments or, even
if they are made, that the Company's products will be competitive.
Additionally, present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements.  The
Company's competitors also may increase their efforts to gain and retain
market share through competitive pricing or product giveaways.  These
competitive pressures may necessitate price reductions by the Company, thus
reducing the Company's profit margins.  In addition, as the number of
competitors increases and competition for scarce consumer time available to
be devoted to the products such as those of the Company and equally scarce
retail shelf space becomes more intense, the Company may need to increase
marketing expenditures to maintain sales and product differentiation.  Also,
as competition for popular titles and themes that may be used in
entertainment software increases, the cost of acquiring such titles and
properties is likely to increase, resulting in reduced margins.  There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the
Company will not materially and adversely affect its business, operating
results and financial condition.


PROPRIETARY RIGHTS

     The Company's success and ability to compete is dependent in part upon
its proprietary technology.  The Company currently intends to file United
States patent applications relating to certain components of its proprietary
technology.  The Company also relies on trademark, trade secret and copyright
laws to protect its technology, with the source code for the Company's
proprietary software being protected both as a trade secret and as a
copyrighted work.

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Also, it is the Company's policy that all employees and
third-party developers sign nondisclosure agreements.  However, there can be
no assurance that such precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or
superior technology independently.  Also, the Company has no license
agreements with the end users of its products and does not copy-protect its
software, so it may be possible for unauthorized third parties to copy the
Company's products or to reverse engineer or otherwise obtain and use
information that the Company regards as proprietary.

     The Company believes that its products, including its suite of software
tools, do not infringe any valid existing proprietary rights of third
parties.  Since the software tools used to create the Multipath Movies were
developed by SAND, a division of Sega Ozisoft, the Company relies entirely on
the representations of Sega Ozisoft contained in the SAND Acquisition
Agreement between BII-Australia and Sega Ozisoft that, to Sega Ozisoft's best
knowledge, the SAND technology and software acquired by the Company does not
infringe the proprietary rights of others.


BACKLOG

     The Company generally ships products upon receipt of orders from
distributors.  Accordingly, the Company operates with little backlog.


EMPLOYEES

     At December  31, 1996 the Company had 35 full-time employees: eight
engaged in research and development, 23 in production and four in general
administration and finance.  None of the employees of the Company is covered
by a collective bargaining agreement.  The Company considers its relationship
with its employees to be good.  The Company currently utilizes the services
of two independent software developers pursuant to contractual relationships.

     The Company intends to hire additional key personnel in the near future.

The Company's expansion may significantly strain the Company's management,
financial and other resources.  Any failure to expand these areas in an
efficient manner could have a material adverse effect on the Company's
operating results.

     The Company believes its future success will depend in large part on the
Company's ability to recruit and retain qualified employees, particularly
those highly skilled design, process and test engineers involved in the
manufacture of existing systems and the development of new systems and
processes.  The competition for such personnel is intense.  There can be no
assurances that the Company will be successful in retaining or recruiting key
personnel.


ITEM 2    DESCRIPTION OF PROPERTIES

PROPERTIES

     The Company's production facilities, consisting of approximately 8,500
square feet, are located in Bondi Junction, Australia and the research and
development facilities occupied by SAND, consisting of approximately 2,500
square feet, are located in Woollahra, Australia.  The lease for the Bondi
Junction facility is for a period of 4 years.  Thereafter it reverts to a
monthly tenancy.  A portion (1900 square feet) of the Woollahra facility is
subject to a two year lease with an option to renew for an additional two
years.  The balance of the Woollahra facility (600 square feet) is subject to
a monthly tenancy.  The current annual rental under the Bondi Junction lease
is $87,384 and under the Woollahra lease is $45,433.  The Company also leases
an office in Woodland Hills, California for rent of approximately $18,000 per
annum.

     The Company anticipates using up to $0.75 million to equip the new
digital production studio ("New Studio") in Bondi Junction, Australia.  The
anticipated cost reflects a $1.25 million reduction from earlier projections
which were achieved as a result of internal studies which refined one of the
Company's specific production requirements and as a

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result of a reduction in the cost of various components which the Company
intends to acquire as well as the phase-in over several years of additional
capabilities initially anticipated to be required in fiscal 1997.  The
Company
intends to equip the New Studio to meet all of the Company's production needs

for both the KidStory Series product line as well as the Multipath Movie
product line.  Certain production capabilities may remain external, including

voice recording, scripting, music recording and certain director and producer
services.  The Company believes that such services can be provided on a more
cost effective basis, thereby focusing the Company's internal production
efforts on the digital production components.  It is anticipated that the New
Studio will have the internal capabilities to provide all other production
requirements such as three-dimensional modeling, digital animation and
rendering, camera direction and editing, sound production, texture animation,
digital video services and overall title production control.


ITEM 3    LEGAL PROCEEDINGS

     The Company is not involved in any litigation.


ITEM 4    SUBMISSION OF MATTER TO A VOTE OF SECURITYHOLDERS

     None.

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                             PART II

ITEM 5    MARKET FOR COMMON EQUITY AND RELATED MATTERS

     The Company's Common Stock has been traded on the American Stock
Exchange under the symbol "BDE" since the Company's initial public offering
on November 22, 1996.  As of March 21, 1997 BDE had approximately 13
shareholders of record.  The price of the Common Stock as of the close of
business on March 26, 1997 was $4-7/8 per share.  The high and low sales
price for the Common Stock of BDE for the fourth quarter of 1996 (from
November 22) were $5 per share and $3-9/16 per share, respectively, as
reported on the American Stock Exchange.

     BDE has never paid any dividends on its Common Stock.  BDE intends to
retain any earnings for use in its business and does not intend paying any
cash dividends on its Common Stock in the foreseeable future.


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

OVERVIEW

     The Company's historical operations discussed in this section reflect
only the operations of BII Australia.  Since its founding in September 1993,
BII Australia has developed and sold interactive education and entertainment
CD-ROM titles primarily for children.  With the completion of the acquisition
of SAND, the nature of the Company's business  changed  significantly.  SAND
is responsible for developing the Multipath Movie suite of proprietary
software tools, production process and first Multipath Movie product.  While
the Company will continue to produce traditional interactive CD-ROM titles at
reduced levels, the Company is focusing its efforts on the development of the
Multipath Movie tools and production process, as well as the
commercialization of the Multipath Movie (including the story teller) genre.
As a result of this change in the Company's business, the following
discussion of historical results is not representative of its expected future
operations.  The Company changed its fiscal year end from June 30 to December
31, effective December 31, 1996.

     The Company intends to generate a substantial majority of its future
revenue from the development and production of Multipath Movies and other
three-dimensional digitally created entertainment.  The first of its
Multipath Movies, CYBERSWINE, is expected to be released in the fall of 1997.

The first product in the Storyteller Series is not expected to be released
until late 1997.  The Company's annual and quarterly revenue will depend upon
the successful development, timing and market acceptance of its interactive
products and upon the costs to distribute and promote these products.
Specifically the revenues derived from the production and distribution of the
Company's Multipath Movies will depend primarily on the acceptance by the
market of the Multipath Movie concept and the underlying content of the
Multipath Movie, neither of which can be predicted nor necessarily bear a
direct correlation to the production or distribution costs incurred.  The
commercial success of a film also depends upon promotion and marketing,
production costs, impact of competition and other factors.  Accordingly, the
Company's annual and quarterly revenues are and will be extremely difficult
to forecast.

     In the six months ended December 31, 1996, the Company incurred certain
charges and non-recurring expenses.  In connection with the Company's
acquisition of SAND, consummated on September 30, 1996, the Company expensed
$1,350,000 attributable to in-process research and development.  Also, the
Company recently has entered into strategic relationships with Packard Bell
NEC and Morgan Creek.  The Company has issued to Packard Bell NEC and Morgan
Creek warrants to purchase 600,000 and 85,000 shares of Common Stock,
respectively.  Issuance of the warrants to Packard Bell NEC and Morgan Creek
resulted in $1,096,000 of operating expenses and a corresponding credit to
equity, based on the value of the warrants issued.  During this period the
Company also incurred a compensation expense of $125,000 in connection with
directors' stock options in November 1996.  In addition, the Company incurred
significant operating expenses and development costs as it continued
development, and commenced marketing, of its Multipath Movies and expanded in
anticipation of growth.  As a result of the foregoing, the Company incurred a
significant loss in the six months ended December 31, 1996.  The Company
expects that these expenses and development costs will result

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in losses in the quarters ended March 31, 1997 and June 30, 1997, and that
the
Company could incur quarterly losses thereafter.

RESULTS OF OPERATIONS

     SIX MONTHS ENDED DECEMBER 31, 1996 AS COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1995

     REVENUES.  The Company historically has derived its revenues from
royalties, development fees and software sales.  Brilliant licenses its CD-
ROM software 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 revenues 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 by the
Company. Development fees are paid by customers in exchange for the Company's
development of software packages in accordance with customer specifications.
The software development agreements generally specify certain "milestones"
which must be achieved throughout the development process.  As these
milestones are achieved, the Company recognizes the portion of the
development fee allocated to each milestone.  Software sales revenues are
recognized upon shipment of product.  See Note 2 of Notes to Consolidated
Financial Statements.  Revenues decreased from $1,184,000 for the six months
ended December 31, 1995 to $350,000 for the six months ended December 31,
1996.  This represents a decrease of $834,000 or 70%, mainly attributable to
decreased royalty revenues as a result of a change in the Company's focus to
the development of multipath movies.

     COST OF REVENUES.  Cost of revenues related to royalties consists
primarily of royalty obligations to third parties. Cost of revenues related
to development fees consists primarily of salaries, benefits and overhead
associated with the development of specific software products to customer
specifications, as well as costs of outside contractors engaged from time to
time in creating aspects of software products such as animation, voice
recording and music.  Cost of revenues related to software sales consists
primarily of royalties to third parties and the direct costs and
manufacturing overhead required to reproduce and package software products.
Cost of revenues decreased from $434,000 for the six months ended December
31, 1995 to $186,000 for the six months ended December 31, 1996.  This
represents a decrease of $248,000, or 57%.  Cost of revenues in the 1995
period included costs associated with development of the Company's own
titles.  In the 1996 period, the Company reduced its development of
traditional CD-ROM product.  Many of the costs associated with the
development of software for third parties were paid directly by the third
parties.

     SALES AND MARKETING.  Sales and marketing expenses include primarily
costs for advertising, promotions, brochures, travel and trade shows.  Sales
expenses also include costs for marketing consultants hired primarily to
support and assist the Company's sales efforts.  Sales and marketing expenses
increased from $35,000 for the six months ended December 31, 1995 to $970,000
for the six months ended December 31, 1996.  This increase is attributable to
the value of the warrants ($960,000) granted to Packard Bell NEC.  The
agreement with Packard Bell NEC requires Packard Bell NEC to provide certain
promotional services to the Company.  Accordingly, the expense associated
with the warrants has been recorded as a sales and marketing expense.

     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 from $129,000 for the six months ended December 31, 1995
to $1,065,000 for the six months ended December 31, 1996.  This increase is
associated with increased accounting, legal and consulting services provided
to the Company and the value of stock options granted during the period.

     RESEARCH AND DEVELOPMENT.  Research and development expenses include
primarily salaries and benefits of personnel conducting research and
development for licensed software products.  Research and development costs
also include costs associated with creating the Company's traditional CD-ROM
software tools.  Research and development expenses increased from $103,000
for the six months ended December 31, 1995 to $1,877,000 for the six months
ended December 31, 1996.  Of this increase, $1,350,000 is attributable to the
in-process research and development costs incurred in connection with the
SAND Acquisition.  As of the date of the Company's acquisition of SAND,
technological

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feasibility of the acquired technology had not been
established.  In addition, the Company has identified no future alternative
uses for the acquired technology.  Therefore, in accordance with Statement of
Financial Accounting Standards No. 86 ("SFAS No. 86"), the results of
operations for the six months ended December 31, 1996 include in research and
development expenses the software development costs as a result of the
acquisition of SAND.  An additional increase of $136,000 is attributable to
the value of the warrants granted to Morgan Creek.  The agreement with Morgan
Creek provides for Morgan Creek to deliver certain creative material for
products being developed by the Company.  Accordingly, the expense associated
with the warrants has been recorded as a research and development expense.

     The Company estimates that it will spend approximately $600,000 in order
to reach technological feasibility of its software development tools by
completing its first Multipath Movie.  These funds will be spent over the
next three months beginning January 1, 1997, primarily for software tool
development, production and direction of the Multipath Movie, scripting,
voice production and music.

     DEPRECIATION.  Depreciation expense relates to depreciation of fixed
assets such as computer equipment and cabling, furniture and fixtures.  These
fixed assets are depreciated over their estimated useful lives (up to three
years) using the straight-line method.  Depreciation expense increased from
$46,000 for the six months ended December 31, 1995 to $74,000 for the six
months ended December 31, 1996.  This increase is attributable to additional
computer equipment put in place during 1996.

     OTHER INCOME AND EXPENSE.  Other income includes interest income and
gains on foreign exchange transactions.  Interest income increased from $0
for the six months ended December 31, 1995 to $41,000 for the six months
ended December 31, 1996 due to the higher cash balances as a result of the
initial public offering in November 1996.  Interest expense relates mainly to
interest on the Company's loan from PIE, a significant shareholder.  Interest
expense decreased from $64,000 for the six months ended December 31, 1995 to
$54,000 for the six months ended December 31, 1996.  This decrease is due to
a lower average balance outstanding on the PIE loan during the six months
ended December 31, 1996 as compared to the six months ended December 31,
1995.

