BRILLIANT DIGITAL ENTERTAINMENT INC, 424B1, 1996-11-22

BRILLIANT DIGITAL ENTERTAINMENT INC
424B1, 1996-11-22
PREPACKAGED SOFTWARE

Previous: STEEL DYNAMICS INC, 424B1, 1996-11-22

Next: LITHIA MOTORS INC, S-1/A, 1996-11-22

<PAGE>

FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-12163

2,000,000 Shares
Brilliant Digital Entertainment, Inc. [LOGO]
Common Stock
($.001 par value)

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

All of the shares of Common Stock, par value $.001 per share (the "Common
Stock"), of Brilliant Digital Entertainment, Inc. ("Brilliant" or the
"Company") offered hereby (the "Offering") are being sold by the
Company. Prior to the Offering, there has been no public
market for the Common Stock. For information relating
to the factors considered in determining the
initial offering price to the public, see
"Underwriting."

The Common Stock has been approved for listing on the American Stock Exchange
under the symbol "BDE," subject to notice of issuance.

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

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 8 HEREIN.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company(1)
------------- ------------- -------------
<S> <C> <C> <C>
Per Share.................................. $5.00 $.375 $4.625
Total (2).................................. $10,000,000 $750,000 $9,250,000
</TABLE>

(1) Before deduction of expenses payable by the Company, estimated at
$1,045,000.
(2) The Company has granted the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase a maximum of 300,000
additional shares to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $11,500,000,
Underwriting Discounts and Commissions will be $862,500, and Proceeds to
the Company will be $10,637,500.

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

The shares of Common Stock are offered by the several Underwriters, when, as
and if issued by the Company, delivered to and accepted by the Underwriters
and subject to their right to reject orders in whole or in part. It is
expected that the shares of Common Stock will be ready for delivery on or
about November 27, 1996, against payment in immediately available funds.

CS First Boston Cruttenden Roth
Incorporated

The date of this Prospectus is November 22, 1996.
<PAGE>

[PICTURES]

First Color Page:

[Enlarged strip of film with images of Cyberswine, a mummy with the caption
"The Mummy Who Wouldn't Die" below and the Yakadoos.]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR
THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES
10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.

Inside Two Page Color Fold Out:

EIGHT STEPS TO MAKING MULTIPATH MOVIES

SCRIPTING

[The scripting graphic is a montage of graphics illustrating how the
ScriptNav tool is used to develop the multipath script and "view" the
Multipath Movie in a narrative format.]

ScripNav, one of the Company's proprietary software tools, assists
scriptwriters in developing their Multipath Movie scripts. These scripts focus
on the moods and personalities of the central characters as in traditional
movies. Users interact with Multipath Movies by influencing these moods and
personalities which generate multiple branching plotlines.

CREATIVE DESIGN

[The creative design image depicts various sketches at different angles and
positions of Sara and Cyberswine superimposed on a background screen capture
of the SCuD tool.]

Talent, character design, set design, props, sound and music are all
elements of the creative design process. Hand illustrations, notes and
preliminary concepts form the foundation of the Multipath Movie's appeal.

VOICE/SOUND

[The sound image is made up of several screen captures from the LipSync
tool. It shows a dialogue wave file being processed in the LipSync tool and
the mouth shapes that are generated as the wave file is processed.]

Voice actors produce the dialogue tracks for each branch of the story. All
dialogue is then processed by the Company's proprietary LipSync software tool,
which accurately coordinates each character's lip movements with the dialogue
track. Music and sound effects are added.

MODEL/WORLD BUILDING

[The character modelling image is made up of a screen capture of a scene
being modelled in 3D Studio MAX with an image of Cyberswine superimposed on
the 3D Studio MAX background. The image of Cyberswine shows half of his body
texture mapped with the other half wire framed.]

Creating new characters, particularly those resembling human beings,
requires talented graphic artists and 3-D modelers. These characters are
created using software modeling packages like 3D MAX and SoftImage.
<PAGE>

TEXTURING/LIGHTING

[This graphic uses SCuD as a background image with a wire frame view of a
city scene and four texture mapped images added and montaged over the SCuD
screen. All textures and lighting effects have been created in Photoshop and
assembled in 3D Studio MAX.]

Texturing is the process of adding pattern, texture, finish and color to the
sets and characters to give them realistic features and make them life-like.
Lighting is also added during this process before capturing the motion on
camera.

<PAGE>

DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR
THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM
RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information (including "Risk Factors" and the Consolidated Financial Statements
and notes thereto) appearing elsewhere in this Prospectus. Unless the context
otherwise requires, all references to Brilliant or the Company include its
wholly owned Australian subsidiary, "BII Australia."

THE COMPANY

Brilliant 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. Using its proprietary, state-of-the-
art software tools, 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.
In order to produce digital entertainment products with wide appeal, the
Company has developed a number of features that it believes represent
significant technical enhancements over existing digital entertainment. For
example, animated characters created using the Company's tools appear human-
like and have realistic features, facial expressions and mouth movements.
Multipath Movies also allow users to control characters' moods as opposed to
only their actions. In addition, a typical Multipath Movie will encourage
viewers to influence or interact with the story on average every 30 to 45
seconds, without interrupting the flow of the story or its graphical
presentation. 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.

The Company plans to release certain of its Multipath Movies in non-
interactive format as television broadcast/cable programming and home video
features. The Company intends to segment such Multipath Movies into three 30-
minute episodes and, by packaging together thirteen episodes, can create a
season-length series for the broadcast market. Similarly, the Company intends
to produce 90- to 120-minute animated features for the home video market. The
Company believes that it can produce Multipath Movies for television
programming and home video features at costs substantially below typical
industry costs. 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.

3
<PAGE>

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 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.

In addition to developing a new genre of multipath entertainment, the Company
produces and sells interactive CD-ROM titles primarily for children, including
the KidStory Series. Since shipment of its first CD-ROM title in January, 1995,
the Company has developed 16 traditional CD-ROM titles. Examples of its titles
include Flipper and The Yukadoos, which received a 1996 Newsweek Editor's
Choice Award. The Company has licensed the rights to over 40 additional titles
for development of KidStory Series products. In addition, the Company recently
acquired the interactive CD-ROM rights to the Popeye characters. The KidStory
Series is a profitable value-for-price product category that is not dependent
upon the production of hit titles.

ACQUISITION FROM RELATED PARTY OF SEGA AUSTRALIA NEW DEVELOPMENTS

The Company acquired Sega Australia New Developments ("SAND") on September
30, 1996 from Sega Ozisoft Pty. Limited ("Sega Ozisoft") in exchange for a
$1,500,000 promissory note convertible into 780,001 shares of the Common Stock
of the Company. SAND is a "skunk works" research and development operation for
leading edge software tools which had commenced development of the Multipath
Movie. Mark Dyne and Kevin Bermeister, the Chairman of the Board and Chief
Executive Officer, and the President of the Company, respectively, were
instrumental in the formation of SAND in their role as joint managing directors
and are significant minority shareholders of Sega Ozisoft. See "Certain
Relationships and Related Transactions." The terms of the transaction,
including the purchase price, were determined through negotiations conducted
between the Board of Directors of Sega Ozisoft, with Messrs. Dyne and
Bermeister not participating, and Brilliant Interactive Ideas Pty. Ltd. See
"The Company."

The Company is a Delaware corporation, was formed in July 1996 and is the
parent of Brilliant Interactive Ideas Pty. Ltd., a corporation formed under the
laws of New South Wales, Australia in September 1993. Its executive offices are
located at 6355 Topanga Canyon Boulevard, Suite 513, Woodland Hills, California
91367, and its telephone number is (818) 346-3653.

THE OFFERING

<TABLE>
<C> <S>
Common Stock offered......................... 2,000,000 shares
Common Stock outstanding after the Offering.. 7,200,001 shares (1)
Use of Proceeds.............................. Production of Multipath Movies,
development of a new production
studio, software tool
enhancement and development,
acquisition of licenses,
repayment of related party
loans and other indebtedness
and for general corporate
purposes. See "Use of
Proceeds."
American Stock Exchange Symbol............... BDE
</TABLE>
- -------
(1) Excludes 910,222 shares of Common Stock subject to outstanding options and
warrants as of November 18, 1996.

4
<PAGE>

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEARS ENDED JUNE 30, (1) ENDED
-------------------------------- SEPTEMBER 30,
1995 1996 1996
--------------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $ 842,796 $ 2,053,877 $ 281,170
Gross profit.................. 186,857 1,315,035 141,299
Total operating expenses...... 566,284 804,748 2,657,667
Income (loss) from
operations................... (379,427) 510,287 (2,516,368)
Net income (loss)............. (423,853) 553,412 (2,536,838)
Net income (loss) per share
(2).......................... $ (0.09) $ 0.12 $ (0.56)
Common shares used in
computing net income (loss)
per share (2)................ 4,508,423 4,557,000 4,503,960
Pro forma net loss per share
(3).......................... $ (0.15) $ (0.48)
Common shares used in
computing pro forma net loss
per share (3)................ 5,337,001 5,283,961
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------
(UNAUDITED)
ACTUAL AS ADJUSTED (4)
----------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 85,941 $ 7,390,507
Total current assets............................... 722,330 8,026,896
Total assets....................................... 1,198,394 8,502,960
Total current liabilities.......................... 2,753,149 352,715
Total stockholders' equity (deficiency)............ (1,554,755) 8,150,245
</TABLE>
- --------
(1) The Company intends to change its fiscal year end from June 30 to December
31, effective December 31, 1996.
(2) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share.
(3) Pro forma net loss per share for the fiscal year ended June 30, 1996
reflects the acquisition by the Company of SAND, in exchange for the SAND
Note. Of the $1,500,000 purchase price, $150,000 was allocated to certain
assets and $1,350,000 was charged to operating expenses as in-process
research and development costs. This resulted in a pro forma net loss of
$796,588. The pro forma net loss per share for the fiscal year ended June
30, 1996 also reflects the conversion of the SAND Note into 780,001 shares
of Common Stock upon the closing of the Offering. Pro forma net loss per
share for the three months ended September 30, 1996 reflects the conversion
of the SAND Note into 780,001 shares of Common Stock upon the closing of
the Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations" and the
Unaudited Pro Forma Financial Information included elsewhere in this
Prospectus.
(4) As adjusted to reflect (i) the sale of 2,000,000 shares of Common Stock
offered by the Company hereby at the initial public offering price of $5.00
per share after deducting underwriting discounts and commissions and
estimated offering expenses, (ii) the conversion of the SAND Note into
780,001 shares of Common Stock upon the closing of the Offering, and (iii)
the repayment of $900,434 of short-term obligations. See "Use of Proceeds."

Except as otherwise indicated, all information in this Prospectus (i) has
been adjusted, where applicable, to reflect the 4.42-for-1 stock split effected
by the Company on September 13, 1996; (ii) reflects the incorporation of the
Company and the subsequent exchange of 100,000 outstanding shares of Brilliant
Interactive Ideas, Pty. Ltd. ("BII Australia") for 1,000,000 shares of the
Company; (iii) reflects the acquisition on September 30, 1996 by the Company of
SAND in exchange for a $1,500,000 principal amount one-year 8% convertible
promissory note payable (the "SAND Note") to Sega Ozisoft; (iv) reflects the
conversion of the SAND Note into 780,001 shares of the Company's Common Stock
upon the closing of the Offering; (v) with respect to information subsequent to
September 30, 1996 set forth in this document, reflects the conversion rate at
September 30, 1996 of Australian Dollars to United States Dollars of 1:0.791;
and (vi) assumes that the Underwriters' over-allotment option is not exercised.

5
<PAGE>

THE COMPANY

Brilliant 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 "skunk
works" research and development operation for leading edge software tools. 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,
the predecessor of which was co-founded by Mark Dyne and Kevin Bermeister.

Since its founding in September 1993, BII Australia has developed and sold
interactive education and entertainment CD-ROM titles primarily for children.
As a result of his experience in the software industry, Mark Miller, Managing
Director of BII Australia, identified BII Australia as a promising software
developer and, during December 1994, Mark Miller, through Pacific Interactive
Education Pty. Limited ("PIE"), and Reefknot Limited ("Reefknot"), a passive
single purpose investment company, purchased a controlling interest in BII
Australia. Under the direction of Mr. Miller, BII Australia has pursued a
strategy of producing profitable value-for-price software entertainment
product that is not dependent upon the production of hit titles.

Sega Ozisoft was built by Messrs. Dyne and Bermeister, each of whom
currently serve on its Board of Directors, and is majority-owned by Sega
Enterprises of Japan ("Sega"). Sega Ozisoft has been an entertainment CD-ROM
publisher and distributor since 1982. As a leading publisher and distributor
of interactive software products for the Australian market, Sega Ozisoft has
operated as the local representative for leading software developers and
achieved expertise in product positioning, associated marketing programs,
customer service support and other related functions. Sega Ozisoft has
represented over 100 United States and European based software publishers and
successfully launched more than 4,000 products. Through Sega Ozisoft Messrs.
Dyne and Bermeister have had broad exposure to the types of entertainment
software introduced throughout the past decade, the distribution and retail
strategies followed by various industry participants, the advantages and
disadvantages of various multimedia business models and the numerous
participants within the multimedia software and various related industries. As
a result of this experience, Messrs. Dyne and Bermeister began to identify
certain opportunities within the entertainment software industry that were not
being addressed. Traditional software games are directed at a demographic
audience comprised primarily of young males, ages eight to 21, who prefer high
adventure, fast action games and who are willing to spend substantial time on
this activity. Other potential market segments, such as females and adult
males over 21, typically have not been targeted by developers. Additionally,
Messrs. Dyne and Bermeister recognized that consumers were seeking additional
entertainment applications for their computers. Messrs. Dyne and Bermeister
conceptualized a new genre of entertainment, the Multipath Movie, that would
address these underserved market segments as well as the traditional gamers
and could be offered at acceptable price points.

Accordingly, Sega Ozisoft established SAND as a stand-alone research and
development division to develop leading edge digital entertainment technology.
SAND has been responsible for developing the suite of proprietary software
tools and low-cost production process that are the foundation for the
Company's new generation of animated digital entertainment.

Sega Ozisoft and BII Australia began working together during November of
1994 to jointly continue the development of SAND's software tools. BII
Australia's core capabilities in software product development and production
processes were recognized as valuable in developing commercial digital
entertainment product applications utilizing 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

6
<PAGE>

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."

With the evolution of the SAND software tools and the realization of the
potential commercial application of associated digital entertainment products,
Sega Ozisoft began developing a business plan to successfully exploit the
commercial potential of products produced with the SAND software tools.
Accordingly, it was determined that the most effective way to accelerate
development of SAND's software tools was to form a separate entity that could
properly oversee and manage the ongoing software tool development and the
product launch of the various business lines generated with SAND's software
tools. Messrs. Dyne and Bermeister developed a plan to (i) acquire a
substantial interest in the Company and for BII Australia to serve as the
production development platform for the new entity, and (ii) acquire SAND. In
June, 1996, Messrs. Dyne and Bermeister reached agreement with Reefknot to
purchase stock of the Company from Reefknot. Pursuant to their agreement with
Reefknot, Messrs. Dyne and Bermeister have since each acquired 15.3% of the
outstanding shares of Common Stock of the Company from Reefknot for an
aggregate cash purchase price of $2,982,000. See "Principal Stockholders."
Pursuant to a Memorandum of Understanding dated June 12, 1996, and superseded
by an Asset Purchase Agreement dated September 12, 1996, the Company acquired
SAND on September 30, 1996 from Sega Ozisoft in exchange for a $1,500,000
promissory note convertible into 780,001 shares of the Common Stock of the
Company.

7
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
or experience could differ significantly from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to those discussed in this section as well as
those discussed elsewhere in this Prospectus.

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 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

8
<PAGE>

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. See "--Acceptance of Multipath Movie Concept;
Successful Development of Multipath Movies with Appealing Creative Content,"
and "--Dependence on Development of Additional Multipath Movies." The
commercial success of a film also depends upon promotion and marketing,
production costs, impact of competition and other factors. See "--
Competition." Accordingly, the Company's annual and quarterly revenues are and
will continue to be extremely difficult to forecast. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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 judgement 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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 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. See "--Rapid
Technological Change; Changing Product Platforms and Formats."

9
<PAGE>

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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Fluctuating Operating Results."

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. See "--Acceptance of Multipath
Movie Concept; Successful Development of Multipath Movies with Appealing
Creative Content," "--Recovery of Prepaid Royalties and Guarantees" and
"Business--Sales and Marketing."

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

10
<PAGE>

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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

In the quarter ending September 30, 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
approximately $1,350,000 attributable to in-process research and development.
This charge for in-process research and development was determined based upon
an independent valuation study made of the various research and development
projects included in the assets acquired in the SAND acquisition. Also, the
Company has recently entered into strategic relationships with Morgan Creek
Interactive, Inc. ("Morgan Creek"), and Packard Bell NEC, Inc. ("Packard Bell
NEC"). The Company has issued to Packard Bell NEC and Morgan Creek warrants to
purchase 600,000 and 85,000 shares of Common Stock, respectively. See
"Business--Strategic Relationships." Issuance of the warrants to Packard Bell
NEC and Morgan Creek resulted in a $1,096,000 operating expense and a
corresponding credit to equity, based on the value of the warrants issued.

As a result of the foregoing, the Company incurred a significant loss in the
quarter ended September 30, 1996. In the quarter ending December 31, 1996, the
Company expects to incur a compensation expense of approximately $260,000 in
connection with the repricing of outstanding director and employee options in
November 1996. In addition, 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 December 31, 1996, March 31, 1997 and June 30,
1997, and that 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,
Crawford Productions Pty., Ltd. ("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

11
<PAGE>

and failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Strategic
Relationships."

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 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 primary competitive areas for
the Company are identified below.

Computer Graphics Special Effect Firms. The Company expects to compete with
computer graphics special effects firms, including Pixar, Industrial Light &
Magic Inc. ("ILM"), an affiliate of Lucasfilm Ltd. ("Lucasfilm"), Digital
Domain, Sony ImageWorks, Pacific Data Images, Rhythm & Hues and Boss Film
Studios, Inc. These computer graphics special effects firms are capable of
creating their own three-dimensional computer animated feature films and may
produce three-dimensional computer animated feature films for movie studios
that compete with the Company. Pixar already has produced and successfully
released an animated

12
<PAGE>

feature film, Toy Story, and ILM has created and produced three-dimensional
character animation used for the ghosts in the live action film Casper. These
firms, each of which have greater financial and marketing resources than the
Company, are expected to compete intensely with the Company in the production
of animated digital products.

CD-ROM Publishers. 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. The Company's competitors in this
area will include several large companies with substantially greater name
recognition, financial, technical, marketing and other resources, including
Broderbund Software, Inc. ("Broderbund"), 7th Level, Inc. ("7th Level"), GT
Interactive Software, Inc. ("GT Interactive"), Electronic Arts, Softkey
International, Inc. ("Softkey"), Sierra On-Line, Inc. ("Sierra On-Line") and
Davidson & Associates Inc. ("Davidson"). Moreover, large corporations, such as
the Walt Disney Company ("Disney") and Microsoft, with substantial bases of
intellectual property content and substantial financial resources, have
entered or announced their intention to enter the market for CD-ROM
entertainment products.

Movie Studios and Production Companies. The Company's Multipath Movies will
compete with traditional feature films and television programming produced by
major 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, as well as numerous other
independent motion picture and television production companies. Several movie
studios already have developed and released animated feature films and the
Company expects additional competition in the animated feature film market
from these and other movie studios. Other movie studios have announced their
intention to enter the animated feature film market, including DreamWorks SKG,
a studio formed in 1994 which is expressly targeting the animated film market.
The Company's broadcast and home video products will compete with the films of
these movie studios for audience acceptance and exhibition over
broadcast/cable and home video channels. 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 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 studios
likely will be able to enter into more favorable distribution arrangements and
to promote their films and television programming more successfully than the
Company.

Several movie studios, including Disney and Lucasfilm (through its affiliate
ILM), have developed their own internal computer animation capability and have
created computer animation for special effects in animated films. Other movie
studios may internally develop, license or sub-contract three-dimensional
animation capability. Further, the Company believes that continuing
enhancements in computer 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.

