BRILLIANT DIGITAL ENTERTAINMENT INC, 424B1, 1997-12-05

BRILLIANT DIGITAL ENTERTAINMENT INC
424B1, 1997-12-05
PREPACKAGED SOFTWARE

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2,500,000 Shares

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

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

Of the shares of Common Stock (the "Common Stock") of Brilliant Digital
Entertainment, Inc. ("Brilliant" or the "Company") offered hereby (the
"Offering,") 2,200,000 shares are being sold by
the Company and 300,000 shares are being sold by the Selling
Stockholder named herein (the "Selling Stockholder"). The
Company will not receive any
proceeds from the sale of shares
by the Selling Stockholder.

The Common Stock is traded on the American Stock Exchange under the symbol
"BDE." On December 4, 1997, the closing price of the Common Stock, as
reported by the American Stock
Exchange, was $5.625 per share. See "Price Range of Common
Stock."

For a discussion of certain factors that should be considered in connection with
an investment in the Common Stock, see "Risk Factors" beginning on page 8.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES 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 $0.35 $4.65
Total (2)................................................... $12,500,000 $875,000 $10,230,000

<CAPTION>
Proceeds to
Selling
Stockholder
-----------------
<S> <C>
Per Share................................................... $4.65
Total (2)................................................... $1,395,000
</TABLE>

(1) Before deduction of expenses payable by the Company estimated at $650,000.

(2) The Company and the Selling Stockholder have granted the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to
purchase up to 175,000 additional shares from the Company and 200,000
additional shares from the Selling Stockholder to cover over-allotments of
shares. If the option is exercised in full, the total Price to Public will
be $14,375,000, Underwriting Discounts and Commissions will be $1,006,250,
Proceeds to Company will be $11,043,750, and Proceeds to the Selling
Stockholder will be $2,325,000.

The shares of Common Stock are offered by the several Underwriters when, as
and if 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 December 10, 1997, against payment
in immediately available funds.

Credit Suisse First Boston Cruttenden Roth

Prospectus dated December 5, 1997.
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[PICTURES]

INSIDE FRONT COVER

[Collage of images from CYBERSWINE, POPEYE, GRAVITY ANGELS and Storyteller
titles.]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

-C- 1997 CYBERSWINE-TM- IS OWNED BY EAT CYBERFIST PTY. LTD. AND USED BY
BRILLIANT DIGITAL ENTERTAINMENT, INC. UNDER LICENSE. BRILLIANT, MULTIPATH
STORYTELLER, DIGITALPROJECTOR, SCUD AND TALKTRACK ARE TRADEMARKS OF BRILLIANT
DIGITAL ENTERTAINMENT, INC. POPEYE-TM- -C- 1997 IS A TRADEMARK OF KING FEATURES
SYNDICATE, INC. & HEARST CORPORATION.

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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 THE 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 producing a new generation
of digital entertainment that is being distributed over the Internet and on
CD-ROM. The Company plans to market versions of its digital stories also as
television programming and for home video in 1998. Using its proprietary
state-of-the-art software tools, the Company produces Multipath-TM- Movies,
which are three-dimensional digitally animated stories each with up to hundreds
of plot alternatives, or paths, leading to multiple distinct conclusions that
are influenced by the user. The Company's Multipath Movies feature seamless
interactivity leaving the plot and graphical presentation of the story
uninterrupted by the user's decisions. The Company utilizes a single
cost-efficient production process to produce multiple formats of a particular
Multipath Movie title for different distribution channels, such as the Internet,
CD-ROM or television programming. In addition, the Company has developed a
system that permits real time distribution of, and user interaction with, its
Multipath Movies over the Internet.

As a key part of its strategy, the Company has secured quality content for
its Multipath Movies from a number of proven sources, including SUPERMAN from
D.C. Comics (a subsidiary of Warner Bros.), XENA: WARRIOR PRINCESS and HERCULES
& XENA THE ANIMATED MOVIE, each from Universal Studios, ACE VENTURA from Morgan
Creek, POPEYE from King Features Syndicate and the CHOOSE YOUR OWN NIGHTMARE
series for kids from Bantam Doubleday Dell Books. The Company also develops
Multipath Movies based on internally-developed content. Further to its strategy,
the Company has entered into distribution agreements with key industry
participants Packard Bell NEC, CompuServe, and graphics acceleration hardware
manufacturers Matrox and S3, which the Company believes will enable over four
million PC users to access its Multipath Movies over the next twelve to eighteen
months.

The Company's Multipath Movies combine the best qualities of traditional
filmed entertainment -- complex characters, stories and plots, with the best of
the traditional computer game -- interactivity. The Company's Multipath Movies
are designed to appeal to the entire home PC market, including both the core
gamer and the much larger segment of PC users not currently served by
traditional game developers. In order to offer digital entertainment products
with wide appeal, the Company is producing a variety of Multipath Movies
tailored to various demographic groups, such as its Storyteller-TM- Series in
which an animated storyteller narrates engaging interactive stories targeted at
children eight to twelve years of age and Multipath Movies for Kids-TM-,
including POPEYE, targeted to children as young as three years old. Multipath
Movies incorporate a number of features that the Company 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
interact with the story seamlessly, influencing the plot without interrupting
its flow or graphical presentation.

The Company's first Multipath Movie title, CYBERSWINE, is expected to be
released by January 1998 through its distribution agreement with Packard Bell
NEC. Pursuant to additional distribution agreements, Matrox is also bundling
CYBERSWINE with its latest line of 3D graphics acceleration chip sets, which are
currently being distributed for the 1997 holiday season, and the Company expects
S3 to bundle CYBERSWINE with its graphics chip sets. The Company has also
entered into a distribution agreement with CompuServe through which the Company
is establishing its own Multipath Movie site on the CompuServe service enabling
each of CompuServe's approximately 1.5 million subscribers in the United States
to purchase

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CYBERSWINE and other Multipath Movies. The Company intends to use its existing
and future distribution relationships for subsequent Multipath Movie titles that
are currently in production.

Beginning in 1998, 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
30-minute episodes and, by packaging together multiple episodes, can create a
season-length series for the broadcast market. Similarly, the Company intends to
produce 80- 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 intends to enter into joint ventures or partnerships with film and
television production companies to jointly develop and release digital
entertainment for the broadcast and home video markets utilizing the Company's
proprietary tools.

Using its proprietary software tools in conjunction with the Company's
digital production and layup skills, the Company develops Multipath Movies in a
single production process. The Company has five proprietary software tools: (i)
SCRIPNAV, a software tool that enables a script writer to write, review and
correct branching multipath scripts; (ii) TALKTRACK, 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; (iv) MR. COPY, a new software tool that arranges, reorders and, using
licensed technology, compresses and decompresses audio and bit map files created
during the production of a Multipath Movie and optimally organizes the files for
use in playing the Multipath Movie; and (v) DIGITALPROJECTOR, which contains all
the necessary elements to load and play a Multipath Movie. Utilizing its
proprietary software tools, the Company can produce each title in multiple
formats 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 TalkTrack tool allows for low-cost modification of
Multipath Movies to other languages without the awkward appearance of dubbed
movies. The Company believes that its proprietary software tools emulate film
writing and production techniques, allowing screenwriters, directors and
producers to develop Multipath Movies without the use of expensive programming
teams. The Company believes that the utilization of existing entertainment
resources will enable it to generate high-quality digital entertainment at a low
cost.

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 120, Woodland Hills, California
91367, and its telephone number is (818) 346-3653.

4
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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company................ 2,200,000 shares
Common Stock offered by the Selling Stockholder.... 300,000 shares
Common Stock outstanding after the Offering........ 9,403,001 shares (1)
Use of Proceeds.................................... Production of Multipath Movies;
software tool development; development
of new California production studio;
expansion of Australian production
studio; content acquisitions; and for
general corporate purposes including
working capital. See "Use of Proceeds."
American Stock Exchange Symbol..................... BDE
</TABLE>

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED THREE MONTHS ENDED SEPTEMBER
JUNE 30, DECEMBER 31, (2) 30,
----------------------------- ----------------------------- -----------------------------
1995 1996 1996 1996 1997
------------- ------------- ------------- ------------- -------------
1995
-------------
(UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues........... $ 842,796 $ 2,053,877 $ 1,184,046 $ 350,147 $ 281,170 $ 2,056,785
Gross profit............. 186,857 1,315,035 750,482 164,286 141,299 2,056,741
Total operating
expenses............... 566,284 804,748 313,007 3,985,824 2,657,667 1,293,055

Income (loss) from
operations............. (379,427) 510,287 437,475 (3,821,538) (2,516,368) 763,686
Net income (loss)........ (423,853) 553,412 390,640 (3,834,963) (2,536,838) 812,382
Net income (loss) per
share (3).............. $ (0.09) $ 0.12 $ 0.09 $ (0.77) $ (0.56) $ 0.11

Common shares used in
computing net income
(loss) per share (3)... 4,508,380 4,557,000 4,557,000 4,953,299 4,503,960 7,643,464
Pro forma net loss per
share (4).............. -- $ (0.15) -- -- -- --
Common shares used in
computing pro forma net
loss per share (4)..... -- 5,337,001 -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
AS ADJUSTED
ACTUAL (5)
--------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $4,327,874 $ 13,907,874
Total current assets.................................................................. 6,368,554 15,948,554
Total assets.......................................................................... 7,674,787 17,254,787
Total current liabilities............................................................. 1,142,586 1,142,586
Total stockholders' equity............................................................ 6,532,201 16,112,201
</TABLE>

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

(1) Excludes 1,208,222 shares of Common Stock subject to outstanding options and
warrants as of September 30, 1997.

(2) The Company changed its fiscal year end from June 30 to December 31,
effective December 31, 1996.

(3) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share.

(4) For a discussion of the calculation of pro forma net loss per share for the
fiscal year ended June 30, 1996, see "Introduction to Unaudited Pro Forma
Financial Information."

(5) As adjusted to reflect the sale of 2,200,000 shares of Common Stock offered
by the Company hereby, at a public offering price of $5.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses. See "Use of Proceeds."

EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS
BEEN ADJUSTED, WHERE APPLICABLE, TO REFLECT A 4.42-FOR-1 STOCK SPLIT EFFECTED BY
THE COMPANY ON SEPTEMBER 13, 1996; AND (II) ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED.

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1997 DEVELOPMENTS

Significant developments since the closing of the Company's initial public
offering in which the Company raised net proceeds of $8.5 million include the
following:

COMPLETED AND COMMENCED THE LAUNCH OF THE FIRST MULTIPATH MOVIE,
CYBERSWINE. The Company's first Multipath Movie title, CYBERSWINE, is now
available in retail stores through the Company's bundling arrangement with
Matrox Graphics, Inc. ("Matrox"). CYBERSWINE was also delivered to Packard Bell
NEC, Inc. ("Packard Bell NEC") during August 1997 for bundling under its
three-year marketing agreement with the Company. This title will be bundled on
up to six million PCs which the Company expects Packard Bell NEC will begin
shipping by January 1998. In addition, the Company expects to market a retail
CD-ROM version of the title through selected retailers for sale during the 1997
holiday season.

LICENSED AND DEVELOPED ADDITIONAL CONTENT FOR USE IN THE PRODUCTION OF
MULTIPATH MOVIE TITLES. Brilliant has obtained the rights to produce Multipath
Movies based on additional licensed content, including scripts and/or characters
from Universal Studio's XENA: WARRIOR PRINCESS and XENA & HERCULES THE ANIMATED
MOVIE: THE BATTLE FOR MOUNT OLYMPUS ("XENA & HERCULES THE ANIMATED MOVIE") and
D.C. Comics' SUPERMAN. The Company has also placed a third internally generated
title, TEN WEEKS IN THE HEAD BIN, in development. These rights increase the
content previously placed in development, which includes CYBERSWINE, episodes
based on the Bantam Doubleday Dell CHOOSE YOUR OWN NIGHTMARE series for kids,
Morgan Creek's ACE VENTURA character, the POPEYE character licensed from King
Features Syndicate and another internally generated title, GRAVITY ANGELS.

EXPANDED THE COMPANY'S MULTIPATH MOVIE PRODUCTION PIPELINE. In order to
rapidly increase the number of Multipath Movie titles available for release, the
Company has placed a significant number of titles into development. The Company
has completed five titles, and based on the current production schedule, the
Company plans to complete an additional six titles by the end of 1997, 29 titles
by the end of 1998 and 22 titles by the end of 1999.

BROADENED DISTRIBUTION OF MULTIPATH MOVIES THROUGH ONLINE SERVICES AND OEM
ARRANGEMENTS. In addition to its bundling arrangement with Packard Bell NEC, the
Company has entered into a strategic relationship with CompuServe Incorporated
("CompuServe") pursuant to which Brilliant is establishing its own Multipath
Movie site on the CompuServe service which will enable consumers to purchase
Multipath Movies directly and be billed by CompuServe. The Company is developing
a bulletin board, library and conferencing/chat area as part of this site.
CompuServe provides comprehensive online/Internet access through its brands and
affiliates to more than 1.5 million subscribers in the United States. Brilliant
has also entered into arrangements with graphics acceleration hardware
manufacturers Matrox and S3 Incorporated ("S3"), pursuant to which the Company
expects CYBERSWINE to be bundled with products shipped by each company.

LAUNCHED A RETAIL SALES AND MARKETING CAMPAIGN. The Company is conducting a
sales and marketing campaign with various national computer supply chains,
software distributors and other software publishers to introduce the Multipath
Movie genre and place certain titles into the marketplace on a limited basis for
the 1997 holiday season. The Company has also recently launched initial efforts
to establish distribution of Multipath Movies in Europe and throughout Asia.

ESTABLISHED A NEW DIGITAL PRODUCTION STUDIO. The Company's digital
production studio in New South Wales, Australia, is fully operational with six
sound studios and 40 work stations for modeling, animation, scripting and
graphic design. Brilliant anticipates using proceeds of the Offering to further
expand the capacity and capabilities of this studio as well as to establish a
second digital production studio in California.