     FISCAL YEAR ENDED JUNE 30, 1996 AS COMPARED TO FISCAL YEAR ENDED JUNE
30, 1995

     The Company experienced significant growth in fiscal year 1996.
Contracts with Packard Bell NEC and Ocean of America Inc. provided
substantial revenues in 1996, and the Company also entered into new
agreements in 1996 to develop software for other companies.  In addition, the
Company entered into new marketing agreements for wider domestic and
international sales of its products.  The Company's growth in 1996 resulted
in increases in operating expenses, although with the increased level of
activity, the Company realized certain operating efficiencies and economies
of scale.

     REVENUES.  Revenues increased from $843,000 for the year ended June 30,
1995 to $2,054,000 for the year ended June 30, 1996.  This represents an
increase of $1,211,000 or 144%.  Royalties increased by $539,000,
attributable to a greater number of completed software titles.  Development
fees increased by $497,000 as a result of more software products being
developed.  Software sales revenues increased by $175,000, also as a result
of the greater number of completed titles.

     COST OF REVENUES.  Cost of revenues increased from $656,000 for the year
ended June 30, 1995 to $739,000 for the year ended June 30, 1996.  This
represents an increase of $83,000 or 13%, mainly attributable to a greater
number of titles in development.  Although revenues almost doubled, costs of
revenues increased only slightly.  The Company's gross profit margin
increased from 22% in 1995 to 64% in 1996, attributable to economies of scale
and increased operating efficiencies.

     SALES AND MARKETING.  Sales and marketing expenses increased from
$116,000 for the year ended June 30, 1995 to $163,000 for the year ended June
30, 1996.  This represents an increase of $47,000 or 41%, attributable
primarily to increases in the Company's sales and marketing efforts.

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<PAGE>

     GENERAL AND ADMINISTRATIVE.  General and administrative expenses
increased from $224,000 for the year ended June 30, 1995 to $366,000 for the
year ended June 30, 1996.  This represents an increase of $142,000 or 63%,
attributable primarily to increased staff and overhead to support the higher
level of production and sales activity.

     RESEARCH AND DEVELOPMENT.  Research and development expenses decreased
slightly from $183,000 for the year ended June 30, 1995 to $174,000 for the
year ended June 30, 1996.  This represents a decrease of $9,000 or 5%.  The
decrease is due to the fact that the Company incurred lower development
expenses in 1996 to enhance software tools that were developed in 1995.

     DEPRECIATION.  Depreciation expense increased from $43,000 for the year
ended June 30, 1995 to $102,000 for the year ended June 30, 1996.  This is
due to increased computer equipment in place during 1996.

     OTHER INCOME AND EXPENSE.  In fiscal year 1996, other income includes
$122,000 which represents an export market development grant paid to BII
Australia by the Australian Trade Commission for BII Australia's
participation in certain export activities.  Interest expense relates mainly
to interest on the Company's loan from PIE, a significant shareholder.
Interest expense increased from $45,000 for the year ended June 30, 1995 to
$95,000 for the year ended June 30, 1996.  This represents an increase of
$50,000 or 111%, resulting from higher average outstanding borrowings from
PIE in 1996 as compared to 1995.


FLUCTUATING OPERATING RESULTS

     The Company's expense levels are, to a large extent, fixed.  The Company
may be unable to adjust spending in a timely manner to compensate for any
revenue shortfall.  As a result, any significant shortfall in revenue from
the Company's Multipath Movies would have an immediate material adverse
effect on the Company's business, operating results and financial condition.
The Company has increased, and expects to continue to increase its operating
expenses to fund greater levels of Multipath Movie development, research and
development, increased marketing operations and expansion of its distribution
channels.  To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, operating results and
financial condition will be materially adversely affected.

     Historically, the Company has experienced significant fluctuations in
its operating results from quarter to quarter and it expects these
fluctuations to continue in the future.  Factors that may influence the
Company's quarterly operating results include customer demand for the
Company's products, introduction or enhancement of products by the Company
and its competitors, the timing of releases of new products or product
enhancements by the Company and its competitors, introduction or availability
of new hardware, market acceptance of the Multipath Movies and other new
products, development and promotional expenses relating to the introduction
of new products or enhancements of existing products, reviews in the industry
press concerning the products of the Company or its competitors, changes or
anticipated changes in pricing by the Company or its competitors, mix of
distribution channels through which products are sold, mix of products sold,
product returns, the timing of orders from major customers, order
cancellations, delays in shipment and other developments and decisions
including the timing and extent of development expenditures, management's
evaluation and judgment regarding a title's acceptance, and other
unanticipated operating expenses and general economic conditions.
Additionally, a majority of the unit sales for a product typically occurs in
the quarter in which the product is introduced.  As a result, the Company's
revenues may increase significantly in a quarter in which a major product
introduction occurs and may decline in following quarters.  The Company's
revenues both domestically and internationally have varied significantly
between monthly and quarterly periods.  Therefore, in the future, the
operating results for any quarter should not be taken as indicative of the
results for any quarter in subsequent periods.

     The entertainment software business is highly seasonal.  Typically, net
revenues are highest during the fourth calendar quarter (which includes the
holiday buying season), decline in the first calendar quarter and are lowest
in the second and third calendar quarters.  This seasonal pattern is due
primarily to the increased demand for entertainment software products during
the year-end holiday buying season.  As a result, a disproportionate share of
the Company's net revenues historically have been generated in the second
quarter of the Company's fiscal year.  The Company expects its revenues and
operating results will continue to reflect these seasonal factors.  The
Company's results for the six months

PAGE 18
<PAGE>

ended December 31, 1996 do not follow
this trend due to the shift in focus to the multipath movie format which is
still under development.

     The entertainment industry historically has been subject to substantial
cyclical variation, with consumer spending for entertainment products tending
to decline during recessionary periods.  There can be no assurance that the
Company will be able to adjust its anticipated product development
expenditures and other expenses in the event of an economic downturn during
such development.  Accordingly, if a recessionary period occurs, tending to
result in decreased sales of the Company's products, product development
expenses likely will remain constant and the Company's business, operating
results and financial condition could be adversely affected


ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES

     The Company's current accounting policy follows SFAS No. 86, which
provides for the capitalization of certain software development costs once
technological feasibility is established.  The capitalized costs are then
amortized 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 the establishment of
technological feasibility, these costs are expensed as incurred.  In the
future, if the Company incurs costs to develop digital entertainment products
for distribution as home video features or television programming, such
discrete costs may be capitalized and amortized in the proportion that gross
revenues realized bear to management's estimate of the total gross revenues
expected to be received, in accordance with Statement of Financial Accounting
Standards No.  53, "Financial Reporting by Producers and Distributors of
Motion Picture Films."

     Equipment and other assets purchased exclusively for use in the
Company's research and development efforts are charged directly to research
and development expenses.

LIQUIDITY AND CAPITAL RESOURCES

     Prior to the Company's initial public offering in November 1996, a
substantial portion of its operations were financed through loans from PIE, a
significant shareholder.  PIE provided loans to the Company of approximately
$1,021,000, $746,000 and $8,000 during the fiscal years ended June 30, 1995
and 1996, and the six months ended December 31, 1996, respectively.  In the
fiscal years ended June 30, 1995 and 1996 and the six months ended December
31, 1996, the Company repaid $541,000, $680,000 and $733,000, respectively.
As at December 31, 1996, the loan had been fully repaid.

     During the six months ended December 31, 1996, the Company executed
three promissory notes in favor of Reefknot in the principal amounts of
$150,000, $50,000 and $145,000 to fund certain costs in connection with the
initial public offering.  These notes bore interest at the rate of 10% per
annum and were fully repaid by December 31, 1996.  In November 1996, the
Company's initial public offering of 2,000,000 shares of Common Stock at $5
per share provided approximately $8.5 million in cash after underwriters'
discounts and commissions and offering expenses.

     Net cash used in operating activities during the 1995 fiscal year and
the six months ended December 31, 1996 was primarily attributable to a net
loss. Net cash provided by operating activities in the fiscal year ended June
30, 1996 was primarily attributable to the net income resulting from
development fees of $586,000 and royalties of $1,291,000.  Net cash used in
investing activities in each of the fiscal years ended June 30, 1995, 1996
and for the six months ended December 31, 1996 was due primarily to the
purchase of computer equipment. Cash flows provided by financing activities
in each of the fiscal years ended June 30 1995 and 1996 were primarily
attributable to the cash infusions from PIE.  Cash flows provided by
financing activities during the six months ended December 31, 1996 were
primarily attributable to the net proceeds of $8.5 million from the Company's
initial public offering of common stock.

     As of December 31, 1996, the Company had no material commitments other
than an advance from a customer for software development of $164,000 which
will be repaid from proceeds from the sales of the completed software (see
Note 6 of the Notes to Consolidated Financial Statements), an obligation
under its agreement with Crawford Productions to

PAGE 19
<PAGE>

contribute up to one half of
the costs incurred to develop and produce each project selected by the
parties, if any, for development into Multipath Movies, which total cost per
title is anticipated to be approximately $790,000 (as at December 31, 1996
one project had been selected), and an obligation under its agreement with
Morgan Creek to fund entirely the development of two Multipath Movies.

     In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation."  This new standard defines a fair value based
method of accounting  for an employee stock option or similar equity
instrument.  This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to measure
compensation using the intrinsic value approach 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 has used the
measurement prescribed by APB Opinion No. 25.

     As of December 31, 1996, the Company's principal source of liquidity was
approximately $7.6 million in cash.  As a result of the reduction in the
anticipated cost in 1997 of development of the Company's production studio
from $2 million to $0.75 million, an additional $1.25 million previously
allocated to development of the Production Studio is expected to be available
for working capital requirements.  The Company believes that these funds will
be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next 12 months.  Thereafter, if cash
generated by operations is insufficient to satisfy the Company's liquidity
requirements, the Company may sell additional equity or debt securities or
obtain credit facilities.  The sale of additional equity or convertible debt
securities will result in additional dilution to the Company's shareholders.
There can be no assurance that financing will be available to the Company in
an amount and on terms acceptable to it.


                                RISK FACTORS

This Report contains certain forward looking statements.  Actual results
could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth below.

ACCEPTANCE OF MULTIPATH MOVIE CONCEPT; SUCCESSFUL DEVELOPMENT OF MULTIPATH
MOVIES WITH APPEALING CREATIVE CONTENT

     The success of the Company's Multipath Movie products will depend to a
significant extent on acceptance by the market of the Multipath Movie
concept.  The market for entertainment software is emerging and is dependent
upon a number of variables, including consumer preferences, the installed
base of personal computers and a sufficient number of entertainment software
titles to stimulate market development.  Any competitive, technological or
other factor materially adversely affecting the introduction or sale of
personal computers or entertainment software would have a material adverse
effect on the Company.  Because the market for entertainment software is
relatively small in comparison with the overall market for consumer software
products, it is impossible to predict with any degree of certainty the future
rate of growth, if any, and the size of the market for the Company's
products.

     Each Multipath Movie will be an individual artistic work, and its
commercial success primarily will be determined by user reaction, which is
unpredictable.  The Company has not yet introduced its first Multipath Movie.

The commercial success of the Company's Multipath Movies will depend on its
ability to predict the type of content that will appeal to a broad audience
and to develop stories and characters that capture the attention and
imagination of the market.  In addition, the success of the Company's
Multipath Movies will depend upon the Company's ability to develop popular
characters and to license recognized characters and properties from third
parties for its software titles.  There can be no assurance that the Company
will be able to develop or license popular stories or characters.  The
success of a Multipath Movie also depends upon the effectiveness of the
Company's marketing and successful introduction of the first Multipath Movie
through the Company's bundling relationship with Packard Bell NEC, as well as
the quality and acceptance of other competing programs released into the
market at or near the same time, critical reviews, the availability of
alternative forms of entertainment and leisure time activities, general
economic conditions and other tangible and intangible factors, all of which
can change and cannot be predicted with certainty.  There can be no


PAGE 20
<PAGE>

assurance
that the Company will be able to successfully introduce the Multipath Movie
through its bundling relationship with Packard Bell NEC or otherwise.
Accordingly, there exists substantial risk that some or all of the Company's
Multipath Movies will not be commercially successful, resulting in certain
costs not being recouped or anticipated profits not being realized.  Further,
the success of the Multipath Movie genre will substantially depend on the
market's reception of the first Multipath Movie.  The failure of the
Company's initial Multipath Movie to achieve commercial success would damage
the ability of the Company to introduce additional titles.  Accordingly, the
failure of any of the Company's Multipath Movies, and especially its first
Multipath Movie, to achieve commercial success, could have a material adverse
affect on the business, operating results and financial condition of the
Company.

FLUCTUATING OPERATING RESULTS

     The Company intends to generate a substantial majority of its future
revenue from the development and production of Multipath Movies and other
three- dimensional digitally created entertainment.  The first of its
Multipath Movies, CYBERSWINE, is expected to be released in the fall of 1997.

The first product in the Storyteller Series is not expected to be released
until late 1997.  The Company's annual and quarterly revenue will depend upon
the successful development, timing and market acceptance of its interactive
products and upon the costs to distribute and promote these products.
Specifically, the revenues derived from the production and distribution of
the  Company's Multipath Movies will depend primarily on the acceptance by
the market of the Multipath Movie concept and the underlying content of the
Multipath Movie, neither of which can be predicted nor necessarily bear a
direct correlation to the production or distribution costs incurred.  The
commercial success of a film also depends upon promotion and marketing,
production costs, impact of competition and other factors. Accordingly, the
Company's annual and quarterly revenues are and will continue to be extremely
difficult to forecast.