13
<PAGE>

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. See "Business--Competition."

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. See "--Software Tools and Product Development."

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
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.
See "Business--Employees" and "Management."

14
<PAGE>

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. See "Management."

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. See "Certain Relationships and Related Transactions." 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

The Company's current production facility located in Manly, Australia, does
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
$2.0 million of the net proceeds from the Offering to equip a production
studio in 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. See
"--Software Tools and Product Development." Any such delay would have a
material adverse effect upon the Company's business, operating results and
financial condition.

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

15
<PAGE>

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, 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. See "Business--Proprietary Rights."

16
<PAGE>

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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

INTERNATIONAL BUSINESS

In fiscal 1995 and 1996, international sales, principally in Australia,
accounted for approximately 20%, and 40%, respectively, of the Company's
revenues. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

CONTROL BY EXISTING STOCKHOLDERS

Immediately following the Offering, the Company's officers and directors and
Sega Ozisoft, of which Messrs. Dyne and Bermeister are directors and
stockholders, will own approximately 40.2% of the Company's outstanding shares
(approximately 38.5% assuming the full exercise of the Underwriters' over
allotment option). As a result, these stockholders will be able to control the
Company and its operations, including the election of at least a majority of
the Company's Board of Directors and thus, the policies of the Company. The
voting power of these stockholders could also serve to discourage potential
acquirors from seeking to acquire control of the Company through the purchase
of the Common Stock, which might have a depressive effect on the price of the
Common Stock. See "Management," "Principal Stockholders" and "Description of
Capital Stock."

MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS

The net proceeds to the Company from the sale of Common Stock offered hereby
are estimated to be approximately $8.2 million. The Company expects to use
approximately $2.0 million of such proceeds to fund the establishment of a
production studio in New South Wales, Australia, approximately $1.0 million
for ongoing software tool development, approximately $0.5 million to acquire
content licenses and $1.1 million to repay the principal and interest accrued
on related party and other indebtedness. However, the Company may change the
allocation of these proceeds in response to developments in the entertainment
and information technology industries and changes in the Company. Accordingly,
Company management will have broad discretion as to the application of the net
proceeds of the Offering. See "Use of Proceeds."

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

17
<PAGE>

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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

IMMEDIATE AND SUBSTANTIAL DILUTION

The initial public offering price is substantially higher than the book
value per outstanding share of Common Stock. Specifically, investors will
sustain immediate dilution of $3.87 per share based on the net tangible book
deficit of the Company at September 30, 1996 of $1,554,755. Investors in the
Offering therefore will bear a disproportionate part of the financial risk
associated with the Company's business while effective control will remain
with existing stockholders and management. Additional dilution may occur upon
the exercise of outstanding stock options and warrants. See "Dilution" and
"Principal Stockholders."

ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; ARBITRARY
DETERMINATION OF OFFERING PRICE

Prior to the Offering, there has been no public market for the Common Stock.
Although the Company's Common Stock has been approved for listing on the
American Stock Exchange, there can be no assurance that an active trading
market for the Common Stock will develop as a result of the Offering or, if a
trading market does develop, that it will continue. In the absence of such a
market, investors may be unable readily to liquidate their investment in the
Common Stock. The trading price of the Common Stock could be subject to wide
fluctuations in response to quarter to quarter variations in operating
results, news announcements relating to the Company's business (including
technological innovations or new product introductions by the Company or its
competitors), changes in financial estimates by securities analysts, the
operating and stock price performance of other companies that investors may
deem comparable to the Company as well as other developments affecting the
Company or its competitors. In addition, the market for equity securities in
general has been volatile and the trading price of the Common Stock could be
subject to wide fluctuations in response to general market trends, changes in
general conditions in the economy, the financial markets or the technology
industry and other factors which may be unrelated to the Company's
performance. The public offering price of the shares of Common Stock has been
determined by negotiations between the Company and the Underwriter and does
not necessarily bear any relationship to the Company's book value, assets,
past operating results, financial condition or any other established criteria
of value. There can be no assurance that the shares offered hereby will trade
at market prices in excess of the initial public offering price. See
"Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of Common Stock by existing stockholders could adversely affect
the prevailing market price of the Company's Common Stock and the Company's
ability to raise capital in the equity markets. Upon completion of the
Offering, the Company will have 7,200,001 shares of Common Stock outstanding.
Of those shares, the 2,000,000 shares of Common Stock offered hereby
(2,300,000 if the Underwriter's over-allotment option is exercised in full)
will be freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 under the Securities Act ("Rule 144"). The remaining
5,200,001 shares of Common Stock outstanding are "restricted securities," as
that term is defined by Rule 144, or otherwise subject to volume limitations
of Rule 144 because they are held by affiliates of the Company. Upon
expiration of lock-up provisions, 2,322,131 shares of Common Stock will become
eligible for sale 180 days following the date of this Prospectus, subject to
compliance with the volume limitations of Rule 144. Under the lock-up
provisions, the officers, directors and securityholders of the Company will
have agreed that they will not, directly or indirectly, sell, assign or
otherwise transfer any shares of Common

18
<PAGE>

Stock owned by them for a period of 180 days, and in the case of Mr. Dyne and
Mr. Bermeister, one year, after the effective date of this Prospectus, without
the prior written consent of the Representatives of the Underwriters. See
"Shares Eligible for Future Sale" and "Underwriting."

The Company intends to file a registration statement under the Securities Act
to register the shares of Common Stock reserved for issuance pursuant to the
Company's 1996 Stock Option Plan (the "1996 Plan"). See "Management--Stock
Option Plan." This registration statement will become effective immediately
upon filing. As of November 18, 1996, options to purchase 185,000 shares of
Common Stock had been granted under the 1996 Plan. The availability for sale,
as well as actual sales, of currently outstanding shares of Common Stock, and
shares of Common Stock issuable upon the exercise of options and warrants, may
depress the prevailing market price for the Common Stock and could adversely
affect the terms upon which the Company would be able to obtain additional
equity financing.

EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW

The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to those of
the Common Stock. Following the Offering, no shares of Preferred Stock of the
Company will be outstanding, and the Company has no present intention to issue
any shares of Preferred Stock. However, the rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Further, certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company. See "Description of Capital Stock--Preferred Stock" and
"Description of Capital Stock--Anti-Takeover Provisions."

19
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock being offered by the Company hereby at an initial public offering
price of $5.00 per share, after deducting the estimated underwriting discounts
and offering expenses, are estimated to be approximately $8.2 million ($9.6
million if the over-allotment option is exercised in full).

The principal purposes of the Offering are to increase the Company's working
capital and equity base and to create a public market for the Company's Common
Stock. The Company intends to use approximately $2.0 million of the net
proceeds to fund the establishment of a production studio in New South Wales,
Australia, approximately $1.0 million for ongoing software tool development
and approximately $0.5 million to acquire content licenses. In addition, the
Company intends to use $1.1 million of the net proceeds from the Offering to
repay the principal and interest accrued on certain indebtedness (including
$900,000 outstanding as of September 30, 1996 and $200,000 incurred subsequent
to September 30, 1996), consisting of $701,000 and $350,000 to PIE (the "PIE
Loan") and Reefknot (the "Reefknot Loans"), respectively, both shareholders of
the Company and an additional $49,000 to Andwhen Pty. Limited (the "Andwhen
Indebtedness"). See "Certain Relationships and Related Transactions" and
"Principal Stockholders." The PIE Loan, which was incurred to fund product
development, is due on the earlier of the closing of the Offering or December
31, 1996 and bears interest at the rate of 12.5% per annum. The Reefknot
Loans, which were incurred to pay certain costs relating to the Offering, are
due on the earlier of the closing of the Offering or the first anniversary of
the date of issuance of each note and bear interest at the rate of 10% per
annum. The Andwhen Indebtedness, one half of which is due upon a change of
ownership of the Company with the balance due in equal monthly installments of
approximately $4,500 was incurred in connection with the repurchase of certain
equipment and bears no interest. In addition, the Company will use a portion
of the proceeds of the Offering to repay to Sega Ozisoft non-interest bearing
advances of operating expenses for the period subsequent to July 31, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The balance of the net proceeds
of the Offering will be used to fund development of digital entertainment
products, for working capital and general corporate purposes.

The Company intends to maintain flexibility with respect to the use of these
funds and the amounts actually expended for each such use, if any, are at the
discretion of the Company and may vary significantly depending upon a number
of factors, including the progress of the Company's research and development
and marketing programs, technological advances, determinations as to the
commercial potential of the Company's products and the status of competitive
products. Accordingly, management reserves the right to reallocate the
proceeds of the Offering as it deems appropriate. The Company may also use a
portion of the net proceeds to acquire businesses, products or technologies;
however, it currently has no commitments or agreements with respect to any
such transactions. Pending such uses, the Company intends to invest the net
proceeds from the Offering in short-term, investment grade, interest bearing
securities.

DIVIDEND POLICY

The Company has never paid, and has no current intention to pay dividends on
its Common Stock and intends to follow a policy of retaining earnings to
finance the growth of its business. Any future determination to pay dividends
will be at the discretion of the Board of Directors of the Company and will be
dependent on the Company's results of operations, financial condition,
contractual and legal restrictions and other factors deemed relevant by the
Board of Directors at that time.

20
<PAGE>

DILUTION

The net tangible book value of the Company's Common Stock as of September
30, 1996, was a deficit of $1,554,755 or $(0.35) per share. Net tangible book
value per share is equal to the total tangible assets of the Company less
total liabilities divided by the number of shares of Common Stock outstanding.
After giving effect to the sale of 2,000,000 shares of Common Stock offered by
the Company hereby (at the initial public offering price of $5.00 per share,
after deducting underwriting discounts and commissions and estimated offering
expenses), the conversion of the SAND Note into 780,001 shares of Common Stock
and the repayment of $900,434 of short-term debt obligations, the net tangible
book value for the Company as of September 30, 1996 would have been $8,150,245
or $1.13 per share. This represents an immediate increase in net tangible book
value of $1.48 per share to existing stockholders and an immediate dilution of
$3.87 per share to new investors purchasing shares in the Offering. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price................................ $5.00
Net tangible book value per share as of September 30,
1996...................................................... $(0.35)
Increase attributable to new investors..................... 1.48
------
Net tangible book value per share after the Offering......... 1.13
-----
Dilution to new investors.................................... $3.87
=====
</TABLE>

The following table summarizes, with respect to existing holders of Common
Stock and new investors, a comparison of the number of shares of Common Stock
acquired from the Company, the percentage ownership of such shares, the total
consideration, the percentage of total consideration and the average price per
share.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
ACQUIRED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT (1) PERCENT PER SHARE
------------- ----------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
All existing
stockholders........... 5,200,001 72.2% $ 1,515,810 13.2% $0.29
New investors........... 2,000,000 27.8 10,000,000 86.8 5.00
------------- --------- ----------- -----
7,200,001 100.0% $11,515,810 100.0%
============= ========= =========== =====
</TABLE>
- --------
(1) Includes, with respect to the total consideration paid by all existing
stockholders, $15,810 paid by the original stockholders and $1,500,000
additional value resulting from the conversion of the SAND Note upon the
closing of the Offering.

The foregoing tables and calculations assume no exercise of outstanding
options or warrants. At November 18, 1996, 725,222 shares of Common Stock were
subject to outstanding warrants at a weighted average exercise price of $4.69
per share and 185,000 shares of Common Stock were subject to outstanding
options at a weighted average exercise price of $4.00 per share. To the extent
options and warrants are exercised, there will be further dilution to new
investors. See "Description of Capital Stock."

21
<PAGE>

CAPITALIZATION

The following table sets forth the actual short-term debt and capitalization
of the Company as of September 30, 1996 and the as adjusted short-term debt
and capitalization of the Company after giving effect to the sale of the
2,000,000 shares of Common Stock offered by the Company hereby (at the initial
public offering price of $5.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses), the conversion of
the SAND Note into 780,001 shares of Common Stock and the repayment of
$900,434 of debt. See "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements and related notes
contained therein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
<S> <C> <C>
Short-term debt...................................... $ 2,400,434 $ --
=========== ===========
Stockholders' equity (deficiency) (1):
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
actual; 5,200,001 shares issued and outstanding pro
forma; 7,200,001 shares issued and outstanding pro
forma as adjusted.................................. 4,420 7,200
Additional paid-in capital.......................... 1,106,163 10,808,383
Accumulated deficit................................. (2,656,759) (2,656,759)
Cumulative translation adjustment................... (8,579) (8,579)
----------- -----------
Total stockholders' equity (deficiency).............. (1,554,755) 8,150,245
----------- -----------
Total capitalization............................... $(1,554,755) $ 8,150,245
=========== ===========
</TABLE>
- --------
(1) Excludes 1,080,000 shares of Common Stock available for issuance pursuant
to the 1996 Plan, of which 185,000 shares were subject to outstanding
options as of November 18, 1996 at a weighted average exercise price of
$4.00 per share. Also excludes 725,222 shares of Common Stock issuable
upon exercise of outstanding warrants issued subsequent to June 30 at a
weighted average exercise price of $4.69 per share. See "Management--Stock
Option Plan."

22
<PAGE>

SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA

The following selected historical and unaudited pro forma financial data
have been derived from the Company's consolidated financial statements. The
data should be read in conjunction with the Consolidated Financial Statements
and related notes thereto, the Unaudited Pro Forma Financial Information and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM FISCAL YEARS ENDED THREE MONTHS ENDED
SEPTEMBER 2, 1993 JUNE 30, (1) SEPTEMBER 30,
(INCEPTION) TO ---------------------- -----------------------
JUNE 30, 1994 1995 1996 1995 1996
----------------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
Royalties from
licensing
arrangements.......... $ 10,977 $ 752,108 $1,291,015 $ 47,286 $ 35,255
Development fees....... -- 88,800 585,743 94,069 244,031
Software sales......... -- 1,888 177,119 -- 1,884
---------- ---------- ---------- ---------- -----------
Total revenues......... 10,977 842,796 2,053,877 141,355 281,170
Cost of revenues........ 211,712 655,939 738,842 235,352 139,871
---------- ---------- ---------- ---------- -----------
Gross profit (loss).... (200,735) 186,857 1,315,035 (93,997) 141,299
---------- ---------- ---------- ---------- -----------
Operating expenses:
Sales and marketing.... 2,100 116,435 163,038 11,396 968,755
General and
administrative........ 19,458 223,470 365,491 86,227 139,861
Research and
development........... 14,594 183,000 174,395 61,163 1,518,337
Depreciation........... 9,816 43,379 101,824 22,769 30,714
---------- ---------- ---------- ---------- -----------
Total operating
expenses.............. 45,968 566,284 804,748 181,555 2,657,667
---------- ---------- ---------- ---------- -----------
Income (loss) from
operations........... (246,703) (379,427) 510,287 (275,552) (2,516,368)
Other income (expense),
net.................... (2,777) (44,426) 43,125 (6,479) (20,470)
---------- ---------- ---------- ---------- -----------
Income (loss) before
income taxes......... (249,480) (423,853) 553,412 (282,031) (2,536,838)
Provision for income
taxes.................. -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Net income (loss)..... $ (249,480) $ (423,853) $ 553,412 $ (282,031) $(2,536,838)
========== ========== ========== ========== ===========
Net income (loss) per
share (2).............. $ (0.06) $ (0.09) $ 0.12 $ (0.06) $ (0.56)
========== ========== ========== ========== ===========
Common shares used in
computing net income
(loss) per share (2)... 4,503,960 4,508,380 4,557,000 4,557,000 4,503,960
========== ========== ========== ========== ===========
Pro forma net loss per
share (3).............. $ (0.15) $ (0.48)
========== ===========
Common shares used in
computing pro forma net
loss per share (3)..... 5,337,001 5,283,961
========== ===========
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
-------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
--------- --------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 17,471 $ 49,283 $ 53,061 $ 85,941
Total current assets.......... 17,471 55,669 717,474 722,330
Total assets.................. 68,509 227,567 915,746 1,198,394
Total current liabilities..... 306,200 874,519 1,045,179 (2,753,149)
Total stockholders' equity
(deficiency)................. (237,691) (646,952) (129,433) (1,554,755)
</TABLE>
- -------
(1) The Company intends to change its fiscal year end from June 30 to December
31, effective December 31, 1996.
(2) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share.
(3) Pro forma net loss per share for the fiscal year ended June 30, 1996
reflects the acquisition by the Company of SAND, in exchange for the SAND
Note. Of the $1,500,000 purchase price, $150,000 was allocated to certain
assets and $1,350,000 was charged to operating expenses as in-process
research and development costs. This resulted in a pro forma net loss of
$796,588. The pro forma net loss per share for the fiscal year ended June
30, 1996 also reflects the conversion of the SAND Note into 780,001 shares
of Common Stock upon the closing of the Offering. Pro forma net loss per
share for the three months ended September 30, 1996 reflects the
conversion of the SAND Note into 780,001 shares of Common Stock upon the
closing of the Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations" and
the Unaudited Pro Forma Financial Information included elsewhere in this
Prospectus.

23
<PAGE>

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

OVERVIEW

Brilliant 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 "skunk
works" research and development operation for leading edge software tools. 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 the Company acquired SAND on
September 30, 1996. 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,
the predecessor of which was co-founded by Mark Dyne and Kevin Bermeister.

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 will change significantly. SAND was
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, the Company
also plans to continue development of the Multipath Movie tools and production
process, as well as the commercialization of the Multipath Movie genre. As a
result of this change in the Company's business, the following discussion may
not be representative of its future operations. See "--Accounting Treatment
for Development Costs and Research Expenditures." The Company intends to
change 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. See "Risk
Factors--Acceptance of Multipath Movie Concept; Successful Development of
Multipath Movies with Appealing Creative Content," and "Risk Factors--
Dependence on Development of Additional Multipath Movies." The commercial
success of a film also depends upon promotion and marketing, production costs,
impact of competition and other factors. See "Risk Factors--Competition--Movie
Studios and Production Companies." Accordingly, the Company's annual and
quarterly revenues are and will be extremely difficult to forecast.

In the quarter ending September 30, 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
approximately $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. See "Business--Strategic Relationships." 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.

24
<PAGE>

As a result of the foregoing, the Company incurred a significant loss in the
quarter ended September 30, 1996. In the quarter ending December 31, 1996, the
Company expects to incur a compensation expense of approximately $260,000 in
connection with repricing of outstanding director and employee options in
November 1996. In addition, 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 December 31, 1996, March 31, 1997 and June 30,
1997, and that the Company could incur quarterly losses thereafter.

RESULTS OF OPERATIONS

Three Months Ended September 30, 1996 as Compared to Three Months Ended
September 30, 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 increased
from $141,355 for the three months ended September 30, 1995 to $281,170 for
the three months ended September 30, 1996. This represents an increase of
$139,815, or 99%, mainly attributable to increased development fees revenue
arising from the development of software for third parties.

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 $235,352 for the three months ended September 30, 1995 to
$139,871 for the three months ended September 30, 1996. This represents a
decrease of $95,481, or 41%. Cost of revenues in the 1995 quarter included
costs associated with development of the Company's own titles. In the 1996
quarter, 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 $11,396 for the three months ended September 30, 1995 to $968,755 for the
three months ended September 30, 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 $86,227 for the three months ended September 30, 1995
to $139,861 for the three months ended September 30, 1996. This represents an
increase of $53,634 or 62%, associated with increased accounting and
consulting services provided to the Company.

25
<PAGE>

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 $61,163 for
the three months ended September 30, 1995 to $1,518,337 for the three months
ended September 30, 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 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
three months ended September 30, 1996 include in research and development
expenses the software development costs incurred as a result of the
acquisition of SAND. See "--Accounting Treatment for Development Costs and
Research Expenditures." 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 $750,000 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
four months 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 $22,769
for the three months ended September 30, 1995 to $30,714 for the three months
ended September 30, 1996. This increase is attributable to additional computer
equipment in place during 1996.