ENHANCED THE COMPANY'S TECHNOLOGY AND PROPRIETARY SOFTWARE TOOLS. The
Company has enhanced its technology and proprietary software tools during the
past year. Significant improvements and new features

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include: (i) substantial improvements in the curves of body shapes and facial
features as well as in the display of other objects by increasing polygon
processing to allow approximately 5,000 polygons to be displayed on screen at
one time compared to approximately 1,000 polygons achievable by the Company one
year ago, (ii) addition of light sourcing providing substantial enhancement to
virtual sets and to character perspectives as they move around a virtual set,
(iii) addition of space warping capability that can be used to create effects
such as smoke and rippling of water, (iv) 3D accelerator card support permitting
display of images on a variety of 3D graphics accelerator card technologies
which improve the look and feel of Multipath Movies, (v) compliance with Intel's
MMX standards, (vi) addition of a fast forward function into the
DIGITALPROJECTOR, and (vii) navigation capability within Multipath Movies
allowing a viewer to move both forward and backward in the plotlines and to
return to and replay previous decision points. The Company has also developed a
new tool, MR. COPY, which locates, arranges and, using licensed technology,
compresses and decompresses audio and bit map files enabling the Company to
produce Multipath Movies with five hours of branching content, utilizing as few
as 60 megabytes of disk storage space.

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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 INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 ("SECURITIES ACT") AND SECTION 21E OF THE
EXCHANGE ACT. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED
IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, THE STATEMENTS UNDER
"PROSPECTUS SUMMARY," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," REGARDING THE
COMPANY'S STRATEGIES, PLANS, OBJECTIVES AND EXPECTATIONS, PRODUCT RELEASE
SCHEDULES, THE COMPANY'S ABILITY TO DESIGN, DEVELOP, MANUFACTURE AND MARKET
PRODUCTS, AND THE ABILITY OF THE COMPANY'S PRODUCTS TO ACHIEVE OR MAINTAIN
COMMERCIAL ACCEPTANCE CONSTITUTE FORWARD-LOOKING STATEMENTS. THE COMPANY
BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE AT THIS TIME, BUT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL
PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE SET FORTH IN THESE "RISK
FACTORS," AS WELL AS ELSEWHERE IN THIS PROSPECTUS. ALL SUBSEQUENT WRITTEN AND
ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR ANY PERSON ACTING
ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE RISK FACTORS.

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 is introducing CYBERSWINE, its first Multipath Movie, in the fourth
quarter of 1997. 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 and the retail channel, 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, in the retail channel 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

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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.

LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY

The Company was founded in September 1993, and shipped its initial
traditional CD-ROM product in November 1994 and substantially curtailed this
aspect of its business in 1996. The Company acquired the software tools
necessary to produce Multipath Movies in August 1996 and has only recently
introduced its first Multipath Movie. The Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be based.
In the third quarter of 1997 the Company was profitable due to revenues
associated with its Packard Bell NEC bundling agreement. In order for the
Company to achieve sustained profitability, the Company must continue to enter
into a variety of distribution and revenue generating arrangements of this type,
as well as arrangements with Internet service providers, traditional CD-ROM
publishers and retailers. There can be no assurance that the Company will enter
into any such arrangements, or that the Company will be able to sustain
quarterly profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

FLUCTUATING OPERATING RESULTS

The Company intends to generate a substantial majority of its future revenue
from the development and production of Multipath Movies and other
three-dimensional digitally created entertainment. The Company has commenced the
launch of the first of its Multipath Movies, CYBERSWINE, in the fourth quarter
of 1997. The Company plans to release the first products in the Storyteller
Series and Multipath Movies for Kids series in the fourth quarter of 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 "--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."

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, shipping
schedules for PC hardware with which Multipath Movies are bundled, introduction
or enhancement of products by the Company and its competitors, the ability of
the Company to produce and distribute retail packaged versions of Multipath
Movies in advance of peak retail selling seasons, 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,

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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 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
production and research and development, increased marketing operations and
expanded 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."

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 fourth 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 materially adversely affected. See "-- Rapid Technological Change;
Changing Product Platforms and Formats."

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."

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

The Company's future capital requirements will depend on many factors,
including but not limited to, the number 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. The
Company anticipates that the proceeds of the Offering will not be sufficient to
fund completion of the entire slate of Multipath Movie episodes estimated to be
completed in 1998, and intends to attempt to raise additional funds to permit
completion of all 22 titles 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. If
the Company is unable to obtain additional financing sufficient to fund the
completion of all 22 titles scheduled for completion in 1998, the Company
anticipates that it may defer completion of several titles. 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

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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."

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 AND LICENSING RELATIONSHIPS

The Company has entered into strategic relationships with Packard Bell NEC,
Morgan Creek, CompuServe, S3 and Matrox as well as licensing arrangements with
numerous additional companies that own the stories underlying and/or characters
in many of the Company's current and planned products. The Company's business
strategy is based largely on its strategic and licensing relationships with
these and other companies and its ability to continue to enter into similar
strategic and licensing relationships in the future. In these relationships,
mutual agreement of the parties is generally 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
be dependent on Packard Bell NEC and other OEMS to bundle Multipath Movies with
their hardware products as a significant element of the Company's launch of the
Multipath Movie genre. Packard Bell NEC's obligation to distribute such
Multipath Movies 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. The Company is also unable to control, manage
or accurately predict the shipping schedules of Packard Bell NEC and other OEM
distributors. Delays in such shipping schedules or other distribution problems
affecting OEM distributors may materially adversely affect the Company's ability
to release its products. Also, Morgan Creek and many other content licensors
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 as well as content licensors to arbitrarily 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. Many content
licensors are also reluctant to grant broad licenses covering multiple formats
(e.g., a license covering both Internet and television distribution rights) to
companies without proven track records in the television production business,
and, where rights are available, there is often significant competition for
licenses. As a result of such competition, and the reluctance by owners of
content to grant broad licenses, there can be no assurance that licensed content
will be available to the Company at prices, or upon terms or conditions
acceptable to the Company or which permit the Company to implement its strategy
of producing Multipath Movies for multiple formats. Delays resulting from
disagreements with licensors or joint venture partners or the Company's failure
to renew or extend a key license, maintain any of its strategic relationships or
enter into new licenses and strategic relationships on sound financial terms
could materially adversely affect 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

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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.

PRODUCT DELAYS AND LIFECYCLES

The Company's current production schedules contemplate that it will release
a number of Multipath Movies in the fourth quarter of 1997, 1998 and 1999. As
with any software product, however, until all aspects of the development and
initial distribution of a product are completed, there can be no assurance of
its release date. Release dates will vary depending on quality assurance testing
and other development factors. If the Company were unable to commence volume
shipments of a significant new product during the scheduled quarter, its revenue
and earnings would likely be materially and adversely affected in that quarter.
In the past, the Company has experienced significant delays in the introduction
of certain new products. It is likely in the future that certain new products
will not be released in accordance with the Company's internal development
schedule or the expectations of public market analysts and investors. A
significant delay in the introduction of, or the presence of a defect in, one or
more new products could have a material adverse affect on the ultimate success
of such products and on the Company's business, operating results and financial
condition, particularly in the quarter in which such products are scheduled to
be completed.

In particular, the Company will expend substantial resources in connection
with the launch of its initial Multipath Movies during the fourth quarter of
1997. Any failure to complete one or more of these titles as scheduled could
result in the inability to recoup such expenditures and loss of marketing
opportunities, retailer fees and consumer interest. Moreover, any delay in the
introduction of, or the presence of a defect in, one or more of the titles
scheduled to be completed in the fourth quarter could cause the Company to miss
the 1997 holiday retail season or other opportunities and could adversely affect
the ultimate success of such titles. See "Business -- Sales and Marketing."

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, 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 materially
adversely affected.

RISKS ASSOCIATED WITH INTERNET DELIVERY

The Company also intends to distribute certain of its Multipath Movies
through its Internet site and through a site on the CompuServe online service.
Accordingly, any system failure that causes interruption or an increase in
response time on the Company's Internet site or the CompuServe site, could
result in less traffic to and distribution of Multipath Movies via the Internet
and, if sustained or repeated, could reduce

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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 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 over 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.

The Company presently serves its Multipath Movies delivered over the
Internet through a single vendor. Any significant interruption in service
provided by this vendor could interrupt sales and delivery of Multipath Movies
and materially adversely affect the Company's ability to conduct its business
and maintain customer satisfaction, and thereby materially adversely affect the
Company's business, operating results and financial condition.

RISKS ASSOCIATED WITH RETAIL DISTRIBUTION

The Company anticipates that a significant proportion of sales of Multipath
Movies will be made through distributors and to retailers. The Company is
currently expending significant resources developing a retail sales channel. The
expenditures associated with this development are likely to precede the
realization of significant sales through this channel. Moreover, the Company has
no prior experience in the development or management of the retail channel or
sales through such channel. The competition for shelf space in retail stores is
intense. To the extent that the number of consumer software products and
computer platforms increases, this competition for shelf space may further
intensify. The Company's products are expected to constitute a small percentage
of a retailer's sales volume, and there can be no assurance that retailers will
provide the Company's products with adequate levels of shelf space and
promotional support. Due to the increased competition for limited retail shelf
space and promotional resources, retailers and distributors are increasingly in
a better position to negotiate favorable terms of sale, including price
discounts and product return policies, as well as cooperative market development
funds. Increased competition could result in loss of shelf space for, and
reduction in sell-through of, the Company's products at retail stores, as well
as significant price competition, any of which could adversely affect the
Company's business, operating results and financial condition.

Retailers often require software publishers to pay fees in exchange for
preferred shelf space. The amounts paid to retailers by software publishers and
distributors for preferred shelf space are generally determined on a case by
case basis and there is, as of yet, no industry standard for determining such
fees, although larger publishers and distributors will likely have a competitive
advantage in this regard to the extent they have greater financial resources and
negotiating leverage. See "Business -- Competition."

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At the time of retail product shipment, the Company will establish reserves,
including reserves which estimate the potential for future returns based on
seasonal terms of sale and distributor and retailer inventories of the Company's
products, as well as other factors. The Company intends to recognize revenue
from the sale of its products upon delivery except for sales made to certain
distributors where the right of ownership does not pass at delivery. Product
returns or price protection concessions that exceed the Company's reserves could
materially adversely affect the Company's business, operating results and
financial condition and could increase the magnitude of quarterly fluctuations
in the Company's operating and financial results. Furthermore, if the Company's
assessment of the creditworthiness of its customers receiving product on credit
proves incorrect, the Company could be required to significantly increase the
reserves previously established. There can be no assurance that such future
write-offs will not occur or that amounts written off will not have a material
adverse effect on the Company's business, results of operations and financial
condition.

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 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 has 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"), GT Interactive Software, Inc. ("GT Interactive"), Electronic
Arts, The Learning Company, Inc. ("Learning Company"), CUC International, Inc.
("CUC"). Moreover, large corporations, such as the Walt Disney Company
("Disney") and Microsoft Corporation ("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

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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.

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 valuable
leisure 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 adversely affect its business, operating results and financial
condition. See "Business -- Competition."

MANUFACTURING RISKS

The production of the Company's Multipath Movies for the retail distribution
channel consists of pressing CD-ROM disks, assembling purchased product
components, printing product packaging and user manuals and packaging finished
products, all of which will be performed for the Company by third party vendors
in accordance with the Company's specifications and forecasts. Currently, the
Company will use primarily one vendor for each of these services. While these
services are available from multiple vendors and at multiple sites, there can be
no assurance that an interruption in the manufacture of the Company's products
could be remedied without undue delay and without materially adversely affecting
the Company's results of operations. The Company does not have contractual
agreements with any of its third party vendors, which may result in an inability
to secure adequate services in a timely manner. Demand for the services of these
vendors is also seasonal, with peak demand, and service and production backlogs
and delays occurring in September, October and November of each year. The
Company's retail Multipath Movies must be manufactured, assembled, printed,
packaged and shipped in this environment of strained capacity and must compete
for capacity and priority with the CD-ROM products of many substantially larger
competitors of the Company which are able to wield substantially greater
influence with the

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Company's vendors than can currently be exerted by the Company. If the Company
is unable to secure adequate services to timely produce and deliver its products
for fourth quarter sales, the Company's business, operating results and
financial condition would be materially adversely effected.

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 continue to enhance the
Multipath Movie format. The Company believes that its future success depends in
large part upon the continuous enhancement of the software tools used 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. 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.

RAPID EXPANSION AND MANAGEMENT OF GROWTH

Implementation of the Company's business plan, including introduction and
marketing of the Company's Multipath Movies, management of the Company's joint
venture with Morgan Creek, management of the Company's strategic relationship
with Packard Bell NEC, negotiation of additional content licensing and
distribution agreements, management of Internet service providers, the expansion
of the Company's studio in Australia and the development of a new studio in
California, and the general strains of the Company's role of a public company
have resulted in a significant expansion of the Company and will require that
the Company continue to significantly expand its operations in all areas. This
growth in the Company's operations and activities has placed and will continue
to 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 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, and to
increase production levels and commence marketing and distribution of its
products will also require it to hire and train new employees, including
management and technical personnel, and motivate and manage its new employees
and integrate them into its overall operations and culture. The Company recently
has made additions to its management team and is in the process of expanding its
marketing and production staff, 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.

RISKS ASSOCIATED WITH ACQUISITIONS

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.

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RAPID TECHNOLOGICAL CHANGE; CHANGING PRODUCT PLATFORMS AND FORMATS

The entertainment software market and the PC 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. 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."

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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 and other businesses. Mark Dyne also serves as Chairman of the Board of
Tag-It Pacific, Inc. Kevin Bermeister also serves as managing director of Sega
Enterprises (Australia) Pty., Ltd. ("Sega Enterprises"). 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.

PRODUCTION STUDIOS

The Company expects to use $0.5 million of the net proceeds from the
Offering to expand its production studio in New South Wales, Australia. In
addition, in order to permit the Company to access talent and scripts based in
the United States and to continue to expand its production of Multipath Movies,
the Company intends to use $0.7 million of the net proceeds from the Offering to
establish a new production studio in California. It is expected that the
expansion of the production studio in Australia and the creation of a second
studio in California will require a substantial time commitment of certain
members of management and could result in delays in production. There can be no
assurance that the Company will be able to complete expansion of its Australian
studio or equip a California production studio at the budgeted price.
Additionally, there can be no assurance that expansion of the Australian
facility or development of the California facility will be completed 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.

LIMITED PROPRIETARY PROTECTION

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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."