     The Company's expense levels are, to a large extent, fixed.  The Company
may be unable to adjust spending in a timely manner to compensate for any
revenue shortfall.  As a result, any significant shortfall in revenue from
the Company's Multipath Movies would have an immediate material adverse
effect on the Company's business, operating results and financial condition.
The Company plans to increase its operating expenses to fund greater levels
of Multipath Movie and traditional CD-ROM development, research and
development, increased marketing operations and expansion of its distribution
channels.  To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, operating results and
financial condition will be materially adversely affected.

     Historically, the Company has experienced significant fluctuations in
its operating results from quarter to quarter and it expects these
fluctuations to continue in the future.  Factors that may influence the
Company's quarterly operating results include customer demand for the
Company's products, introduction or enhancement of products by the Company
and its competitors, the timing of releases of new products or product
enhancements by the Company and its competitors, introduction or availability
of new hardware, market acceptance of the Multipath Movies and other new
products, development and promotional expenses relating to the introduction
of new products or enhancements of existing products, reviews in the industry
press concerning the products of the Company or its competitors, changes or
anticipated changes in pricing by the Company or its competitors, mix of
distribution channels through which products are sold, mix of products sold,
product returns, the timing of orders from major customers, order
cancellations, delays in shipment and other developments and decisions
including the timing and extent of development expenditures, management's
evaluation and judgment regarding a title's acceptance, other unanticipated
operating expenses and general economic conditions.  Additionally, a majority
of the unit sales for a product typically occurs in the quarter in which the
product is introduced.  As a result, the Company's revenues may increase
significantly in a quarter in which a major product introduction occurs and
may decline in following quarters.  The Company's revenues both domestically
and internationally have varied significantly between monthly and quarterly
periods.  Therefore, in the future, the operating results for any quarter
should not be taken as  indicative of the results for any quarter in
subsequent periods.

     The entertainment software business is highly seasonal.  Typically, net
revenues are highest during the fourth calendar quarter (which includes the
holiday buying season), decline in the first calendar quarter and are lowest
in the second and third calendar quarters.  This seasonal pattern is due
primarily to the increased demand for entertainment software products during
the year-end holiday buying season.  As a result, a disproportionate share of
the Company's net

PAGE 21
<PAGE>

revenues historically have been generated in the last
calendar quarter of the Company's fiscal year.  The Company expects its
revenues and operating results will continue to reflect these seasonal
factors.

     The entertainment industry historically has been subject to substantial
cyclical variation, with consumer spending for entertainment products tending
to decline during recessionary periods.  There can be no assurance that the
Company will be able to adjust its anticipated product development
expenditures and other expenses in the event of an economic downturn during
such development.  Accordingly, if a recessionary period occurs, tending to
result in decrease sales of the Company's products, product development
expenses likely will remain constant and the Company's business, operating
results and financial condition could be adversely affected.

     Due to all of the foregoing factors, it is also likely that in some
future periods the Company's operating results will be below the expectations
of public market analysts and investors.  In such event, the price of the
Company's Common Stock would likely be materially adversely affected.

SOFTWARE TOOLS AND PRODUCT DEVELOPMENT

     The suite of software tools that will enable the Company to create its
Multipath Movie has been developed over the past two years and additional
refinement of these tools may be necessary in order to create the Multipath
Movie.  The Company believes that its future success depends in large part
upon the continuous enhancement of the software tools necessary to create the
Multipath Movie.  If problems in the development of the Company's software
tools arise, no assurance can be given that the Company will be able
successfully to remedy these problems.  Even if the Company can remedy these
potential problems, the creation, and consequently the distribution, of the
Multipath Movie may be significantly delayed or could become significantly
more expensive.  Any such delay or increase in cost would have a material
adverse affect on the business, operating results and financial condition of
the Company.

     For the foreseeable future, the Company expects to be significantly
dependent upon the success of the Multipath Movie.  The Multipath Movie is
still in the development stage.  The Company expects to release its first
product in the  Multipath Movie product line in the fall of 1997.  There can
be no assurance that these products will be successfully developed at all, or
if successfully developed, will be released during these periods.  If the
Company is unable to timely produce and develop these products and subsequent
digital entertainment products that meet with broad market acceptance, the
Company's business, operating results and financial condition will be
materially adversely affected.

     Also, entertainment products as complex as those offered by the Company
may contain undetected errors or defects when first introduced or as new
versions are released.  The Company has in the past discovered software
errors in certain of its new products and enhancements after their
introduction.  Although the Company has not experienced material adverse
effects resulting from any such errors to date, there can be no assurance
that errors or defects will not be found in new products or releases after
commencement of commercial shipments, resulting in adverse product reviews
and a loss of or delay in market acceptance, which would have a material
adverse effect upon the Company's business, operating results and financial
condition.

DEPENDENCE ON DEVELOPMENT OF ADDITIONAL MULTIPATH MOVIES

     The Company's success will depend largely upon its ability in the future
to continuously develop new, commercially-successful Multipath Movie titles
and to replace revenues from Multipath Movie titles in the later stages of
their life cycles.  If revenues from new products or other activities fail to
replace declining revenues from existing products, the Company's business,
operations and financial condition could be materially adversely affected.
In addition, the Company's success will depend upon its ability to develop
popular characters and to license recognized characters and properties from
third parties for its digital entertainment products.  If the Company is
unable to develop popular characters or if the cost of licensing characters
and properties from third parties becomes prohibitive, the Company's
business, operating results and financial condition could be adversely
affected.  Also, pursuant to certain of its licensing arrangements, the
Company historically has, and may continue to, prepay royalties to third
parties.  There can be no assurance that the sales of products associated
with these royalties will equal or exceed the amount of the prepayment

PAGE 22
<PAGE>


LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY

     The Company was founded in September 1993, and shipped its initial CD-
ROM product in November 1994.  The Company has not introduced its first
Multipath Movie and has only recently acquired the software tools necessary
to produce a Multipath Movie.  Accordingly, the Company has only a limited
operating history in the case of CD-ROM development and no operating history
in the case of Multipath Movies upon which an evaluation of the Company and
its prospects can be based.  There can be no assurance that the revenues of
the Company will continue at their current level or will increase, or that
the Company will be able to achieve profitability.

     The Company incurred a significant loss in the six months ended December
31, 1996.  The Company expects to incur significant operating expenses and
development costs as it completes development, and commences marketing, of
its Multipath Movies and expands in anticipation of growth.  The Company
expects that these expenses and development costs will result in losses in
the quarters ended March 31, 1997 and June 30, 1997, and that, depending on
the level of revenues, the Company could incur quarterly losses thereafter.

SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES

     The Company depends substantially upon third parties for several
critical elements of its business including the development and licensing of
content and the distribution of its products.

     DEPENDENCE UPON STRATEGIC RELATIONSHIPS

     The Company has entered into strategic relationships with Packard Bell
NEC, Crawfords and Morgan Creek, as well as licensing arrangements with
numerous additional companies that own the stories underlying and/or
characters in many of the Company's products.  The Company's business
strategy is based largely on its strategic relationships with these and other
companies.  In each of these relationships, mutual agreement of the parties
is required for significant matters, or approval of the strategic partner or
both parties is required to release products or to commence distribution of
products.  For example, the Company will rely on Packard Bell NEC to
distribute CD-ROMs to purchasers of certain Packard Bell NEC computers as a
significant element of the Company's launch of the Multipath Movie genre.
Packard Bell NEC's obligation to distribute such CD-ROMs will depend upon
Packard Bell NEC's acceptance of master CD-ROMs complying with the Company's
specifications.  Consequently, Packard Bell NEC may, in the exercise of its
approval rights, delay the introduction of the Company's first Multipath
Movie.  Also, Morgan Creek and Crawfords have various creative controls and
approval rights pursuant to their joint venture agreements with the Company.
These creative controls and approval rights allow Morgan Creek or Crawfords
to reject or delay the Multipath Movie productions of the respective joint
ventures.  There can be no assurance that the Company will not be subject to
delays resulting from disagreements with or an inability to obtain approvals
from its strategic partners or that the Company will achieve its objectives
in respect of any or all of its strategic relationships or continue to
maintain and develop these or other strategic relationships, or that licenses
between the Company and any such third party will be renewed or extended at
their expiration dates.  Any such delays or the Company's failure to renew or
extend a key license or maintain any of its strategic relationships could
materially and adversely affect the Company's business, operating results and
financial condition.  In addition, under certain key license agreements, the
Company must obtain approval on a timely basis from the licensor in order to
ship products it develops under the license.  There can be no assurance that
the Company will obtain such approval and failure to do so could have a
material adverse effect on the Company's business, operating results and
financial condition.

     USE OF INDEPENDENT SOFTWARE DEVELOPERS AND CONTENT PROVIDERS

     In addition to internally developing software and creating content, the
Company uses entertainment software created by independent software
developers as well as content developed by third parties.  The Company has
less control over the scheduling and the quality of the software generated by
independent contractors than over that developed by its own employees.
Additionally, the Company may not be able to secure the services of talented
content developers.  The

PAGE 23
<PAGE>

Company's business and future operating results will
depend in part on the Company's continued ability to maintain relationships
with skilled independent software developers and content providers, and to
enter into and renew product development agreements with such developers.
There can be no assurance that the Company will be able to maintain such
relationships or enter into and renew such agreements.

RISKS ASSOCIATED WITH INTERNET DELIVERY

     The Company intends to distribute its Multipath Movies via an Internet
site to be established by the Company.  The Company also intends to
distribute certain of its Multipath Movies through a link connecting Packard
Bell NEC's "Planet Oasis" Web site to the Company's Internet site.
Accordingly, any system failure that causes interruption or an increase in
response time on the Company's Internet site or the Planet Oasis Web site
could result in less traffic to and distribution of Multipath Movies via the
Company's Internet site and, if sustained or repeated, could reduce the
attractiveness of the Company's products.  The Company is also dependent upon
Web browsers and Internet and online service providers to ensure user access
to its products.  User acceptance with respect to payment methods over the
Internet may also create barriers to distribution of the Company's products
through the Internet.  Any disruption in the Internet access provided to the
Company's  Internet site provided by Planet Oasis, Internet and online
service providers or Web browsers or any failure by the Company's Internet
site to handle higher volumes of transactions could have a material adverse
effect on the Company's business, operating results and financial condition.

     The seamless appearance of Multipath Movies delivered via the Internet
requires that while a scene is being viewed, succeeding scenes must be
downloaded.  This requires the use of 28.8 kilobits per second or faster
modems, computers equipped with high-speed Pentium (or equivalent)
microprocessors, 24 megabytes of random access memory and appropriately
configured operating systems.  These requirements generally are not satisfied
by the majority of the base of currently installed PCs.  There can be no
assurance that adequately equipped and configured computers will become
widespread prior to release of the Company's Multipath Movies.  Users of
computers with less sophisticated PCs may experience noticeable latencies or
"lag times" between scene changes.  Additionally, the performance
characteristics of Multipath Movies delivered via the Internet may not equal
those of Multipath Movies delivered solely on CD-ROMs, particularly with
respect to perceived seamlessness and sound quality.  Moreover,
communications between the user and an Internet site delivering Multipath
Movies may require routing of Multipath Movie instructions through several
servers and may result in brief but noticeable lag times.  Noticeable lag
times or negative comparisons to Multipath Movies distributed on CD-ROM may
reduce the attractiveness of online versions of the Multipath Movies.


COMPETITION

     The markets for the Company's digital entertainment products are
intensely competitive, subject to rapid change and characterized by constant
demand for new product features at reduced prices and pressure to accelerate
the release of new products and product enhancements.  The Company expects to
compete with computer graphics special effects firms, including Pixar, ILM,
Digital Domain, Sony ImageWorks, Pacific Data Images, Rhythm & Hues and Boss
Film Studios, Inc.  The CD-ROM industry is intensely competitive and consumer
demand for particular software products may be adversely affected by the
proliferation of competitive products.  The Company believes that the primary
competitive factors in the market for CD-ROM products include creative
content, product quality, technological capabilities, pricing, breadth of
features, marketing and distribution resources and customer service and
support.  The Company will compete primarily against companies offering
entertainment software and related products such as Broderbund, 7th Level, GT
Interactive, Electronic Arts, Softkey, and Sierra On-Line, and companies
offering traditional feature films and television programming produced by
major movie studios, including Disney, Warner Bros., Twentieth Century Fox,
Paramount, Sony, Lucasfilm, MCA Universal, and MGM/UA.  In addition, the
Company will compete with movie studios for the acquisition of literary
properties, production financing, the services of performing artists, and the
services of other creative and technical personnel, particularly in the
fields of animation and technical direction.  Most of the companies with
which the Company will compete have significantly greater name recognition
and significantly greater financial, technical, creative, marketing, and
other resources than does the Company.  Due to their substantially greater
resources, these competitors likely will be able to enter into more favorable
distribution arrangements and to promote their products more successfully
than the Company.  Further, the Company believes that continuing enhancements
in computer

PAGE 24
<PAGE>

hardware and software technology will lower barriers to entry for
studios or special effects companies which intend to produce computer
animated feature films or other products.

     In response to all of these competitive forces, the Company will be
required to make a high level of investment in content and tool development,
marketing and customer service and support.  There can be no assurance that
the Company  will have sufficient resources to make such investments or, even
if they are made, that the Company's products will be competitive.
Additionally, present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements.  The
Company's competitors also may increase their efforts to gain and retain
market share through competitive pricing or product giveaways.  These
competitive pressures may necessitate price reductions by the Company, thus
reducing the Company's profit margins.  In addition, as the number of
competitors increases and competition for scarce consumer time available to
be devoted to the products such as those of the Company and equally scarce
retail shelf space becomes more intense, the Company may need to increase
marketing expenditures to maintain sales and product differentiation.  Also,
as competition for popular titles and themes that may be used in
entertainment software increases, the cost of acquiring such titles and
properties is likely to increase, resulting in reduced margins.  There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the
Company will not materially and adversely affect its business, operating
results and financial condition.