Other income and expense. Other income includes interest income and gains on
foreign exchange transactions. Interest expense relates mainly to interest on
the Company's loan from PIE, a significant shareholder. Interest expense
decreased from $23,417 for the three months ended September 30, 1995 to
$20,881 for the three months ended September 30, 1996. This decrease is due to
a lower average balance outstanding on the PIE loan in the quarter ended
September 30, 1996 as compared to the quarter ended September 30, 1995.

Pro forma net loss per share. Net loss per share for the quarter ended
September 30, 1996 is computed using the weighted average number of shares of
Common Stock outstanding, including common equivalent shares from stock
options and warrants. Common equivalent shares issued during the twelve-month
period prior to the Offering at prices below the Offering price have been
included in the calculation as if they were outstanding for the entire period.
Pro forma net loss per share for the quarter ended September 30, 1996 reflects
the conversion of the SAND Note into 780,001 shares of Common Stock of the
Company.

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.

26
<PAGE>

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.

General and Administrative. General and administrative expenses increased
from $223,000 for the year ended June 30, 1995 to $365,000 for the year ended
June 30, 1996. This represents an increase of $142,000 or 64%, 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.

Pro forma net income (loss) per share. Pro forma net loss per share for the
fiscal year ended June 30, 1996 reflects the acquisition by the Company of
SAND in exchange for a $1,500,000 convertible promissory note. The purchase
price has been allocated between in-process research and development
($1,350,000) and other assets ($150,000) in accordance with SFAS No. 86. This
resulted in a pro forma charge to research and development expenses of
$1,350,000, including the pro forma consolidation of the operations of SAND.
Pro forma net loss per share for the fiscal year ended June 30, 1996 also
reflects the conversion of the SAND Note into 780,001 shares of Common Stock
of the Company. The unaudited consolidated pro forma financial data may not
represent the results of operations or financial position which actually would
have been obtained if those transactions had been completed as of the date
indicated or which may be obtained in the future.

Fiscal Year Ended June 30, 1995 as Compared to the Period from September 2,
1993 (inception) through June 30, 1994

The Company experienced significant growth in fiscal year 1995. The Company
completed development of six titles and commenced development of ten
additional titles in fiscal year 1995. The sales and marketing efforts of the
Company also increased in 1995 with the release of new products.

Revenues. Revenues increased from $11,000 for the period from September 2,
1993 through June 30, 1994 to $843,000 for the year ended June 30, 1995. The
Company's operations did not begin until March 1994, therefore no significant
revenues were recognized during the period from September 2, 1993 through June
30, 1994.

27
<PAGE>

Cost of revenues. Cost of revenues increased from $212,000 for the period
from September 2, 1993 through June 30, 1994 to $656,000 for the year ended
June 30, 1995, primarily attributable to increased production activity. Any
gross profit comparison between the ten months ended June 30, 1994 and fiscal
year 1995 is not relevant due to partial year activity during 1994.

Sales and marketing. Sales and marketing expenses increased from $2,000 for
the period from September 2, 1993 through June 30, 1994 to $116,000 for the
year ended June 30, 1995, attributable primarily to the general growth of the
Company and an increased sales and marketing effort.

General and administrative. General and administrative expenses increased
from $19,000 from the period from September 2, 1993 through June 30, 1994 to
$223,000 for the year ended June 30, 1995, attributable primarily to increased
staff and overhead to support the increased production and sales activity of
the Company.

Research and development. Research and development expenses increased from
$15,000 for the period from September 2, 1993 through June 30, 1994 to
$183,000 for the year ended June 30, 1995, primarily attributable to the
Company's increased research and development efforts relating to its
traditional CD-ROM software tools in 1995.

Depreciation. Depreciation expense increased from $10,000 for the period
from September 2, 1993 through June 30, 1994 to $43,000 for the year ended
June 30, 1995. This increase is due to significant purchases of computer
equipment in 1995.

Other income and expense. Interest expense increased from $3,000 for the
period from September 2, 1993 through June 30, 1994 to $45,000 for the year
ended June 30, 1995, attributable primarily to higher average outstanding
borrowings from PIE in 1995 as compared to 1994.

FLUCTUATING OPERATING RESULTS

28
<PAGE>

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. See "Risk
Factors--Rapid Technological Change; Changing Product Platforms and Formats."

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

The Company has financed a substantial part of its operations through loans
from a significant shareholder, PIE. PIE has provided loans to the Company of
approximately $126,000, $1,021,000, $746,000 and $29,000 during the fiscal
years ended June 30, 1994, 1995 and 1996 and the quarter ended September 30,
1996, respectively. In the fiscal years ended June 30, 1995 and 1996 and the
quarter ended September 30, 1996, the Company repaid $541,000, $680,000 and
$0, respectively. As of September 30, 1996, $701,000 remains due and payable,
including accrued interest.

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
$150,000 to fund certain costs in connection with the Offering. These notes
bear interest at the rate of 10% per annum and are due and payable on the
earlier of the closing of the Offering or the first anniversary of the date of
issuance of each note.

Net cash used in operating activities during each of the 1994 and 1995
fiscal years was primarily attributable to a net loss. Net cash provided by
operating activities in the year ended June 30, 1996 and in the three months
ended September 30, 1996 was primarily attributable to net income resulting
from development fees of $586,000 and $244,000, respectively and royalties of
$1,291,000 in the year ended June 30, 1996. Net cash used in investing
activities in each of the fiscal years ended June 30, 1994, 1995 and 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 1994, 1995 and
1996 were primarily attributable to the cash infusions from PIE.

29
<PAGE>

The Company expects to incur capital expenditures of approximately
$2,000,000 to fund the establishment of a production studio in New South
Wales, Australia, including approximately $1,300,000 for Multipath Movie
production equipment, and approximately $300,000 for digital video equipment.
The remaining funds will be used for additional KidStory production and other
equipment, and to furnish the facility.

As of November 11, 1996, the Company's material commitments consisted of the
$701,000 payable to PIE, the $350,000 due to Reefknot, and an advance from a
customer for software development of $213,000. The note payable to PIE bears
interest at a rate of 12.5% per annum and is due on the earlier of the closing
of the Offering or December 31, 1996. The notes payable to Reefknot bear
interest at a rate of 10% per annum and are due on the earlier of the closing
of the Offering or the first anniversary of the date of issuance of each note.
The Company expects to use a portion of the net proceeds from the Offering to
repay these notes in full. The customer advance will be repaid from proceeds
from the sales of the completed software. See Note 5 of the Notes to
Consolidated Financial Statements.

Pursuant to the SAND Acquisition Agreement, Sega Ozisoft has agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company has 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 $59,175 per month
advanced by Sega Ozisoft for August, September and October of 1996. As of
September 30, 1996, the Company had incurred a total obligation of $36,605
pursuant to this agreement. See "Certain Relationships and Related
Transactions."

Under its agreement with Crawford Productions, 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
Movies, which total cost per title is anticipated to be approximately
$789,000. Under its agreement with Morgan Creek, the Company is obligated to
fund entirely the development of two Multipath Movies.

The Company believes that the net proceeds from the Offering combined with
the Company's current resources will be sufficient to enable the Company to
meet its operating and capital needs as required by its present business plan
for approximately 12 months. In the event the Offering is not consummated, the
Company will be unable to complete its research and development programs,
commercialize its technologies, or finance the planned growth of the Company's
business.

30
<PAGE>

BUSINESS

GENERAL

Brilliant 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. Using its proprietary,
state-of-the-art software tools, 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. In order to produce digital entertainment products with wide appeal,
the Company has developed a number of features that it believes represent
significant technical enhancements over existing digital entertainment. For
example, animated characters created using the Company's tools appear human-
like and have realistic features, facial expressions and mouth movements.
Multipath Movies also allow users to control characters' moods as opposed to
only their actions. In addition, a typical Multipath Movie will encourage
viewers to influence or interact with the story on average every 30 to 45
seconds, without interrupting the flow of the story or its graphical
presentation. 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.

The Company develops Multipath Movies in a single process utilizing its
proprietary software tools in conjunction with the Company's digital
production and layup 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

31
<PAGE>

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.

In addition to developing a new genre of multipath entertainment, the
Company produces and sells interactive CD-ROM titles primarily for children,
including the KidStory Series. Since shipment of its first CD-ROM title in
January, 1995, the Company has developed 16 traditional CD-ROM titles.
Examples of its titles include Flipper and The Yukadoos, which received a 1996
Newsweek Editor's Choice Award. The Company has licensed the rights to over 40
additional titles for development of KidStory Series products. In addition,
the Company recently acquired the interactive CD-ROM rights to the Popeye
characters. The KidStory Series is a profitable value-for-price product
category that is not dependent upon the production of hit titles.

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. The number of multimedia
PCs used in homes worldwide is expected to grow from 40 million in 1996 to 67
million in 2000. These enhanced processing, graphics, sound, storage and
transmission capabilities have enabled PC users to more easily operate
multimedia software and digital entertainment products. 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. Dataquest
estimates that the worldwide Internet population of individual consumers will
grow from approximately 10 million subscribers in 1995 to approximately 170
million in 1999. 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 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. Despite the technological advances that have been
made in producing, processing and delivering digital entertainment, the
Company believes that the consumer will expect digital entertainment products
to have increasingly sophisticated features, including more realistic graphics
and special effects, user control of more complicated or subtle character
movements and real time interactivity.

32
<PAGE>

Brilliant's Technological Advantages. The Company believes that its
technological capabilities will position the Company as a leader in producing
digital entertainment that appeals to the growing expectations of consumers.
Utilizing proprietary software tools, the Company is developing Multipath
Movies with features that it believes represent significant technical
enhancements over existing digital entertainment. For example, animated
characters created using the Company's tools appear human-like and have
realistic features, facial expressions and mouth movements. Multipath Movies
will also allow users to control characters' moods and actions. In addition,
the Company is developing a system that will enable users to interact in real
time with its digital entertainment products over the Internet.

THE COST OF DIGITAL ENTERTAINMENT

Advances in technology have dramatically improved the ability to produce
digital entertainment, but have also driven up the overall cost of producing
interactive games and other forms of digital entertainment. Competitive
pressures to produce differentiated product has increased due to the
proliferation of game cartridges and CD-ROM entertainment titles. The demand
for continuing product enhancements and differentiation has caused digital
entertainment producers to rely heavily upon scarce and expensive teams of
talented programmers. To produce interactive plot-driven digital entertainment
using currently available techniques, a programming team is critical
throughout the development process to integrate plot, graphic and sound
elements and to control the flow of the action. Although the costs of
programming are less significant in the development of products with simple
plots and a few pages of script, such as arcade style games, programming costs
can become prohibitively expensive for the complex, script-intensive products
that are increasingly demanded by consumers.

Brilliant's Cost Advantages. The Company believes that its proprietary
software tools and object-oriented production process will enable the Company
to avoid much of the high programming cost associated with the development of
complex, interactive scripts. The Company intends to utilize existing
entertainment industry resources rather than expensive programmers to generate
high-quality digital entertainment at a low cost. The Company believes that
its proprietary software tools and processes will allow screenwriters,
directors and producers to develop Multipath Movies without any detailed
knowledge of computer programming or significant assistance from expensive
programming teams. The Company also intends to utilize the entertainment
industry as a primary resource for scripts. 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 Multipath Movie scripts to be released in CD-ROM and via the Internet.
In addition, the Company believes that it will be able to utilize a single
script and one production process to produce digital interactive entertainment
that can be delivered in multiple formats, such as CD-ROM, the Internet,
television broadcast/cable programming and home video features. Consequently,
the Company will be able to amortize its production costs across a number of
revenue streams. The Company believes that its ability to manage production
budgets is in part due to its lower operating costs in Australia as compared
to the United States.

THE UNDERSERVED PC MARKET FOR DIGITAL ENTERTAINMENT

The Company believes that there is a significant segment of the home PC user
population that currently does not use interactive PC-based entertainment
products. Much of PC-based and game console digital entertainment to date has
been developed for the dedicated computer game player, typically an eight to
21 year-old male with substantial free time and spending money. Traditional
developers of computer games have continually enhanced and improved the game
playing experience by adding complexity, graphics and other features to their
games in order to keep the core gamer interested. 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. Although the installed base of game
consoles and multimedia PCs is growing, the penetration rate of a typical game
product remains relatively low.

33
<PAGE>

Brilliant's Broad Target Market. The Company's digital entertainment
products 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'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.

DIGITAL ENTERTAINMENT FOR TELEVISION BROADCAST/CABLE AND HOME VIDEO

The television and cable programming industries generally are highly
speculative and involve a substantial degree of development risk. The success
of an individual television or cable series depends upon unpredictable and
changing factors, such as public tastes, viewer preferences and the
availability of other activities competing for consumers' leisure time, all of
which create substantial risks that development costs for any particular
program may not be recouped. Additionally, while the risks associated with
television and cable programming are high, the costs to develop any individual
series are also high. Due to the industry's continuing dependence upon large
production crews and high-cost, on-screen talent, production costs continue to
rise rapidly. At the same time, however, demand for well-priced broadcast,
cable television and home video content remains strong as a result of the
increasing number of available broadcast and cable channels, the strong
international interest in American-based content and delivery of television
and cable into emerging markets. In addition, recently enacted federal
legislation requires broadcasters to offer children's programming for at least
three hours per week. Although an increasing number of digitally animated
broadcast programs have achieved commercial acceptance and success, the
Company believes that a lack of technical capability has prevented the motion
picture industry from producing commercially viable plot-based interactive
digital entertainment on a broader scale.

Brilliant's Products for the Television Broadcast/Cable and Home Video
Markets. The Company believes that the strong demand for television
programming and home video features will provide a ready market for the low-
cost, animated digital entertainment that the Company plans to produce.
Utilizing its proprietary tools, the Company is able to produce digital
entertainment suitable for television and home video, as well as distribution
on CD-ROM and over the Internet, in one integrated production process. This
enables the Company to amortize its production costs across a number of
revenue streams. Accordingly, the incremental costs allocated to the
production of television programming and home video features will be
substantially below typical industry costs. The Company has entered into a
production joint venture with Crawford Productions, an Australian television
and motion picture production company, through which the Company and Crawford
Productions will jointly develop two Multipath Movies for distribution as
broadcast and cable programming scripts.

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

34
<PAGE>

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 modificaton
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.

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

35
<PAGE>

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. See "--Strategic Relationships." The Company believes that these
arrangements will provide the Company with significant content development and
distribution advantages.

PRODUCTS

Utilizing its proprietary, state-of-the-art software development tools, the
Company is developing a new genre of digital entertainment, the Multipath
Movie. In addition to developing Multipath Movies, the Company produces and
sells traditional interactive CD-ROM titles primarily for children.

ANIMATED DIGITAL MULTIPATH MOVIES

The Company's Multipath Movies combine the best qualities of traditional
filmed entertainment--story and plot, with the best of the traditional
computer game--its interactivity. 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. The
opening scenes of each Multipath Movie, however, will require limited
interaction, which is intended to introduce users to the story in a manner
that builds user empathy with the lead characters and teaches the user how to
interact with the Multipath Movie. Further into the Multipath Movie, the level
of prompted interactivity will increase and prompts are designed to become
less direct and more intuitive. Users' responses to prompts determine a
character's actions and affect 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 Multipath Movie will allow the user to jump forward or reverse to
previously viewed scenes and will allow the user, if desired, to select a
different decision path. 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 of the Multipath Movie.

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. See "--Strategic
Relationships." 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. See "Certain Transactions."

36
<PAGE>

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. See "--
Strategic Relationships."

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. See "--Strategic Relationships." 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 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.

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 currently develops
and sells interactive CD-ROM titles primarily for children, including the
KidStory Series, and a number of other titles based on licensed characters or
content.

37
<PAGE>

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's traditional CD-ROM products are developed on a value-for-price
model, which does not rely upon the production of hit titles. The Company's
strategy is to provide distributors and retailers with products that deliver
high value relative to cost and sell well at the retail level. The Company
believes that its profitability on traditional CD-ROM products is a result of
this value-for-price strategy.

38
<PAGE>

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 MULTIPATH MOVIE PRODUCTION PROCESS CHART]

Scripting Scripting is the process in which the story and
its characters are created and developed. The
scripting process includes generating the story
concept, completing its treatment and outline
and final delivery.

Creative Design Creative Design includes conceptualizing and
designing the look, feel and style of the
title; also includes sketching characters,
wardrobes, props and sets.

Voice and Sound The Voice and Sound phase includes recording
voices for the characters and developing and
recording the musical score and sound effects.

Model and World
Building Model Building involves creating digitized
models of each character by defining their
shapes in three dimensions (height, width and
depth) and by adding animation control points
through various techniques that allow the model
to be moved or animated. World Building is
similar to model building except that it
involves environments and sets rather than
characters.

Texturing and Lighting Texturing is the process of adding
characteristics such as pattern, texture,
finish and color to the "world" and its models.
Lighting is also added during this process.

Blocking, Camera and
Editing In Blocking, the models are animated, or
"brought to life," in three dimensions to
create a motion sequence. Blocking is performed
by defining the points in a "world" around
which a particular character will move. Once
the character's movements are blocked, cameras
are positioned in virtual space and the action
is captured using traditional camera
techniques. The director can view each scene
immediately following this process and edit by
adjusting the cameras and action.

Special Effects
Animation In this phase, any necessary special effects
are added, which may include special sound or
visual effects.

Rendered Output All of the data for script, sound, graphics and
special instructions generated by ScripNav,
LipSync and SCuD Engine are gathered by
DigitalProjector and played in sequential order
to output the Multipath Movie in either real
time or frame by frame depending upon the
output format required.

39
<PAGE>

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 the DigitalProjector; 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. For
example, if the character is angry, the character will approach the other
characters and the events in the scene in a much more aggressive and hostile
manner, which will, in turn, send the plot in the appropriate direction. By
inserting directional guides throughout the script, the scriptwriter is able
to create a script with multiple paths and endings based on a character's
moods and his or her interactions with the other characters. Once the script
has been developed in the Multipath Movie style, ScripNav enables the
scriptwriter to read, review and correct the script. ScripNav then corrects
for syntax and branching errors and allows the scriptwriter to review the
multiple plots produced. Lastly, ScripNav produces statistics that allow the
scriptwriter to identify scenes that either cannot or are unlikely to be
reached through the plot's development and, therefore, should be excluded from
the final Multipath Movie product.

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

40
<PAGE>

product. When a previously unedited scene is opened, SCuD Engine retrieves the
text for the scene from the script text file of ScripNav 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:

Sound Tools. The Company utilizes other non-proprietary sound tools that
enable producers to incorporate wave files from standard sound files generated
by almost any sound-editing package. Because wave files are generally not
compressed, the Company then uses other non-proprietary tools to compress and
prepare these files for use in DigitalProjector.

Graphics Tools. Graphics tools enable producers to convert the graphics
created by existing commercially available packages into a format that is
compatible with SCuD Engine and DigitalProjector. In addition, producers of
digital animation use graphics tools in the model and world building phase.
Producers create digitized models by defining their shapes in three dimensions
(height, width and depth) and by adding control points. The number of control
points is determined by the number of polygons that are used to create the
model. "Polygons" are multi-sided objects that can be colored or textured and
moved as single entities in computer graphics, allowing for three-dimensional
digital animation.

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. The chart
below depicts the digital Multipath Movie production process discussed
previously and the phases of the process enabled by each tool.

41
<PAGE>

[SOFTWARE TOOLS AND PRODUCTION CAPABILITIES CHART]

COMPARISON OF MULTIPATH MOVIE FORMATS

The specifications of the formats for video, the PC and online differ
substantially. While each format will run for a total of 90 to 120 minutes, the
length of any individual scene will vary depending upon the extent of its
interactivity. While content produced for the PC will be user interactive,
video will not. The most significant difference between formats is the number
of polygons per character and per scene required to create the models and
worlds. Due to processing capacity constraints of current PCs, the Company's
Multipath Movie for CD-ROM and the Internet will use a limited number of
polygons. Because polygon counts are scaleable, the Company creates its models
and worlds with high polygon counts suitable for broadcast/cable or video
markets, and then reduces the number of polygons in order to adapt the
Multipath Movie for the PC and online markets. To date, digital entertainment
for home video and the PC have been produced separately. As a result, the
models and worlds developed for one format would not be used in other format
types. By combining the development of multiple products into one process, the
Company can cost effectively build models and worlds that can be utilized over
multiple product formats.