VOLATILITY OF STOCK PRICE

The Company's Common Stock is traded on the American Stock Exchange, and
there has been substantial volatility in the market price of the Common Stock.
The trading price of the Common Stock has been and is likely to continue to be
subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant contracts, changes in
management, announcements of technological innovations or new products by the
Company or its competitors, legislative or regulatory changes, general trends in
the industry, recommendations by securities industry analysts and other events
or factors. In addition, the stock market has experienced extreme price and
trading volume fluctuations which have affected the market price of the common
stock of many technology companies in particular and which have at times been
unrelated to operating performance of the specific companies whose stock is
affected. In addition, in the past the Company has not experienced significant
trading volume in its Common Stock, has not been actively followed by stock
market analysts and has had limited market-making support from broker-dealers.
If market-making support does not continue at present or greater levels and/or
the Company does not continue to receive analyst coverage, the average trading
volume in the Common Stock may not increase or even sustain its current levels,
in which case, there can be no assurance that an adequate trading market will
exist to sell large positions in the Common Stock. See "Price Range of Common
Stock."

19
<PAGE>
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 30.7% of the Company's outstanding shares
(approximately 30.2% 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 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 and Selling 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 $9.6 million. The Company expects to use
approximately $7.0 million of the net proceeds for the development of Multipath
Movies, approximately $1.0 million to fund software tool development and
preparation of the Company's software tools for distribution, approximately $0.7
million to establish a new production studio in California, approximately $0.5
to fund expansion of the Company's production studio in New South Wales,
Australia, and approximately $0.4 million to acquire content licenses. 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."

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 9,403,001 shares of Common Stock outstanding. Of those
shares, the 2,500,000 shares of Common Stock offered hereby (2,875,000 shares if
the Underwriters' over-allotment option is exercised in full) and 2,003,000
shares held by current stockholders will be freely tradable without restriction
under the Securities Act, except for any such shares held at any time by an
"affiliate" of the Company, as such term is defined in Rule 144 promulgated
under the Securities Act ("Rule 144"). The remaining 4,900,001 shares of Common
Stock outstanding are "restricted securities," as that term is defined by Rule
144, or otherwise subject to Rule 144 because they are held by affiliates of the
Company. Upon expiration of lock-up provisions, approximately 2,486,801, 500,000
(assuming no earlier sale of such shares of Common Stock by the Selling
Stockholder upon exercise of the Over-allotment Option), and 1,591,200 shares of
Common Stock will become eligible for immediate public sale following expiration
of the 90, 120, and 180 day lock-up periods, respectively, subject to compliance
with the volume limitations of Rule 144. Under the lock-up provisions, certain
securityholders of the Company including all officers and directors, have agreed
that for a period of (i) 180 days after December 4, 1997 in the case of Messrs.
Dyne and Bermeister, (ii) 90 days in the case of the Selling Stockholder with
respect to 700,118 shares of Common Stock held by the Selling Stockholder and
120 days after December 4, 1997 with respect to all remaining shares held by the
Selling Stockholder and not sold upon exercise of the Over-allotment Option, and
(iii) 90 days after December 4, 1997 in the case of certain other
securityholders of the Company (each, a "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. See "Shares Eligible for
Future Sale" and "Underwriting."

20
<PAGE>
The Company has registered under the Securities Act 1,080,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1996 Stock Option
Plan (the "1996 Plan"). See "Management -- Stock Option Plan." As of October 31,
1997, options to purchase 283,000 shares were outstanding. 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. See "Shares Eligible for Future Sale."

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."

21
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock being offered by the Company hereby at a public offering price of
$5.00 per share, after deducting the underwriting discounts and estimated
offering expenses, are estimated to be approximately $9.6 million ($10.4 million
if the over-allotment option is exercised in full).

The Company expects to use approximately $7.0 million of the net proceeds
for the production of Multipath Movies, approximately $1.0 million to fund
software tool development and preparation of the Company's software tools for
distribution, approximately $0.7 million to establish a new production studio in
California, approximately $0.5 million to fund the expansion of the Company's
production studio in New South Wales, Australia, and approximately $0.4 million
to acquire content licenses. The remainder of the proceeds are expected to be
used for general corporate purposes including working capital.

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, industry changes, 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.

PRICE RANGE OF COMMON STOCK

The Common Stock commenced trading on the American Stock Exchange on
November 22, 1996 under the symbol "BDE." Prior to that time, there was no
public market for the Company's Common Stock. The following table sets forth,
for the periods indicated, certain high and low prices for the Common Stock as
reported by the American Stock Exchange.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Fourth Quarter (beginning November 22, 1996)............................. $ 5.125 $ 3.563
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................................ 6.000 3.875
Second Quarter........................................................... 8.375 4.500
Third Quarter............................................................ 9.875 6.250
Fourth Quarter (through December 4, 1997)................................ 9.375 5.625
</TABLE>

On December 4, 1997, the closing price of the Common Stock as reported on
the American Stock Exchange was $5.625 per share. As of December 4, 1997, there
were 16 holders of record of the Common Stock.

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.

22
<PAGE>
CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of September 30, 1997 and the as adjusted capitalization of the Company after
giving effect to the sale of the 2,200,000 shares of Common Stock offered by the
Company hereby (at a public offering price of $5.00 per share), after deducting
underwriting discounts and commissions and estimated offering expenses. 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, 1997
-----------------------------
AS ADJUSTED
ACTUAL -------------
--------------
(UNAUDITED)
<S> <C> <C>
Stockholders' equity:
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; 7,203,001 shares
issued and outstanding actual; 9,403,001 shares issued and outstanding as
adjusted (1)................................................................... 7,203 9,403
Additional paid-in capital....................................................... 11,472,591 21,050,391
Accumulated deficit.............................................................. (4,899,297) (4,899,297)
Cumulative translation adjustment................................................ (48,296) (48,296)
-------------- -------------
Total stockholders' equity......................................................... 6,532,201 16,112,201
-------------- -------------
Total capitalization............................................................. $ 6,532,201 $ 16,112,201
-------------- -------------
-------------- -------------
</TABLE>

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

(1) Excludes 1,080,000 shares of Common Stock available for issuance pursuant to
the 1996 Stock Option Plan, of which 283,000 shares were subject to
outstanding options as of September 30, 1997 at a weighted average exercise
price of $4.47 per share. Also excludes 925,222 shares of Common Stock
issuable upon exercise of outstanding warrants issued as of September 30,
1997 at a weighted average exercise price of $5.84 per share. See
"Management -- Stock Option Plan."

23
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA

The following selected financial data for the fiscal years ended June 30,
1995 and June 30, 1996 and the six months ended December 31, 1996 are derived
from the audited consolidated financial statements of the Company included
elsewhere in this Prospectus. The financial data for the six months ended
December 31, 1995 and the three and nine month periods ended September 30, 1996
and 1997 are derived from unaudited consolidated financial statements included
elsewhere in this Prospectus. The unaudited consolidated financial statements
include all adjustments, consisting of normal recurring adjustments, which the
Company considers necessary for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the three
and nine month periods ended September 30, 1997 are not necessarily indicative
of the results that may be expected for the entire year ending December 31, 1997
or for any future period. 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>
FISCAL YEARS ENDED JUNE SIX MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED
30, DECEMBER 31,(1) SEPTEMBER 30,(1) SEPTEMBER 30,
------------------------ ------------------------ ------------------------ ------------------------
1995 1996 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Royalties from
licensing
arrangements......... $ 752,108 $ 1,291,015 $ 703,863 $ 93,699 $ 618,297 $ 2,083,904 $ 35,255 $ 2,048,920
Development fees....... 88,800 585,743 306,956 254,547 518,914 241,322 244,031 7,865
Software sales......... 1,888 177,119 173,227 1,901 1,863 51,524 1,884 --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues....... 842,796 2,053,877 1,184,046 350,147 1,139,074 2,376,750 281,170 2,056,785
Cost of revenues......... 655,939 738,842 433,564 185,861 410,552 17,370 139,871 44
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............. 186,857 1,315,035 750,482 164,286 728,522 2,359,380 141,299 2,056,741
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing.... 116,435 163,038 35,160 970,592 1,098,500 386,921 968,755 184,812
General and
administrative....... 223,470 365,491 129,159 1,064,771 345,380 1,664,712 139,861 664,960
Research and
development.......... 183,000 174,395 103,278 1,876,825 1,641,315 1,418,229 1,518,337 363,147
Depreciation........... 43,379 101,824 45,410 73,636 86,933 197,774 30,714 80,136
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 566,284 804,748 313,007 3,985,824 3,172,128 3,667,636 2,657,667 1,293,055
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............. (379,427) 510,287 437,475 (3,821,538) (2,443,606) (1,308,256) (2,516,368) 763,686
Other income (expense),
net.................... (44,426) 43,125 (46,835) (13,425) 72,702 366,183 (20,470) 49,476
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... (423,853) 553,412 390,640 (3,834,963) (2,370,904) (942,073) (2,536,838) 813,162
Provision for income
taxes.................. -- -- -- -- -- (2,340) -- (780)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........ $ (423,853) $ 553,412 $ 390,640 $(3,834,963) $(2,370,904) $ (944,413) $(2,536,838) 812,382
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per
share (2).............. $ (0.09) $ 0.12 $ 0.09 $ (0.77) $ (0.52) $ (0.13) $ (0.56) $ 0.11
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Common shares used in
computing net income
(loss) per share (2)... 4,508,380 4,557,000 4,557,000 4,953,299 4,539,320 7,200,333 4,503,960 7,643,464
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma net loss per
share (3).............. -- $ (0.15) -- -- -- -- -- --
-----------
-----------
Common shares used in
computing pro forma net
loss per share (3)..... -- 5,337,001 -- -- -- -- -- --
-----------
-----------
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
--------- ------------
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash and cash equivalents............................................... $ 53,061 $7,590,932 $ 4,327,874
Total current assets.................................................... 717,474 7,933,453 6,368,554
Total assets............................................................ 915,746 8,484,772 7,674,787
Total current liabilities............................................... 1,045,179 1,139,197 1,142,586
Total stockholders' equity (deficiency)................................. (129,433) 7,345,575 6,532,201
</TABLE>

- ------------------------------
(1) The Company changed 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) For a discussion of the calculation of pro forma net loss per share for the
fiscal year ended June 30, 1996, see "Introduction to Unaudited Pro Forma
Financial Information."

24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Brilliant is a production and development studio producing a new generation
of digital entertainment that is being distributed over the Internet and on
CD-ROM. The Company, headquartered in the United States, was incorporated in
July 1996. The Company was 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 prior to September 1996 discussed in
this section reflect only the operations of BII Australia. Founded in September
1993, BII Australia initially developed and sold interactive education and
entertainment CD-ROM titles primarily for children. With the completion of the
acquisition of SAND in September 1996, the nature of the Company's business
changed significantly. SAND is responsible for developing the Multipath Movie
suite of proprietary software tools, production process and first Multipath
Movie product. The Company is focusing its efforts on the development of the
Multipath Movie tools and production process, as well as the commercialization
of the Multipath Movie genre and has substantially completed the phase-out of
its traditional CD-ROM business. As a result of this change in the Company's
business, the following discussion may not be representative of its future
operations. The Company changed its fiscal year end from June 30 to December 31,
effective December 31, 1996.

The Company intends to generate a substantial majority of its future revenue
from the development and production of Multipath Movies and other
three-dimensional digitally created entertainment. The Company began the launch
of the first of its Multipath Movies, CYBERSWINE, in the fourth quarter of 1997.
The first products in the Storyteller Series and the Multipath Movies for Kids
series are expected to be completed in the fourth quarter of 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 Multipath Movie is also expected to depend 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.

The Company incurred significant operating expenses and development costs as
it continued development of its proprietary software tools and its Multipath
Movies and as it continued to expand in anticipation of growth. In connection
with the Company's acquisition of SAND in September 1996, the Company expensed
$1,350,000 attributable to in-process research and development. Also, the
Company entered into strategic relationships with Packard Bell NEC and Morgan
Creek. In September 1996, the Company issued to Packard Bell NEC and Morgan
Creek warrants to purchase 600,000 and 85,000 shares of Common Stock,
respectively, resulting in a $1,096,000 expense and corresponding credit to
equity in

25
<PAGE>
September 1996. In September 1997, Packard Bell NEC was issued an additional
200,000 warrants resulting in an expense of $140,000 and a corresponding credit
to equity, based on the value of the warrants issued. The Company also incurred
compensation expense of $125,000 in connection with directors' stock options in
November 1996. As a result of these operating expenses and charges, the Company
incurred a significant loss in the six months ended December 31, 1996, and in
the three months ended March 31, 1997 and June 30, 1997. The Company was
profitable for the three months ended September 30, 1997 as a result of revenue
recognized under its distribution agreement with Packard Bell NEC. However,
costs associated with development of its Multipath Movies in prior quarters
resulted in a net loss for the nine months ended September 30, 1997. See "Risk
Factors--Limited Operating History; Uncertain Profitability."

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996

REVENUES. The Company historically has derived its revenues from royalties,
development fees and software sales. The Company licenses its traditional CD-ROM
products to publishers and distributors in exchange for non-refundable advances,
and royalties based on product sales. Royalties based on product sales are due
only to the extent 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.

For those distribution contracts under which the Company is entitled to a
fixed minimum guaranteed amount that has not yet been received, the minimum
guaranteed amount is recognized as revenue when the CD-ROM master is delivered
to the distributor. Revenues from the sale of electronic tickets to view
Multipath Movies over the Internet will be recognized when such tickets are
sold.

The Company anticipates that revenues from the sale of Multipath Movies
through retail outlets will be recognized when the product is shipped. Product
returns or price protection concessions that exceed the Company's reserves could
materially adversely affect the Company's business, operating results and
financial condition and could increase the magnitude of quarterly fluctuations
in the Company's operating and financial results. Furthermore, if the Company's
assessment of the creditworthiness of its customers receiving product on credit
proves incorrect, the Company could be required to significantly increase the
reserves previously established. There can be no assurance that such future
write-offs will not occur or that amounts written off will not have a material
adverse effect on the Company's business, results of operations and financial
condition.

Revenues increased from $1,139,000 for the nine months ended September 30,
1996 to $2,377,000 for the nine months ended September 30, 1997. This represents
an increase of $1,238,000. Revenues increased from $281,000 for the three months
ended September 30, 1996 to $2,057,000 for the three months ended September 30,
1997. This represents an increase of $1,776,000. Revenues in the 1997 periods
included $1,973,333 of revenue from its distribution agreement with Packard Bell
NEC recognized in the third quarter of 1997. Revenues in the 1996 periods were
generated from sales of the Company's traditional CD-ROM products, a business
which is being phased out.