RAPID TECHNOLOGICAL CHANGE; CHANGING PRODUCT PLATFORMS AND FORMATS

     The entertainment software market and the personal computer industry in
general are characterized by rapid and significant technological developments
and frequent changes in computer operating environments.  To compete
successfully in these markets, the Company must continually improve and
enhance its existing products and technologies and develop new products and
technologies that incorporate technological advances while remaining
competitive in terms of performance and price.  The Company's success also
will depend substantially upon its ability to anticipate the emergence of,
and to adapt its products to, popular platforms for consumer software.

     The Company has designed its Multipath Movies for use with the
IBM-compatible PC and the Sega Saturn game console.  The Company intends to
design future products for use with new platforms which will require
substantial investments in research and development.  Generally, such
research and development efforts must occur one to two years in advance of
the widespread release or use of the platforms in order to introduce products
on a timely basis following the release of such platforms.  The research and
development efforts in connection with games for certain advanced and
emerging platforms may require greater financial and technical resources than
currently possessed by the Company.  In addition, there can be no assurance
that the new platforms for which the Company develops products will achieve
market acceptance and, as a result, there can be no assurance that the
Company's development efforts with respect to such new platforms will lead to
marketable products or products that generate sufficient revenues to offset
the research and development costs incurred in connection with their
development.  Failure to develop products for new platforms that achieve
significant market acceptance would have a material adverse effect on the
Company's business, operating results and  financial condition.  There can be
no assurance that technological developments will not render certain of the
Company's existing products obsolete, that the Company will be able to adapt
its products or technologies to emerging hardware platforms, that the Company
has chosen to support platforms that ultimately will be successful or that
the Company will be able successfully to create software titles for such
platforms in a timely manner, or at all.

DEPENDENCE ON KEY PERSONNEL

     The Company's success has and will continue to depend to a significant
extent upon certain key management, product development and technical
personnel, many of whom would be difficult to replace, particularly Mark
Dyne, its Chairman and Chief Executive Officer and Kevin Bermeister, its
President.  Although the Company has entered into employment agreements with
certain officers, such agreements are terminable upon 30 days notice by
either party.  Accordingly, there can be no assurance that such employees
will continue to be available to the Company.  The loss of the services of
one or more of these key employees could have a material adverse effect on
the Company and the


PAGE 25
<PAGE>

Company's future success will depend in large part upon
its ability to attract, retain and motivate personnel with a variety of
technical and managerial skills, including software development and
programming expertise.  Significant competition exists for such personnel and
the companies with which the Company competes are often larger and more
established than the Company.  Additionally, there is currently an
industry-wide shortage of technical personnel which makes it more difficult
to attract and retain such personnel.  There can be no assurance that the
Company will be able to retain and motivate its managerial and technical
personnel or attract additional qualified members to management or technical
staff.  The inability to attract and retain necessary technical and
managerial personnel could have a material and adverse effect upon the
Company's business, operating results and financial condition.

SHARED RESPONSIBILITIES AND OTHER EMPLOYMENT COMMITMENTS OF CHIEF EXECUTIVE
OFFICER AND PRESIDENT

     The Company's Chief Executive Officer and Chairman, Mark Dyne and its
President, Kevin Bermeister, also serve as joint managing directors of Sega
Ozisoft, Sega Enterprises (Australia) Pty., Ltd. ("Sega Enterprises") and
other businesses.  Although Messrs. Dyne and Bermeister are active in the
management of the Company, they are not required to spend a certain amount of
time at the Company nor are they able to devote their full time and resources
to the Company.  Further, the Company does not have employment agreements
with either of Messrs. Dyne or Bermeister.  There can be no assurance that
the inability of Messrs. Dyne and Bermeister to devote their full time and
resources to the Company will not adversely affect the Company's business,
operating results or financial condition.

CONFLICTS OF INTEREST

     Certain of the Company's directors and officers are directors or
officers of  potential competitors and/or strategic partners of the Company.
These relationships may give rise to conflicts of interest between the
Company, on the one hand, and one or more of the directors, or officers
and/or their affiliates, on the other hand.  The Company's Certificate of
Incorporation provides that Mark Dyne and Kevin Bermeister are required to
present to the Company any corporate opportunities for the development of any
type of digital entertainment with the exception of opportunities for (i)
minority participation in the development of digital entertainment and (ii)
participation in the development by others of digital entertainment where
publishing and distribution rights for the product to be developed are
offered to Messrs. Dyne and/or Bermeister solely for Australia, New Zealand
and/or Southern Africa.  The Company's Certificate of Incorporation provides
that Messrs. Dyne and Bermeister are not required to present to the Company
any other opportunities which potentially may be of benefit to the Company.

NEW PRODUCTION STUDIO

     As at December 31, 1996, the Company's production facility was located
in Manly, Australia.  This facility did not provide adequate space to house
the necessary equipment and personnel to develop the quantity of Multipath
Movies intended to be produced by the Company in the next several years.  The
Company intends to use approximately $0.75 million to equip a production
studio in Australia.  The creation of the production studio is currently
proceeding in Bondi Junction, a suburb of Sydney, Australia.  It is expected
that the creation of this studio will require a substantial time commitment
of certain members of management in order to facilitate an uninterrupted and
efficient transition of current operations to the new facility and could
result in delays in production.  There can be no assurance that the Company
will be able to equip the production studio at the budgeted price.
Additionally, there can be no assurance that the facility will be available
on time or that the Company will be successful in timely hiring and training
new content developers and software programmers necessary to conduct the
additional operations in which event the development, and consequently the
release, of the Company's products may be delayed.  Any such delay would have
a material adverse effect upon the Company's business, operating results and
financial condition.

PAGE 26
<PAGE>

MANAGEMENT OF BUSINESS CHANGES; POTENTIAL GROWTH; POTENTIAL ACQUISITIONS

     Implementation of the Company's business plan, including introduction of
the Company's Multipath Movies, management of the Company's joint ventures
with Morgan Creek and Crawfords, management of the Company's strategic
relationship with Packard Bell NEC, the establishment of a new production
studio in Australia, and the general strains of the Company's new role of a
public company will require that the Company significantly expand its
operations in all areas.  This growth in the Company's operations and
activities will place a significant strain on the Company's management,
operational, financial and accounting resources.  Successful management of
the Company's operations will require the Company to continue to implement
and improve its financial and management information systems.  In addition,
the restructuring of the Company and resulting management and reporting of
Australian operations and financial results from the United States, as well
as other aspects of the process of preparing the Company for the Offering
have placed and will continue to place an additional strain on the Company's
accounting and information systems resources.  The Company's ability to
manage its future growth, if any, will  also require it to hire and train new
employees, including management and technical personnel, and motivate and
manage its new employees and integrate them into its overall operations and
culture.  The Company recently has made additions to its management team and
is in the process of expanding its accounting staff and modifying its
internal procedures to adapt to its new role as a public company, a process
which is expected to continue following the Offering.  The Company's failure
to manage implementation of its business plan and the changes made to
structure and prepare for the Offering would have a material adverse effect
on the Company's business, operating results and financial condition.

     In the future, the Company may acquire complementary companies, products
or technologies, although no specific acquisitions currently are pending or
under negotiation.  Acquisitions involve numerous risks, including adverse
short-term effects on the combined business' reported operating results,
impairments of goodwill and other intangible assets, the diversion of
management's attention, the dependence on retention, hiring and training of
key personnel, the amortization of intangible assets and risks associated
with unanticipated problems or legal liabilities.

LIMITED PROPRIETARY PROTECTION

     The Company's success and ability to compete is dependent in part upon
its proprietary technology.  The Company currently intends to file United
States patent applications relating to certain components of its proprietary
technology.  The Company also relies on trademark, trade secret and copyright
laws to protect its technology, with the source code for the Company's
proprietary software being protected both as a trade secret and as a
copyrighted work.  Also, it is the Company's policy that all employees and
third-party developers sign nondisclosure agreements.  However, there can be
no assurance that such precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or
superior technology independently.  Also, the Company has no license
agreements with the end users of its products and does not copy-protect its
software, so it may be possible for unauthorized third parties to copy the
Company's products or to reverse engineer or otherwise obtain and use
information that the Company regards as proprietary.  Although the Company is
not aware of unauthorized copying of its products, if a significant amount of
unauthorized copying of the Company's products were to occur, the Company's
business, operating results and financial condition could be adversely
affected.  Furthermore, policing unauthorized use of the Company's products
is difficult and costly, and software piracy can be expected to be a
persistent problem.  If litigation is necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade
secrets or to determine the validity and scope of the proprietary rights of
others, such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results and financial condition.  Ultimately, the Company may be
unable, for financial or other reasons, to enforce its rights under
intellectual property laws and the laws of certain countries in which the
Company's products are or  may be distributed may not protect the Company's
products and intellectual rights to the same extent as the laws of the United
States.

     The Company believes that its products, including its suite of software
tools, do not infringe any valid existing proprietary rights of third
parties.  Since the software tools used to create the Multipath Movies were
developed by SAND, a division of Sega Ozisoft, the Company relies entirely on
the representations of Sega Ozisoft contained in the SAND Acquisition
Agreement between BII Australia and Sega Ozisoft that, to Sega Ozisoft's best
knowledge, the SAND technology and software acquired by the Company does not
infringe the proprietary rights of others.  Additionally,

PAGE 27
<PAGE>

although the
Company has received no communication from third parties alleging the
infringement of proprietary rights of such parties, there can be no assurance
that third parties will not assert infringement claims in the future.  Any
such third party claims, whether or not meritorious, could result in costly
litigation or require the Company to enter into royalty or licensing
agreements.  There can be no assurance that the Company would prevail in any
such litigation or that any such licenses would be available on acceptable
terms, if at all.  If the Company were found to have infringed upon the
proprietary rights of third parties, it could be required to pay damages,
cease sales of the infringing products and redesign or discontinue such
products, any of which alternatives, individually or collectively could have
a material adverse effect on the Company's business, operating results and
financial condition.

RECOVERY OF PREPAID ROYALTIES AND GUARANTEES

     The Company may from time to time, enter into agreements with licensors
of intellectual property that involve advance payments of royalties and
guaranteed minimum royalty payments.  If the sales volumes of products
subject to such arrangements are not sufficient to recover such advances and
guarantees, the Company will be required to write off unrecovered portions of
such payments.  If the Company is required to write off a material portion of
any advances, or ultimately accrue for the guarantees, its business,
operating results and financial condition could be adversely affected.

INTERNATIONAL BUSINESS

     Historically, international sales, principally in Australia, accounted
for a significant portion of the Company's revenues and the Company expects
that international sales will continue to account for a significant portion
of the Company's total revenue.  The Company's international business is
subject to numerous risks, including the need to comply with a wide variety
of foreign and U.S. export and import laws, changes in export or import
controls, tariffs and other regulatory requirements, the imposition of
governmental controls, political and economic instability, trade
restrictions, the greater difficulty of administering business overseas and
general economic conditions.  Although the Company's international sales are
denominated principally in United States dollars,  sales to international
customers may also be affected by changes in demand resulting from
fluctuations in interest and currency exchange rates.  In addition, the laws
of certain foreign countries may not protect the Company's intellectual
property to the same extent as do the laws of the United States.  There can
be no assurance that these factors will not have a material adverse effect on
the Company's business and results of operations.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

     The Company's future capital requirements will depend on many factors,
including but not limited to, the quantity of Multipath Movies developed, the
cost of content development, marketing and distribution, the size and timing
of future acquisitions, if any, and the availability of additional financing.

To the extent that existing resources and future earnings are insufficient to
fund the Company's activities, the Company may need to raise additional funds
through debt or equity financings.  No assurance can be given that such
additional financing will be available or that, if available, it can be
obtained on terms favorable to the Company and its stockholders.  In
addition, any equity financing could result in dilution to the Company's
stockholders.  The Company's inability to obtain adequate funds would
adversely affect the Company's operations and ability to implement its
strategy.

PAGE 28
<PAGE>


ITEM 7  FINANCIAL STATEMENTS

                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . .30

Consolidated Balance Sheets as of June 30, 1996 and December 31, 1996. . 31

Consolidated Statements of Operations for the years ended
  June 30, 1995 and 1996 and for the six months
  ended December 31, 1995 (unaudited) and 1996. . . . . . . . . . . . . .32

Consolidated Statements of Stockholders' Equity (Deficiency)
  for the years ended June 30, 1995 and 1996,
  and the six months ended December 31, 1996. . . . . . . . . . . . . . .33

Consolidated Statements of Cash Flows for the years ended
  June 30, 1995 and 1996 and for the six months ended
  December 31, 1995 (unaudited) and 1996. . . . . . . . . . . . . . . . .34

Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . .36

PAGE 29
<PAGE>

                       Report of Independent Auditors

The Board of Directors
Brilliant Digital Entertainment, Inc.

     We have audited the accompanying consolidated balance sheets of
Brilliant Digital Entertainment, Inc. as of June 30, 1996 and December 31,
1996, and the related statements of operations, stockholders' deficiency, and
cash flows for each of the two years in the period ended June 30, 1996 and
the six months ended December 31, 1996.  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 generally accepted auditing
standards.  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 June 30, 1996 and December 31, 1996, and the
results of its operations and its cash flows for each of the two years in the
period ended June 30, 1996 and for the six months ended December 31, 1996, in
conformity with generally accepted accounting principles.