42
<PAGE>

<TABLE>
- --------------------------------------------------------------------------------------------
<CAPTION>
BROADCAST/
HOME VIDEO CABLE PC/ INTERNET/
CRITERIA FEATURE SERIES GAME CONSOLE ONLINE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Movie duration 90-120 mins Three 22-min episodes 90-120 mins 90-120 mins
Polygons per character Unlimited Unlimited 500 500
Polygons per scene Unlimited Unlimited 3,000 3,000
Special effects All All Limited Limited
Interactivity None None Plot branching Plot branching
Camera angle Camera angle
Real time moods Real time moods
Output method Pre-rendered Pre-rendered Real time Real time
video video 3D graphics 3D graphics
Distribution media D1 tape D1 tape CD-ROM Internet
- --------------------------------------------------------------------------------------------
</TABLE>

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) for 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 will follow one of two distribution models with
respect to the Company's traditional CD-ROM products and Multipath Movie
products it produces on CD-ROM. In the first model, which is primarily used
for the licensing of the Company's traditional CD-ROM products, the Company
contracts to develop and produce titles for third parties on a fixed rate
basis without retaining any rights to the products. In such situations, any
future royalty streams to which the Company may be entitled would be minimal.
In the second model, the Company negotiates an affiliated publishing
arrangement for a designated title. Under this 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. When a
user views the opening window on the Packard Bell NEC computer screen, an icon
will appear directing the user to the Multipath Movie. By inserting the CD-ROM
and clicking on the icon, the user will be presented a free preview

43
<PAGE>

of the Multipath Movie title that has been bundled. Following the free
preview, a screen prompt will encourage the user to purchase a "ticket" for
further viewing of the Multipath Movie. If the user selects this option, the
user will be connected by modem to the Multipath Movie location within the
Planet Oasis site and charged for a movie ticket either through a major credit
card account or an "E-Cash" account. If 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 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.
See "Strategic Relationships."

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. In order to be
competitive in this market it is necessary to be prepared to place at least 13
episodes. 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 is currently 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

44
<PAGE>

logistical or cost issues. Because the lip movements of the characters are
automatically synchronized to the dialogue track of the Multipath Movie, the
Company has the ability to downstream foreign-language versions to
international online users of Multipath Movies.

RESEARCH AND DEVELOPMENT

The Company's research and development program is focused on: (i) enhancing
the Company's software tools, (ii) developing enhanced Internet delivery
capabilities for Multipath Movies, (iii) improving the Company's proprietary
object-oriented database to enhance facial expressions and mouth movements of
Multipath Movie characters, and (iv) increasing the efficiency of its object-
oriented production process. The Company's research and development program
includes development of a proprietary object-oriented database, known as
"Rodeo," 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 "skunk works" 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. Because the Company
anticipates that online distribution will become increasingly important in the
digital entertainment industry, the Company intends to prepare the Company to
take advantage of changing Internet delivery technologies.

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.

The Company incurred research and development costs in connection with the
development and improvement of the Company's traditional CD-ROM software tools
of $14,594, $183,000, $174,395 and $1,518,337 for the period from September 2,
1993 to June 30, 1994 and the fiscal years ended June 30, 1995 and 1996 and
the three months ended September 30, 1996, respectively. The amount for the
quarter ended September 30, 1996 includes $1,350,000 of in-process research
and development costs incurred 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 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 master CD-ROM is a disk to
be used by Packard Bell NEC to duplicate enabling CD-ROMs for distribution
with Packard Bell NEC computers. 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 and will also contain a
library of characters, scenes, graphics, sound and other components for
viewing of future episodes of the 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
point of sale retail advertising for the Multipath Movies distributed through
Packard Bell NEC, and to create a prominently displayed icon on the Packard
Bell NEC screen display which, when clicked, will enable the user to view a
preview of the Multipath Movie and purchase the entire Multipath Movie through
a link to Packard Bell NEC's Web site. Packard Bell NEC's Web site, Planet
Oasis, is formatted as a 3-D Internet city providing users with a simple, user
friendly tool through which a user can explore the World Wide Web. When the
site is accessed, a

45
<PAGE>

3-D version of the city appears containing skyscrapers, enchanted forests,
parks and museums. Users cruise through the virtual city using the computer's
mouse to click on different images, representing different topics and
information sites. One of the destinations within the virtual city will be a
theater in which Multipath Movies can be purchased through a link to the
Company's Internet site. 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 will receive warrants to purchase
600,000 shares of the Company's Common Stock. See "Description of Capital
Stock--Warrants."

Morgan Creek Productions. The Company has entered into an agreement to form
a joint venture with Morgan Creek Interactive, 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 will also 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. See "Description of Capital
Stock--Warrants." 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 $1 million. 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.

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.

46
<PAGE>

COMPETITION

Computer Graphics Special Effect Firms. 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. These computer graphics special effects firms are capable of creating
their own three-dimensional computer animated feature films or may produce
three-dimensional computer animated feature films for movie studios that
compete with the Company. Pixar has already produced and successfully released
an animated feature film, Toy Story, and ILM has created and produced three-
dimensional character animation used for the ghosts in the live action film
Casper. These firms, each of which have greater financial and marketing
resources than the Company, are expected to compete intensely with the Company
in the production of animated digital products.

CD-ROM Publishers. 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. The Company's competitors in this
area will include several large companies with substantially greater name
recognition, financial, technical, marketing and other resources, including
Broderbund, 7th Level, GT Interactive, Electronic Arts, Softkey, Sierra On-
Line and Davidson. Moreover, large corporations, such as Disney and Microsoft,
with substantial bases of intellectual property content and substantial
financial resources, have entered or announced their intention to enter the
market for CD-ROM entertainment products.

Movie Studios and Production Companies. The Company's Multipath Movies will
compete with 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, as well as numerous
other independent motion picture and television production companies. Several
movie studios already have developed and released animated feature films and
the Company expects additional competition in the animated feature film market
from these and other movie studios. Other movie studios have announced their
intention to enter the animated feature film market, including DreamWorks SKG,
a studio formed in 1994 which is expressly targeting the animated film market.
The Company's broadcast and home video products will compete with the films of
these movie studios for audience acceptance and exhibition over
broadcast/cable and home video channels. 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 movie studios with which the Company will
competes 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 studios
likely will be able to enter into more favorable distribution arrangements and
to promote their films and television programming more successfully than the
Company.

47
<PAGE>

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 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, 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
any such licenses would be available on acceptable terms, if at all, or that
the Company would prevail in any such litigation. If the Company were found to
have infringed upon the proprietary rights of third

48
<PAGE>

parties, it could be required to pay damages, cease sales of the infringing
products and redesign or discontinue such products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition.

BACKLOG

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

EMPLOYEES

At September 30, 1996 the Company had 27 full-time employees (including six
employees of SAND): ten engaged in research and development, 14 in production
and three 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 three 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. Three of the Company's employees, the Chairman and CEO, the CFO and
the Director of Licensing, are based in Los Angeles, California. All other
employees operate out of facilities located in Mascot and Woollahra, both
suburbs of Sydney, Australia.

PROPERTIES

The Company's production facilities, consisting of approximately 1,800
square feet, are located in Manly, Australia and the research and development
facilities occupied by SAND consisting of approximately 900 square feet are
located in Woollahra, Australia. The leases for these facilities are month-to-
month. The current annual rental under the Manly lease is $24,617 and under
the Woollahra lease is $13,009. The Company also leases an office in Woodland
Hills, California for rent of approximately $18,000 per annum.

The Company anticipates using up to $2.0 million of the proceeds raised in
the Offering to equip a new digital production studio ("New Studio") to be
located in or near Sydney, Australia. It is contemplated that the current
production offices located in Manly, Australia will be closed and all of those
operations will be integrated into the new facilities. The software tool
development facilities occupied by SAND located in Woollahra, Australia will
be kept at their current location. 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 will 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. The Company intends to lease additional
space in or near Sydney, Australia, as the site of its new production
facilities. The Company has not reached an agreement in principle with respect
to the lease of any space for the New Studio.

LEGAL PROCEEDINGS

The Company is not involved in any litigation.

49
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Information with respect to the directors and executive officers as of
November 18, 1996 is as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark Dyne............... 35 Chairman of the Board of Directors and
Chief Executive Officer
Kevin Bermeister........ 36 President and Director
Mark Miller............. 37 Vice President, Production and Operations and Director
Anthony Rose............ 32 Vice President, Technology
Diana Maranon (1)....... 38 Secretary and Director
Michael Ozen............ 42 Chief Financial Officer
Gary Barber (2)......... 39 Director
Ray Musci (1)........... 36 Director
Garth Saloner (2)....... 41 Director
Jeff Scheinrock (1)(2).. 45 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

MARK DYNE. Mr. Dyne has served as the Chairman of the Board of Directors and
as Chief Executive Officer of the Company since October 1996. Mr. Dyne has
served as a joint managing director of Sega Ozisoft since its founding in 1982
by Mr. Dyne and Kevin Bermeister. Sega Ozisoft is now a majority owned
subsidiary of Sega operating under the name of Sega Ozisoft. Mr. Dyne
continues to own an equity interest in Sega Ozisoft. Sega Ozisoft is a
distributor for many leading publishers including, among others, Virgin
Interactive, Accolade, Microprose, Viacom, Interplay, Access, and Starwave.
Mr. Dyne currently is Co-Chief Executive Officer with Kevin Bermeister of Sega
Enterprises, a position he has held since June 1995, a director of Monto
Holdings Pty. Ltd. ("Monto") and Consumer Electronics Pty. Ltd. ("Consumer
Electronics"), and a co-owner of Packard Bell Pty. Ltd. ("Packard Bell
Australia"). Sega Enterprises is a theme park developer which recently has
launched the development of a $70 million interactive indoor theme park in
Darling Harbor in Sydney, Australia. Sega Enterprises is owned jointly by
Mr. Dyne, Mr. Bermeister, Sega Enterprises Japan ("Sega Japan"), Mitsubishi
Corp. and Mitsui Corp. Monto is a private investment holding company. Consumer
Electronics is a South African based distributor of multi-media software
products. Packard Bell Australia is one of the leading manufacturers and
distributors of personal computers through the Australian mass merchant
channel.

KEVIN BERMEISTER. Mr. Bermeister has served as President of the Company
since October 1996 and as a Director since August 1996. Mr. Bermeister is a
joint managing director of Sega Ozisoft, a position he has held since 1982,
and continues to own an equity interest in Sega Ozisoft. Mr. Bermeister
currently is Co-Chief Executive Officer with Mr. Dyne of Sega Enterprises, a
position he has held since June 1995, a director of Consumer Electronics and
Jacfun Pty., Ltd. ("Jacfun"), and a co-owner and director of Packard Bell
Australia. Mr. Bermeister also serves as a director of Jewish House of Sydney,
Australia, a charitable organization. Sega Enterprises is a theme park
developer which recently has launched the development of a $70 million
interactive indoor theme park in Darling Harbor in Sydney, Australia. Sega
Enterprises is owned jointly by Mr. Dyne, Mr. Bermeister, Sega Japan,
Mitsubishi Corp. and Mitsui Corp. Consumer Electronics is a South African
based distributor of multi-media software products. Jacfun is the owner of the
Darling Harbor property occupied by the Sega Enterprises indoor theme park.
Packard Bell Australia is one of the leading manufacturers and distributors of
personal computers through the Australian mass merchant channel.

50
<PAGE>

MARK MILLER. Mr. Miller has served as Vice President, Production and
Operations since October 1996 and as a Director of the Company since August
1996. Mr. Miller served as President and Chief Financial Officer of the
Company from August 1996 through September 1996. Mr. Miller also is Managing
Director of BII Australia, a position he has held since March, 1994. From
February 1993 through December 1994, Mr. Miller was Managing Director of PIE,
where he was primarily engaged in the development and maintenance of
educational and multimedia software for use by schools and other educational
institutions. Mr. Miller currently is a director of PIE. From 1989 through
1992, Mr. Miller was Director of Sales and Marketing of Dealing Information
Systems Pty. Ltd., a developer of proprietary modular software treasury
systems for managing financial transactions.

ANTHONY ROSE. Anthony Rose has served as a consultant to SAND since April
1994 and currently serves as Vice President, Technology of the Company. Mr.
Rose also is the owner and director of and, prior to April 1994 was employed
by, A.R. Technology Pty. Ltd., an Australian company founded by Mr. Rose in
1988 which is involved in the design and manufacture of digital electronics
hardware and software. A.R. Technology has completed design assignments for
Apple, Epson, Panasonic and other corporations and government institutions.
Mr. Rose holds several international patents relating to anti-virus hardware
circuits for personal computers.

DIANA MARANON. Ms. Maranon has served as Secretary of the Company since
August 1996 and as a Director of the Company since October 1996. Ms. Maranon
is the President and Managing Director of Averil Associates, Inc. ("Averil
Associates"), a financial advisory firm. Prior to founding Averil Associates
in 1994, Ms. Maranon was a Vice President with Wasserstein Perella & Co., Inc.
("Wasserstein"), an investment banking firm, with whom she started in 1988. At
Wasserstein, Ms. Maranon was responsible for covering companies headquartered
in the Western United States. From 1985 to 1988, Ms. Maranon practiced
securities law with Skadden Arps Slate Meagher & Flom. Ms. Maranon is a member
of the California Bar.

MICHAEL OZEN. Mr. Ozen has served as Chief Financial Officer of the Company
since October 1996. From May 1991 through June 1996, Mr. Ozen served as
Manager--International Taxes at Coopers & Lybrand, LLP. In July 1996, Mr. Ozen
became Director--International Taxes at Coopers & Lybrand, LLP, a position he
held until October 1996.

GARY BARBER. Mr. Barber has served as a Director of the Company since
October 1996. Since May 1989, Mr. Barber has been Vice Chairman and Chief
Operating Officer of Morgan Creek Productions, Inc. While at Morgan Creek, Mr.
Barber has executive produced numerous feature films including Ace Ventura:
Pet Detective, Ace Ventura: When Nature Calls, Robin Hood: Prince of Thieves
and currently is executive producer of the Ace Ventura animated television
series that airs on CBS.

RAY MUSCI. Mr. Musci has served as a Director of the Company since October
1996. From May 1990 to the present, Mr. Musci has served as the President,
Chief Operating Officer and as a Director of Ocean of America, Inc., a company
that develops, publishes and distributes software products. From September
1994 to July 1996, Mr. Musci served as a director of Ocean International,
Ltd., the holding company of Ocean of America, Inc. From August 1985 to March
1990, Mr. Musci was Executive Vice President/General Manager of Data East USA,
Inc., a subsidiary of Data East Corp., a Japanese company, where he
established a consumer division to develop, manufacture, market and distribute
consumer video games, entertainment software and coin-operated video arcade
games and pinball machines.

GARTH SALONER. Mr. Saloner has served as a Director of the Company since
October 1996. From 1990 to the present, Mr. Saloner has served as the Robert
A. Magowan Professor of Strategic Management and Economics at the Graduate
School of Business at Stanford University. He also has served as Associate
Dean for Academic Affairs and Director of Research and Course Development at
Stanford Graduate School of Business. From 1982 to 1990, Mr. Saloner taught as
a professor in the Economics Department of the Massachusetts Institute of
Technology. Mr. Saloner also is a director and a member of the audit committee
of Quick Response Services, Inc., a corporation that provides electronic data
interchange services in the retail market.

51
<PAGE>

JEFFREY SCHEINROCK. Mr. Scheinrock has served as a Director of the Company
since October 1996. Since July 1, 1996, Mr. Scheinrock has been Vice Chairman,
Chief Financial Officer and Assistant Secretary of Kistler Aerospace
Corporation, a company involved in the development, marketing and manufacture
of reusable satellite launch vehicles. From March 1, 1989 to July 1, 1996, Mr.
Scheinrock was the Vice Chairman of Finance and Strategic Planning of Packard
Bell NEC. Mr. Scheinrock is a director of SRS Labs, Inc. and SmarTalk
TeleServices, Inc., corporations listed on the Nasdaq Stock Market's National
Market. Mr. Scheinrock also is a director of various other private companies
including MicroNet Technology, Inc., which is a California-based high
technology company.

The Company's Chief Executive Officer and Chairman, Mark I. Dyne, and its
President, Kevin Bermeister, also are Joint Managing Directors of Sega
Ozisoft. Messrs. Dyne and Bermeister are not required to spend a specific
amount of time at the Company nor are they able to devote their full time and
resources to the Company. 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.

Pursuant to the SAND Acquisition Agreement, the Company and Sega Ozisoft
agreed that so long as Sega Ozisoft maintains ownership of at least 7% of the
outstanding equity securities of the Company, the Company has agreed to use
its best efforts to cause a nominee of Sega Ozisoft reasonably acceptable to
the Company to be nominated by the Board of Directors of the Company for
election as a director of the Company so that Sega Ozisoft either has one
representative on the Board of Directors of the Company or one representative
nominated for election at the succeeding annual stockholders meeting.
Currently, Kevin Bermeister has been designated by Sega Ozisoft as its nominee
on the Board of Directors.

The Board of Directors is divided into three classes, designated Class I,
Class II and Class III. Gary Barber and Garth Saloner currently are the Class
I directors. This class will stand for election at the 1997 annual
stockholders meeting. Mark Miller, Ray Musci and Jeff Scheinrock currently are
the Class II directors. This class will stand for election at the 1998 annual
meeting. Mark Dyne, Kevin Bermeister and Diana Maranon currently are the Class
III directors. This class will stand for election at the 1999 annual meeting.
At each annual meeting of stockholders, successors of the class of directors
whose term expires at that annual meeting are elected for a three-year term or
until their successors have been elected and qualified. If the number of
directors is changed, any increase or decrease is to be apportioned among the
classes so as to maintain the number of directors in each class as nearly
equal as possible. The authorized number of members of the Board of Directors
currently is eight. Directors may be removed from office only for cause by the
affirmative vote of a majority of the outstanding shares of Common Stock.
Vacancies on the Board of Directors may be filled only by a majority of the
directors then in office.

BOARD COMMITTEES

The Company's Board of Directors maintains an Audit Committee and a
Compensation Committee. The Audit Committee's functions include recommending
to the Board of Directors the engagement of the Company's independent
certified public accountants, reviewing with those accountants the plan and
results of their audit of the financial statements and determining the
independence of the accountants. The Compensation Committee reviews and makes
recommendations with respect to compensation of officers and key employees,
and is responsible for the grant of options and other awards under the
Company's 1996 Plan. See "--Stock Option Plan."

DIRECTOR COMPENSATION

Nonemployee directors of the Company currently are paid $1,500 for their
personal attendance at any meeting of the Board and $500 for attendance at any
telephonic meeting of the Board or at any meeting of a committee of the Board.
Directors also are reimbursed for their reasonable travel expenses incurred in
attending Board or committee meetings. In September 1996, the Company granted
to each of Ms. Maranon and Messrs. Barber, Musci, Scheinrock and Garth Saloner
effective upon commencement of service as a director, options to purchase
25,000 shares of Common Stock at an exercise price of $10.00 per share. In
November 1996, the options were repriced to $4.00 per share.

52
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company did not have a compensation committee for the fiscal year ended
June 30, 1996. For the year ended June 30, 1996, all decisions regarding
executive compensation were made by Mr. Miller. No interlocking relationship
exists between any member of the Company's Compensation Committee and any
member of any other company's board of directors or compensation committee.