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

26
<PAGE>
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 $411,000 for the nine months ended September 30, 1996 to $17,000
for the nine months ended September 30, 1997. This represents a decrease of
$394,000, or 96%. Cost of revenues decreased from $140,000 for the three months
ended September 30, 1996 to $44 for the three months ended September 30, 1997.
Cost of revenues in the 1996 periods include costs associated with development
of the Company's traditional CD-ROM products. During the 1997 periods, most of
the costs associated with the development of the Company's Multipath Movies were
charged to research and development expenses, in accordance with Statement of
Financial Accounting Standards No. 86 ("SFAS No. 86") See "--Accounting
Treatment for Development Costs and Research Expenditures."

SALES AND MARKETING. Sales and marketing expenses include primarily costs
for advertising, promotions, brochures, travel and trade shows. Sales and
marketing expenses decreased from $1,099,000 for the nine months ended September
30, 1996 to $387,000 for the nine months ended September 30, 1997, and from
$969,000 for the three months ended September 30, 1996 to $185,000 for the three
months ended September 30, 1997. Sales and marketing expenses include expenses
related to grants of warrants to Packard Bell NEC of $140,000 in September 1997
and $960,000 in September 1996. Sales and marketing expenses are expected to
increase in future periods due to the expansion of the Company's sales force.

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 $345,000 for the nine months ended September 30, 1996 to
$1,665,000 for the nine months ended September 30, 1997, and from $140,000 for
the three months ended September 30, 1996 to $665,000 for the three months ended
September 30, 1997. These increases are attributable to increased costs
associated with the development of internal management and infrastructure to
support the Company's increased development activity, and other services.

RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and benefits of personnel conducting research and development of
software products. Research and development costs also include costs associated
with creating the Company's traditional CD-ROM software tools and the software
tools used to develop Multipath Movies. Research and development expenses
decreased from $1,641,000 for the nine months ended September 30, 1996 to
$1,418,000 for the nine months ended September 30, 1997, and from $1,518,000 for
the three months ended September 30, 1996 to $363,000 for the three months ended
September 30, 1997. These decreases are attributable to the addition in
September 1996 of $1,350,000 in-process research and development costs incurred
in connection with the SAND acquisition. Costs in 1997 include continuing
development of Multipath Movies and the Multipath Movie software tools. In
accordance with SFAS No. 86, the results of operations for the nine months ended
September 30, 1997 include in-process research and development expenses incurred
in connection with development of the Multipath Movie and the Company's
proprietary software tools.

The Company has chosen to focus on the development of Multipath Movies for
the PC and has deferred development for other platforms, including game
consoles, until warranted by market conditions. This focus allows the Company to
devote more of its resources to development of Multipath Movie technology and
development of additional titles. The Company believes that its decision will
have no adverse impact on revenues in the near or medium term.

DEPRECIATION. Depreciation expense relates to depreciation of fixed assets
such as computer equipment and cabling, furniture and fixtures and leasehold
improvements. These fixed assets are depreciated over their estimated useful
lives (up to four years) using the straight-line method. Depreciation expense
increased from $31,000 and $87,000 for the three and nine months, respectively,
ended September 30, 1996

27
<PAGE>
to $80,000 and $198,000 for the three and nine months, respectively, ended
September 30, 1997. These increases are primarily attributable to additional
computer equipment put in place and leasehold improvements made during 1997.

OTHER INCOME AND EXPENSE. Other income includes interest income and
expenses, gains and losses on foreign exchange transactions and export
development grants paid to BII Australia by the Australian Trade Commission for
BII Australia's participation in certain export activities. Interest increased
from a net expense of $20,000 and $48,000 for the three and nine months,
respectively, ended September 30, 1996 to a net income of $45,000 and $215,000
for the three and nine months, respectively, ended September 30, 1997. These
increases are due to the higher cash balances as a result of the initial public
offering in November 1996 and the repayment of all interest bearing debt.

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

REVENUES. Revenues decreased from $1,184,000 for the six months ended
December 31, 1995 to $350,000 for the six months ended December 31, 1996. This
represents a decrease of $834,000 or 70%, mainly attributable to decreased
royalty revenues as a result of a change in the Company's focus from development
of traditional CD-ROM products to the development of Multipath Movies.

COST OF REVENUES. Cost of revenues decreased from $434,000 for the six
months ended December 31, 1995 to $186,000 for the six months ended December 31,
1996. This represents a decrease of $248,000, or 57%. Cost of revenues in the
1995 period included costs associated with development of the Company's own
titles. In the 1996 period, the Company reduced its development of traditional
CD-ROM product. Many of the costs associated with the development of software
for third parties were paid directly by the third parties.

SALES AND MARKETING. Sales and marketing expenses increased from $35,000
for the six months ended December 31, 1995 to $971,000 for the six months ended
December 31, 1996. Sales and marketing expenses include expenses related to
grants of warrants to Packard Bell NEC of $960,000 in September 1996. 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 increased
from $129,000 for the six months ended December 31, 1995 to $1,065,000 for the
six months ended December 31, 1996. This increase is associated with increased
accounting, legal and consulting services provided to the Company and the value
of stock options granted during the period.

RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$103,000 for the six months ended December 31, 1995 to $1,877,000 for the six
months ended December 31, 1996. Of this increase, $1,350,000 is attributable to
the in-process research and development costs incurred in connection with the
SAND acquisition.

DEPRECIATION. Depreciation expense increased from $45,000 for the six
months ended December 31, 1995 to $74,000 for the six months ended December 31,
1996. This increase is attributable to additional computer equipment put in
place during 1996.

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

28
<PAGE>
balance outstanding on the PIE loan during the six months ended December 31,
1996 as compared to the six months ended December 31, 1995.

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

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

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

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

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

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 stockholder. 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). 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

29
<PAGE>
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.

FLUCTUATING OPERATING RESULTS

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, shipping
schedules for PC hardware with which Multipath Movies are bundled, introduction
or enhancement of products by the Company and its competitors, the ability of
the Company to produce and distribute retail packaged versions of Multipath
Movies in advance of peak retail selling seasons, the timing of releases of new
products or product enhancements by the Company and its competitors,
introduction or availability of new hardware, market acceptance of the Multipath
Movies and other new products, development and promotional expenses relating to
the introduction of new products or enhancements of existing products, reviews
in the industry press concerning the products of the Company or its competitors,
changes or anticipated changes in pricing by the Company or its competitors, mix
of distribution channels through which products are sold, mix of products sold,
product returns, the timing of orders from major customers, order cancellations,
delays in shipment and other developments and decisions including the timing and
extent of development expenditures, management's evaluation and judgment
regarding a title's acceptance, other unanticipated operating expenses and
general economic conditions. Additionally, a majority of the unit sales for a
product typically occurs in the quarter in which the product is introduced. As a
result, the Company's revenues may increase significantly in a quarter in which
a major product introduction occurs and may decline in following quarters. The
Company's revenues both domestically and internationally have varied
significantly between monthly and quarterly periods. Therefore, in the future,
the operating results for any quarter should not be taken as indicative of the
results for any quarter in subsequent periods.

The entertainment 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 materially adversely affected.

30
<PAGE>
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. Historically, the Company has expensed all
costs related to the development of both its software tools and Multipath Movie
titles. During the third quarter of 1997, the Company began capitalizing certain
development costs related to the production of Multipath Movies in accordance
with SFAS No. 86. 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."

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1997, the Company's principal source of liquidity was
approximately $4.3 million in cash. Prior to the Company's initial public
offering in November 1996, a substantial portion of its operations were financed
through loans from two significant stockholders, PIE and Reefknot.

In November 1996, the Company's initial public offering of 2,000,000 shares
of Common Stock at $5 per share provided approximately $8.5 million in cash
after underwriters' discounts and commissions and offering expenses. All loans
from Reefknot and PIE were repaid from proceeds of the initial public offering.

Net cash provided by operating activities during the nine months ended
September 30, 1996 was primarily attributable to revenues of $1,139,000. Net
cash used in operating activities during the nine months ended September 30,
1997 was primarily attributable to a net loss of $944,000 and an increase in
accounts receivable of $1,869,000. Net cash used in investing activities in the
nine months ended September 30, 1997 was due primarily to the purchase of
computer equipment. Cash flows used in financing activities in the nine months
ended September 30, 1996 was primarily attributable to the repayment of loans
from PIE and Reefknot.

The Company has an obligation under its agreement with Morgan Creek to fund
entirely the development of two Multipath Movies, the first of which, ACE
VENTURA, is currently under development.

The Company believes that current funds and cash generated from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next twelve months but will not be
sufficient to permit completion of the entire slate of Multipath Movie episodes
estimated to be completed in 1998. See "Business--Development and Production
Schedule." The Company intends to raise additional funds to permit completion of
all 22 titles 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. If the Company
is unable to obtain additional financing sufficient to fund the completion of
all 22 titles scheduled for completion in 1998, the Company anticipates that it
may defer completion of several titles. See "Risk Factors -- Future Capital
Needs; Uncertainty of Additional Funding."

31
<PAGE>
BUSINESS

GENERAL

As a key part of its strategy, the Company has secured quality content for
its Multipath Movies from a number of proven sources, including SUPERMAN from
D.C. Comics (a subsidiary of Warner Bros.), XENA: WARRIOR PRINCESS and HERCULES
& XENA THE ANIMATED MOVIE, each from Universal Studios, ACE VENTURA from Morgan
Creek, POPEYE from King Features Syndicate and the CHOOSE YOUR OWN NIGHTMARE
series for kids from Bantam Doubleday Dell Books. The Company also develops
Multipath Movies based on internally-developed content. Further to its strategy,
the Company has entered into distribution agreements with key industry
participants Packard Bell NEC, CompuServe, and graphics acceleration hardware
manufacturers Matrox and S3, which the Company believes will enable over 4
million PC users to access its Multipath Movies over the next twelve to eighteen
months.

The Company's Multipath Movies combine the best qualities of traditional
filmed entertainment -- complex characters, stories and plots, with the best of
the traditional computer game -- interactivity. The Company's Multipath Movies
are designed to appeal to the entire home PC market, including both the core
gamer and the much larger segment of PC users not currently served by
traditional game developers. In order to offer digital entertainment products
with wide appeal, the Company is producing a variety of Multipath Movies
tailored to various demographic groups, such as its STORYTELLER-TM- SERIES in
which an animated storyteller narrates engaging interactive stories targeted at
children eight to twelve years of age and Multipath Movies for Kids-TM-,
including POPEYE, targeted to children as young as three years old. Multipath
Movies incorporate a number of features that the Company 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
interact with the story seamlessly, influencing the plot without interrupting
its flow or graphical presentation.

32
<PAGE>
create a season-length series for the broadcast market. Similarly, the Company
intends to produce 80- 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 intends to enter into joint ventures or partnerships
with film and television production companies to jointly develop and release
digital entertainment for the broadcast and home video markets utilizing the
Company's proprietary tools.

Using its proprietary software tools in conjunction with the Company's
digital production and layup skills, the Company develops Multipath Movies in a
single production process. The Company has five proprietary software tools: (i)
SCRIPNAV, a software tool that enables a script writer to write, review and
correct branching multipath scripts; (ii) TALKTRACK, 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; (iv) MR. COPY, a new software tool that arranges, reorders and, using
licensed technology, compresses and decompresses audio and bit map files created
during the production of a Multipath Movie and optimally organizes the files for
use in playing the Multipath Movie; and (v) DIGITALPROJECTOR, which contains all
the necessary elements to load and play a Multipath Movie. Utilizing its
proprietary software tools, the Company can produce each title in multiple
formats 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 TalkTrack 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. The Company believes that the utilization of
existing entertainment resources will enable it to generate high-quality digital
entertainment at a low cost.

The Company has significantly strengthened its title development and
production pipeline during the past year. Brilliant has completed five episodes
as set forth below and has 57 additional Multipath Movie episodes in various
stages of development and production. The Company plans to complete six
additional episodes prior to the end of 1997, 29 episodes during 1998 and the
balance of the current production slate, or 22 episodes, during 1999. The
Company plans to release completed episodes based upon market conditions and
other factors, including the bundling and shipping schedules of its OEM
distributors. See "-- Introducing the Multipath Movie -- Development and
Production Schedule."
<TABLE>
<CAPTION>
EPISODES IN
DEVELOPMENT 1997 1998
TITLE CONTENT SOURCE OR PRODUCTION COMPLETIONS COMPLETIONS
- ----------------------------------- ---------------------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
CYBERSWINE......................... Internally developed 2 5 2
GRAVITY ANGELS..................... Internally developed 7 1 4
TEN WEEKS IN THE HEAD BIN.......... Internally developed 6 -- 4
CHOOSE YOUR OWN NIGHTMARE.......... Bantam Doubleday Dell 12 4 8
POPEYE............................. King Features Syndicate 3 1 2
ACE VENTURA........................ Morgan Creek 9 -- 3
XENA: WARRIOR PRINCESS............. Universal Studios 9 -- 3
SUPERMAN........................... D.C. Comics 9 -- 3
--
--- ---
TOTAL............................ 57 11 29
--
--
--- ---
--- ---

<CAPTION>
1999
TITLE COMPLETIONS
- ----------------------------------- ---------------
<S> <C>
CYBERSWINE......................... 0
GRAVITY ANGELS..................... 2
TEN WEEKS IN THE HEAD BIN.......... 2
CHOOSE YOUR OWN NIGHTMARE.......... --
POPEYE............................. --
ACE VENTURA........................ 6
XENA: WARRIOR PRINCESS............. 6
SUPERMAN........................... 6
--
TOTAL............................ 22
--
--
</TABLE>

33
<PAGE>
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. In addition, technological advances have
enabled millions of consumers and businesses to utilize the Internet,
particularly the World Wide Web. International Data Corporation estimates that
World Wide Web users grew to approximately 35 million by the end of 1996 and
will grow to approximately 163 million by 2000. 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, the growing
popularity of the Internet and the increasing ease 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.

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 has developed 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 also allow users to control
characters' moods and actions. In addition, the Company has developed a system
that enables users to interact in real time with its digital entertainment
products over the Internet. The Company has also developed a software tool that,
when used with licensed compression technologies, decreases download time 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 products have 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

34
<PAGE>
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 many of the high programming costs 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. 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. Consequently,
the Company expects to be able to amortize its production costs across a number
of revenue streams.

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
valuable leisure time that is required to complete the experience.
Well-conceived games are also 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
multimedia PCs is growing, the penetration rate of a typical game product
remains relatively low.