                                             Ernst & Young LLP

March 24, 1997
Los Angeles, California

PAGE 30
<PAGE>


                    BRILLIANT DIGITAL ENTERTAINMENT, INC.
                         CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                    JUNE 30,  DECEMBER 31,
                                                      1996        1996
                                                   ---------  ------------
<S>                                                <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents                         $    53      $  7,591
  Accounts receivable (net of allowance for
    doubtful accounts of $0 at June 30, 1996
    and $93 at December 31, 1996)                       657            80
    Accounts receivable from related parties             --            29
    Other assets                                          7           233
                                                   ---------     ---------
Total current assets                                    717         7,933
Property, plant and equipment, net                      198           345
Other assets                                             --           206
                                                   ---------     ---------
Total assets                                        $   915      $  8,484
                                                   =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
  Accounts payable and accrued expenses             $    99       $   891
  Deferred revenue                                      213           164
  Amounts payable to related parties                    733            84
                                                   ---------     ---------
Total current liabilities                             1,045         1,139
Commitments and contingencies
Stockholders' equity (deficiency):
  Preferred Stock ($0.001 par value;
    1,000,000 shares authorized; no shares
    issued or outstanding)                               --            --
  Common Stock ($0.001 par value;
    30,000,000 shares authorized;
    4,420,000 shares issued and outstanding
    at June 30, 1996; and 7,200,001 shares
    issued and outstanding at December 31, 1996)          4             7

  Additional paid-in capital                             10        11,320
  Accumulated deficit                                  (120)       (3,955)
  Cumulative translation adjustment                     (24)          (27)
                                                   ---------     ---------
Total stockholders' equity (deficiency)                (130)        7,345
                                                   ---------     ---------
Total liabilities and stockholders'
  equity (deficiency)                               $   915      $  8,484
                                                   =========     =========

</TABLE>
                           See accompanying notes.


PAGE 31
<PAGE>

<TABLE>
                                                 BRILLIANT DIGITAL ENTERTAINMENT, INC.
                                                 CONSOLIDATED STATEMENTS OF OPERATIONS
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>

                                                                                    SIX MONTHS ENDED
                                                       YEAR ENDED JUNE 30,             DECEMBER 31,
                                                        ------------------         ----------------
                                                        1995          1996         1995          1996
                                                        ----          ----         ----          ----
                                                                                      (unaudited)
<S>                                                     <C>           <C>          <C>             <C>
Revenues:
   Royalties from licensing arrangements           $    752       $  1,291     $    704        $    94
   Development fees                                      89            586          307            254
   Software sales                                         2            177          173              2

                                                  ---------      ---------    ---------      ---------
         Total revenues                                 843          2,054        1,184            350

Cost of revenues:
   Royalties from licensing arrangements                595            255          195             20
   Development fees                                      60            455          239            165
   Software sales                                         1             29           --              1
                                                   ---------      ---------    ---------      ---------
         Total cost of revenues                         656            739          434            186
                                                   ---------      ---------    ---------      ---------
Gross profit                                            187          1,315          750            164
Operating expenses:
Sales and marketing                                     116            163           35            970
   General and administrative                           224            366          129          1,065
   Research and development                             183            174          103          1,877
   Depreciation                                          43            102           46             74
                                                   ---------      ---------    ---------      ---------
         Total operating expenses                       566            805          313          3,986
                                                   ---------      ---------    ---------      ---------
Income (loss) from operations                          (379)           510          437         (3,822)
Other income (expense):
   Export market development grant                       --            122           --             --
   Gain (loss) on foreign exchange transactions          --             14           17             --
   Interest income                                       --              2           --             41
   Interest expense                                     (45)           (95)         (64)           (54)
                                                   ---------      ---------    ---------      ---------
         Total other income (expense)                   (45)            43          (47)           (13)
                                                   ---------      ---------    ---------      ---------
Income (loss) before income taxes                      (424)           553          390         (3,835)
Provision for income taxes                               --             --           --             --
                                                   ---------      ---------    ---------      ---------
Net income (loss)                                   $  (424)      $    553      $   390       $ (3,835)

                                                   =========      =========    =========      =========
Net income (loss) per share                         $ (0.09)      $   0.12      $  0.09       $  (0.77)
                                                   =========      =========    =========      =========
Weighted average number of shares used in
computing net income (loss) per share                 4,508          4,557        4,557          4,953
                                                   =========      =========    =========      =========

</TABLE>
                                                        See accompanying notes.

PAGE 32
<PAGE>

<TABLE>
                                                 BRILLIANT DIGITAL ENTERTAINMENT, INC.
                                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                                                   (IN THOUSANDS, EXCEPT SHARE DATA)


<CAPTION>
                                                       COMMON STOCK
                                                       ------------
                                                                                           RETAINED
                                                                          ADDITIONAL     EARNINGS      CUMULATIVE
                                                  NO. OF                  PAID-IN     (ACCUMULATED    TRANSLATION
                                                  SHARES        AMOUNT    CAPITAL       DEFICIT)      ADJUSTMENT          TOTAL
                                                ----------     --------   ----------    -----------    -----------      ---------
<S>                                             <C>            <C>        <C>           <C>            <C>              <C>
Balance at June 30, 1994                        4,420,000      $     4     $     10       $   (249)      $     (2)      $   (237)
   Proceeds from sale of shares to employees       53,040           --           --             --             --             --
   Foreign exchange translation                        --           --           --             --             14             14
   Net loss                                            --           --           --           (424)            --           (424)
                                                ----------      -------    ---------      ---------      ---------      ---------
Balance at June 30, 1995                        4,473,040            4           10           (673)            12           (647)
   Repurchase of shares                           (44,200)          --           --             --             --             --
   Cancellation of shares                          (8,840)          --           --             --             --             --
   Foreign exchange translation                        --           --           --             --            (36)           (36)
      Net income                                       --           --           --            553             --            553
                                                ----------      -------    ---------      ---------      ---------      ---------
Balance at June 30, 1996                        4,420,000            4           10           (120)           (24)          (130)
   Grant of warrants                                   --           --        1,096             --             --          1,096
   Initial public offering, net of
      expenses of $1,468,000                    2,000,000            2        8,530             --             --          8,532
   Conversion of SAND note                        780,001            1        1,499             --             --          1,500
   Grant of stock options                              --           --          185             --             --            185
   Foreign exchange translation                        --           --           --             --             (3)            (3)
   Net loss                                            --           --           --         (3,835)            --         (3,835)
                                                ----------      -------    ---------      ---------      ---------      ---------
Balance at December 31, 1996                    7,200,001       $    7     $ 11,320       $ (3,955)      $    (27)        $7,345
                                                ==========      =======    =========      =========      =========      =========

</TABLE>
                                                     See accompanying notes.

PAGE 33
<PAGE>

<TABLE>
                                                 BRILLIANT DIGITAL ENTERTAINMENT, INC.
                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                            (IN THOUSANDS)

<CAPTION>
                                                                                     SIX MONTHS ENDED
                                                       YEAR ENDED JUNE 30,           DECEMBER 31,
                                                       ------------------            ----------------
                                                        1995          1996         1995            1996
                                                        ----          ----         ----            ----
                                                                                (unaudited)
<S>                                                     <C>           <C>          <C>             <C>
OPERATING ACTIVITIES
Net income (loss)                                   $  (424)       $   553      $   390       $ (3,835)
Adjustments to reconcile net income (loss)
   to the net cash provided by (used in)
   operating activities:
      Depreciation and amortization                      43            102           46             74
      Effect of warrants granted                         --             --           --          1,096
      Effect of stock options granted                    --             --           --            125
      Effect of SAND Note                                --             --           --          1,350
      Changes in operating assets and
      liabilities:
         Accounts receivable                             --           (633)        (869)           551
         Accounts payable and accruals                    4             40            7            791
         Other assets                                    (6)            --           --           (371)
         Deferred revenue                                66             --           --            (50)
                                                    --------         --------    --------       --------
Net cash provided by (used in) operating
   activities                                          (317)            62         (426)          (269)

INVESTING ACTIVITIES
Purchases of equipment                                 (168)          (110)         (72)           (69)
                                                    --------       --------     --------       --------
Net cash used in investing activities                  (168)          (110)         (72)           (69)

FINANCING ACTIVITIES
Proceeds from issuance of shares                         --             --           --          8,532
Repurchase of shares                                     --             --           --             --
Increase in amounts payable to
   related parties                                    1,076            711          702            491
Repayments of amounts payable to
   related parties                                     (556)          (672)        (169)        (1,145)
                                                    --------       --------     --------       --------
Net cash provided by financing
   activities                                           520             39          533          7,878
                                                    --------       --------     --------       --------

NET INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS                                      35             (9)          35          7,540
Translation adjustments                                  (3)            13            2             (2)
Cash and cash equivalents at beginning
   of period                                             17             49           49             53
                                                    --------       --------     --------       --------
Cash and cash equivalents at end
   of period                                        $    49        $    53      $    86        $ 7,591
                                                    ========       ========     ========       ========
Supplemental disclosure of cash flow
   information:
   Cash paid during the period for:
      Interest                                      $    --        $    --      $    --        $   204
                                                    ========       ========     ========       ========
      Income taxes                                  $    --        $    --      $    --        $    --
                                                    ========       ========     ========       ========

</TABLE>
                           See accompanying notes.


PAGE 34
<PAGE>

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

     In September 1996, the Company acquired SAND and in consideration
therefore issued a one-year $1,500,000 convertible promissory note.  (See
Note 3 of the Notes to Consolidated Financial Statements.)  The purchase
price was allocated to in-process research and development ($1,350,000),
which amount was included in operating expenses for the six months ended
December 31, 1996, and to certain assets ($150,000), which amount was
included in other assets at December 31, 1996.

     During the six months ended December 31, 1996, the Company recorded
$60,000 of stock option deferred compensation, which is included in other
assets at December 31, 1996 (see Note 5 of the Notes to Consolidated
Financial Statements).





PAGE 35
<PAGE>


                    BRILLIANT DIGITAL ENTERTAINMENT, INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              DECEMBER 31, 1996
    (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)

1.   DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

     In August 1996, a newly formed holding company, Brilliant Digital
Entertainment, Inc.  (the "Company"), 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") (the "Exchange").  BII Australia
develops, produces and markets interactive multimedia titles for the
education and entertainment markets.  BII Australia operates principally in
the computer software industry, predominantly in Australia with significant
exports to the United States.

     On September 13, 1996, the Company effected a 4.42 to 1 stock split (the
"Stock Split") resulting in a 3,420,000 increase in the number of shares of
Common Stock outstanding.

     These financial statements have been restated to give retroactive effect
to the Exchange, the subsequent consolidation of the Company and BII
Australia, and the Stock Split.

     In September 1996 the Company completed its acquisition of Sega
Australia New Development ("SAND") (see Note 3), which owns the rights to
proprietary software tools which are designed to allow the Company to both
develop a new genre of digital entertainment products, and to produce
ancillary products cost effectively.  The results of operations of SAND are
included in the Company's consolidated financial statements from the date of
acquisition.

     In November 1996, the Company completed its initial public offering of
Common stock ("the Offering")  (see Note 5).  The Company has elected to
change its fiscal year-end from June 30 to December 31.


2.   SIGNIFICANT ACCOUNTING POLICIES

     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 current exchange rates
($0.789 at June 30, 1996 and $0.794 at December 31, 1996), and revenues and
expenses are translated into U.S. dollars using average exchange rates
($0.739 for the year ended June 30, 1995, $0.760 for the year ended June 30,
1996, $0.743 for the six months ended December 31, 1995 and $0.792 for the
six months ended December 31, 1996).  The effects of foreign currency
translation adjustments are deferred and included as a component of
stockholders' equity.

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

     NET INCOME (LOSS) PER SHARE

     Net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding.  Common equivalent shares from
stock options and warrants (using the treasury stock method) have been
included in the computation when dilutive.  Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, all common and common
equivalent shares issued by the Company at an exercise price below the public
offering price during the twelve-month period prior to the offering have been
included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method at an initial public offering
price of $5.00 per share for stock options and warrants).

PAGE 36
<PAGE>

     INCOME TAXES

     The Company uses the 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.

     RESEARCH AND DEVELOPMENT COSTS

     The Company incurs research and development costs relating to the
development of traditional CD-ROM software tools which provide the technical
infrastructure for production of CD-ROM titles produced by the Company.  The
Company incurred research and development costs of $183,000, $174,000,
$103,000 and $1,877,000 for the fiscal years ended June 30, 1995 and 1996 and
the six months ended December 31, 1995 and 1996, respectively.  The amount
for the six months ended December 31, 1996 includes $1,350,000 of in-process
research and development attributable to SAND prior to the SAND acquisition
(see Note 3).

     The Company's accounting policy follows Statement of Financial
Accounting Standards No. 86 ("SFAS No. 86"), which provides for the
capitalization of certain software development costs once technological
feasibility is established.  The Company also evaluates the estimated net
realizable value of new and unproven products and the evidence of the extent
of any established market for the products.  Capitalized costs are amortized
on a straight-line basis over the estimated product life or on a ratio of
current revenues to total projected product revenues, whichever is greater.
As of December 31, 1996, technological feasibility of the Company's software
had not been established.  Therefore, in accordance with SFAS No. 86,
software development costs have been included in Research and Development
Expenses.  No software development costs were capitalized in the fiscal years
ended June 30, 1995 and 1996, or the six months ended December 31, 1995 and
1996.