EXECUTIVE COMPENSATION

The following table sets forth both cash and noncash compensation paid or to
be paid by the Company to, Mark I. Dyne, Chief Executive Officer, Kevin
Bermeister, and Mark Miller, President and Chief Financial Officer (the "Named
Executive Officers"). No other officer received compensation in excess of
$100,000 for the fiscal year ended June 30, 1996:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
FISCAL YEAR ANNUAL COMPENSATION COMPENSATION
NAME AND PRINCIPAL ENDED --------------------NUMBER OF SECURITIES ALL OTHER
POSITION JUNE 30, SALARY BONUS UNDERLYING OPTIONS(1) COMPENSATION
------------------ ----------- ---------- ------------------------------ ------------
<S> <C> <C> <C> <C> <C>
Mark Dyne (2) 1996 $ -- $ -- -- $ --
Chief Executive Officer
Kevin Bermeister, 1996 -- -- -- --
President (2)
Mark Miller, Vice 1996 69,263 -- -- 21,224(4)
President Production
and Operations (3)
</TABLE>
- --------
(1) See "--Stock Option Plan."
(2) Messrs. Dyne and Bermeister will receive annual salaries of $225,000 and
$225,000, respectively.
(3) During the Company's last fiscal year, Mr. Miller served as the Managing
Director. Compensation amounts shown consist of consulting fees paid by
BII Australia to PIE or Mr. Miller. See "--Employment Agreements with
Executive Officers."
(4) Includes auto allowances, contributions to retirement benefits and profit
included in payments to PIE for purchases of computer equipment.

EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS

Effective October 1, 1996, the Company entered into an employment agreement
with Mr. Ozen pursuant to which Mr. Ozen serves as the Company's Chief
Financial Officer and the Company will pay Mr. Ozen a base salary equal to
$150,000 per year. Mr. Ozen received options to purchase an aggregate of
30,000 shares of Common Stock of the Company which vest in four equal annual
installments commencing on the date of grant. Mr. Ozen's employment is
terminable by the Company at will. In the event the Company terminates Mr.
Ozen's employment without cause, Mr. Ozen is entitled to three months
severance payment (the "Initial Payment") if termination occurs during the
first or second year of employment (the "Initial Period"), and in addition to
the Initial Payment, one month severance payment for each year served after
the Initial Period, not to exceed an aggregate of 12 months severance payment,
if termination occurs after the Initial Period. For purposes of the agreement,
"cause" means the willful disregard of, or failure to perform, duties where
such willful disregard or failure is not discontinued within a reasonable
period of time from receipt of written notice relating thereto.

A.R. Technology Limited, an Australian corporation of which Anthony Rose is
the sole stockholder, will provide the services of Anthony Rose to BII
Australia in exchange for $134,130 per year. The arrangement is terminable at
will by either party upon 30 days prior written notice.

PIE provides the services of Mark Miller to BII Australia. PIE was paid $0,
$36,985 and $90,487 during the period from September 2, 1993 to June 30, 1994,
and the years ended June 30, 1995 and 1996, respectively.

53
<PAGE>

For the period from July 1, 1996 to September 30, 1996, BII Australia paid PIE
$4,577 for the services of Mark Miller and paid directly to Mark Miller an
additional $12,903 for his services. These amounts include auto allowances,
contributions to retirement benefits and profit included in payments to PIE
for purchases of computer equipment. This arrangement is terminable at will by
either party upon 30 days prior written notice.

STOCK OPTION PLAN

The Company adopted a Stock Option Plan (the "1996 Plan") in September 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 1996 Plan will be administered by the Board of Directors or another
committee of two or more non-employee directors appointed by the Board of
Directors (the "Committee"), each of whom shall be an "outside director" for
purposes of 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"). Subject to the provisions of the 1996 Plan, the Committee will have
full and final authority to select the executives and other employees to whom
awards will be granted thereunder, to grant the awards and to determine the
terms and conditions of the awards and the number of shares to be issued
pursuant thereto.

Awards. The 1996 Plan authorizes the Committee to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of (1) shares of Common Stock, (2) an option, warrant,
convertible security, stock appreciation right or similar right with an
exercise or conversion privilege at a price related to the Common Stock, or
(3) any other security or benefit with a value derived from the value of the
Common Stock. 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.

Awards under the 1996 Plan are not restricted to any specified form or
structure and may include arrangements such as sales, bonuses and other
transfers of stock, restricted stock, stock options, reload stock options,
stock purchase warrants, other rights to acquire stock or securities
convertible into or redeemable for stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares. An award
may consist of one such arrangement or two or more such arrangements in tandem
or in the alternative. An award may provide for the issuance of Common Stock
for any lawful consideration, including services rendered or, to the extent
permitted by applicable state law, to be rendered. Currently, Delaware law
does not permit the issuance of common stock for services to be rendered.

An award granted under the 1996 Plan may include a provision conditioning or
accelerating the receipt of benefits, either automatically or in the
discretion of the Committee, upon the occurrence of specified events,
including a change of control of the Company, an acquisition of a specified
percentage of the voting power of the Company or a dissolution, liquidation,
merger, reclassification, sale of substantially all of the property and assets
of the Company or other significant corporate transaction. Any stock option
granted may be an incentive stock option within the meaning of Section 422 of
the Code or a nonqualified stock option.

An award under the 1996 Plan may permit the recipient to pay all or part of
the purchase price of the shares or other property issuable pursuant to the
award, and/or to pay all or part of the recipient's tax withholding
obligations with respect to such issuance, by delivering previously owned
shares of capital stock of the Company or other property, or by reducing the
amount of shares or other property otherwise issuable pursuant to the award.
If an option granted under the 1996 Plan permitted the recipient to pay for
the shares issuable pursuant thereto with previously owned shares, the option
may grant the recipient the right to "pyramid" his or her previously owned
shares, i.e., to exercise the option in successive transactions, starting with
a relatively small number of shares and, by a series of exercises using shares
acquired from each transaction to pay the purchase price of the shares
acquired in the following transaction, to exercise the option for a larger
number of shares with no more investment than the original share or shares
delivered.

54
<PAGE>

Plan Duration. The 1996 Plan became effective upon its adoption by the Board
of Directors on September 13, 1996, and was approved by the Company's
stockholders on September 13, 1996. As of November 18, 1996, the Board had
granted options covering an aggregate of 185,000 shares of Common Stock to
certain directors of the Company and to Messrs. Ozen and Rose, with an
exercise price of $10.00 per share. In November 1996, the options were
repriced to $4.00 per share. The directors' options were granted effective at
such time as each director joins the Board of Directors and will be
immediately fully vested. The options granted to Mr. Ozen vest in four equal
annual installments commencing on the date of grant. Mr. Rose's options vest
in 48 equal monthly installments commencing on the date of grant. Although any
award that was duly granted on or prior to such date 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. See
"Principal Stockholders."

Amendments. The Committee may amend or terminate the 1996 Plan at any time
and in any manner, subject to the following: (1) no recipient of any award
may, without his or her consent, be deprived thereof or of any of his or her
rights thereunder or with respect thereto as a result of such amendment or
termination; and (2) if any rule or regulation promulgated by the Securities
and Exchange Commission (the "Commission"), the Internal Revenue Service or
any national securities exchange or quotation system upon which any of the
Company's securities are listed requires that any such amendment be approved
by the Company's stockholders, then such amendment will not be effective until
it has been approved by the Company's stockholders.

Form S-8 Registration. The Company intends to file a registration statement
under the Securities Act to register the 1,080,000 shares of Common Stock
reserved for issuance under the 1996 Plan. Such registration statement is
expected to be filed shortly following the date of this Prospectus and will
become effective immediately upon filing with the Commission. Shares issued
under the 1996 Plan after the effective date of such registration statement
generally will be available for sale to the public without restriction, except
for the 180-day lock-up provisions and except for shares issued to affiliates
of the Company, which will remain subject to the volume and manner of sale
limitations of Rule 144. See "Shares Eligible For Future Sale."

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation and its Bylaws provide for the
indemnification by the Company of each director, officer and employee of the
Company to the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or may hereafter be amended. Section 145 of the
Delaware General Corporation Law provides in relevant part that a corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that such person
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful.

In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent
that the Delaware Court of Chancery or the court in which such

55
<PAGE>

action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Delaware Court of Chancery or such other court shall deem proper.
Delaware law further provides that nothing in the above-described provisions
shall be deemed exclusive of any other rights to indemnification or
advancement of expenses to which any person may otherwise be entitled under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.

The Company's Certificate of Incorporation also provides that a director of
the Company shall not be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director. Section 102(b)(7)
of the Delaware General Corporation Law provides that a provision so limiting
the personal liability of a director shall not eliminate or limit the
liability of a director for, among other things: breach of the duty of
loyalty; acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; unlawful payment of dividends;
and transactions from which the director derived an improper personal benefit.

The Company has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director of the Company and certain of
its officers (the "Indemnitees"). Pursuant to the terms and conditions of the
Indemnity Agreements, the Company has agreed to indemnify each Indemnitee
against any amounts which he or she becomes legally obligated to pay in
connection with any claim against him or her based upon any action or inaction
which he or she may commit, omit or suffer while acting in his or her capacity
as a director and/or officer of the Company or its subsidiaries, provided,
however, that Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal action, had no reasonable cause to
believe Indemnitee's conduct was unlawful.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PIE and Mark Miller:

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 loan agreement to reflect the parties' lending relationship. The
maximum principal amount BII Australia may borrow from PIE pursuant to the
loan agreement is $631,125. The note bears interest at the rate of 12.5% per
annum and was due and payable on December 31, 1994. By written agreement (the
"Note Extension") dated September 13, 1996, the maturity date 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, 1995 and 1996, BII Australia owed PIE $606,152 (including
accrued interest in the amount of $46,427), and $670,488 (including accrued
interest of $149,389), respectively. As of September 30, 1996, the amount
outstanding was $701,128, including accrued interest of $169,478. The Company
intends to apply a portion of the proceeds of the Offering to repay all
amounts owed to PIE. See "Use of Proceeds."

BII Australia periodically purchases certain computer equipment from PIE.
For the period from September 2, 1993 (inception) to June 30, 1994 and the
fiscal years ended June 30, 1995 and 1996 and the quarter ended September 30,
1996, BII Australia's purchases totaled $0, $15,356, $15,792 and $8,330,
respectively.

Mark Miller is a director and shareholder of Multimedia Connexion Pty. Ltd.
BII Australia periodically purchases hardware and software from Multimedia
Connexion Pty. Ltd. For the period from September 2, 1993 (inception) to June
30, 1994 and the fiscal years ended June 30, 1995 and 1996, BII Australia
purchased computer equipment totaling $0, $12,304 and $15,724, respectively.
No purchases were made during the quarter ended September 30, 1996.

Sega Ozisoft, Mark Dyne and Kevin Bermeister:

In December 1994, BII Australia entered into a Software License Agreement
(the "Sega Agreement") with Sega Ozisoft. Mark Dyne and Kevin Bermeister are
directors and shareholders of Sega Ozisoft and of the

56
<PAGE>

Company. Pursuant to the terms of the Sega Agreement, Sega Ozisoft became the
exclusive distributor in Australia and New Zealand of certain CD-ROM software
products developed by BII Australia. Pursuant to the terms of the Sega
Agreement, BII Australia received non-refundable advances totaling $71,040
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,
after Sega Ozisoft recoups the advance. Such royalty is reducible to $4.73 per
net unit sold after 2000 units have been sold for each title. The non-
refundable advances are recoupable from the royalties earned by BII Australia
under the Sega Agreement. As of September 12, 1996, other than its non-
refundable advance, BII Australia had received no royalty payments relating to
the Sega Agreement. The Sega Agreement expires on December 15, 1996.

Kevin Bermeister is a director and each of Kevin Bermeister and Mark Dyne is
a shareholder of Packard Bell Australia. Between February 1994 and June 30,
1996, BII Australia purchased an aggregate of approximately $38,124 in goods
from Packard Bell Australia. During the quarter ended September 30, 1996, BII
Australia purchased an additional $6,045 in goods from Packard Bell Australia.

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 $165,690 for certain assistant production
services. Amounts are payable by Sega Ozisoft upon attainment of mutually
determined milestones. In addition, BII Australia is entitled to 2.5% in
royalties on net revenues, as defined by the agreement. As of June 30, 1996,
Brilliant had received $120,396 and had recorded a receivable of $52,146,
which was received in July and August 1996. As of September 30, 1996, the
Company had no additional receivable recorded for this agreement.

On September 13, 1996 the Company and Sega Ozisoft entered into the SAND
Acquisition Agreement. Mark Dyne and Kevin Bermeister both currently serve as
directors of Sega Ozisoft and are significant minority shareholders of Sega
Ozisoft. Pursuant to the SAND Acquisition Agreement, the Company acquired all
of the assets of SAND and in consideration therefor issued a one year
$1,500,000 mandatorily convertible note to Sega Ozisoft. The SAND Note bears
interest at a rate of 8% per annum. Concurrent with the closing of the
Offering, the SAND Note automatically will be converted into 780,001 shares of
Common Stock. The terms of the SAND Acquisition were determined by
negotiations between Messrs. Dyne and Bermeister and Averil Associates, Inc.
on behalf of the Company and by the Board of Directors of Sega Ozisoft, with
Messrs. Dyne and Bermeister abstaining, on behalf of Sega Ozisoft. See "The
Company."

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 defined as the 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. In addition, so long as Sega Ozisoft maintains ownership of at least
7% of the outstanding equity securities of the Company, the Company has agreed
to use its best efforts to cause a nominee of Sega Ozisoft reasonably
acceptable to the Company to be nominated by the Board of Directors of the
Company for election as a director of the Company so that Sega Ozisoft either
has one representative on the Board of Directors of the Company or one
representative nominated for election at the succeeding annual stockholders
meeting. Kevin Bermeister has been nominated by Sega Ozisoft to serve on the
Board of Directors.

Pursuant to the SAND Acquisition Agreement, Sega Ozisoft has agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company has 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 $59,175 per month
advanced by Sega Ozisoft for August, September and October 1996. As of
September 30, 1996 the Company had incurred a total obligation of $36,605
pursuant to the SAND Acquisition Agreement.

Monto, an investment holding company in which Messrs. Dyne and Bermeister
hold significant equity interests, has entered into a multimedia production
agreement with BII Australia dated March 14, 1995 whereby

57
<PAGE>

Monto paid BII Australia $180,000 to be used to develop a series of two CD-ROM
interactive magazine programs based on the Beyond 2000 television series. BII
Australia will secure publication and distribution of the completed software
packages and is obligated to pay to Monto 50% of the net receipts from the
commercialization of the Beyond 2000 product. As of June 30, 1996, net
receipts totaled approximately $24,624 and payments to Monto totaled $12,312.
In addition, a liability to Monto for $7,425 was recorded at June 30, 1996. In
the quarter ended September 30, 1996, no additional receipts or payments were
made pursuant to this agreement.

In November 1995, BII Australia entered into a Distribution Agreement (the
"Consumer Electronics Agreement") with Consumer Electronics. Each of Mark Dyne
and Kevin Bermeister is a director and significant shareholder of Consumer
Electronics. BII Australia developed, pursuant to the Consumer Electronics
Agreement, several CD-ROM software entertainment 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
software products in the same territories. Pursuant to the Consumer
Electronics Agreement, BII Australia is entitled to a non-refundable advance
of $84,700, of which $21,175 was paid in 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 $47,643 representing the full amount due pursuant to the re-
negotiated terms. The Company anticipates no further receipts pursuant to the
Consumer Electronics Agreement, which expires on December 6, 1996.

Other:

In September 1995, BII Australia entered into a Distribution Agreement (the
"Ocean Agreement") with Ocean of America, Inc. ("Ocean"). Ray Musci, a
director of the Company, is currently a director and significant shareholder
of Ocean. BII Australia granted to Ocean certain retail distribution and
bundling rights in North America and Europe to the software products developed
by BII Australia. Pursuant to the terms of the Ocean Agreement, BII Australia
was entitled to receive a non-refundable advance from Ocean of approximately
$825,000 in 1996. In addition, BII Australia is entitled to receive royalty
payments in exchange for a percentage of Net Revenues generated from
distribution sales of the CD-ROM entertainment software products and a
percentage of Net Revenues received by Ocean from bundling of the software
products, after Ocean recoups the advance. "Net Revenues" are defined as gross
receipts less returns and certain other expenses. Through October 23, 1996,
Ocean had paid approximately $572,000 against the non-refundable advance.
Royalties have not yet been accrued in connection with this distribution
arrangement. The Ocean Agreement expires on September 29, 1997, subject to a
two year extension under certain circumstances.

In August 1996, the Company issued an aggregate of 1,000,000 shares of its
Common Stock to the two stockholders of BII Australia, PIE and Reefknot, in
exchange (the "Exchange") for all of the capital stock of BII Australia held
by each of PIE and Reefknot. As a result of the Exchange, the Company acquired
all of the outstanding capital stock of BII Australia, PIE was issued 117,650
shares of Common Stock and Reefknot was issued 882,350 shares of Common Stock.

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
$150,000. These notes bear interest at the rate of 10% per annum and are due
and payable on the earlier to occur of the closing of the Offering and the
first anniversary of the date of issuance of each note.

Averil Associates, Inc. ("Averil Associates"), a financial advisory firm
founded and controlled by Diana Maranon, has, since November 1995, performed
various services for the Company including investigation of strategic
alternatives and assistance with the Offering. As consideration for such
services, the Company has paid to Averil Associates the aggregate amount of
$25,000, plus out of pocket expenses. The Company has granted to Chloe
Holdings, Inc. ("Chloe"), an affiliate of Averil Associates, currently
exercisable warrants to purchase 40,222 shares of Common Stock with an
exercise price of $.0326 per share and has committed to a cash payment of
$200,000 payable upon consummation of the Offering. The Company has entered
into an indemnification agreement with Averil Associates pursuant to which the
Company will indemnify Averil Associates, Chloe, and Ms. Maranon against any
amounts these parties may become obligated to pay in connection with Ms.
Maranon's

58
<PAGE>

service as Secretary and as a Director of and consultant to the Company. The
Company plans to continue to engage Averil Associates; however, the Company is
unable to currently estimate the extent to which it will use Averil Associates
in the future.

Certain of the Company's directors and officers, including Mark Dyne and
Kevin Bermeister, are also 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, 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 interactive digital entertainment with the
exception of opportunities for participation in the development by others of
interactive digital entertainment where publishing and/or 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. See "Risk Factors--
Conflicts of Interest."

59
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 18, 1996 and as adjusted
to reflect the sale of 2,000,000 shares of Common Stock offered hereby, for
(i) each person who is known to the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock, (ii) each of the Company's directors,
(iii) each of the Named Executive Officers, and (iv) all directors and
executive officers of the Company as a group. The address of each person listed
is in care of the Company, 6355 Topanga Canyon Boulevard, Suite 513, Woodland
Hills, California 91367, unless otherwise set forth below such person's name.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING (1) AFTER THE OFFERING (1)
---------------------------- ----------------------------
NUMBER PERCENT NUMBER PERCENT
NAME AND ADDRESS OF SHARES OF CLASS OF SHARES OF CLASS
- ---------------- --------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Insinger Group, as man-
ager of the Reefknot
Limited (2)............ 1,822,118 35.0% 1,822,118 25.3%
One Stokes Place
St. Stephens Green
Dublin 2
Republic of Ireland
Mark Dyne............... 795,600 15.3 795,600 11.0
Kevin Bermeister........ 795,600 15.3 795,600 11.0
Sega Ozisoft Pty. Ltd... 780,001 15.0 780,001 10.8
Bldg. A, Southern Indus-
trial Estates,
200 Coward Street, Mas-
cot, NSW
2020 Australia
Packard Bell NEC (3).... 600,000 10.3 600,000 7.7
One Packard Bell Way
Sacramento, California
95828
PIE (4)................. 500,013 9.6 500,013 6.9
17 the Corso
Manly, NSW, Australia
2095
Safcor, Inc. ........... 486,669 9.4 486,669 6.8
8474 Commerce Ave.
Suite B
San Diego, CA 92121
Morgan Creek (5)........ 85,000 1.6 85,000 1.2
4000 Warner Boulevard
Building 76
Burbank, California
91522
Diana Maranon (6)....... 65,222 1.2 65,222 *
Gary Barber (7)......... 25,000 * 25,000 *
Ray Musci (7)........... 25,000 * 25,000 *
Garth Saloner (7)....... 25,000 * 25,000 *
Jeff Scheinrock (7)..... 25,000 * 25,000 *
Anthony Rose (8)........ 20,000 * 20,000 *
All of the directors and
executive officers as a
group (10 persons)
(9).................... 2,283,935 42.5 2,283,935 31.0
</TABLE>

(footnotes on following page)

60
<PAGE>

- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated, the persons named in
this table have sole voting and sole investment power with respect to all
shares shown as beneficially owned, subject to community property laws
where applicable. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, shares of Common
Stock subject to options or warrants held by that person that are
currently exercisable or exercisable within 60 days of September 16, 1996
are deemed outstanding. Such shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of each other
person.