BRILLIANT'S BROAD TARGET MARKET. The Company's digital entertainment
products are designed to appeal to the entire home PC market, 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 as few as
30 minutes and will utilize content intended to appeal to a wider audience than
the traditional gamer. In order to offer digital entertainment products with
wide appeal, the Company is producing a variety of Multipath Movies tailored to
various demographic groups, such as its Storyteller Series in which an animated
storyteller narrates engaging interactive stories targeted at children eight to
twelve years of age and Multipath Movies for Kids, including POPEYE, targeted to
children as young as three years old.

DIGITAL ENTERTAINMENT FOR THE TELEVISION BROADCAST/CABLE AND HOME VIDEO
MARKETS

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

35
<PAGE>
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 is expected to enable 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 intends to enter into joint ventures or partnerships with
film and television production companies to jointly develop digital
entertainment for the broadcast and home video markets utilizing the Company's
proprietary tools.

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 the Multipath
Movie -- a new genre of digital entertainment; (ii) continue to develop and
secure compelling content; (iii) devise and aggressively pursue a broad range of
distribution methods; (iv) leverage proprietary software tools and production
capabilities to develop low-cost, high-value, digital entertainment products in
multiple formats; (v) utilize the existing entertainment industry talent base
for content development and establish the Multipath format as a standard; and
(vi) maintain a strong in-house research and development program.

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 will also serve as television broadcast/cable programming and home
video features. The Company has designed its Multipath Movies to capitalize on
underserved segments of the home PC market with stories that can be experienced
in as few as 30 minutes and utilize content intended to appeal to a wider
audience than the traditional gamer. The Company is producing a variety of
Multipath Movies tailored for various demographic groups, including comedies,
adventures, science fiction stories and children's stories. Through its
integrated production process for Multipath Movies, the Company has the ability
to produce 30-minute episodes for the broadcast/cable television market and 80-
to 120-minute animated features 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.

CONTINUE TO DEVELOP AND SECURE COMPELLING CONTENT

In addition to internally developing attractive and creative original
content, a key element of the Company's strategy focuses on securing third party
licensed content which is compelling and has an established level of consumer
recognition. The Company has secured quality content for its Multipath Movies
from a number of proven sources, including SUPERMAN from D.C. Comics (a
subsidiary of Warner

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Bros.), XENA: WARRIOR PRINCESS and HERCULES & XENA THE ANIMATED MOVIE, each from
Universal Studios, ACE VENTURA from Morgan Creek, POPEYE from King Features
Syndicate and the CHOOSE YOUR OWN NIGHTMARE series for kids from Bantam
Doubleday Dell Books. The Company is collaborating with Morgan Creek to jointly
develop Multipath Movies based on the Ace Ventura character and plans to work
with other studios and content providers to develop Multipath Movies. For
example, the Company plans to cooperate with D.C. Comics' writers to script
Multipath Movies featuring the Superman character.

DEVISE AND AGGRESSIVELY PURSUE A BROAD RANGE OF DISTRIBUTION METHODS

In order to maximize the number of users able to play its Multipath Movies
on their PCs, the Company is devising and pursuing a broad range of distribution
methods. The Company is pursuing hardware/software bundling arrangements, retail
CD-ROM sales, and promotional agreements with Internet service providers, as
well as joint ventures with studios and other content owners who have their own
production and distribution capabilities. The Company has entered into
distribution agreements with key industry participants Packard Bell NEC,
CompuServe and graphics acceleration hardware manufacturers Matrox and S3, which
the Company believes will enable over four million PC users to access its
Multipath Movies over the next twelve to eighteen months. The Company intends to
aggressively seek joint ventures with film and television studios to create
their own Multipath Movies under revenue sharing arrangements. The Company
intends to create other innovative distribution methods and is exploring
arrangements with ISPs and Internet advertisers and interactive links to
Internet entertainment sites.

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 produces Multipath Movies in multiple delivery formats, including
CD-ROM and the Internet. The Company plans to market versions of its digital
stories also as television programming and for home video. By managing the
specific sound, graphics, layup and other production elements associated with
each format on an integrated basis from the beginning, the Company can produce
multiple formats from each title during one production process. This enables the
Company to amortize its production costs across the revenue stream associated
with each format. Consequently, the Company believes that it will be able to
offer high-quality digital entertainment at competitive prices. In addition, the
Company's proprietary lip synchronization software tool allows for low-cost
modification of the Multipath Movies to any language without the awkward
appearance of dubbed movies. The Company also believes that its proprietary
software tools and object-oriented production process enable it to inexpensively
develop digital entertainment content that is readily adaptable for a variety of
different hardware platforms. 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 AND ESTABLISH THE MULTIPATH FORMAT AS A STANDARD

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 proprietary software
tools emulate film writing and production techniques allowing screenwriters,
directors and producers to develop Multipath Movies without the use of expensive
programming teams. The Company intends to selectively release object code
versions of its software tools through joint ventures designed to more rapidly
familiarize the creative community with the production processes and commercial
possibilities of Multipath Movies. The Company anticipates that these joint
ventures will generate revenue for the Company through retained interests and
will increase the number of Multipath Movies worldwide to help establish the
Multipath Movie format as a de facto standard. In addition, the Company plans to
derive revenue

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through sales of subsets of its software tools. The Company also intends to
selectively adapt and enhance its tools to include features suggested by
entertainment production professionals.

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.

INTRODUCING THE MULTIPATH MOVIE

The Company's Multipath Movies combine the best qualities of traditional
filmed entertainment -- complex characters, stories and plots, with the best of
traditional computer games -- interactivity. Multipath Movies are
three-dimensional, digitally animated stories 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 as short as 30 minutes in
length 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.

Multipath Movies are 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 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. A typical Multipath Movie
will prompt users for a decision approximately every 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 a Multipath
Movie. Further into a Multipath Movie, the level of prompted interactivity will
increase and prompts are designed to become less direct and more intuitive.
Users interact with Multipath Movies by responding with a mouse, joystick,
keyboard or remote control device to decision points which affect the plot of a
Multipath Movie. Decision points are identified by indicators that include (i)
on-screen or dialogue prompts that manipulate the moods and personality profiles
of the main characters, which in turn produce new plot directions and story
lines, (ii) a character choice icon appearing at pre-scripted points where there
is tension between two characters or characters have differing opinions about an
issue which requires the viewer to make a supportive selection, and (iii) a
mechanism which inventories items a character has collected in prior scenes and
provides the user access to those items at set moments which in turn affect the
action and the outcome of a scene.

For example, in viewing CYBERSWINE, the 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. In CYBERSWINE, 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. Additionally, in XENA: WARRIOR PRINCESS the Company plans to
incorporate an interface mechanism enabling users to make characters collect
items such as weapons, valuables or food that they can use in later scenes.

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The Multipath Movie allows the user to jump forward or reverse to previously
viewed scenes and, 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 the characters of the Multipath Movie.

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

RETAIL CD-ROM TITLES. The Company intends to produce versions of its
Multipath Movies in stand-alone CD-ROM format for retail distribution.

BUNDLED TITLES WITH ONLINE CAPABILITY. The Company has also developed a
system that enables 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, but the Company has developed a system
permitting real-time online interactivity with its Multipath Movies. As part of
the Company's system, most of the data necessary for viewing Multipath Movies is
distributed on CD-ROM or installed on PC hard drives by manufacturers. This data
generally includes a library of characters, scenes, graphics, sound and other
components, as well as DigitalProjector, which includes the architecture
necessary for playing the Multipath Movie and accessing the Internet for future
episodes. Generally, consumers will receive a preview or first episode of a
Multipath Movie title without being required to connect to the Internet. Because
most of the data necessary to play a Multipath Movie and future episodes is
resident on the CD-ROM or hard drive of the viewer's computer, a low-bit rate
data stream can be delivered via the Internet to provide the animation and
storyline for future episodes. The Company is currently also developing
technology that will stream animation messages as well as sound, which will then
not be required to reside on the user's CD-ROM or hard drive.

TELEVISION BROADCAST/CABLE PROGRAMMING AND HOME VIDEO. Commencing in 1998,
the Company also plans to release certain of its Multipath Movie titles in
non-interactive format, as television broadcast/cable programming and as home
video features. The Company intends to segment such Multipath Movies into
episodes for sale into the 30-minute broadcast and cable series market. By
packaging together multiple 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 80- to
120-minute features to home video publishers.

MULTIPATH MOVIE CONTENT CATEGORIES

The Company is developing a broad range of Multipath Movie titles designed
to appeal to viewers of varying ages and tastes. Much of the PC-based digital
entertainment developed to date has been designed for the dedicated computer
game player, typically an eight to 21-year-old male with substantial free time
and spending money who appreciates game playing complexities. The Company's
strategy is to develop and produce Multipath Movie titles based upon various
types of compelling content directed at discrete consumer categories. Because
internally-developed titles require significant time and expertise, the Company
intends to place even greater emphasis on licensed content in the future. The
Company is currently developing titles according to the following categories:

MULTIPATH MOVIE FEATURES. The Company's first Multipath Movie, CYBERSWINE,
was produced from original scripts developed by the Company, and is loosely
based on an Australian science fiction comic strip series. The Company has
certain royalty obligations on revenues derived from CYBERSWINE. The Company is
also developing various other titles for this category including the internally
generated series, GRAVITY ANGELS and TEN WEEKS IN THE HEAD BIN, as well as
titles based on licensed content including ACE VENTURA, XENA: WARRIOR PRINCESS
and SUPERMAN. Additional titles in this category will be based on science
fiction,

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adventure, comedic and other types of underlying content and may capitalize on
popular and widely recognized film, television and comic strip characters and
personalities. The Company intends to investigate and pursue content
opportunities for this category that will continually broaden the appeal of
Multipath Movie features.

STORYTELLER SERIES. 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 be based upon published children's books and
original stories. Initial titles in the Storyteller Series, including NIGHT OF
THE WEREWOLF and BITING FOR BLOOD, will be based upon Bantam Doubleday Dell's
popular children's series, CHOOSE YOUR OWN ADVENTURE, currently comprised of
approximately 181 titles, and CHOOSE YOUR OWN NIGHTMARE, currently comprised of
approximately 18 titles. Each of these book series is written in a branching
format, in which the reader will skip to different pages or chapters of the book
depending upon responses to questions posed in the story. Because of the
branching nature of the CHOOSE YOUR OWN ADVENTURE and CHOOSE YOUR OWN NIGHTMARE
series, the Company believes that these stories are ideally suited to the
multipath format of the Storyteller Series. The Company anticipates introducing
the Storyteller Series in the fourth quarter of 1997.

MULTIPATH MOVIES FOR KIDS. The Company is developing Multipath Movies for
Kids for children three to twelve years of age. These titles will be
specifically designed to appeal to this age group by including more comic-like
characters and engaging music and sound effects. The first title, QUEST FOR THE
WOOLLY MAMMOTH, featuring POPEYE, and is scheduled to be completed in the fourth
quarter of 1997.

DEVELOPMENT AND PRODUCTION SCHEDULE

Over the past year, the Company has placed considerable emphasis on the
development and production of a broad slate of Multipath Movie titles. To date,
the Company has completed five episodes of CYBERSWINE, which are being launched
through its OEM arrangements. The Company also intends to release the first five
CYBERSWINE episodes on a single CD-ROM through retail distribution channels. As
set forth in the chart on the following page, the Company has 62 titles in
various stages of production or development, including 11 titles scheduled for
completion in 1997, 29 titles scheduled for completion in 1998 and 22 titles
scheduled for completion in 1999. The Company plans to release completed titles
based upon market conditions and other factors, including the bundling and
shipping schedules of its OEM distributors, and the availability of additional
financing. The Company anticipates that the proceeds of the Offering will not be
sufficient to fund completion of the entire slate of Multipath Movie episodes
estimated to be completed in 1998, and intends to attempt to raise additional
funds to permit completion of all 22 titles 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. If the Company is unable to obtain additional financing sufficient
to fund the completion of all 22 titles scheduled for completion in 1998, the
Company anticipates that it may defer completion of several titles. See "Risk
Factors--Future Capital Needs; Uncertainty of Additional Funding."

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CURRENT MULTIPATH MOVIE DEVELOPMENT AND PRODUCTION SCHEDULE

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ESTIMATED
TITLE NO. OF COMPLETION DISTRIBUTION
(LICENSOR IF APPLICABLE) STATUS EPISODES DATE FORMAT PROGRAM DESCRIPTION
- ---------------------------------- -------------- ----------- ----------- --------------- -----------------------
MULTIPATH MOVIE FEATURES

CYBERSWINE Completed 1 -- 30 min Q3 1997 Bundled, Science fiction for
ages 13
Completed 4 -- 30 min Q3 1997 Internet, and above
Production 1 -- 30 min Q3 1998 Retail
Production 1 -- 30 min Q3 1998

GRAVITY ANGELS Production 1 -- 30 min Q4 1997 Internet, Science fiction for
ages 13
Production 3 -- 30 min Q2 1998 Retail, and above
Scripting 1 -- 50 min Q3 1998 D1 broadcast(1)
Scripting 1 -- 50 min Q1 1999
Scripting 1 -- 50 min Q3 1999

TEN WEEKS IN THE HEAD BIN Scripting 4 -- 30 min Q3 1998 Internet, Adventure/science
fiction
Scripting 1 -- 50 min Q1 1999 Retail, for ages 16 and above
Scripting 1 -- 50 min Q3 1999 D1 broadcast(1)

ACE VENTURA
(Morgan Creek Productions)
CASE OF THE SERIAL SHAVER Scripting 1 -- 30 min Q4 1998 Internet, Comedic adventures for
THE DON IS DEAD Scripting 1 -- 30 min Q4 1998 Retail ages 8 through 16
FISTS OF FUR Scripting 1 -- 30 min Q4 1998
UNTITLED Development 6 -- 30 min 1999

XENA: WARRIOR PRINCESS Development 3 -- 30 min Q4 1998 Internet, Heroine
(Universal Studios) 6 -- 30 min 1999 Retail action/adventure for
ages 8 and above

SUPERMAN Development 1 -- 30 min Q3 1998 Internet, Superhero action/
(D.C. Comics) 2 -- 30 min Q4 1998 Retail adventure for ages 8
6 -- 30 min 1999 and above

STORYTELLER SERIES

CHOOSE YOUR OWN NIGHTMARE SERIES
(Bantam Doubleday Dell Books)
HALLOWEEN Production 1 -- 30 min Q4 1997 Internet, Light thrillers for
NIGHT OF THE WEREWOLF Production 1 -- 30 min Q4 1997 Retail ages 8 through 12
BITING FOR BLOOD Production 1 -- 30 min Q4 1997
MUMMY WHO WOULDN'T DIE Production 1 -- 30 min Q4 1997
THE SUMMONING Production 1 -- 30 min Q2 1998
SOMETHING IN THE WOODS Production 1 -- 30 min Q2 1998
THUNDERSTRUCK Scripting 1 -- 30 min Q2 1998
BLACK HOLE Scripting 1 -- 30 min Q2 1998
EVIL PENPAL Scripting 1 -- 30 min Q3 1998
HOW I BECAME A FREAK Scripting 1 -- 30 min Q3 1998
CASTLE OF DARKNESS Scripting 1 -- 30 min Q3 1998
HIT GHOST Scripting 1 -- 30 min Q3 1998

MULTIPATH MOVIES FOR KIDS

POPEYE
(King Features Syndicate)
QUEST FOR THE WOOLLY MAMMOTH Production 1 -- 30 min Q4 1997 Internet, Animated cartoon for
RESCUE OF THE WOOLLY MAMMOTH Production 1 -- 30 min Q2 1998 Retail ages 3 through 12
TREASURE HUNT Production 1 -- 30 min Q3 1998
</TABLE>

(1) The Company, as the creator of this title, retains all rights to its future
distribution. Depending upon the title's reception in the market, this title
may be slated for distribution into the television or home video market if
warranted.