     REVENUE RECOGNITION

     ROYALTIES:  The Company grants distribution rights to its CD-ROM
products to distributors in exchange for a non-refundable recoupable advance
and a percentage of sales of the products.  Revenue related to the non-
refundable advance is recognized when the CD-ROM master is delivered to the
customer.  Revenue related to a percentage of sales is recognized upon
notification by the distributor that a royalty has been earned by the
Company.

     DEVELOPMENT FEES:  In exchange for the development of CD-ROM products
pursuant to an agreement with a software customer, the Company receives
development fees.  The software development agreements generally specify
certain "milestones" which must be achieved throughout the development
process.  As these milestones are achieved, the Company recognizes the
portion of the development fee allocated to each milestone.

     SOFTWARE SALES: Software sales result from the Company selling to
customers completed software products developed by the Company.  Software
sales revenues are recognized upon shipment of product.

     It is the Company's policy to provide for estimated returns at the time
software sales revenue is recognized.  For the years ended June 30, 1995 and
1996 and the six months ended December 31, 1995 and 1996, the Company had
experienced no returns on software sales.

PAGE 37
<PAGE>

     COST OF REVENUES

     Cost of revenues related to royalties consists primarily of royalty
obligations to third parties.  Cost of revenues related to development fees
consists primarily of salaries, benefits and overhead associated with the
development of specific software products to customer specifications, as well
as costs of outside contractors engaged from time to time in creating aspects
of software products such as animation, voice recording and music.  Cost of
revenues related to software sales consists primarily of royalties to third
parties and the direct costs and manufacturing overhead required to reproduce
and package software products.

     DEFERRED REVENUES

     Cash advances are received by the Company to develop software for third
parties.  If such advances are refundable, they are included in Deferred
Revenue until the software is completed and delivered to the customer.

     USE OF ESTIMATES

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

     CASH EQUIVALENTS

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

     CONCENTRATION OF CREDIT RISK

     Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, short-term
investments 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 analyzes customer receivables to determine the necessity of
an allowance for doubtful accounts.  For the years ended June 30, 1995 and
1996 and the six months ended December 31, 1995, no such allowance was
considered necessary.  For the six months ended December 31, 1996 the Company
recorded an allowance for doubtful accounts of $93,000.

     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 ranging up to three years.

     LONG-LIVED ASSETS

     In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF.  SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995, and requires long-lived assets to be
evaluated for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable.  The Company has
adopted SFAS No. 121 for the six months ended December 31, 1996. The
provisions of SFAS No. 121 do not have a material effect on the Company's
consolidated results of operations for that period.

PAGE 38
<PAGE>

     STOCK OPTIONS

     In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation."  This new standard 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 approach 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 has used the
measurement prescribed by APB Opinion No. 25.  See Note 5 for supplemental
disclosure.


3.   ACQUISITION OF SAND

     In June 1996, the Company entered into a Memorandum of Understanding
with Sega Ozisoft to acquire SAND, a division of Sega Ozisoft.  In September
1996, the Company and Sega Ozisoft entered into an Asset Purchase Agreement
(the "SAND Acquisition Agreement") which superseded the Memorandum of
Understanding.  Pursuant to the SAND Acquisition Agreement, the Company
acquired SAND and in consideration therefor issued a $1,500,000 convertible
promissory note which, upon the completion of the Offering was automatically
converted into 780,001 shares of Common Stock of the Company.  The
acquisition was accounted for using the purchase method.

     SAND was created to develop state-of-the-art technology for interactive,
digital, Multipath Movies.  SAND was in the development stage, devoting
substantially all of its efforts to research and development.  During its
development stage, SAND incurred significant costs to develop proprietary
software tools to be used in the creation and development of a new genre of
interactive digital entertainment called "Multipath Movies." (Through the
date of the SAND Acquisition, SAND had incurred research and development
expenses of approximately $1,563,000.)

     The SAND Acquisition Agreement also provides that the Company shall pay
to Sega Ozisoft a royalty of 12.5% of "Adjusted Gross Receipts" on the
CYBERSWINE Multipath Movie.  Adjusted Gross Receipts is gross receipts
received by the Company on the CYBERSWINE Multipath Movie after deducting any
royalties and fees payable to CYBERSWINE licensors.  Pursuant to an agreement
between Sega Ozisoft and the licensor of the characters and content of
CYBERSWINE, the Company will be required to pay to the CYBERSWINE licensor a
royalty of 2% of gross revenues less cost of goods on all sales of CYBERSWINE
products.

     Pursuant to the SAND Acquisition Agreement, Sega Ozisoft agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company agreed to reimburse Sega Ozisoft from the proceeds
of the Offering for all expenses advanced by Sega Ozisoft for any period
after October 31, 1996, and all expenses in excess of $59,000 per month
advanced by Sega Ozisoft for August, September and October 1996.  As of
December 31, 1996, the Company had incurred a total obligation of $84,000
pursuant to this agreement which amount is included in accounts payable and
accrued expenses at December 31, 1996.

     The following summarized, unaudited pro forma results of operations for
the year ended June 30, 1996 assume the SAND acquisition occurred as of the
beginning of the period, after giving effect to the conversion of the SAND
Note into 780,001 shares of common stock.  Because SAND assets were charged
to expense on the date of acquisition, there is no material pro forma effect
for the six months ended December 31, 1996.

PAGE 39
<PAGE>

<TABLE>
<CAPTION>
                                         YEAR ENDED
                                        JUNE 30, 1996
                                        -------------
              <S>                       <C>
               Revenues                 $    1,881,000
               Net loss                 $     (797,000)
               Net loss per share       $        (0.15)

</TABLE>


4.   RELATED PARTY TRANSACTIONS

     Pacific Interactive Education Pty. Ltd. ("PIE") entered into an oral
agreement with BII Australia whereby Mark Miller, a shareholder and director
of PIE and a director of BII Australia, provides consulting services to BII
Australia.  Pursuant to the oral agreement, PIE was paid $23,000, $69,000,
$18,000 and $18,000 for the fiscal years ended June 30, 1995 and 1996 and the
six months ended December 31, 1995 and 1996, respectively, for such services.

     Since March 1994, PIE has made periodic cash advances to BII Australia
for working capital purposes.  On October 24, 1994, PIE and BII Australia
entered into a formal loan agreement to reflect the parties' lending
relationship.  The maximum amount BII Australia may borrow from PIE pursuant
to the loan agreement is $631,000.  The note bears interest at an annual rate
of 12.5% and was due and payable on December 31, 1994.  By written agreement
(the "Note Extension") dated September 13, 1996, the maturity of the note was
extended until the earlier to occur of the closing of the Offering or
December 31, 1996.  Pursuant to the Note Extension, PIE and BII Australia
increased the maximum amount BII Australia may borrow under the loan
agreement to $710,000.  As of June 30, 1996, BII Australia owed PIE $670,000
including accrued interest in the amount of $149,000.  In December 1996, BII
Australia repaid PIE in full for the balance outstanding ($733,000, including
accrued interest of $199,000).

     BII Australia periodically purchases certain computer equipment from
PIE.  For the fiscal years ended June 30, 1995 and 1996 and the six months
ended December 31, 1995 and 1996, BII Australia's purchases totaled $15,000,
$16,000, $19,000 and $8,000, respectively.

     Mark Miller is a shareholder of Multimedia Connexion Pty. Ltd. BII
Australia periodically purchases hardware and software from Multimedia
Connexion Pty. Ltd.  For the fiscal years ended June 30, 1995 and 1996 and
the six months ended December 31, 1995, BII Australia purchased computer
equipment totaling $12,000, $16,000 and $3,000, respectively.  No purchases
were made during the six months ended December 31, 1996.

     Peter Dodds was a shareholder of BII Australia from inception to May 10,
1996.  Mr. Dodds is also a shareholder of Andwhen Pty. Limited ("Andwhen").
Mr. Dodds provided consulting services to BII Australia in 1995 and 1996.  In
exchange for such services, fees of $71,000, $51,000 and $36,000 were paid to
Andwhen for the years ended June 30, 1995 and 1996, and for the six months
ended December 31, 1995 respectively.  No consulting fees were paid during
the six months ended December 31, 1996.

     Certain equipment owned by Andwhen was leased to BII Australia pursuant
to an agreement dated March 1, 1994.  Under the lease arrangements, BII
Australia made lease payments to Andwhen in the amount of $4,000 and $0 for
the years ended June 30, 1995 and 1996, respectively.  On May 10, 1996, the
agreement was terminated.  As a result, the equipment was transferred to BII
Australia and BII Australia agreed to pay to Andwhen a total amount of
approximately $87,000 for the purchase of such equipment.  Of this amount,
$20,000 was paid upon termination of the agreement.  The balance was due in
equal monthly installments of approximately $4,500 each.  As of June 30,
1996, approximately $62,000, was payable under the terms of the agreement.
This balance was paid in full in December 1996.

PAGE 40
<PAGE>

     In December 1994, BII Australia entered into a Software License
Agreement (the "Sega Agreement") with Sega Ozisoft Pty. Ltd. ("Sega
Ozisoft").  Mark Dyne and Kevin Bermeister are directors and shareholders of
Sega Ozisoft and directors and stockholders of the Company.  Pursuant to the
terms of the Sega Agreement, Sega Ozisoft became the exclusive distributor in
Australia and New Zealand of certain CD-ROM products developed by BII
Australia.  Pursuant to the terms of the Sega Agreement, BII Australia
received non-refundable advances totaling $71,000 from Sega Ozisoft in the
fiscal year ended June 30, 1995.  In addition, BII Australia is entitled to
receive royalty payments of $6.31 per net unit sold.  Such royalty is
reducible to $4.73 per net unit sold after 2000 units have been sold of each
title.  The non-refundable advances are recoupable from the royalties earned
by BII Australia under the Sega Agreement.  As of December 31, 1996, BII
Australia has received no royalty payments relating to the Sega Agreement.
The Sega Agreement expired on December 15, 1996.

     In November 1995, BII Australia entered into a Distribution Agreement
(the "Consumer Electronics Agreement") with Consumer Electronics Pty. Ltd.
("Consumer Electronics").  Mark Dyne and Kevin Bermeister are each a director
and shareholder of Consumer Electronics.  BII Australia developed, pursuant
to the Consumer Electronics Agreement, several CD-ROM products to be
distributed by Consumer Electronics in South Africa and neighboring
territories.  In addition, BII Australia granted to Consumer Electronics
certain bundling rights to the CD-ROM products in the same territories.
Pursuant to the Consumer Electronics Agreement, BII Australia is entitled to
receive a non-refundable advance of $85,000, of which $21,000 was paid in the
fiscal year ended June 30, 1996.  In September 1996, the Company agreed to
reduce the remaining advance by 25% in exchange for an immediate payment of
the balance due.  On October 15, 1996, the Company received $48,000
representing the full amount due pursuant to the re-negotiated terms.  The
Company anticipates no further receipts pursuant to the Consumer Electronics
Agreement, which expired on December 6, 1996.

     Kevin Bermeister and Mark Dyne are directors and shareholders of Packard
Bell Pty. Ltd.  Between February 1994 and June 30, 1996, BII Australia
purchased an aggregate of approximately $38,000 in goods from Packard Bell
Pty. Ltd.  During the six months ended December 31, 1996, BII Australia
purchased an additional $9,000 in goods from Packard Bell Pty. Ltd.

     In January 1996, BII Australia entered into a Multimedia Software
Development and Production agreement (the "Development Agreement") with Sega
Ozisoft for CYBERSWINE.  Pursuant to the terms of the Development Agreement,
BII Australia is entitled to receive payment for certain assistant production
services.  Amounts are payable by Sega Ozisoft upon attainment of mutually
determined milestones.  In September 1996, the Company entered into the SAND
Acquisition Agreement (see Note 3) which provided for additional payments for
production services, and which superseded the Development Agreement. As of
June 30, 1996, the Company had received $120,000 and had recorded a
receivable of $52,000, which was received in July and August 1996.  For the
six months ended December 31, 1996 the Company billed an additional $92,000,
of which $29,000 was receivable at December 31, 1996.

     Mark Dyne is a director of Monto Holdings Pty. Ltd. ("Monto").  Monto
entered into a multimedia production agreement with BII Australia dated March
14, 1995 whereby Monto paid BII Australia $180,000 to be used to develop a
series of two CD-ROM interactive magazine programs based on a television
series.  BII Australia has arranged for publication and distribution of the
completed software packages and is obligated to pay to Monto 50% of the net
receipts from the sale of the software packages.  As of June 30, 1996, net
receipts totaled approximately $25,000 and payments to Monto totaled $12,000.
In addition, a liability to Monto for $7,000 was recorded at June 30, 1996.
In the six months ended December 31, 1996, no additional receipts or payments
were made pursuant to this agreement.

     Diana Maranon is the Secretary of the Company. Averil Associates, Inc.
("Averil Associates"), a financial advisory firm founded and controlled by
Ms. Maranon, has, since November 1995, performed services for the Company
including investigation of strategic alternatives and assistance with the
Offering.  As consideration for such services, the Company paid to Averil
Associates $25,000 as of June 30, 1996 and $200,000 during the six months
ended December 31, 1996, plus out of pocket expenses.  The Company has
granted to Chloe Holding, Inc. ("Chloe"), an affiliate of Averil Associates,
currently exercisable warrants to purchase 40,222 shares of Common Stock with
an exercise price of $0.0326 per share.