(2) Insinger Group is the manager of Reefknot Limited, and as such, controls
the disposition and voting of the shares of Common Stock held by Reefknot.

(3) Consists of 600,000 shares of Common Stock underlying warrants which are
or will become exercisable on or prior to December 23, 1996. See
"Description of Capital Stock--Warrants."

(4) Includes 70,000 shares of Common Stock held by the Mark Miller Family
Trust, of which PIE is trustee. Mark Miller and his wife, are the sole
stockholders of PIE.

(5) Consists of 85,000 shares of Common Stock underlying warrants which are or
will become exercisable on or prior to December 23, 1996. See "Description
of Capital Stock--Warrants."

(6) Consists of (i) 25,000 shares of Common Stock of the Company reserved for
issuance upon exercise of stock options which are or will become
exercisable on or prior to December 23, 1996; and (ii) 40,222 shares of
Common Stock underlying warrants which are or will become exercisable on
or prior to December 23, 1996. See "Description of Capital Stock--
Warrants."

(7) Consists of 25,000 shares of Common Stock of the Company reserved for
issuance upon exercise of stock options which are or will become
exercisable on or prior to December 23, 1996.

(8) Consists of 20,000 shares of Common Stock registered in the name of HiTech
Corporation Limited over which Mr. Rose has exclusive voting and
investment power.

(9) Includes (i) 132,500 shares of Common stock of the Company reserved for
issuance upon exercise of stock options which are or will become
exercisable on or prior to December 23, 1996; and (ii) 40,222 shares of
Common Stock underlying warrants which are or will become exercisable on
or prior to December 23, 1996. See "Description of Capital Stock--
Warrants."

61
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The total number of shares that the Company is authorized to issue is
31,000,000, consisting of 30,000,000 shares of Common Stock, par value $0.001
per share, and 1,000,000 shares of Preferred Stock, par value $0.001 per
share. The following statements are brief summaries of certain provisions
relating to the Company's capital stock.

COMMON STOCK

At November 18, 1996, the Company had 4,420,000 shares of Common Stock
outstanding held by approximately seven holders of record of the Company's
Common Stock. After the Offering there will be 7,200,001 shares of Common
Stock outstanding. 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
ratably 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, and the Common Stock issuable pursuant
to this Prospectus will be, when issued, fully paid and nonassessable.

PREFERRED STOCK

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. In the event of
issuance, the Preferred Stock could be utilized, under certain circumstances,
as a way of discouraging, delaying or preventing an acquisition or change in
control of the Company. The Company does not currently intend to issue any
shares of its Preferred Stock.

WARRANTS

In connection with its strategic relationships with Packard Bell NEC and
Morgan Creek (See "Business--Strategic Relationships"), on September 14, 1996
the Company issued to each of Packard Bell NEC and Morgan Creek warrants to
purchase 600,000 shares and 85,000 shares of the Common Stock of the Company,
respectively.

The warrant issued to Packard Bell NEC was purchased for $100.00 and is
exercisable in full upon the closing of the Offering at 100% of the initial
public offering price of the Common Stock per share and expires three years
from the date of grant. The warrant provides for piggyback registration
rights. See "--Registration Rights."

On or after the first anniversary of the closing of the Offering, the
Company has the right to redeem all, but not less than all, of the warrant
issued to Packard Bell NEC at a price of $0.001 per share by written notice
mailed 30 days prior to the redemption date. Such notice may be given within
20 days following any period of 15 consecutive trading days during which the
shares to be issued to Packard Bell NEC are publicly tradeable and the high
closing bid of the shares of Common Stock on the American Stock Exchange
exceeds a per share price equal to 125% of the exercise price.

The warrants issued to Morgan Creek were purchased in the aggregate for
$100.00. Warrants to purchase 35,000 shares of Common Stock issued to Morgan
Creek are immediately exercisable at $4.00 per share and

62
<PAGE>

warrants to purchase the additional 50,000 shares of Common Stock are
immediately exercisable at $5.20 per share. Each of these warrants expire
three years from the date of grant. Each warrant provides for piggyback
registration rights. See "--Registration Rights." The Company has the right to
redeem all, but not less than all, of the warrants at a price of $0.001 per
share by written notice mailed 30 days prior to the redemption date. Such
notice may be given within 20 days following any period of 15 consecutive
trading days during which the shares to be issued to Morgan Creek are publicly
tradable and the closing sale price of the shares of Common Stock on the
American Stock Exchange exceeds a per share price equal to 125% of the
respective warrant exercise prices.

Pursuant to its agreement with Averil Associates, the Company issued to
Chloe warrants to purchase 40,222 shares of Common Stock with an exercise
price of $0.0326 per share. In the event the shares of Common Stock underlying
the warrants are not freely tradeable pursuant to an exemption from
registration under the Securities Act, the Company has agreed to register
these shares on Form S-8. Additionally, these warrants provide for piggyback
registration rights. See "--Registration Rights." These warrants expire on
September 14, 1999.

All of the warrants granted to Packard Bell NEC, Morgan Creek and Chloe are
entitled to equitable adjustments in the purchase price and in the number of
shares of Common Stock and/or other securities deliverable upon exercise
thereof in the event of a stock dividend, stock split, reclassification,
reorganization, consolidation or merger.

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation provides that the Company's Board
of Directors is classified into three classes of directors. The Certificate of
Incorporation also provides that all stockholder action must be effected at a
duly called meeting of stockholders and not by a consent in writing. In
addition, the Company's Certificate of Incorporation and Bylaws provide that
only the Company's Chief Executive Officer, President or a majority of the
members of the Company's Board of Directors may call a special meeting of
stockholders. In addition, directors may not be removed without cause. The
Company also has the authority to issue one or more series of "blank check"
preferred stock. See "Preferred Stock." These provisions of the Certificate of
Incorporation and Bylaws could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. Such provisions
also may have the effect of preventing changes in the management of the
Company. See "Risk Factors--Effect of Certain Charter Provisions; Antitakeover
Effects of Certificate of Incorporation, Bylaws and Delaware Law."

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exceptions, that
a Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of such person, who is
an "interested stockholder" for a period of three years from the date that
such person became an interested stockholder unless: (i) the transaction
resulting in a person becoming an interested stockholder, or the business
combination, is approved by the board of directors of the corporation before
the person becomes an interested stockholder; (ii) the interested stockholder
acquires 85% or more of the outstanding voting stock of the corporation in the
same transaction that makes it an interested stockholder (excluding shares
owned by persons who are both officers and directors of the corporation, and
shares held by certain employee stock ownership plans); or (iii) on or after
the date the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by the
holders of at least 66 2/3% of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.

63
<PAGE>

REGISTRATION RIGHTS

After the Offering, the holders of 780,001 shares of Common Stock and the
holders of warrants to purchase 725,222 shares of Common Stock will be
entitled to certain rights with respect to registration of such shares under
the Securities Act. If the Company proposes to register any of its securities
under the Securities Act at least 180 days subsequent to the Offering, Sega
Ozisoft, with respect to the shares of Common Stock issuable upon exercise of
the SAND Note and Common Stock issuable to Packard Bell NEC, Morgan Creek and
Chloe, are entitled to notice of such registration and are entitled to include
the shares received upon conversion of the SAND Note and underlying the
warrants, respectively, in such registration, provided among other conditions,
that the underwriters of any offering have the right to limit the number of
shares included in such registration. In the event the shares of Common Stock
underlying the warrant issued to Chloe are not freely tradeable pursuant to an
exemption from registration under the Securities Act, the Company has agreed
to register these shares on Form S-8.

TRANSFER AGENT

The Company's transfer agent and registrar for its Common Stock is U.S.
Stock Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204-
2991.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has been no public market for the Company's
Common Stock. Sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock.

Upon completion of the Offering, based on the number of shares outstanding
as of November 18, 1996, the Company will have outstanding an aggregate of
7,200,001 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, the 2,000,000 shares sold in the Offering will be freely
tradeable without restriction or further registration under the Securities
Act, unless held by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act. The remaining 5,200,001 shares of Common
Stock held by existing shareholders are "restricted" securities within the
meaning of Rule 144 under the Securities Act. Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which rules are summarized below.

All holders of the Company's securities outstanding prior to the Offering
will, prior to the Offering, be subject to "lock-up" provisions providing that
such holders will not offer to sell, contract to sell or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to, any shares of
Common Stock, or any options or warrants to purchase Common Stock, or any
securities convertible into or exercisable for Common Stock, of the Company
for 180 days, and in the case of Mr. Dyne and Mr. Bermeister, one year, after
the effective date of the Offering without the prior written consent of the
representatives of the underwriters. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, no shares will be eligible for
immediate sale on the effective date of the Offering and, unless earlier
released from the lock-up provisions, 2,322,131 currently outstanding shares
of Common Stock will be eligible for sale 180 days after the effective date of
the Offering, subject in all cases to the volume limitations of Rules 144 and
701 summarized below.

Additionally, pursuant to Rules 144 and 701, beginning 180 days after the
effective date of the Offering, upon the expiration of contractual lock-up
provisions with the Company, an aggregate of approximately 132,500 shares will
be vested and eligible for sale upon the exercise of outstanding stock
options.

In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least two years but less than
three years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock (approximately 72,000 shares immediately after the
Offering) or (ii) the average weekly trading volume during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission. Sales pursuant to

64
<PAGE>

Rule 144 are subject to certain requirements relating to manner of sale,
notice and availability of current public information about the Company. A
person (or person whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at
least three years is entitled to sell such shares pursuant to Rule 144(k)
without regard to the limitations described above. In general, under Rule 701
under the Securities Act as currently in effect, any employee, consultant or
advisor of the Company who purchases shares from the Company in connection
with a compensatory stock or option plan or other written agreement related to
compensation is eligible to resell such shares 90 days after the effective
date of the Offering in reliance on Rule 144, but without compliance with
certain restrictions contained in Rule 144.

At November 18, 1996, the Company had reserved an aggregate of 1,080,000
shares of Common Stock for issuance pursuant to the 1996 Plan, and options to
purchase 185,000 shares were outstanding under the 1996 Plan. The Company
intends to file a registration statement under the Securities Act to register
the 1,080,000 shares of Common Stock reserved for issuance under the 1996
Plan. Such registration statement is expected to be filed shortly following
the date of this Prospectus and will become effective immediately upon filing
with the Securities and Exchange Commission. Shares issued under the 1996 Plan
after the effective date of such registration statement generally will be
available for sale to the public without restriction, except for shares issued
to affiliates of the Company, which will remain subject to the volume and
manner of sale limitations of Rule 144 and the 180 day lock-up provisions. See
"Underwriting." Additionally, after the Offering, the holders of 780,001
shares of Common Stock and the holders of warrants to purchase 685,000 shares
of Common Stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act.

65
<PAGE>

UNDERWRITING

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated November 21, 1996 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom CS First Boston
Corporation and Cruttenden Roth Incorporated are acting as representatives
(the "Representatives"), have severally but not jointly agreed to purchase
from the Company the following respective numbers of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
------------ ----------------
<S> <C>
CS First Boston Corporation................................. 936,000
Cruttenden Roth Incorporated................................ 624,000
Alex. Brown & Sons Incorporated............................. 80,000
Cowen & Company............................................. 40,000
Furman Selz LLC............................................. 40,000
Josephthal Lyon & Ross Incorporated......................... 40,000
Oppenheimer & Co., Inc...................................... 80,000
Piper Jaffray Inc........................................... 40,000
Robertson, Stephens & Company LLC........................... 80,000
Volpe, Welty & Company...................................... 40,000
---------
Total....................................................... 2,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of the Common Stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased. The Underwriting Agreement provides that, in the event
of a default by an Underwriter, in certain circumstances the purchase
commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.

The Company has granted to the Underwriters an option, expiring at the close
of business on the 30th day after the date of this Prospectus, to purchase up
to 300,000 additional shares at the initial public offering price less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock. To the extent such option is
exercised, each Underwriter will be obligated, subject to certain conditions,
to purchase approximately the same percentage of such additional shares of
Common Stock as it was obligated to purchase pursuant to the Underwriting
Agreement.

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus and,
through the Representatives, to certain dealers at such price less a
concession of $0.225 per share, and the Underwriters and such dealers may
allow a discount of $0.10 per share on sales to certain other dealers. After
the initial public offering, the public offering price and concession and
discount to dealers may be changed by the Representatives.

The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the shares being
offered hereby.

The Company has agreed that it will not offer, sell, contract to sell,
announce its intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 (the "Securities Act") relating to,
any shares of its Common Stock or securities convertible into or exchangeable
or exercisable for any shares of the Company's Common Stock without the prior
written consent of CS First Boston Corporation for a period of 180 days after
the date of this Prospectus.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.

66
<PAGE>

The shares of Common Stock have been approved for listing on the American
Stock Exchange subject to official notice of issuance, under the symbol "BDE."

Prior to the Offering, there has been no public trading market for the
Common Stock. The initial public offering price for the Common Stock offered
hereby has been determined by negotiation between the Company and the
Representatives. Among the factors considered in determining the initial
public offering price were the market valuation of comparable companies;
market conditions for initial public offerings; the history of, and the
prospects for, the Company's business; the Company's past and present
operations; the Company's current financial position; an assessment of the
Company's management; and the general condition of the securities markets.

Pursuant to the terms of lock-up provisions, all officers, directors and all
securityholders of the Company will have agreed that, until 180 days, and in
the case of Mr. Dyne and Mr. Bermeister, one year, after the effective date of
the Registration Statement of which this Prospectus is a part (the "lock-up
period"), they will not offer, sell, contract to sell or otherwise dispose of
or grant any rights with respect to any shares of Common Stock, any options or
warrants to purchase shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock now owned or hereafter acquired
directly by such holders or with respect to which they have the power of
disposition, without the prior written consent of the Representatives of the
Underwriters. Approximately 2,322,131 shares of Common Stock subject to the
lock-up provisions will become eligible for immediate public sale following
expiration of the lock-up period, subject to the provisions of Rule 144. The
Representatives of the Underwriters may, in their sole discretion, and at any
time without notice, release all or a portion of the securities subject to the
lock-up provisions. See "Shares Eligible for Future Sale." In addition, the
Company has agreed that until the expiration of the lock-up period, the
Company will not offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock, any options or warrants to purchase Common Stock or
any securities convertible into or exchangeable for shares of Common Stock,
other than the Company's sales of shares in this Offering, the issuance of
shares of Common Stock upon the exercise of outstanding options, the grant of
options to purchase shares or the issuance of shares of Common Stock without
the prior written consent of the Representatives of the Underwriters.

67
<PAGE>

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of the Common Stock are effected. Accordingly, any
resale of the Common Stock in Canada must be made in accordance with
applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of the Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from
whom such purchase confirmation is received that (i) such purchaser is
entitled under applicable provincial securities laws to purchase such Common
Stock without the benefit of a prospectus qualified under such securities
laws, (ii) where required by law, that such purchaser is purchasing as
principal and not as agent, and (iii) such purchaser has reviewed the text
above under "Resale Restrictions."

RIGHTS OF ACTION AND ENFORCEMENT

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.

All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Ontario purchasers to effect service of process within Canada
upon the Company or such persons. All or a substantial portion of the assets
of the Company and such persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against the Company or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against such Company or persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of the Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Common Stock acquired by such purchaser pursuant to the Offering. Such
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from the Company.
Only one such report must be filed in respect of the Common Stock acquired on
the same date and under the same prospectus exemption.

68
<PAGE>

LEGAL MATTERS

Counsel for the Company, Troop Meisinger Steuber & Pasich, LLP, Los Angeles,
California, have rendered an opinion to the effect that the Common Stock
offered by the Company upon sale will be duly and validly issued, fully paid
and non-assessable. Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, Palo Alto, California, has acted as counsel to the Underwriters
in connection with certain legal matters relating to the Offering.

EXPERTS

The consolidated financial statements of Brilliant Digital Entertainment,
Inc. at June 30, 1996 and 1995, and for each of the two years in the period
ended June 30, 1996 and for the period from September 2, 1993 (inception) to
June 30, 1994, as well as the financial statements of Sega Australia New
Developments (a development stage business unit of Sega Ozisoft Pty. Ltd.) as
of June 30, 1996 and 1995 and for each of the two years in the period ended
June 30, 1996 and the period from March 1, 1993 (inception) through June 30,
1994, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditor, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting
and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement under the Securities Act with
respect to the shares offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and
with respect to any contract or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement is qualified in
its entirety by such reference. For further information with respect to the
Company and the shares offered hereby, reference is hereby made to the
Registration Statement and exhibits thereto. A copy of the Registration
Statement, including the exhibits thereto, may be inspected without charge at
the Securities and Exchange Commission's principal office in Washington, D.C.,
and copies of all or any part thereof may be obtained from the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain prescribed
rates.

Upon consummation of the Offering, the Company will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Securities and Exchange
Commission in accordance with its rules. Such reports and other information
concerning the Company may be inspected and copied at the public reference
facilities referred to above as well as certain regional offices of the
Securities and Exchange Commission.

69
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF BRILLIANT DIGITAL ENTERTAINMENT,
INC.
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996 and September
30, 1996 (unaudited).................................................... F-3
Consolidated Statements of Operations for the period from September 2,
1993 (inception) to June 30, 1994, for the years ended June 30, 1995 and
1996 and for the three months ended September 30, 1996 (unaudited)...... F-4
Consolidated Statements of Stockholders' Deficiency for the period from
September 2, 1993 (inception) to June 30, 1994, for the years ended June
30, 1995 and 1996, and the three months ended September 30, 1996
(unaudited)............................................................. F-5
Consolidated Statements of Cash Flows for the period from September 2,
1993 (inception) to June 30, 1994, for the years ended June 30, 1995 and
1996 and for the three months ended September 30, 1996 (unaudited)...... F-6
Notes to Consolidated Financial Statements............................... F-8
FINANCIAL STATEMENTS OF SEGA AUSTRALIA NEW DEVELOPMENTS
Report of Independent Auditors........................................... F-19
Balance Sheets as of June 30, 1995 and 1996.............................. F-20
Statements of Operations and Business Unit Deficit for the period from
March 1, 1994 (inception) to June 30, 1994 and for the years ended June
30, 1995 and 1996....................................................... F-21
Statements of Cash Flows for the period from March 1, 1994 (inception) to
June 30, 1994 and for the years ended June 30, 1995 and 1996............ F-22
Notes to Financial Statements............................................ F-23
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Introduction to Unaudited Pro Forma Financial Information................ F-25
Unaudited Pro Forma Balance Sheet as of September 30, 1996............... F-26
Unaudited Pro Forma Statement of Operations for the three months ended
September 30, 1996...................................................... F-27
Unaudited Pro Forma Statement of Operations for the year ended September
30, 1996................................................................ F-28
Notes to Pro Forma Financial Statements.................................. F-29
</TABLE>

F-1
<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 1995, and the related
statements of operations, stockholders' deficiency, and cash flows for the
period from September 2, 1993 (inception) to June 30, 1994 and for each of the
two years in the period ended June 30, 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 1995, 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 period from September 2, 1993 to June 30, 1994, in
conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that Brilliant Digital Entertainment, Inc. will continue as a going
concern. As more fully described in Note 1, Brilliant Digital Entertainment,
Inc. has a working capital deficiency and an accumulated stockholders'
deficit. These conditions raise substantial doubt about Brilliant Digital
Entertainment, Inc.'s ability to continue as a going concern. Management's
plans in regards to these matters are also described in Notes 1 and 10. These
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.