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INTERNET DISTRIBUTION AND TICKETING

Given the importance of the Internet as a distribution channel for Multipath
Movies, the Company has expended considerable time and resources during the past
year to enhance Multipath Movies for online delivery. The Company believes that
the widespread commercialization of Multipath Movies as a new digital
entertainment genre is not only dependent upon the quality of the product and
the viewer's experience, but also upon the viewer's ease in accessing the
product online. Given the complexities involved in delivering the Multipath
Movie product over the Internet, which is accessed through numerous delivery
mechanisms including different OEM configurations, Internet service provider
("ISP") systems, proprietary online services systems and directly through the
World Wide Web, the Company has had to overcome various technical challenges in
order to ensure the easy installation, use and payment for use of its Multipath
Movie products in these discrete hardware, software and online environments.

In connection with delivering the CYBERSWINE gold master to Packard Bell NEC
under its bundling arrangement, the Company spent considerable time meeting the
quality control standards of Packard Bell NEC as well as adapting the product
for easy and software error-free use by consumers that might access CYBERSWINE
through various online entry points including online services and ISPs. As part
of this process, the Company believes that it has significantly improved the
delivery of the Multipath Movie format over the Internet and online and will be
able to utilize this expertise in bundling Multipath Movies with other OEMs and
in its current or future online arrangements. The Company has also engineered
its distribution technology and DigitalProjector to be compatible with
Microsoft's Internet Explorer and Netscape Navigator, as well as the multiple
configurations of Windows 95. Once installed, the DigitalProjector and its
installation program query the client computer configuration files and
automatically adjust DigitalProjector to operate within the specific parameters
of the client computer. The Company's server technology can also issue "cookies"
to end-user computers allowing two-way transfer of data that enables the Company
to transparently assist the end-user computer to play a Multipath Movie.

In addition to developing the necessary infrastructure to enable its
products to be delivered over and through numerous online configuration
environments, the Company has also developed its own proprietary ticketing
system to collect revenue from its online users. The Company's ticketing system
is designed for compatibility with a wide variety of data storage and content
billing arrangements, and to provide added value for ISPs and allow customers to
be billed more easily under a variety of charging options. The Company's
ticketing system allows a viewer to purchase a "Movie Ticket" and apply the
ticket to purchase a Multipath Movie from any participating ISP. When a viewer
accesses the "Box Office" at Brilliant's Web site, if the viewer is not a
subscriber with one of the participating ISPs, the viewer purchases a "Direct
Purchase" ticket against a credit card. When the viewer accesses the ISP to
purchase a movie, a verification and authorization sequence begins that enables
the ISP to approve the viewer for viewing and creates an audit process by which
the Company reimburses the ISP for its revenue share. If the viewer accessing
the "Ticket Vendor" is a user of an ISP that has a billing arrangement with the
Company, the viewer's ISP account can be charged as an "Indirect Purchase"
ticket. The ISP charges the viewer on its monthly statement for the Multipath
Movies viewed and the Company's portion of accrued charges is forwarded to the
Company. The Ticket Vendor and the Company's principal Multipath Movie serving
Web site are currently hosted and maintained by Worldsite Networks
("Worldsite"). The Company's proprietary ticketing system and multipath serving
software reside on restricted access servers at Worldsite's facility and are
maintained, upgraded and queried for reports by the Company via remote access.
Through the facilities of Worldsite, the Company (i) receives requests from
customers to purchase Tickets, (ii) receives, processes and transmits credit
card or other payment authorization sufficient to allow the Company to receive
payment of the price of each Ticket from the customer's bank, credit card
processor, ISP, debit account, or special purpose Internet charge or payment
account, (iii) delivers Tickets to customers, (iv) provides Multipath Movie
instructions after receipt, verification and cancellation of the customer's
Ticket and (v) collects and processes information relating to customers for the
benefit of the Company.

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THE PRODUCTION OF MULTIPATH MOVIES

[LOGO]

<TABLE>
<S> <C>
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, TalkTrack and SCuD
Engine are gathered by Mr. Copy, fed to the
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.
</TABLE>

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 director builds
"worlds" and "models." In the same way that traditional filmed entertainment
directors give actors wardrobes and props, the Multipath Movie director
"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,

43
<PAGE>
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 five proprietary software tools that enable it to
produce high-quality Multipath Movies: (i) SCRIPNAV, a software tool that
enables a script writer to write, review and correct branching multipath
scripts; (ii) TALKTRACK, 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; (iv) MR. COPY, a new software
tool that arranges, reorders and, using licensed technology, compresses and
decompresses audio and bit map files created during the production of a
Multipath Movie and optimally organizes the files for use in playing the
Multipath Movie; and (v) DIGITALPROJECTOR, which contains all the necessary
elements to load and play a Multipath Movie.

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.

TALKTRACK. TalkTrack 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 tool samples
sounds and matches them to the most appropriate mouth shape, and in the process,
builds a library of correct sound samples with a direct relationship to a
correct mouth shape. As the Company creates more content, it will build a
library of improving sound and mouth shape matches. The Company believes that
TalkTrack is a more efficient and cost effective way to incorporate voice into
Multipath Movies than other existing sound tools. In addition, TalkTrack allows
for low cost modification of the Multipath Movies to any language without the
awkward appearance of dubbed movies. The sophistication of this tool has been
significantly enhanced during 1997 by incorporation of improved voice sampling
techniques and database applications.

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SCUD ENGINE. SCuD Engine is the centerpiece of the Multipath Movie
development and production process. SCuD Engine is an object-oriented
environment that collects and integrates source files from ScripNav, graphics,
sound and TalkTrack tools and makes them available for layup and editing. SCuD
Engine provides a multi-window editing environment in which the developer can
preview, analyze and edit the final product. When a previously unedited scene is
opened, SCuD Engine retrieves the text for the scene from the script text file
of ScripNav 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. SCuD also
includes a Shot Based Editing System which enables multiple sets and or props to
be incorporated into one scene such that cuts and edits can take place in line
with a traditional film environment. For example, in CYBERSWINE the specific
scene data (sets and props) could be loaded into memory and then shown through
different camera positions. In GRAVITY ANGELS, data from a number of different
scenes (multiple scene sets and props) can be loaded into memory residing in an
'off' state until it needs to be used by the camera or editor at which state it
returns to an 'on' state. This substantially improves the visual richness of
scenes.

MR. COPY. The Company has recently developed Mr. Copy which builds,
integrates and allocates the final data files in composing a Multipath Movie to
be played on the DigitalProjector. Mr. Copy arranges, assembles and, using
licensed technology, compresses and decompresses thousands of audio and bit map
files that are created during the development of a Multipath Movie in a manner
that optimizes the playing of the title. Mr. Copy compresses files allowing up
to five hours of branching content to be captured in as little as 60 megabytes
of disk space, as compared with conventional technologies which presently would
require at least one gigabyte of storage.

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, and may develop DigitalProjector for
other platforms.

In order to further promote the Multipath Movie as a digital entertainment
format, the Company intends to release on a limited basis object code versions
of its software tools to selected entertainment production companies and other
entertainment professionals. The Company intends to release these software tool
sets through joint venture arrangements in which the Company can control the
proprietary value of the software tools and control their dissemination. As part
of these joint venture arrangements, the Company will provide certain technical
and production assistance, while deriving revenue from a retained ownership
interest in the Multipath Movie titles produced by the joint venture partner.
The Company will particularly target potential joint venture partners with
either the type and availability of content or other creative and production
skills that are well-suited to the software tools and production of Multipath
Movies. The Company believes that the availability and use of the software tools
by the entertainment community at large will stimulate the overall level of
interest in the Multipath Movie format and will increase the number of available
Multipath Movie titles, thereby helping to establish the Multipath Movie format
as a de facto standard. Additionally, the Company intends to selectively adapt
and enhance its tools to include features suggested by entertainment production
professionals.

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.

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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.

[CHART]

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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 30 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 scalable, 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.

<TABLE>
<CAPTION>
HOME VIDEO BROADCAST/CABLE
CRITERIA FEATURE SERIES PC INTERNET/ONLINE
<S> <C> <C> <C> <C>
MOVIE DURATION 80-120 minutes 30-minute episodes 30-120 minutes 30-120 minutes

POLYGONS PER Unlimited Unlimited 1,000 1,000
CHARACTER

POLYGONS PER SCENE Unlimited Unlimited 5,000 5,000

SPECIAL EFFECTS All All Limited Limited

INTERACTIVITY None None Plot branching Plot branching
Camera angle Camera angle
Real time decisions Real time decisions

OUTPUT METHOD Pre-rendered video Pre-rendered video Real time 3D graphics Real time 3D graphics

DISTRIBUTION MEDIA D1 tape D1 tape CD-ROM Internet
</TABLE>

SALES AND MARKETING

The Company's sales and marketing program is designed to achieve revenue
growth, create and continue capturing new customers and promote the ongoing
growth of the Multipath Movie genre through various distribution methods and
promotional initiatives. In order to facilitate the broad acceptance of
Multipath Movies, the Company is pursuing a broad distribution strategy. The
Company will focus on three primary channels in building broad distribution of
its product formats:

CD-ROM RETAIL CHANNELS AND DIRECT-TO-RETAIL. The Company is establishing a
retail distribution program in which Multipath Movies will be marketed through
traditional software publishers and distributors nationwide. The Company seeks
to develop multiple arrangements without giving broad title exclusivity to any
particular publisher or distributor. To complement these arrangements, the
Company is also establishing a direct-to-retail program in which the Company
will enter into certain marketing and distribution agreements with selected
retailers with particular emphasis on national and regional computer, office and
mass merchants. The Company will outsource the logistical, shipping and
warehousing needs for its direct-to-retail program.

INTERNET AND ONLINE SERVICES Given the importance of Internet and online
delivery in the overall success of the Multipath Movie format, the Company
believes that it is critical to make Multipath Movies available to as many
Internet and online service users as possible. Consequently, the Company seeks
to bundle its titles on various types of PC hardware. Through its relationship
with Packard Bell NEC, Packard Bell NEC is obligated to bundle the Company's
products on up to six million PCs shipped during a three-

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year period. In addition to this bundling arrangement, the Company has entered
into bundling arrangements with each of S3 and Matrox. The Company will continue
to pursue additional bundling arrangements with other OEM manufacturers. To
complement its title bundling arrangements, the Company is also establishing a
site for its Multipath Movies as part of the online service offered by
CompuServe, including a bulletin board, library and conferencing/chat area. As
part of this program, selected Multipath Movie titles will be distributed to
Compuserve users on CD-ROMs, which will allow them to purchase Multipath Movies
through this site while being billed on their monthly CompuServe statement. The
Company anticipates that Multipath Movies will become available through the
CompuServe service by the first quarter of 1998.

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 beginning in 1998. Due to the
episodic and serial nature of its Multipath Movies, the Company's titles are
easily adaptable to the episodic television market. In addition, by grouping
multiple episodes together, the Company can also produce titles for the cable
and direct to video markets.

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 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 has
recently retained a managing director for Europe, based in the United Kingdom.
The Company is currently exploring possible product development and distribution
joint venture and strategic relationship opportunities in Europe. The Company
believes that product distribution in Europe will require implementation of
localized distribution strategies and methods through established regional
distributors. In addition, the Company believes that greater emphasis on
traditional retail distribution methods will be required in Europe initially
because of lower Internet usage rates in this region.

Given the global nature of the World Wide Web, the Company believes that
international markets represent a significant incremental opportunity for its
Multipath Movies delivered over the Internet. Utilizing its proprietary
TalkTrack technology, the Company believes it can deliver Multipath Movies in
foreign languages without significant logistical or cost issues. In particular,
the Company intends to initially explore opportunities in France and Germany.
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.

STRATEGIC, CONTENT AND DISTRIBUTION RELATIONSHIPS

The Company has entered into various strategic relationships and other
arrangements to assist in the development, production and distribution of
Multipath Movies. These 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 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, Canada, the United Kingdom, Australia,
New Zealand and South Africa over a three-year period which began in August of
1997 (the "Shipping Period"). The bundled software allows the user to play or
download Multipath Movies from an Internet site established by the Company. The
bundled software permits viewing of a preview or the first episode of CYBERSWINE
and includes a library of characters, scenes, graphics, sound and other

48
<PAGE>
components permitting viewing of future episodes of the title. The Company has
the ability to periodically substitute other Multipath Movie titles for the
CYBERSWINE 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. Under the terms of the agreement,
which was amended in September, 1997, Packard Bell NEC will pay a royalty on
each bundled unit of a Multipath Movie shipped by Packard Bell NEC during a
portion of the Shipping Period and is entitled to receive a percentage of the
net revenues earned by the Company from those bundled units. Thereafter, the
Company will be entitled to all revenues that are derived from Multipath Movies
distributed pursuant to the Agreement. Packard Bell NEC received warrants to
purchase 600,000 shares of the Company's Common Stock upon execution of the
agreement in 1996, and additional warrants to purchase 200,000 shares of the
Company's Common Stock upon execution of the amendment to the agreement in
September 1997. 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 PCs and
over the Internet. The first project commenced under this agreement is a
thirteen episode comedy adventure series featuring the Ace Ventura character.
The Company is scripting three episodes of ACE VENTURA, which it expects to
complete during 1998. The Company expects to commence scripting of an additional
six episodes in the fourth quarter of 1997. The rights granted by Morgan Creek
under the agreement do not extend to broadcast/cable television programming.
Morgan Creek is providing 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. Morgan Creek also received 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.