PAGE 41
<PAGE>

     Between September and November 1996, the Company executed three
promissory notes in favor of Reefknot in the principal amounts of $150,000,
$50,000 and $145,000.  The notes bore interest at the rate of 10% per annum.
In December 1996, the Company repaid Reefknot in full the balance outstanding
of $350,000 including accrued interest of $5,000.

     Gary Barber is a director of the Company, and Vice Chairman and a
shareholder of Morgan Creek Productions.  In September 1996, the Company
entered into a strategic relationship with Morgan Creek Interactive, Inc.
("Morgan Creek"), an affiliate of Morgan Creek Productions, to provide
creative product for the Company's Multipath Movies.  Pursuant to the
agreement between the Company and Morgan Creek, the Company is obligated to
fund entirely the development of two Multipath Movies.

5.   STOCKHOLDERS' EQUITY

     COMMON STOCK

     The Company is authorized to issue 30,000,000 shares of Common Stock,
par value $0.001 per share.  In August 1996, the Company issued an aggregate
of 1,000,000 shares of its Common Stock in exchange for all of the capital
stock of BII Australia.  As a result of the Exchange, the Company acquired
all of the outstanding common stock of BII Australia.  Simultaneously with
the Exchange, BII Australia canceled 100 shares of Common Stock of BII
Australia held by an employee of BII Australia.

     In November 1996, the Company completed its initial public offering of 2
million shares of Common Stock for $5 per share, which resulted in proceeds
to the Company of $8,532,000, net of issuance costs of $1,468,000.

     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
therefor.  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.

     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 nonassessable.

     PREFERRED STOCK

     The Company is authorized to issue 1,000,000 shares of Preferred Stock,
par value $0.001 per share.  As of June 30, 1996 and December 31, 1996, 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 adversely
affect the voting power or other rights of the holders of the Company's
Common Stock.

     WARRANTS

     During September 1996 the Company entered into two strategic agreements
with terms that provided for the issuance of warrants to purchase a total of
685,000 shares of the Company's Common Stock.  Warrants to purchase 600,000
shares of Common Stock are exercisable at $5, the initial public offering
price of the Company's Common Stock.

PAGE 42
<PAGE>

Additionally, 35,000 and 50,000 of the
warrants are exercisable at $4.00 and $5.20, respectively.  The warrants
expire in September 1999.  The value of the warrants is calculated to be
approximately $1,096,000 and this value represented an expense charge to
operations with a corresponding credit to stockholders' equity in the six
months ended December 31, 1996.

     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 1,080,000, 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.

     As of October 23, 1996, the Board had granted options covering an
aggregate of 185,000 shares of Common Stock to certain directors (125,000
shares) and employees (60,000 shares) of the Company, with an exercise price
of $10 per share.  In November 1996, the options were repriced to $4.00 per
share.  The directors options were granted effective as each director joined
the Board of Directors and were immediately fully vested.  In accordance with
APB No. 25, the Company recognized compensation expense of $125,000 in
connection with the granting of the directors' stock options.  The options
granted to employees vest over a four year period.  In connection with these
employee stock options, deferred compensation of $60,000 is included in other
assets at December 31, 1996.  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.

     The Corporation has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."  SFAS No. 123 requires the use of option valuation models to
provide supplemental information regarding options granted after 1994.  Pro
forma information regarding net income and earnings per share shown below was
determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS NO. 123.

     The fair value of the options as examined at the date of grant based on
a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996:  interest rates of 6.6%; dividend yields of 0%;
volatility factors of the expected market price of the Company's common stock
of 38.8%; and expected life of the options of 3 years.  These assumptions
resulted in weighted average fair values of $2.80 per share for stock options
granted in 1996.

     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.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods.  The pro forma effect
on net income for 1996 is not representative of the pro forma effect on net
income in future years because it reflects expense for only one year's
vesting.  Pro forma information in future years will reflect the amortization
of a larger number of stock options granted in succeeding years.  The
Company's pro forma information is as follows:

PAGE 43
<PAGE>

<TABLE>
<CAPTION>
                                        SIX MONTHS ENDED
                                        DECEMBER 31, 1996
                                        -----------------
          <S>                           <C>
          Net loss, as reported         $    (3,835,000)
          Net loss, pro forma           $    (3,992,000)
          Loss per share, as reported   $         (0.77)
          Loss per share, pro forma     $         (0.81)

</TABLE>


6.   COMMITMENTS AND CONTINGENCIES

     In March 1995, BII Australia entered into an agreement with Monto
whereby Monto paid BII Australia a nonrefundable fee of approximately
$180,000 to develop a series of two CD-ROM interactive magazine programs
based on a television series.  BII Australia will distribute the completed
software packages and is obligated to pay to Monto 50% of the net receipts
from the sale of the software packages.  As of June 30, 1996, net receipts
totaled $25,000 and payments to Monto totaled $12,000.  In addition, a
liability to Monto of $7,000 was recorded at June 30, 1996.  In the six
months ended December 31, 1996, no additional receipts or payments were made
pursuant to this agreement.

     In 1995, Pick Two Limited ("Pick Two"), advanced $193,000 to BII
Australia to develop certain software.  In 1996, Pick Two advanced an
additional $19,000 to BII Australia.  These advances are non-interest
bearing, will be repaid from proceeds from the sales of the completed
software, and are included in deferred revenues.  As of December 31, 1996,
the software development had not been completed.  During the six months ended
December 31, 1996, approximately $48,000 of the advances were repaid out of
proceeds received from the sale of certain research materials.

     In September 1996, the Company entered into a strategic relationship
with Crawford Productions Pty., Ltd. ("Crawford") to provide creative product
for the Company's Multipath Movies.  Pursuant to the agreement between the
Company and Crawford, the Company is obligated to contribute up to one half
of the costs incurred to develop and produce each project selected by the
parties, if any, for development into Multipath Movie titles, which cost per
film is anticipated to be approximately $790,000.


7.   INCOME TAXES

     The Company has adopted the liability method of accounting for income
taxes.  Income tax expense shown in the income statements 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.

     The Company's net losses in the fiscal year ended June 30, 1995, and net
income for fiscal year ended June 30, 1996 are related to the Australian
operations of BII Australia.  As a result, no provision was made for United
States federal income taxes.  Due to BII Australia's net losses for 1994 and
1995, net operating loss carryforwards ("NOL's") were generated for
Australian tax purposes.  A portion of these Australian NOL's were offset
against BII Australia's taxable income for fiscal year ended June 30, 1996.
At June 30, 1996 BII Australia had NOL's remaining of approximately $160,000,
which increased to approximately $853,000 at December 31, 1996, and which are
available for offset against Australian taxable income in the future.  These
NOL's may be carried forward indefinitely.  During the six months ended
December 31, 1996, the U. S. parent incurred a tax loss resulting in an NOL
carryforward of approximately $594,000.  The loss will expire in the year
2011.  No tax benefit has been recorded for these NOL's.

PAGE 44
<PAGE>

     The significant components of the net deferred tax asset recorded in the
accompanying consolidated balance sheet as of June 30, 1996 and December 31,
1996 are as follows:

<TABLE>
<CAPTION>
                                               June 30,      December 31,
                                                 1996            1996
                                             ------------    ------------
     <S>                                     <C>             <C>
     Deferred tax assets:
        Acquired in-process
          research and development             $      --     $   495,000
        Directors' stock options                      --          49,000
        Warrants issued                               --         438,000
        Allowance for doubtful accounts               --          34,000
        Net operating loss carryforward               --         545,000
        Deferred development costs                36,000              --
                                               ----------     -----------
        Total deferred tax assets                 36,000       1,561,000

        Valuation allowance                      (36,000)     (1,561,000)
                                               ----------     -----------
        Net deferred tax assets                $       --     $        --
                                               ==========     ===========

</TABLE>

The Company recorded a valuation allowance amounting to the entire deferred
tax asset balance because the parent of the group, Brilliant Digital
Entertainment, Inc., has only recently been incorporated.  Consequently it
does not have a history of consistent U.S. taxable income.

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

<TABLE>
<CAPTION>
                                                          Six months ended
                                 Year ended June 30,         December 31,
                                 -------------------      -----------------
                                 1995          1996       1995        1996
                                 ----          ----       ----        ----
<S>                              <C>           <C>        <C>         <C>

Federal income tax rate          34.0%         34.0%      34.0%       34.0%
State income tax, net
  of Federal benefit              --            --         --          --
Foreign and U. S. tax
  effect attributable
  to foreign operations           --            2.0        2.0         --
Effect of net operating
  loss and net operating
  loss carryforward              (34.0)        (36.0)     (36.0)      (34.0)
                                 -----         -----      -----       -----
Effective income tax rate         0.0%          0.0%       0.0%        0.0%
                                 =====         =====      =====       =====

</TABLE>

PAGE 45
<PAGE>


8.   PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                              DECEMBER 31
                                       JUNE 30, 1996              1996
                                       -------------          -----------
     <S>                               <C>                    <C>
     Computers and Equipment               $350,000             $568,000
     Furniture and Fixtures                  12,000               16,000
                                          ----------           ----------
                                            362,000              584,000
     Less accumulated depreciation         (164,000)            (239,000)
                                          ----------           ----------
                                          $ 198,000            $ 345,000
                                          ==========           ==========

</TABLE>


9.   OTHER INCOME AND EXPENSE

     Other income for the fiscal year ended June 30, 1996, includes an export
market development grant of $122,000 from the Australian Trade Commission for
participating in certain export activities. Interest expense for each of the
years ended June 30, 1995 and 1996 and for the six months ended December 31,
1995, related to the note payable to PIE (see Note 4).  Interest expense for
the six months ended December 31, 1996 included $49,000 related to PIE and
$5,000 related to Reefknot (see Note 4).

10.  GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

     The Company's operations for the years ended June 30, 1995 and 1996 and
the six months ended December 31, 1995 and 1996 consisted solely of the
operations of BII Australia.  The operations of BII Australia are in
Australia, with significant exports to the United States.  The following
schedule sets forth the revenues and accounts receivable of BII Australia by
geographic area:


<TABLE>
<CAPTION>
                                                              United States         Australia             Other
                                                              -------------         ---------          ----------
<S>                                                           <C>                   <C>                <C>
Year ended June 30, 1995:
     Revenues from unaffiliated customers                       $    46,000         $   2,000           $      --
     Revenues from affiliated customers                             635,000           160,000                  --
                                                                -----------         ---------           ---------
     Total revenues                                             $   681,000         $ 162,000           $      --
                                                                ===========         =========           =========
Year ended June 30, 1996:
     Revenues from unaffiliated customers                       $   932,000         $ 258,000           $ 235,000
     Revenues from affiliated customers                             316,000           264,000              49,000
                                                                -----------         ---------           ---------
     Total revenues                                             $ 1,248,000         $ 522,000           $ 284,000
                                                                ===========         =========           =========
Six months ended December 31, 1995:
     Revenues from unaffiliated customers                       $   715,000         $  48,000           $ 233,000
     Revenues from affiliated customers                             130,000            30,000              28,000
                                                                -----------         ---------           ---------
     Total revenues                                             $   845,000         $  78,000           $ 261,000

PAGE 46
<PAGE>

                                                                ===========         =========           =========
Six Months ended December 31, 1996:
     Revenues from unaffiliated customers                       $    68,000         $ 184,000           $   8,000
     Revenues from affiliated customers                                  --            63,000              27,000
                                                                -----------         ---------           ---------
     Total revenues                                             $    68,000         $ 247,000           $  35,000
                                                                ===========         =========           =========
Accounts Receivable as of:
     June 30, 1996                                              $   413,000         $ 223,000           $  21,000
                                                                ===========         =========           =========
     December 31, 1996                                          $    80,000         $     --           $      --
                                                                ===========         =========           =========

</TABLE>

     For each of the periods shown above, all of the operating expenses of
the Company were incurred and paid in Australia, with the exception of
certain corporate expenses for the six months ended December 31, 1996.  The
identifiable assets of the Company, other than accounts receivable and
corporate assets, are predominantly related to the operations in Australia.

     In the fiscal year ended June 30, 1995, two customers accounted for more
than 10% of total revenues (Packard Bell Electronics, Inc., 75% or $635,000
and Monto, a related party, 11% or $89,000).  In the fiscal year ended June
30, 1996, three customers accounted for more than 10% of total revenues
(Packard Bell Electronics, Inc., 15% or $316,000; Shortland Publications, 11%
or $226,000; and Ocean of America, Inc., 40% or $813,000).  In the six months
ended December 31, 1995, four customers accounted for more than 10% of total
revenues (Packard Bell Electronics, Inc., 11% or $130,000; Shortland
Publications, 14% or $160,000; Ocean of America, Inc., 39% or $465,000; and
Roadshow Films, 11% or $134,000).  In the six months ended December 31, 1996,
four customers accounted for more than 10% of total revenues (Frontline
Agency, 17% or $60,000; Interplay Productions, Inc., 17% or $60,000; Sega
Ozisoft, 18% or $62,000; and Golden Dolphin Productions Pty. Ltd., 35% or
$122,000).

PAGE 47
<PAGE>

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

          None.


                                  PART III


ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

     Information regarding Directors and Executive Officers of Registrant
will appear in the proxy statement for the 1997 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 1997 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 1997 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 1997 Annual Meeting of
Stockholders, and is incorporated by this reference.


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

     (a)  Exhibits:

          See attached Exhibit List.

     (b)  Reports on Form 8-K.

          None.

PAGE 48
<PAGE>

                                 SIGNATURES

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

                                   BRILLIANT DIGITAL ENTERTAINMENT, INC.