Ernst & Young LLP

September 13, 1996
Los Angeles, California

F-2
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30,
--------------------- SEPTEMBER 30,
1995 1996 1996
--------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 49,283 $ 53,061 $ 85,941
Accounts receivable..................... -- 657,550 628,756
Other assets............................ 6,386 6,863 7,633
--------- ---------- -----------
Total current assets...................... 55,669 717,474 722,330
Property, plant and equipment, net........ 171,898 198,272 181,064
Other assets.............................. -- -- 295,000
--------- ---------- -----------
Total assets.............................. $ 227,567 $ 915,746 $ 1,198,394
========= ========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses... $ 45,012 $ 88,389 $ 125,524
Deferred revenue........................ 193,725 213,003 213,570
Notes payable, related party............ 628,986 732,989 900,434
Note payable............................ -- -- 1,500,000
Other................................... 6,796 10,798 13,621
--------- ---------- -----------
Total current liabilities................. 874,519 1,045,179 2,753,149
Commitments and contingencies
Stockholders' 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, 4,473,040
shares issued and outstanding at June
30, 1995; and 4,420,000 shares issued
and outstanding at June 30, 1996 and
September 30, 1996).................... 4,473 4,420 4,420
Additional paid-in capital.............. 10,262 10,163 1,106,163
Accumulated deficit..................... (673,333) (119,921) (2,656,759)
Cumulative translation adjustment....... 11,646 (24,095) (8,579)
--------- ---------- -----------
Total stockholders' deficiency............ (646,952) (129,433) (1,554,755)
--------- ---------- -----------
Total liabilities and stockholders' defi-
ciency................................... $ 227,567 $ 915,746 $ 1,198,394
========= ========== ===========
</TABLE>

See accompanying notes.

F-3
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 2,
1993 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED JUNE 30, SEPTEMBER 30,
JUNE 30, ---------------------- -----------------------
1994 1995 1996 1995 1996
-------------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Royalties from
licensing
arrangements......... $ 10,977 $ 752,108 $1,291,015 $ 47,286 $ 35,255
Development fees...... -- 88,800 585,743 94,069 244,031
Software sales........ -- 1,888 177,119 -- 1,884
---------- ---------- ---------- ---------- -----------
Total revenues...... 10,977 842,796 2,053,877 141,355 281,170
Costs of revenues:
Royalties from
licensing
arrangements......... 211,712 594,719 254,510 157,502 19,354
Development fees...... -- 60,234 455,414 77,850 119,732
Software sales........ -- 986 28,918 -- 785
---------- ---------- ---------- ---------- -----------
Total costs of
revenue............ 211,712 655,939 738,842 235,352 139,871
---------- ---------- ---------- ---------- -----------
Gross profit............ (200,735) 186,857 1,315,035 (93,997) 141,299
Operating expenses:
Sales and marketing... 2,100 116,435 163,038 11,396 968,755
General and adminis-
trative.............. 19,458 223,470 365,491 86,227 139,861
Research and develop-
ment................. 14,594 183,000 174,395 61,163 1,518,337
Depreciation.......... 9,816 43,379 101,824 22,769 30,714
---------- ---------- ---------- ---------- -----------
Total operating ex-
penses............. 45,968 566,284 804,748 181,555 2,657,667
---------- ---------- ---------- ---------- -----------
Income (loss) from oper-
ations................. (246,703) (379,427) 510,287 (275,552) (2,516,368)
Other income (expense):
Export market develop-
ment grant........... -- -- 122,488 -- --
Gain on foreign
exchange
transactions......... -- -- 13,382 16,846 --
Interest income....... -- 707 2,017 92 411
Interest expense...... (2,777) (45,133) (94,762) (23,417) (20,881)
---------- ---------- ---------- ---------- -----------
Total other income
(expense).......... (2,777) (44,426) 43,125 (6,479) (20,470)
---------- ---------- ---------- ---------- -----------
Income (loss) before in-
come taxes............. (249,480) (423,853) 553,412 (282,031) (2,536,838)
Provision for income
taxes.................. -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Net income (loss)....... $ (249,480) $ (423,853) $ 553,412 $ (282,031) $(2,536,838)
========== ========== ========== ========== ===========
Net income (loss) per
share.................. $ (0.06) $ (0.09) $ 0.12 $ (0.06) $ (0.56)
========== ========== ========== ========== ===========
Common shares used in
computing net income
(loss) per share....... 4,503,960 4,508,380 4,557,000 4,557,000 4,503,960
========== ========== ========== ========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

<TABLE>
<CAPTION>
COMMON STOCK RETAINED
----------------- ADDITIONAL EARNINGS CUMULATIVE
NUMBER OF PAID-IN (ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT TOTAL
--------- ------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 2,
1993 (Inception)....... -- $ -- $ -- $ -- $ -- $ --
Proceeds from issuance
of shares............ 4,420,000 4,420 10,140 -- -- 14,560
Foreign exchange
translation.......... -- -- -- -- (2,771) (2,771)
Net loss.............. -- -- -- (249,480) -- (249,480)
--------- ----- --------- ---------- ------- ----------
Balance at June 30,
1994................... 4,420,000 4,420 10,140 (249,480) (2,771) (237,691)
Proceeds from sale of
shares to employees.. 53,040 53 122 -- -- 175
Foreign exchange
translation.......... -- -- -- -- 14,417 14,417
Net loss.............. -- -- -- (423,853) -- (423,853)
--------- ----- --------- ---------- ------- ----------
Balance at June 30,
1995................... 4,473,040 4,473 10,262 (673,333) 11,646 (646,952)
Repurchase of shares.. (44,200) (44) (108) -- -- (152)
Cancellation of
shares............... (8,840) (9) 9 -- -- --
Foreign exchange
translation.......... -- -- -- -- (35,741) (35,741)
Net income............ -- -- -- 553,412 -- 553,412
--------- ----- --------- ---------- ------- ----------
Balance at June 30,
1996................... 4,420,000 4,420 10,163 (119,921) (24,095) (129,433)
Grant of warrants (un-
audited).............. -- -- 1,096,000 -- -- 1,096,000
Foreign exchange
translation
(unaudited)........... -- -- -- -- 15,516 15,516
Net loss (unaudited)... -- -- -- (2,536,838) -- (2,536,838)
--------- ----- --------- ---------- ------- ----------
Balance at September 30,
1996 (unaudited)....... 4,420,000 4,420 1,106,163 (2,656,759) (8,579) (1,554,755)
========= ===== ========= ========== ======= ==========
</TABLE>

See accompanying notes.

F-5
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 2, THREE MONTHS
1993 ENDED
(INCEPTION) TO YEAR ENDED JUNE 30, SEPTEMBER 30,
JUNE 30, --------------------- ----------------------
1994 1995 1996 1995 1996
-------------- ---------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $(249,480) $ (423,853) $ 553,412 $(282,031) $(2,536,838)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization......... 9,816 43,379 101,824 22,769 30,714
Effect of warrants
granted.............. -- -- -- -- 1,096,000
Effect of SAND Note... -- -- -- -- 1,350,000
Changes in operating
assets and
liabilities:
Accounts
receivable......... -- -- (633,461) (7,914) 30,311
Accounts payable and
accruals........... 48,806 (3,181) 37,471 11,631 36,663
Other assets........ -- (6,577) (152) 177 (746)
Deferred revenue.... 131,040 66,510 -- -- --
Other liabilities... -- 7,000 3,203 4,905 2,774
--------- ---------- --------- --------- -----------
Net cash provided by
(used in) operating
activities............. (59,818) (316,722) 62,297 (250,463) 8,878
INVESTING ACTIVITIES
Purchases of equipment.. (60,854) (168,619) (110,753) (52,375) (13,112)
--------- ---------- --------- --------- -----------
Net cash used in
investing activities... (60,854) (168,619) (110,753) (52,375) (13,112)
FINANCING ACTIVITIES
Proceeds from issuance
of shares.............. 14,560 175 -- -- --
Repurchase of shares.... -- -- (152) -- --
Costs relating to
offering............... -- -- -- -- (145,000)
Increase in note
payable, related
party.................. 126,354 1,075,660 711,686 311,335 178,721
Repayments of note
payable, related
party.................. -- (555,870) (672,018) (30,164) (13,345)
--------- ---------- --------- --------- -----------
Net cash provided by
financing activities... 140,914 519,965 39,516 281,171 20,376
--------- ---------- --------- --------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 20,242 34,624 (8,940) (21,667) 16,142
Translation
adjustments............ (2,771) (2,812) 12,718 17,750 16,738
Cash and cash
equivalents at
beginning of period.... -- 17,471 49,283 49,283 53,061
--------- ---------- --------- --------- -----------
Cash and cash
equivalents at end of
period................. $ 17,471 $ 49,283 $ 53,061 $ 45,366 $ 85,941
========= ========== ========= ========= ===========
Supplemental disclosure
of cash flow
information:
Cash paid during the
year for:
Interest............ $ -- $ -- $ -- $ -- $ --
========= ========== ========= ========= ===========
Income taxes........ $ -- $ -- $ -- $ -- $ --
========= ========== ========= ========= ===========
</TABLE>

F-6
<PAGE>

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

In September 1996, the Company acquired SAND and in consideration therefor
issued a one-year $1,500,000 convertible promissory note, which was included
in Notes Payable at September 30, 1996. (See Note 10 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 three months ended September 30, 1996 and to
certain assets ($150,000), which amount was included in other assets at
September 30, 1996.

See accompanying notes.

F-7
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND GOING CONCERN ISSUES

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.

The Company has entered into, and continues to negotiate, strategic
agreements intended to secure quality content for its digital entertainment
products. The Company has contracted to acquire the rights to proprietary
software tools which are designed to allow it to both develop a new genre of
digital entertainment products, and to produce ancillary products cost
effectively. These issues are discussed more fully under the heading
"Business" elsewhere in this Prospectus.

The Company is dependent upon continued financing to complete its research
and development programs, commercialize its technologies, and to finance the
planned growth of the Company's business. Management intends to raise
additional equity through an initial public offering of its common stock as
contemplated by this Prospectus (the "Offering"). To the extent the Company is
not able to raise the amounts of funds anticipated by the Offering, management
will investigate other financing alternatives such as privately placed third
party capital or other capital infusions. Reference is made to "Risk Factors"
appearing elsewhere in this Prospectus, which contains a detailed discussion
of certain risks associated with the Company's business.

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 ($0.718 at June
30, 1995, $0.789 at June 30, 1996, and $0.791 at September 30, 1996), and
revenues and expenses are translated into U.S. dollars using average exchange
rates ($0.72 for the period from September 2, 1993 to June 30, 1994, $0.739
for the year ended June 30, 1995, $0.760 for the year ended June 30, 1996 and
$0.785 for the three months ended September 30, 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

F-8
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

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 assumed
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 $6.00 per share for stock options and warrants).

After giving effect to the acquisition of SAND and the conversion of the
SAND Note (See Note 10) into 780,001 shares of common stock, net loss per
share would be $(0.15) for the year ended June 30, 1996, based on 5,337,001
shares outstanding, and $(0.48) for the three months ended September 30, 1996,
based on 5,283,961 shares outstanding.

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 $14,594, $183,000, $174,395
and $1,543,837 for the period from September 2, 1993 to June 30, 1994 and the
fiscal years ended June 30, 1995 and 1996 and the quarter ended September 30,
1996, respectively. The amount for the quarter ended September 30, 1996
includes $1,350,000 of in-process research and development attributable to
SAND (see Note 10).

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 September 30,
1996, technological feasibility of the Company's software had not been
established. Therefore, in accordance with SFAS No. 86, software

F-9
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

development costs have been included in Research and Development Expenses. No
software development costs were capitalized in the period from September 2,
1993 to June 30, 1994, the fiscal years ended June 30, 1995 and 1996, or the
quarter ended September 30, 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 quarter ended September 30, 1996, the Company had experienced no
returns on software sales.

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

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

F-10
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

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 period from September 2, 1993 through
June 30, 1994, the years ended June 30, 1995 and 1996 and the quarter ended
September 30, 1996, no such allowance was considered necessary.

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.

3. 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 $0, $23,209, $69,263
and $4,577 for the period from September 2, 1993 to June 30, 1994, the fiscal
years ended June 30, 1995 and 1996 and the quarter ended September 30, 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 $631,125. 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, 1995, BII Australia owed PIE $606,152, including accrued
interest of $46,427. As of June 30, 1996, BII Australia owed PIE $670,488,
including accrued interest in the amount of $149,389. As of September 30,
1996, BII Australia owed PIE $701,128, including accrued interest in the
amount of $169,478.

BII Australia periodically purchases certain computer equipment from PIE.
For the period from September 2, 1993 (inception) to June 30, 1994, the fiscal
years ended June 30, 1995 and 1996 and the quarter ended September 30, 1996,
BII Australia's purchases totaled $0, $15,356, $15,792 and $8,330,
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 period from September 2, 1993 (inception) through June 30, 1994
and the fiscal years ended June 30, 1995 and 1996, BII Australia purchased
computer equipment totaling $0, $12,304 and $15,724, respectively. No
purchases were made during the quarter ended September 30, 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

F-11
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

in 1995 and 1996. In exchange for such services, fees of $0, $70,849 and
$50,663 were paid to Andwhen for the period from September 2, 1993 through
June 30, 1994 and the years ended June 30, 1995 and 1996, respectively.

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 $4,200, $3,997 and $0 for the
four month period ended June 30, 1994 and the years ended June 30, 1995 and
1996, respectively. At June 30, 1995, BII Australia owed Andwhen $22,834
pursuant to the lease. 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 is due in equal monthly installments of
approximately $4,500 each. As of June 30, 1996 and September 30, 1996,
approximately $62,500 and $49,000, respectively, was payable under the terms
of the agreement. One half of the outstanding amount becomes due upon a change
of ownership.

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
nominees for director 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 $71,040 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 for each title. The non-
refundable advances are recoupable from the royalties earned by BII Australia
under the Sega Agreement. As of September 30, 1996, BII Australia has received
no royalty payments relating to the Sega Agreement. The Sega Agreement expires
on December 15, 1996. See Note 10 regarding a subsequent agreement between
Sega Ozisoft and the Company.

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 $84,700, of which $21,175 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 $47,643 representing the full
amount due pursuant to the re-negotiated terms. The Company anticipates no
further receipts pursuant to the Consumer Electronics Agreement, which expires
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 $38,124 in goods from Packard Bell
Pty. Ltd. During the quarter ended September 30, 1996, BII Australia purchased
an additional $6,045 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 $165,690 for certain assistant production
services. Amounts are

F-12
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

payable by Sega Ozisoft upon attainment of mutually determined milestones.
Subsequent to June 30, 1996, the Company entered into the SAND Acquisition
Agreement (see Note 10) which provided for additional payments for production
services. In addition, BII Australia is entitled to 2.5% in royalties on net
revenues as defined by the agreement. As of June 30, 1996, the Company had
received $120,396 and had recorded a receivable of $52,146, which was received
in July and August 1996. As of September 30, 1996 the Company had no
receivable associated with this agreement.

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 $24,624 and payments to Monto totaled $12,312. In
addition, a liability to Monto for $7,425 was recorded at June 30, 1996. In
the quarter ended September 30, 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 has paid to Averil
Associates the aggregate amount of $25,000, 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 and has committed to a cash
payment of $200,000 payable upon consummation of the Offering.

In September 1995, BII Australia entered into a Distribution Agreement (the
"Ocean Agreement") with Ocean of America, Inc. ("Ocean"). Ray Musci became a
director of the Company on October 1, 1996, and is currently a director and
significant shareholder of Ocean. BII Australia granted to Ocean certain
retail distribution and bundling rights in North America and Europe to the
software products developed by BII Australia. Pursuant to the terms of the
Ocean Agreement, BII Australia was entitled to receive a non-refundable
advance from Ocean of approximately $825,000 in 1996. In addition, BII
Australia is entitled to receive royalty payments in exchange for a percentage
of Net Revenues generated from distribution sales of the CD-ROM entertainment
software products and a percentage of Net Revenues received by Ocean from
bundling of the software products, after Ocean recoups the advance. "Net
Revenues" are defined as gross receipts less returns and certain other
expenses. Through September 30, 1996, Ocean had paid approximately $492,000
against the non-refundable advance. In October, Ocean paid an additional
$80,000 against the non-refundable advance. Royalties have not yet been
accrued in connection with this distribution arrangement. The Ocean Agreement
expires on September 29, 1997, subject to a two year extension under certain
circumstances.

4. STOCKHOLDERS' DEFICIENCY

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 200 shares of Common Stock of BII Australia held by an
employee of BII Australia.

F-13
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

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.

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, 1995 and 1996 and September 30, 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.

5. 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
$24,624 and payments to Monto totaled $12,312. In addition, a liability to
Monto of $7,425 was recorded at June 30, 1996. In the quarter ended
September 30, 1996, no additional receipts or payments were made pursuant to
this agreement.

In 1995, Pick Two Limited ("Pick Two"), advanced $193,725 to BII Australia
to develop certain software. In 1996, Pick Two advanced an additional $19,278
to BII Australia. These advances are non-interest bearing and will be repaid
from proceeds from the sales of the completed software. As of June 30, 1996,
the software development has not been completed and no sales have been made.
As of June 30, 1995 and 1996 and September 30, 1996, the total advances have
been included in deferred revenues.

6. 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.

F-14
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

The Company's net losses in the period from September 2, 1993 to June 30,
1994 and 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 has been 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 $3,000, which can be offset against Australian taxable income in
the future and which expire in 2010. No tax benefit has been recorded for
these Australian NOL's.

In the future, a portion of the Company's taxable income will be subject to
federal and state income tax in the United States and may be subject to higher
tax rates than those used to calculate any taxes due in Australia. Some of the
Company's taxable income will remain subject to Australian taxation.

Significant components of the Company's deferred tax benefits as of June 30,
1996 are as follows:

<TABLE>
<S> <C>
Deferred tax assets:
Development costs............................................. $ 36,240
Valuation allowance for deferred tax assets................... (36,240)
--------
Net deferred tax assets......................................... $ 0
========
</TABLE>

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
JUNE 30,
------------------- SEPTEMBER 30,
1995 1996 1996
-------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment................ $216,395 $ 350,162 $ 362,779
Furniture and fixtures................. 8,698 12,295 13,855
-------- --------- ---------
225,093 362,457 376,634
Less accumulated depreciation.......... (53,195) (164,185) (195,570)
-------- --------- ---------
$171,898 $ 198,272 $ 181,064
======== ========= =========
</TABLE>

8. 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 the period
from September 2, 1993 to June 30, 1994, for each of the years ended June 30,
1995 and 1996 and for the quarters ended September 30, 1995 and 1996, related
to the note payable to PIE (see Note 3).

F-15
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

9. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

The Company's operations for the period from September 2, 1993 to June 30,
1994, the years ended June 30, 1995 and 1996 and the quarter ended September
30, 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>
Period September 2, 1993 through June 30, 1994:
Revenues from unaffiliated customers........... $ -- $ 10,977 $ --
Revenues from affiliated customers............. -- -- --
---------- -------- --------
Total revenues................................. $ -- $ 10,977 $ --
========== ======== ========
Year ended June 30, 1995:
Revenues from unaffiliated customers........... $ 46,240 $ 1,888 $ --
Revenues from affiliated customers............. 634,828 159,840 --
---------- -------- --------
Total revenues................................. $ 681,068 $161,728 $ --
========== ======== ========
Year ended June 30, 1996:
Revenues from unaffiliated customers........... $ 931,797 $257,993 $234,679
Revenues from affiliated customers............. 316,167 263,742 49,499
---------- -------- --------
Total revenues................................. $1,247,964 $521,735 $284,178
========== ======== ========
Three months ended September 30, 1996:
Revenues from unaffiliated customers........... $ 60,016 $132,996 $ --
Revenues from affiliated customers............. -- 62,323 25,835
---------- -------- --------
Total revenues................................. $ 60,016 $195,319 $ 25,835
========== ======== ========
Accounts receivable as of:
June 30, 1994.................................. $ -- $ -- $ --
========== ======== ========
June 30, 1995.................................. $ -- $ -- $ --
========== ======== ========
June 30, 1996.................................. $ 413,333 $223,042 $ 21,175
========== ======== ========
September 30, 1996............................. $ 414,433 $167,059 $ 47,264
========== ======== ========
</TABLE>

For each of the periods shown above, all of the operating expenses of the
Company were incurred and paid in Australia. The identifiable assets of the
Company, other than accounts receivable, are predominantly related to the
operations in Australia.