BANTAM DOUBLEDAY DELL BOOKS FOR YOUNG READERS. The Company has entered into
an agreement (the "Bantam Agreement") with Bantam Doubleday Dell providing the
Company with an option to acquire exclusive worldwide interactive rights to
Bantam Doubleday Dell's "CHOOSE YOUR OWN NIGHTMARE" and "CHOOSE YOUR OWN
ADVENTURE" series of interactive books. The Company's option covers over 185
titles, plus any additional titles in each series published by Bantam Doubleday
Dell. 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
Doubleday Dell 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 four titles, the Company is required to pay Bantam
Doubleday Dell a non-refundable advance against which royalties will be applied.
To date, the Company has exercised its option on 10 titles.

49
<PAGE>
KING FEATURES SYNDICATE. The Company has entered into an agreement with
King Features Syndicate providing the Company with the right to use its
character Popeye and related story characters in Multipath Movies for play on
PC-based CD-ROM products and over the Internet in countries where English is the
predominantly spoken language. The option includes the right to adapt licensed
titles for three Multipath Movies. The Company has paid King Features Syndicate
a cash advance against future royalties. If the Company meets certain minimum
earned royalty levels, the Company shall have the option to extend the agreement
for two years beyond its original three-year term which continues until December
31, 1999.

UNIVERSAL STUDIOS. The Company's agreement with Universal provides the
Company with the rights to use certain story scripts from the live action
television series XENA: WARRIOR PRINCESS and animated character designs from the
direct-to-video motion picture HERCULES & XENA THE ANIMATED MOVIE for use in the
production of Multipath Movies. The sale of Multipath Movie titles based on the
original plots can be made for the CD-ROM and DVD platforms and additional plots
can be distributed and sold via the Internet. The Company has paid Universal
Studios part of an advance against future royalty payments and guaranteed
minimum royalties. The initial term of this agreement continues until January
31, 2002.

D.C. COMICS (WARNER BROS.). The Company's agreement with D.C. Comics
provides the Company with the rights to use the comic strip character "Superman"
in Multipath Movies which can be distributed on CD-ROM and DVD platforms, or via
the Internet. The Company has a guaranteed advance against royalties. The
Company is also obligated to pay D.C. Comics a certain percentage of net
advertising proceeds received from the sale of Multipath Movies based on the
Superman character. The initial term of the agreement continues until September
1, 2001.

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. 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.

MATROX. The Company has granted Matrox, a manufacturer of graphics
acceleration hardware, the right to place the first episode of CYBERSWINE on an
Internet enabled CD-ROM bundled with Matrox products. Matrox has bundled the
first episode of CYBERSWINE with its Matrox m3D graphics upgrade. Matrox'
customers who view the first CYBERSWINE episode are connected to the Company's
Internet site where they are able to purchase additional episodes. The Company
will retain all revenues from purchases of additional episodes by Matrox
customers. Matrox has the right to bundle the first episode with its other
products but is not under an obligation to do so.

S3. S3, a manufacturer of graphics acceleration hardware, has entered into
a two-year agreement with the Company permitting, but not requiring, S3 to
bundle CYBERSWINE on a CD-ROM distributed with its three dimensional hardware
products. Under the agreement, CYBERSWINE would be distributed in encrypted form
and may be viewed by users who purchase a code or "key" by calling a service
center using a toll-free phone number. The Company will receive a portion of the
purchase price of each key sold by S3.

COMPUSERVE. CompuServe has agreed to distribute the enabling software and
digital assets for the Company's Multipath Movies on CompuServe's version
upgrade CD-ROMs sent to its members and prospective members. If CompuServe
determines not to distribute the enabling software and digital assets on its
upgrade CD-ROMs, the Company may terminate the agreement. The Company will
establish a site providing CompuServe users access to Multipath Movies. Through
the site, CompuServe users will be able to download the DigitalProjector, and
files for various Multipath Movies and episodes. The site will also include a
forum consisting of a message board, library and "chat" area. The site will be
hosted by computer facilities provided by CompuServe. Under the agreement, the
Company will receive a portion of Multipath

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Movie revenues, connect-time fees and advertising and sponsorship fees generated
by use of the Company's CompuServe site. The Company will also receive
"bounties" for CompuServe subscribers brought to CompuServe by the Company's
marketing efforts.

RESEARCH AND DEVELOPMENT

The Company's research and development program is focused on: (i) enhancing
the Company's software tools to continually add features identified by and of
value to the creative and production entertainment communities, (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 intended to give Multipath Movie producers ready access to the
Company's database of objects, such as sets, props and characters, and thereby
increase production efficiencies. The Company is expending substantial resources
in its research and development facility in Australia, where it maintains a
staff of fourteen engineers, eight of whom are devoted to pioneering new
technologies and six of whom are devoted exclusively to advancing the Company's
existing technology and software tools. The Company intends to apply a portion
of the proceeds of the Offering to increase its research and development staff
in order to progressively enhance existing features of the software tools,
continue development of the user interface of the Company's software tools
re-write sections of code, improve modularity, and provide technical support for
joint venture partners to whom the software tools are licensed.

The Company has significantly enhanced and improved its technology and
proprietary software tools during the past year as a result of discrete
programming upgrades. Significant improvements and new features include: (i)
substantial improvements in the curves of body shapes and facial features as
well as in the display of other objects by increasing polygon processing to
allow approximately 5,000 polygons to be displayed on screen at one time
compared to approximately 1,000 polygons achievable by the Company one year ago,
(ii) the addition of light sourcing providing substantial enhancement to virtual
sets and to character perspectives as they move around a virtual set, (iii)
addition of space warping capability that can be used to create effects such as
smoke and rippling of water, (iv) 3D accelerator card support permitting display
of images on a variety of 3D graphics accelerator card technologies which
improve the look and feel of Multipath Movies, (v) compliance with Intel's MMX
standards, (vi) addition of a fast forward function into the DIGITALPROJECTOR,
and (vii) navigation capability within Multipath Movies allowing a viewer to
move both forward and backward in the plotlines and to return to and replay
previous decision points. The Company has also developed a new tool, MR. COPY,
which locates, arranges and, using licensed technology, compresses and
decompresses audio and bit map files enabling the Company to produce Multipath
Movies with five hours of branching content utilizing as few as 60 megabytes of
disk storage space.

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

51
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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, GT Interactive,
Electronic Arts, Learning Company and CUC. 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 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.

PROPRIETARY RIGHTS

The Company's success and ability to compete is dependent in part upon 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

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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 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 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.

EMPLOYEES

At October 31, 1997 the Company had 77 full-time employees: 12 engaged in
research and development, 58 in production, five in general administration and
finance and two in sales and marketing. 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 nine 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 Bondi Junction and Woollahra, both suburbs of Sydney,
Australia.

PROPERTIES

The Company's production facilities, consisting of approximately 8,500
square feet, are located in Bondi Junction, Australia and the research and
development facilities occupied by SAND consisting of approximately 1,900 square
feet are located in Woollahra, Australia. The current annual rental under the
Bondi Junction lease is $126,000 and under the Woollahra lease is $30,000. The
Company also leases an office in Woodland Hills, California for rent of
approximately $69,000 per annum.

The Company anticipates using up to $0.5 million of the proceeds raised in
the Offering to expand its current production studio in Bondi Junction. The
current facility is fully operational with six sound studios

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and forty work stations for modeling and animation as well as a number of
additional work station seats for authors and graphic artists that work on a
contract basis. Brilliant anticipates expanding this studio to accommodate
additional sound studios and work stations. In addition, the Company will use
proceeds form the Offering to establish new production facilities in California.
It is anticipated that these facilities will develop and produce titles with
local joint venture partners and overflow work from Australia. Research and
development with respect to the continual enhancements and upgrades of the
Company's proprietary software tool suite will be maintained in Bondi Junction.

LEGAL PROCEEDINGS

The Company is not involved in any litigation.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Information with respect to the directors and executive officers as of
October 31, 1997 is as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Mark Dyne................................................ 36 Chairman of the Board of Directors and Chief
Executive Officer
Kevin Bermeister......................................... 37 President and Director
Michael Ozen............................................. 43 Chief Financial Officer and Secretary
Mark Miller.............................................. 38 Vice President, Production and Operations and
Director
Anthony Rose............................................. 33 Vice President, Technology
Olympia Proal............................................ 41 Vice President, Sales and Marketing
Alan Sharam.............................................. 54 Managing Director, Europe
Diana Maranon (1)........................................ 39 Director
Gary Barber (2).......................................... 40 Director
Ray Musci (1)............................................ 37 Director
Garth Saloner (2)........................................ 42 Director
Jeff Scheinrock (1)(2)................................... 46 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
currently is Chairman of the Board of Directors of Tag-It Pacific, Inc., a
position he has held since September 1997. Mr. Dyne also serves as joint
managing director of Sega Ozisoft, a company he helped found in 1982 with 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 a director of Monto
Holdings Pty. Ltd. ("Monto") and Nu-Metro Multimedia Pty. Ltd. ("Nu-Metro"), and
a co-owner of Packard Bell Australia Pty. Ltd. ("Packard Bell NEC Australia").
From June 1995 through May 1997, Mr. Dyne served as a Co-Chief Executive Officer
of Sega Enterprises (Australia) Pty., Ltd. ("Sega Enterprises"), a theme park
developer which operates the $70 million interactive indoor theme park in
Darling Harbor in Sydney, Australia. Nu-Metro is a South African based
distributor of multi-media software products. 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. Packard
Bell NEC 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
Chief Executive Officer of Sega Enterprises, a position he has held since June
1995, a director of Nu-Metro and Jacfun Pty., Ltd. ("Jacfun"), and a co-owner
and director of Packard Bell NEC Australia. Mr. Bermeister also serves as a
director of Jewish House of Sydney, Australia, a charitable organization. Jacfun
is the owner of the Darling Harbor property occupied by the Sega Enterprises
indoor theme park.

MICHAEL OZEN. Mr. Ozen has served as Chief Financial Officer of the Company
since October 1996 and Secretary of the Company since March 1997. From May 1991
through June 1996, Mr. Ozen served as

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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.

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. ("A.R. Technology"), 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.

OLYMPIA PROAL. Ms. Proal has served as Vice President, Sales and Marketing
of the Company since August 1997. From April 1996 until joining the Company, Ms.
Proal served as Vice President, Sales and Marketing of Looking Glass
Technologies, a publisher of entertainment software products. From July 1994
until April 1996, Ms. Proal was Director of Sales for DK Multimedia, a book
publisher, where she helped launch their multimedia division. Prior to joining
DK Multimedia, Ms. Proal served in various positions at Sierra On-Line, Inc. for
over seven years, including Director of Sales.

ALAN SHARAM. Mr. Sharam has served as Managing Director, Europe since June
1997. Mr. Sharam also is a consultant to Magic Touch International Ltd. ("Magic
Touch"), a position he has held since April 1996. Magic Touch is a manufacturer
of touch screen computer monitors. From June 1992 to January 1996, Mr. Sharam
served as a European Board Member of Sega Europe and as Managing Director of
Sega UK.

DIANA MARANON. Ms. Maranon has served as a Director of the Company since
October 1996, and served as Secretary of the Company from August 1996 until
March 1997. Ms. Maranon is the President and Managing Director of Averil
Associates, Inc. ("Averil Associates"), a financial advisory firm and member of
the National Association of Securities Dealers, and serves as a director of
Micronet Technology, Inc. and Tag-It Pacific, Inc. 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.

GARY BARBER. Mr. Barber has served as a Director of the Company since
October 1996. From May 1989 to July 1997, Mr. Barber was employed by Morgan
Creek Productions, Inc. From January 1995 until July 1997, he was Vice Chairman
and Chief Operating Officer of Morgan Creek. 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

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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.

JEFF SCHEINROCK. Mr. Scheinrock has served as a Director of the Company
since October 1996. Since May 1997, Mr. Scheinrock has been Chief Executive
Officer of Scheinrock Advisory Group, Inc. From July 1, 1996 until May 2, 1997,
Mr. Scheinrock served as 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.

The Company's Chief Executive Officer and Chairman, Mark 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 2000 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.

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<PAGE>
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 of Directors and $500 for
attendance at any telephonic meeting of the Board of Directors or at any meeting
of a committee of the Board of Directors. Directors also are reimbursed for
their reasonable travel expenses incurred in attending Board of Directors or
committee meetings. In September 1996, the Company granted to each of Ms.
Maranon and Messrs. Barber, Musci, Scheinrock and 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.

EXECUTIVE COMPENSATION

The following table sets forth both cash and noncash compensation paid or to
be paid by the Company to Mark Dyne, Chief Executive Officer, Kevin Bermeister,
President and Mark Miller, Vice President, Production and Operations (the "Named
Executive Officers"). No officer received compensation in excess of $100,000 for
the fiscal year ended December 31, 1996:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL YEAR --------------------
NAME AND PRINCIPAL POSITION ENDED SALARY BONUS
- -------------------------------------------------------- ---------------------- --------- ---------
<S> <C> <C> <C>
Mark Dyne (1)........................................... December 31, 1996 $ 56,250 $ --
Chief Executive Officer June 30, 1996 -- --
June 30, 1995 -- --
Kevin Bermeister (1).................................... December 31, 1996 56,250 --
President June 30, 1996 -- --
June 30, 1995 -- --
Mark Miller (2)......................................... December 31, 1996 23,279 --
Vice President, Production and June 30, 1996 68,931 --
Operations June 30, 1995 50,160 --
</TABLE>

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

(1) Messrs. Dyne and Bermeister receive annual salaries of $225,000 and
$225,000, respectively.

(2) Mr. Miller served as President of the Company during the fiscal year ended
December 31, 1996.