                                   /s/ Michael Ozen
                                   ------------------------------------
                                   By:  Michael Ozen
                                   Its: Chief Financial Officer (Principal
                                        Financial and Accounting Officer)
                                        and Secretary


                              POWER OF ATTORNEY

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

                                 SIGNATURES

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


    SIGNATURE            TITLE                              DATE

/s/Mark Dyne
-------------------      Chief Executive Officer and        March 28, 1997
Mark Dyne                and Chairman of the
                         Board of Directors

/s/Kevin Bermeister      President and Director             March 28, 1997
-------------------
Kevin Bermeister

/s/Michael Ozen          Chief Financial Officer            March 28, 1997
-------------------      (Principal Financial and
Michael Ozen             Accounting Officer) and
                         Secretary
/s/ Diana Maranon
-------------------      Director                           March 27, 1997
Diana Maranon

/s/Mark Miller           Vice President, Operations         March 30, 1997
-------------------      and Production and Director
Mark Miller

/s/Gary Barber
-------------------      Director                           March 27, 1997
Gary Barber

/s/Ray Musci
-------------------      Director                           March 27, 1997
Ray Musci

/s/Garth Saloner
-------------------      Director                           March 27, 1997
Garth Saloner

/s/Jeff Scheinrock
------------------       Director                           March 28, 1997
Jeff Scheinrock

PAGE 49
<PAGE>



                                  EXHIBIT INDEX

EXHIBIT
NUMBER                        EXHIBIT DESCRIPTION
________                      ___________________

2.        Exchange Agreement, dated August 20, 1996, by and among the
          Registrant, Brilliant Interactive Ideas Pty. Ltd. ("BII Australia"),
          Reefknot Limited and Pacific Interactive Education Pty. Limited.
          Incorporated by reference to Exhibit 2.1 to Form S-1 filed on
          September 17, 1996, and the amendments thereto.

2.2       Asset Purchase Agreement, dated September 12, 1996, by and between
          the Registrant and Sega Ozisoft Pty. Ltd.  Incorporated by reference
          to Exhibit 2.2 to Form S-1 filed on September 17, 1996, and the
          amendments thereto.

3.1       Amended and Restated Certificate of Incorporation of Registrant.
          Incorporated by reference to Exhibit 3.1 to Form S-1 filed on
          September 17, 1996, and the amendments thereto.

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.

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.

10.1      Registrant's 1996 Stock Option Plan.  Incorporated by reference to
          Exhibit 10.1 to Form S-1 filed on September 17, 1996, and the
          amendments thereto.

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 Registrants'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      Distribution Agreement, dated November 22, 1995, by and between BII
          Australia and Consumer Electronics Pty. Ltd. Incorporated by
          reference to Exhibit 10.4 to Form S-1 filed on September 17, 1996,
          and the amendments thereto.  [Portions of this Exhibit have been
          deleted and filed separately with the Securities and Exchange
          Commission pursuant to a grant of Confidential Treatment.]

10.5      CD-ROM Distribution Agreement, dated September 14, 1996 by and
          between the Registrant and Packard Bell NEC.  Incorporated by
          reference to Exhibit 10.5 to Form S-1 filed on September 17, 1996,
          and the amendments thereto. [Portions of this Exhibit have been
          deleted and filed separately with the Securities and Exchange
          Commission pursuant to a grant of Confidential Treatment.]

10.6      Distribution Agreement, dated August 22, 1995, by and between BII
          Australia and Packard Bell Electronics Inc. Incorporated by reference
          to Exhibit 10.6 to Form S-1 filed on September 17, 1996, and the
          amendments thereto. [Portions of this Exhibit have been deleted and
          filed separately with the Securities and Exchange Commission pursuant
          to a grant of Confidential Treatment.]

10.7      Software License Agreement, dated May 2, 1995, by and between BII
          Australia and Packard Bell Electronics Inc. Incorporated by reference
          to Exhibit 10.7 to Form S-1 filed on September 17, 1996, and the
          amendments thereto. [Portions of this Exhibit have been deleted and
          filed separately with the Securities and Exchange Commission pursuant
          to a grant of Confidential Treatment.]

10.8      Agreement, dated February 18, 1996, by and between Golden Dolphin
          Productions Pty. Ltd. and BII Australia. Incorporated by reference to
          Exhibit 10.8 to Form S-1 filed on September 17, 1996, and the
          amendments thereto. [Portions of this Exhibit have been deleted and
          filed separately with the Securities and Exchange Commission pursuant
          to a grant of Confidential Treatment.]

PAGE 50
<PAGE>

EXHIBIT
NUMBER                        EXHIBIT DESCRIPTION
________                      ___________________

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

10.10     Production Agreement, dated March 18, 1994, by and between Pick Two
          Ltd. and BII Australia. Incorporated by reference to Exhibit 10.10 to
          Form S-1 filed on September 17, 1996, and the amendments thereto.
          [Portions of this Exhibit have been deleted and filed separately with
          the Securities and Exchange Commission pursuant to a grant of
          Confidential Treatment.]

10.11     Assistant Multimedia Software Development & Production Agreement,
          dated January 17, 1996, by and between Sega Ozisoft Pty. Limited and
          BII Australia. Incorporated by reference to Exhibit 10.11 to Form S-1
          filed on September 17, 1996, and the amendments thereto. [Portions of
          this Exhibit have been deleted and filed separately with the
          Securities and Exchange Commission pursuant to a grant of
          Confidential Treatment.]

10.12     Licensing Agreement for "Cyberswine" Story Concept & Characters,
          dated July 19, 1995, by and between Eat Cyberfist Pty. Limited and
          Sega Ozisoft Pty Limited.  Incorporated by reference to Exhibit 10.12
          to Form S-1 filed on September 17, 1996, and the amendments thereto.
          [Portions of this Exhibit have been deleted and filed separately with
          the Securities and Exchange Commission pursuant to a grant of
          Confidential Treatment.]

10.13     Distribution Agreement, dated November 2, 1995, by and between BII
          Australia and Roadshow Entertainment Pty. Ltd.  Incorporated by
          reference to Exhibit 10.13 to Form S-1 filed on September 17, 1996,
          and the amendments thereto. [Portions of this Exhibit have been
          deleted and filed separately with the Securities and Exchange
          Commission pursuant to a grant of Confidential Treatment.]

10.14     Publishing Agreement, dated March 9, 1994, by and between Shortland
          Publications Limited and BII Australia.  Incorporated by reference to
          Exhibit 10.14 to Form S-1 filed on September 17, 1996, and the
          amendments thereto. [Portions of this Exhibit have been deleted and
          filed separately with the Securities and Exchange Commission pursuant
          to a grant of Confidential Treatment.]

10.15     Settlement Agreements and Mutual General Releases, by and among BII
          Australia, Ray Musci, Ocean of America, Inc., and Ocean Software,
          Ltd. and Ocean International, Ltd. Incorporated by reference to
          Exhibit 10.15 to Form S-1 filed on September 17, 1996, and the
          amendments thereto. [Portions of this Exhibit have been deleted and
          filed separately with the Securities and Exchange Commission pursuant
          to a grant of Confidential Treatment.]

10.16     Publishing Agreement, dated December 1, 1994, by and between
          Shortland Publications Limited and BII Australia. Incorporated by
          reference to Exhibit 10.16 to Form S-1 filed on September 17, 1996,
          and the amendments thereto. [Portions of this Exhibit have been
          deleted and filed separately with the Securities and Exchange
          Commission pursuant to a grant of Confidential Treatment.]

10.17     Distribution Agreement, dated July 1, 1996, by and between BII
          Australia and Fujitsu Basic Software Corporation. Incorporated by
          reference to Exhibit 10.7 to Form S-1 filed on September 17, 1996,
          and the amendments thereto. [Portions of this Exhibit have been
          deleted and filed separately with the Securities and Exchange
          Commission pursuant to a grant of Confidential Treatment.]

PAGE 51
<PAGE>


EXHIBIT
NUMBER                        EXHIBIT DESCRIPTION
________                      ___________________

10.18     License Agreement--Domestic, dated July 31, 1996, between the Hearst
          Corporation, King Features Syndicate Division and the Registrant.
          Incorporated by reference to Exhibit 10.18 to Form S-1 filed on
          September 17, 1996, and the amendments thereto. [Portions of this
          Exhibit have been deleted and filed separately with the Securities
          and Exchange Commission pursuant to a grant of Confidential
          Treatment.]

10.19     Distribution Agreement, dated September 29, 1995, by and between BII
          Australia and Ocean of America, Inc. Incorporated by reference to
          Exhibit 10.19 to Form S-1 filed on September 17, 1996, and the
          amendments thereto. [Portions of this Exhibit have been deleted and
          filed separately with the Securities and Exchange Commission pursuant
          to a grant of Confidential Treatment.]

10.20     Distribution Agreement, dated February 22, 1996, by and between BII
          Australia and Shortland Publications Limited. Incorporated by
          reference to Exhibit 10.20 to Form S-1 filed on September 17, 1996,
          and the amendments thereto. [Portions of this Exhibit have been
          deleted and filed separately with the Securities and Exchange
          Commission pursuant to a grant of Confidential Treatment.]

10.21     Heads of Agreement, dated November 25, 1994, by and between SAND and
          Eat Cyberfist Pty. Limited. Incorporated by reference to Exhibit

10.21     to Form S-1 filed on September 17, 1996, and the amendments thereto.
          [Portions of this Exhibit have been deleted and filed separately with
          the Securities and Exchange Commission pursuant to a grant of
          Confidential Treatment.]

10.22     Software License Agreement, dated December 15, 1994, by and between
          BII Australia and Sega Ozisoft. Incorporated by reference to Exhibit
          10.22 to Form S-1 filed on September 17, 1996, and the amendments
          thereto. [Portions of this Exhibit have been deleted and filed
          separately with the Securities and Exchange Commission pursuant to a
          grant of Confidential Treatment.]

10.23     Memorandum of Understanding, dated September 14, 1996, by and between
          the Registrant and Morgan Creek Interactive, Inc. Incorporated by
          reference to Exhibit 10.23 to Form S-1 filed on September 17, 1996,
          and the amendments thereto. [Portions of this Exhibit have been
          deleted and filed separately with the Securities and Exchange
          Commission pursuant to a grant of Confidential Treatment.]

10.24     Multimedia Production Agreement, dated March 14, 1995, by and between
          BII Australia and Monto Holdings Pty. Ltd. Incorporated by reference
          to Exhibit 10.24 to Form S-1 filed on September 17, 1996, and the
          amendments thereto. [Portions of this Exhibit have been deleted and
          filed separately with the Securities and Exchange Commission pursuant
          to a grant of Confidential Treatment.]

10.25     Nontransferable Redeemable Warrant Agreement, dated September 14,
          1996, by and between the Registrant and Packard Bell NEC.
          Incorporated by reference to Exhibit 10.25 to Form S-1 filed on
          September 17, 1996, and the amendments thereto.

10.26     License Agreement by and between Beyond Properties Pty. Ltd. and BII
          Australia. Incorporated by reference to Exhibit 10.26 to Form S-1
          filed on September 17, 1996, and the amendments thereto. [Portions of
          this Exhibit have been deleted and filed separately with the
          Securities and Exchange Commission pursuant to a grant of
          Confidential Treatment.]

10.27     Registrant's Promissory Note, dated September 10, 1996. Incorporated
          by reference to Exhibit 10.27 to Form S-1 filed on September 17,
          1996, and the amendments thereto.

10.28     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.

PAGE 52
<PAGE>


EXHIBIT
NUMBER                        EXHIBIT DESCRIPTION
________                      ___________________

10.29     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.

10.30     Commercial Lease by and among Hilrok Properties Pty. Limited, Peter
          Dodds and Simon Van Wyk. Incorporated by reference to Exhibit 10.30
          to Form S-1 filed on September 17, 1996, and the amendments thereto.

10.31     Loan Agreement, dated October 10, 1994, by and between BII Australia
          and PIE. Incorporated by reference to Exhibit 10.31 to Form S-1 filed
          on September 17, 1996, and the amendments thereto.

10.32     Commercial Lease, dated August 8, 1994, by and between PW Securities
          Pty. Ltd. and Sega Ozisoft. Incorporated by reference to Exhibit
          10.32 to Form S-1 filed on September 17, 1996, and the amendments
          thereto.

10.33     PIE Loan Extension, dated September 13, 1996, by and among PIE, BII
          Australia and the Registrant. Incorporated by reference to Exhibit
          10.33 to Form S-1 filed on September 17, 1996, and the amendments
          thereto.

10.34     Agreement, dated September 12, 1996, by and between the Registrant
          and Crawford Productions Pty. Limited. Incorporated by reference to
          Exhibit 10.34 to Form S-1 filed on September 17, 1996, and the
          amendments thereto.

10.35     Engagement Letter, dated May 1, 1996, by and between Averil
          Associates, Inc. and the Registrant. Incorporated by reference to
          Exhibit 10.35 to Form S-1 filed on September 17, 1996, and the
          amendments thereto.

10.36     Warrant Agreement by and between Chloe Holdings, Inc. and the
          Registrant. Incorporated by reference to Exhibit 10.36 to Form S-1
          filed on September 17, 1996, and the amendments thereto.

10.37     Product Agreement, dated January 12, 1996, by and between Interplay
          Productions and BII Australia. Incorporated by reference to Exhibit
          10.37 to Form S-1 filed on September 17, 1996, and the amendments
          thereto. [Portions of this Exhibit have been deleted and filed
          separately with the Securities and Exchange Commission pursuant to a
          grant of Confidential Treatment.]

11.1      Computation of Earnings (Loss) per Common Share.

21.1      List of Subsidiaries.

24.1      Power of Attorney (included on signature page).

27.1      Financial Data Schedule.