In the period from September 2, 1993 to June 30, 1994, no single customer
accounted for more than 10% of total revenues. 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 three months ended September 30, 1996, three
customers accounted for more than 10% of total revenues (Interplay
Productions, Inc., 21% or $60,000; Sega Ozisoft, 22% or $62,000; and Golden
Dolphin Productions Pty. Ltd., 43% or $122,000).

F-16
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

10. SUBSEQUENT EVENTS

In June 1996, the Company entered into a Memorandum of Understanding with
Sega Ozisoft to acquire Sega Australia New Developments ("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
one-year $1,500,000 convertible promissory note (the "SAND Note") to Sega
Ozisoft. The SAND Note bears interest at a rate of 8% per annum. Upon the
completion of the Offering, the SAND Note will be automatically converted into
780,001 shares of Common Stock of the Company.

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 has agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company has 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 $59,175 per month
advanced by Sega Ozisoft for August, September and October 1996. As of
September 30, 1996, the Company had incurred a total obligation of $36,605
pursuant to this agreement.

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
$150,000. The notes bear interest at the rate of 10% per annum and are due and
payable on the earlier to occur of the closing of the Offering or the first
anniversary of the date of issuance of each note.

In September 1996, the Company entered into strategic relationships with
Crawford Productions Pty., Ltd. ("Crawford") and Morgan Creek Interactive,
Inc. ("Morgan Creek") 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 total cost per film is
anticipated to be approximately $789,000. Pursuant to the agreement between
the Company and Morgan Creek, the Company is obligated to fund entirely the
development of two Multipath Movies.

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 $10.00 per share or the initial
public offering price of the Company's Common Stock. 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

F-17
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND
SUBSEQUENT TO JUNE 30, 1996 IS UNAUDITED)

approximately $1,096,000 and this value represented an expense charge to
operations with a corresponding credit to stockholders' deficiency in the
quarter ended September 30, 1996.

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 and employees 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 joins the Board of Directors and will be
immediately fully vested. The options granted to employees vest over a four
year period. Although any award that was duly granted on or prior to such date
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.

F-18
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Brilliant Digital Entertainment, Inc.

We have audited the accompanying balance sheets of Sega Australia New
Developments (a development stage business unit of Sega Ozisoft Pty. Ltd.) as
of June 30, 1996 and 1995, and the related statements of operations and
business unit deficit, and cash flows for each of the two years in the period
ended June 30, 1996 and the period from March 1, 1994 (inception) through June
30, 1994. These financial statements are the responsibility of the business
unit's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sega Australia New
Developments at June 30, 1996 and 1995, and the results of its operations and
its cash flows for each of the two years in the period ended June 30, 1996 and
the period from March 1, 1994 (inception) through June 30, 1994, in conformity
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that Sega
Australia New Developments will continue as a going concern. As more fully
described in Note 1, the business unit has a working capital deficiency and an
accumulated deficit. These conditions raise substantial doubt about the
business unit's ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 1. These financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.

Ernst & Young LLP

September 13, 1996
Los Angeles, California

F-19
<PAGE>

SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)

BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
ASSETS
Total assets.................................. $ -- $ --
========= ===========
LIABILITIES AND DEFICIT ACCUMULATED DURING THE
DEVELOPMENT STAGE
Liabilities:
Due to parent company......................... $ 472,318 $ 1,306,331
--------- -----------
Total liabilities............................... 472,318 1,306,331
Deficit accumulated during the development
stage:
Deficit accumulated during the development
stage........................................ (485,839) (1,244,209)
Cumulative translation adjustment............. 13,521 (62,122)
--------- -----------
Total deficit accumulated during the development
stage.......................................... (472,318) (1,306,331)
--------- -----------
Total liabilities and deficit accumulated during
the development stage.......................... $ -- $ --
========= ===========
</TABLE>

See accompanying notes.

F-20
<PAGE>

SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)

STATEMENTS OF OPERATIONS AND BUSINESS UNIT DEFICIT

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, CUMULATIVE
1994 MARCH 1, 1994
(INCEPTION) (INCEPTION)
THROUGH YEAR ENDED JUNE 30, THROUGH
JUNE 30, -------------------- JUNE 30,
1994 1995 1996 1996
----------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Expenses:
General and administrative
expenses...................... $ -- $ 43,871 $ 89,903 $ 133,774
Research and development
expenses...................... 11,095 430,873 668,467 1,110,435
------- -------- ---------- ----------
Total expenses............... 11,095 474,744 758,370 1,244,209
Beginning deficit accumulated
during the development stage.. -- 11,218 472,318 --
Translation adjustment......... 123 (13,644) 75,643 62,122
------- -------- ---------- ----------
Ending deficit accumulated
during the development stage.. $11,218 $472,318 $1,306,331 $1,306,331
======= ======== ========== ==========
</TABLE>

See accompanying notes.

F-21
<PAGE>

SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE
MARCH 1, MARCH 1,
1994 1994
(INCEPTION) (INCEPTION)
THROUGH YEAR ENDED JUNE 30, THROUGH
JUNE 30, -------------------- JUNE 30,
1994 1995 1996 1996
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................... $(11,095) $(474,744) $(758,370) $(1,244,209)
-------- --------- --------- -----------
Net cash used in operating
activities.................... (11,095) (474,744) (758,370) (1,244,209)
FINANCING ACTIVITIES
Increase in amounts due to
parent company................ 11,095 474,744 758,370 1,244,209
-------- --------- --------- -----------
Net cash provided by financing
activities.................... 11,095 474,744 758,370 1,244,209
-------- --------- --------- -----------
Increase in cash............... -- -- -- --
Cash at beginning of period.... -- -- -- --
-------- --------- --------- -----------
Cash at end of period.......... $ -- $ -- $ -- $ --
======== ========= ========= ===========
</TABLE>

F-22
<PAGE>

SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 1996

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements include the assets, liabilities, revenues and
expenses of Sega Australia New Developments ("SAND"), a business unit of Sega
Ozisoft Pty. Ltd. ("Sega Ozisoft"). SAND was created to develop state-of-the-
art technology for interactive, digital, Multipath Movies. In June 1996, Sega
Ozisoft and Brilliant Digital Entertainment, Inc. (the "Company") entered into
a Memorandum of Understanding and in September 1996, Sega Ozisoft and the
Company entered into an asset purchase agreement, whereby the Company agreed
to purchase certain assets of SAND. See Note 3 for a discussion of these
transactions.

The accompanying financial statements reflect the "carved-out" financial
position and results of operations of SAND as if SAND had been operating as a
company separate from Sega Ozisoft. Certain corporate, general and
administrative expenses of Sega Ozisoft have been allocated to SAND on various
bases which, in the opinion of management, are reasonable. However, such
expenses are not necessarily indicative of, and it is not practicable for
management to estimate, the level of expenses which might have been incurred
had SAND been operating as a separate company.

SAND is in the development stage devoting substantially all of its efforts
to research and development. During its development stage, SAND has incurred
cumulative net losses of approximately $1,300,000 through June 30, 1996, and
expects to incur substantial and increasing additional development costs. SAND
will require substantial additional funds in order to complete the research
and development activities currently contemplated and to commercialize its
proposed products. Without additional funding, SAND may be required to delay,
reduce the scope of or eliminate one or more of its research or development
programs, or obtain funds through arrangements with collaborative partners or
others which may require SAND to relinquish rights to certain of its
technologies, product candidates or products that SAND would otherwise seek to
develop or commercialize on its own.

Research and Development Costs

SAND has 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". SAND recorded research and
development expenses of $11,095, $430,873 and $668,467 for the four month
period ended June 30, 1994 and the fiscal years ended June 30, 1995 and 1996,
respectively.

SAND'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
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 is greater. No software development costs were
capitalized in the four month period ended June 30, 1994 or the fiscal years
ended June 30, 1995 and 1996.

Foreign Currency Translation

The functional currency of SAND is its local currency, Australian dollars.
Assets and liabilities of SAND are translated into U.S. dollars (the reporting
currency) using current exchange rates ($0.718 at June 30, 1995 and $0.789 at
June 30, 1996), and revenues and expenses are translated into U.S. dollars
using the average exchange rate ($0.72 for the period from March 1, 1993 to
June 30, 1994, $0.739 for the year ended June 30, 1995 and $0.760 for the year
ended June 30, 1996).

F-23
<PAGE>

SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA-OZISOFT PTY. LTD.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

JUNE 30, 1996

2. RELATIONSHIP AND TRANSACTIONS WITH SEGA OZISOFT

The financial statements include allocations to SAND of certain
administrative costs incurred by Sega Ozisoft related to accounting, human
resources and certain other corporate expenses. These expenditures were $0,
$29,111 and $43,924 for the four month period ended June 30, 1994 and years
ended June 30, 1995 and 1996, respectively.

In the opinion of management, these allocations were made on a reasonable
basis. However, they are not necessarily indicative of the level of
expenditures which may have been experienced on a standalone basis. The
amounts that would have or will be incurred on a separate company basis could
differ significantly from the allocated amounts due to economies of scale,
differences in management and/or operational practices or other factors.

3. SUBSEQUENT EVENTS

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 one-year $1,500,000
convertible promissory note (the "SAND Note") to Sega Ozisoft. The SAND Note
bears interest at a rate of 8% per annum. Upon the completion of the Offering,
the SAND Note will be automatically converted into 780,001 shares of Common
Stock of the Company.

F-24
<PAGE>

INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial information (the
"Unaudited Pro Forma Financial Information") of the Company has been derived
by the application of pro forma adjustments to the historical financial
statements of the Company and SAND for the periods indicated. The adjustments
are described in the accompanying notes. The pro forma adjustments are based
upon available information and upon certain assumptions that management
believes are reasonable.

The Unaudited Pro Forma Financial Information gives effect to (i) the
acquisition by the Company of SAND in exchange for the SAND Note and the
conversion of the SAND Note into 780,001 shares of Common Stock, (ii) the sale
of 2,000,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $5.00 per share after deducting
underwriting discounts and commissions and estimated offering expenses and
(iii) the repayment of $900,434 of short-term obligations as if these
transactions had occurred as of September 30, 1996, for purposes of the
balance sheet data, and as of the beginning of the period presented, for
purposes of the statements of operations data. The Unaudited Pro Forma
Financial Information does not give effect to any transactions other than
those discussed above and in the accompanying notes. The Unaudited Pro Forma
Financial Information is provided for informational purposes only and does not
purport to represent the results of operations or financial position of the
Company had the transactions in fact occurred on such dates, nor does it
purport to be indicative of the financial position or results of operations as
of any future date or for any future period.

The Unaudited Pro Forma Financial Information and accompanying notes should
be read in conjunction with the financial statements and accompanying notes
thereto and the other financial information included elsewhere in this
Prospectus.

F-25
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

UNAUDITED PRO FORMA BALANCE SHEET

SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
PRO FORMA
BRILLIANT PRO FORMA PRO FORMA OFFERING AS ADJUSTED
AS REPORTED ADJUSTMENTS CONSOLIDATED ADJUSTMENTS CONSOLIDATED
----------- ----------- ------------ ----------- ------------
(NOTE 1) (NOTE 2)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 85,941 $ -- $ 85,941 $7,304,566 $ 7,390,507
Accounts receivable................ 628,756 -- 628,756 -- 628,756
Other current assets............... 7,633 -- 7,633 -- 7,633
----------- ----------- ----------- ---------- -----------
Total current assets............... 722,330 -- 722,330 7,304,566 8,026,896
Capitalized software costs.......... 295,000 -- 295,000 -- 295,000
Property, plant and equipment, net.. 181,064 -- 181,064 -- 181,064
----------- ----------- ----------- ---------- -----------
Total assets....................... $ 1,198,394 $ -- $ 1,198,394 $7,304,566 $ 8,502,960
=========== =========== =========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable and accrued
expenses.......................... $ 125,524 $ -- $ 125,524 $ -- $ 125,524
Deferred revenue................... 213,570 -- 213,570 -- 213,570
Notes payable, related party....... 900,434 -- 900,434 (900,434) --
Note payable....................... 1,500,000 (1,500,000) -- -- --
Other current liabilities.......... 13,621 -- 13,621 -- 13,621
----------- ----------- ----------- ---------- -----------
Total current liabilities.......... 2,753,149 (1,500,000) 1,253,149 (900,434) 352,715
Stockholders' equity (deficiency):
Common Stock (.001 par value)...... 4,420 780 5,200 2,000 7,200
Additional paid-in capital......... 1,106,163 1,499,220 2,605,383 8,203,000 10,808,383
Accumulated deficit................ (2,656,759) -- (2,656,759) -- (2,656,759)
Cumulative translation adjustment.. (8,579) -- (8,579) -- (8,579)
----------- ----------- ----------- ---------- -----------
Total stockholders' equity
(deficiency)...................... (1,554,755) 1,500,000 (54,755) 8,205,000 8,150,245
----------- ----------- ----------- ---------- -----------
Total liabilities and stockholders'
equity (deficiency)............... $ 1,198,394 $ -- $ 1,198,394 $7,304,566 $ 8,502,960
=========== =========== =========== ========== ===========
</TABLE>

See Notes to Unaudited Pro Forma Financial Information.

F-26
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
BRILLIANT PRO FORMA OFFERING PRO FORMA
AS REPORTED ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- -----------
(NOTE 1) (NOTE 2)
<S> <C> <C> <C> <C> <C>
Revenues:
Development fees...... $ 244,031 $ -- $ 244,031 $ -- $ 244,031
Royalties............. 35,255 -- 35,255 -- 35,255
Software sales........ 1,884 -- 1,884 -- 1,884
----------- ------- ----------- --------- -----------
Total revenues...... 281,170 -- 281,170 -- 281,170
Cost of revenues........ 139,871 -- 139,871 -- 139,871
----------- ------- ----------- --------- -----------
141,299 -- 141,299 -- 141,299
Operating expenses:
Sales and marketing... 968,755 -- 968,755 -- 968,755
General and
administrative....... 139,861 -- 139,861 -- 139,861
Research and
development.......... 1,518,337 -- 1,518,337 -- 1,518,337
Depreciation.......... 30,714 -- 30,714 -- 30,714
----------- ------- ----------- --------- -----------
2,657,667 -- 2,657,667 -- 2,657,667
Income (loss) from
operations............. (2,516,368) -- (2,516,368) -- (2,516,368)
Other:
Interest income....... 411 -- 411 -- 411
Interest expense...... (20,881) -- (20,881) -- (20,881)
----------- ------- ----------- --------- -----------
(20,470) -- (20,470) -- (20,470)
Loss before income
taxes.................. (2,536,838) -- (2,536,838) -- (2,536,838)
Provision for income
taxes.................. -- -- -- -- --
----------- ------- ----------- --------- -----------
Net loss................ $(2,536,838) $ -- $(2,536,838) $ -- $(2,536,838)
=========== ======= =========== ========= ===========
Net loss per share...... $ (0.56) $ (0.48) $ (0.35)
=========== =========== ===========
Common shares used in
calculating net loss
per share.............. 4,503,960 780,001 5,283,961 2,000,000 7,283,961
=========== ======= =========== ========= ===========
</TABLE>

See Notes to Unaudited Pro Forma Financial Information.

F-27
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

YEAR ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
BRILLIANT SAND AS PRO FORMA PRO FORMA OFFERING PRO FORMA
AS REPORTED REPORTED ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
----------- --------- --------------- ----------- ---------- ----------- -----------
(NOTES 1 AND 3) (NOTE 4)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Development fees....... $ 585,743 $ -- $ -- $(172,542) $ 413,201 $ -- $ 413,201
Royalties.............. 1,291,015 -- -- -- 1,291,015 -- 1,291,015
Software sales......... 177,119 -- -- -- 177,119 -- 177,119
---------- --------- --------- --------- ---------- --------- ----------
Total revenues......... 2,053,877 -- -- (172,542) 1,881,335 -- 1,881,335
Cost of revenues........ 738,842 -- -- -- 738,842 -- 738,842
---------- --------- --------- --------- ---------- --------- ----------
1,315,035 -- -- (172,542) 1,142,493 -- 1,142,493
Operating expenses:
Sales and marketing.... 163,038 -- -- -- 163,038 -- 163,038
General and
administrative........ 365,491 89,903 (89,903) -- 365,491 -- 365,491
Research and
development........... 174,395 668,467 681,533 (172,542) 1,351,853 -- 1,351,853
Depreciation........... 101,824 -- -- -- 101,824 -- 101,824
---------- --------- --------- --------- ---------- --------- ----------
804,748 758,370 591,630 (172,542) 1,982,206 -- 1,982,206
Income (loss) from
operations............. 510,287 (758,370) (591,630) -- (839,713) -- (839,713)
Other:
Gain on foreign
exchange
transactions.......... 13,382 -- -- -- 13,382 -- 13,382
Export market
development grant..... 122,488 -- -- -- 122,488 -- 122,488
Interest income........ 2,017 -- -- -- 2,017 -- 2,017
Interest expense....... (94,762) -- -- -- (94,762) -- (94,762)
---------- --------- --------- --------- ---------- --------- ----------
43,125 -- -- -- 43,125 -- 43,125
Income (loss) before
income taxes........... 553,412 (758,370) (591,630) -- (796,588) -- (796,588)
Provision for income
taxes.................. -- -- -- -- -- -- --
---------- --------- --------- --------- ---------- --------- ----------
Net income (loss)....... $ 553,412 $(758,370) $(591,630) $ -- $ (796,588) $ -- $ (796,588)
========== ========= ========= ========= ========== ========= ==========
Net income (loss) per
share.................. $ 0.12 $ (0.15) $ (0.11)
========== ========== ==========
Common shares used in
calculating net income
(loss) per share....... 4,557,000 780,001 5,337,001 2,000,000 7,337,001
========== ========= ========== ========= ==========
</TABLE>

See Notes to Unaudited Pro Forma Financial Information.

F-28
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO PRO FORMA FINANCIAL STATEMENTS

AS OF JUNE 30, 1996

NOTE 1:

Reflects the immediate conversion of the SAND Note into 780,001 shares of
$.001 par value common stock. As a result, the SAND Note will be reduced to
$0. Common Stock will be increased by $780 and additional paid in capital will
increase by $1,499,220.

NOTE 2:

Reflects the Offering contemplated in this Prospectus assuming the
following:

<TABLE>
<S> <C>
Number of shares to be issued.................................... 2,000,000
Issue price per share............................................ $ 5.00
Par value of shares issued....................................... 0.001
Costs related to the Offering.................................... 1,795,000
</TABLE>

It is also assumed that the notes to related parties of $900,434 will be
repaid from the proceeds of the Offering.

Based on the above assumptions, at the closing of the Offering:

<TABLE>
<S> <C>
Cash will increase by............................................ $7,304,566
Notes payable to related parties will decrease by................ 900,434
Common Stock will increase by.................................... 2,000
Additional paid in capital will increase by...................... 8,203,000
</TABLE>

NOTE 3:

SAND incurred $758,370 in total expenses for the year ended June 30, 1996.
In order to reflect the allocation of $1,350,000 of the SAND purchase price to
in-process research and development costs, total expenses have been increased
by $591,630.

NOTE 4:

Reflects the elimination of revenues recorded by the Company relating to
development fees paid by SAND during the fiscal year ended June 30, 1996. SAND
recorded research and development expenses when the payment was made to the
Company. Therefore, development fees will be reduced and research and
development costs will be reduced by $172,542.

F-29
<PAGE>

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
The Company.............................................................. 6
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Dilution................................................................. 21
Capitalization........................................................... 22
Selected Historical and Pro Forma Consolidated Financial Data............ 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 31
Management............................................................... 50
Certain Relationships and Related Transactions........................... 56
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 62
Shares Eligible For Future Sale.......................................... 64
Underwriting............................................................. 66
Notice to Canadian Residents............................................. 68
Legal Matters............................................................ 69
Experts.................................................................. 69
Additional Information................................................... 69
Index to Consolidated Financial Statements............................... F-1
</TABLE>

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

UNTIL DECEMBER 17, 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

[LOGO]
2,000,000 Shares
Common Stock

PROSPECTUS

CS First Boston

Cruttenden Roth
Incorporated

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