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 $165,000 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

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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 $134,000 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,
$37,000 and $90,000 during the period from September 2, 1993 to June 30, 1994,
and the years ended June 30, 1995 and 1996, respectively. For the period from
July 1, 1996 to December 31, 1996, BII Australia paid PIE $18,000 for the
services of Mark Miller and paid directly to Mark Miller an additional $22,000
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 may be administered by the Board of Directors or a 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

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<PAGE>
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.

As of October 31, 1997, the Board had granted options covering an aggregate
of 286,000 shares of Common Stock to certain directors, officers and employees
of the Company, with a weighted average exercise price of $4.47 per share, of
which options to purchase 283,000 shares were outstanding, and 794,000 options
were available for future grant. Options granted to directors are generally
effective at such time as each director joins the Board of Directors, and are
immediately fully vested. Options granted to officers and employees generally
vest in four equal annual installments commencing on the date of grant or 48
equal monthly installments commencing on the date of grant.

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. 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 and Selling 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. In December 1996, the Company filed a registration
statement under the Securities Act to register the 1,080,000 shares of Common
Stock reserved for issuance under the 1996 Plan. The registration statement
became effective immediately upon filing with the Commission. Shares issued
under the 1996 Plan generally are available for sale to the public without
restriction, except for the 90-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."

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<PAGE>
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
("Delaware Law"), as the same exists or may hereafter be amended. Section 145 of
the Delaware Law ("Section 145") 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 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 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.

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<PAGE>
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 could borrow from PIE pursuant to the loan
agreement was $631,000. The interest rate of the note was 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 Company's initial public
offering or December 31, 1996. Pursuant to the Note Extension, PIE and BII
Australia increased the maximum amount BII Australia could borrow under the loan
agreement to $710,000. As of June 30, 1995 and 1996, BII Australia owed PIE
$606,000 (including accrued interest in the amount of $46,000), and $670,000
(including accrued interest of $149,000), respectively. In December 1996, the
Company applied a portion of the proceeds of the initial public offering to
repay all amounts owed to PIE ($733,000, including accrued interest of
$199,000).

BII Australia periodically purchases certain computer equipment from PIE.
For the fiscal years ended June 30, 1995 and 1996, the six months ended December
31, 1996 and the nine months ended September 30, 1997, BII Australia's purchases
totaled $15,000, $16,000, $8,000 and $0, respectively.

Mark Miller is a shareholder of Multimedia Connexion Pty. Ltd. BII Australia
periodically purchases hardware and software from Multimedia Connexion Pty. Ltd.
For the fiscal years ended June 30, 1995 and 1996, and the nine months ended
September 30, 1997, BII Australia purchased computer equipment totaling $12,000
and $16,000, and $111,000, respectively. No purchases were made during the six
months ended December 31, 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 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 $71,000 from Sega Ozisoft in the fiscal year
ended June 30, 1995. In addition, BII Australia was entitled to receive royalty
payments of $6.31 per net unit sold. Such royalty was reducible to $4.73 per net
unit sold after 2000 units had been sold for each title. The non-refundable
advances were 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 expired on December 15, 1996.

Kevin Bermeister and Mark Dyne are both directors and shareholders of
Packard Bell NEC Australia. Between February 1994 and June 30, 1996, BII
Australia purchased an aggregate of approximately $38,000 in goods from Packard
Bell NEC Australia. During the six months ended December 31, 1996 and the nine
months ended September 30, 1997, BII Australia purchased an additional $9,000
and $7,000, respectively, in goods from Packard Bell NEC Australia.

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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 was entitled to receive payment for certain assistant production
services. Amounts were 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. The Development
Agreement was superseded by the SAND Acquisition 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 SAND
and in consideration therefor issued a $1,500,000 mandatorily convertible note
which, upon the completion of the Company's initial public offering was
automatically 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 agreed to fund
certain development expenses of the Company prior to the closing of the
Company's initial public offering; and the Company agreed to reimburse Sega
Ozisoft from the proceeds of the initial public offering for all expenses
advanced by Sega Ozisoft for any period after October 31, 1996, and all expenses
in excess of $59,000 per month advanced by Sega Ozisoft for August, September
and October 1996. As of December 31, 1996 the Company had incurred a total
obligation of $84,000 pursuant to the SAND Acquisition Agreement. During the
nine months ended September 30, 1997 the Company paid $62,000 of the amount due
Sega Ozisoft.

Mark Dyne is a director of 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 the Beyond 2000 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 sales of the Beyond
2000 product. As of June 30, 1996, net receipts under the agreement totaled
approximately $25,000 and payments to Monto totaled $12,000. In addition, a
liability to Monto for $7,000 was recorded at June 30, 1996. In the six months
ended December 31, 1996 no additional receipts or payments were made pursuant to
this agreement. During the nine months ended September 30, 1997, the liability
to Monto was reduced to $4,200.

In November 1995, BII Australia entered into a distribution agreement (the
"Consumer Electronics Agreement") with Consumer Electronics. Mark Dyne and Kevin
Bermeister are both directors and significant shareholders of Consumer
Electronics. BII Australia developed, pursuant to the Consumer Electronics
Agreement, several CD-ROM software entertainment products to be distributed by
Consumer

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<PAGE>
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 was entitled to a non-refundable advance of $85,000, of
which $21,000 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
$48,000, representing the full amount due pursuant to the re-negotiated terms.
The Company anticipates no further receipts pursuant to the Consumer Electronics
Agreement, which expired on December 6, 1996.

OTHER:

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
$145,000. The interest rate on the notes was 10% per annum and the notes were
due and payable on the earlier to occur of the closing of the Company's initial
public offering and the first anniversary of the date of issuance of each note.
In December 1996, the Company repaid Reefknot in full the balance outstanding of
$350,000, including accrued interest of $5,000.

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 Company's initial public offering and in
connection with this Offering. As consideration for services rendered in the
initial public offering, the Company paid to Averil Associates the aggregate
amount of $225,000, plus out of pocket expenses, and 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. During the nine months ended September 30, 1997, the Company
paid Averil Associates $22,000 for consulting services. As consideration for
services rendered in connection with this Offering, the Company has agreed to
pay Averil Associates a cash payment of $180,000 upon consummation of the
Offering and has issued to Chloe warrants to purchase 15,040 shares of Common
Stock at an exercise price equal to 110% of the price to the public of the
shares offered in this Offering (the "1997 Warrants"). The 1997 Warrants will
first become exercisable on the first anniversary 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 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.

In September 1996, the Company and Packard Bell NEC entered into a CD-ROM
Distribution Agreement pursuant to which Packard Bell NEC has agreed 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 and other countries over a three year period. Packard Bell NEC received
warrants to purchase 600,000 shares of the Company's Common Stock upon execution
of the agreement in September 1996. In September 1997, the agreement was amended
to provide for the payment by Packard Bell NEC of a royalty on each bundled unit
of a Multipath Movie shipped by Packard Bell NEC during a portion of the three
year period, and Packard Bell NEC obtained the right to receive a percentage of
the revenues earned by the Company from those bundled units. Thereafter, the
Company will be entitled to all revenues derived from Multipath Movies
distributed pursuant to the agreement. In connection with the

64
<PAGE>
amendment to the CD-ROM Distribution Agreement, the Company granted to Packard
Bell NEC warrants to purchase up to an additional 200,000 shares of the
Company's Common Stock in September 1997. As of October 31, 1997, no payments
had been made by the Company to Packard Bell NEC under the agreement.

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."

65
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of October 31, 1997 and as adjusted
to reflect the sale of 2,200,000 shares of Common Stock by the Company and
300,000 shares of Common Stock by the Selling Stockholder 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 120, Woodland Hills,
California 91367, unless otherwise set forth below such person's name.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING (1) THE OFFERING (1)
----------------------- -----------------------
NUMBER PERCENT NUMBER OF NUMBER PERCENT
NAME AND ADDRESS OF SHARES OF CLASS SHARES OFFERED OF SHARES OF CLASS
- ---------------------------------------------------- ---------- ----------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Insinger Group, as manager of the Reefknot Limited 1,500,118 20.8% 300,000 1,200,118 12.8%
(2)...............................................
One Stokes Place
St. Stephens Green
Dublin 2
Republic of Ireland
Mark Dyne........................................... 795,600 11.0 -- 795,600 8.5
Kevin Bermeister.................................... 795,600 11.0 -- 795,600 8.5
Sega Ozisoft Pty. Ltd. ............................. 780,001 10.8 -- 780,001 8.3
Bldg. A, Southern Industrial Estates,
200 Coward Street, Mascot, NSW
2020 Australia
Packard Bell NEC (3) ............................... 800,000 10.0 -- 800,000 7.8
One Packard Bell Way
Sacramento, California 95828
Mark Miller (4) .................................... 500,013 6.9 -- 500,013 5.3
Safcor, Inc. ....................................... 486,669 6.8 -- 486,669 5.2
8474 Commerce Ave.
Suite B
San Diego, California 92121
Diana Maranon (5)................................... 65,222 * -- 65,222 *
Gary Barber (6)..................................... 25,000 * -- 25,000 *
Ray Musci (6)....................................... 25,000 * -- 25,000 *
Garth Saloner (6)................................... 25,000 * -- 25,000 *
Jeff Scheinrock (6)................................. 25,000 * -- 25,000 *
All of the directors and executive officers as a 2,309,761 31.2 -- 2,309,761 24.1
group (11 persons) (7)............................
</TABLE>

(FOOTNOTES ON FOLLOWING PAGE)

66
<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 October 31, 1997 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 800,000 shares of Common Stock underlying warrants which are
currently exercisable. See "Description of Capital Stock -- Warrants."

(4) Includes 430,013 shares of Common Stock held by PIE, and 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 (i) 25,000 shares of Common Stock of the Company reserved for
issuance upon exercise of stock options which are currently exercisable; and
(ii) 40,222 shares of Common Stock underlying warrants which are currently
exercisable. See "Description of Capital Stock -- Warrants."

(6) Consists of 25,000 shares of Common Stock of the Company reserved for
issuance upon exercise of stock options which are currently exercisable.

(7) Includes (i) 158,326 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 31, 1997; and (ii) 40,222 shares of Common Stock
underlying warrants which are currently exercisable. See "Description of
Capital Stock -- Warrants."

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<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 October 31, 1997, the Company had 7,203,001 shares of Common Stock
outstanding held by approximately 16 holders of record of the Company's Common
Stock. After the Offering there will be 9,403,001 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, 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. See "Business -- Strategic
Relationships." On September 1, 1997, the Company issued to Packard Bell NEC an
additional warrant to purchase 200,000 shares of Common Stock.

The warrant issued to Packard Bell NEC on September 14, 1996 was purchased
for $100.00 and is currently exercisable in full at an exercise price of $5.00
per share and expires three years from the date of grant. The warrant issued to
Packard Bell NEC on September 1, 1997 was purchased for $200.00 and is currently
exercisable in full at an exercise price of $10.00 per share and expires on
February 28, 1999. These warrants provide for piggyback registration rights. See
"-- Registration Rights."

On or after November 27, 1997, the Company has the right to redeem all, but
not less than all, of the warrants to purchase 600,000 shares of Common Stock
issued to Packard Bell NEC on September 14, 1996, 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

68
<PAGE>
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 $6.25.

The Company has a similar right to redeem all, but not less than all, of the
warrants to purchase 200,000 shares of Common Stock issued to Packard Bell NEC
on September 1, 1997 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 $12.50.

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 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 connection with the Offering, the Company issued to
Chloe the 1997 Warrants. 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 or Form S-3. The warrants provide for piggyback registration rights and
the Chloe Warrants and 1997 Warrants expire on September 14, 1999 and November
4, 2000, respectively. See "-- Registration Rights."

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

69
<PAGE>
"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.

REGISTRATION RIGHTS

The holders of 780,001 shares of Common Stock and the holders of warrants to
purchase 940,262 shares of Common Stock are 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, Sega
Ozisoft, with respect to 780,001 shares of Common Stock, and Common Stock
issuable to Packard Bell NEC, Morgan Creek and Chloe, are entitled to notice of
such registration and are entitled to include their respective shares 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 or Form S-3.

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

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 October 31, 1997, the Company will have outstanding an aggregate of
9,403,001 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, 2,000,000 shares previously sold by the Company in its initial
public offering completed on November 27, 1996, 3,000 shares issued upon the
exercise of stock options, and the 2,500,000 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 4,900,001 shares of
Common Stock held by existing stockholders are "restricted" securities within
the meaning of Rule 144 under the Securities Act ("Rule 144"). 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) ("Rule
144(k)") or 701 ("Rule 701") promulgated under the Securities Act, which rules
are summarized below.

Officers, directors and certain other shareholders holding approximately
48.7% of the Company's Common Stock outstanding immediately after the Offering
will, prior to the Offering, be subject to "lock-

70
<PAGE>
up" provisions providing that for a period of (i) 180 days after December 4,
1997 in the case of Messrs. Dyne and Bermeister, (ii) 90 days in the case of the
Selling Stockholder with respect to 700,118 shares of Common Stock held by the
Selling Stockholder and 120 days after December 4, 1997 with respect to all
remaining shares held by the Selling Stockholder and not sold upon exercise of
the Over-allotment Option, and (iii) 90 days after December 4, 1997 in the case
of certain other securityholders of the Company (each, a "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. 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, approximately
2,486,801, 500,000 (assuming no earlier sale of such shares of Common Stock by
the Selling Stockholder upon exercise of the Over-allotment Option), and
1,591,200 shares of Common Stock will become eligible for immediate public sale
following expiration of the 90, 120, and 180 day lock-up periods, respectively,
subject in all cases to the volume limitations of Rules 144 and 701 summarized
below.

Additionally, pursuant to Rules 144 and 701, beginning 90 days after the
effective date of this Prospectus, upon the expiration of contractual lock-up
provisions with the Company, an aggregate of approximately 160,408 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 one year but less than two 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 94,030 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 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 one year 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 October 31, 1997, 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 283,000 shares were outstanding under the 1996 Plan. In December 1996,
the Company filed a registration statement under the Securities Act on Form S-8
to register the 1,080,000 shares of Common Stock reserved for issuance under the
1996 Plan. Such registration statement became effective immediately upon filing
with the Securities and Exchange Commission. Shares issued under the 1996 Plan
are 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 90-day lock-up provisions. See
"Underwriting." Additionally, the holders of 780,001 shares of Common Stock and
the holders of warrants to purchase 940,262 shares of Common Stock will be
entitled to certain rights with respect to registration of such shares under the
Securities Act.

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<PAGE>
UNDERWRITING

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated December 4, 1997 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation and Cruttenden Roth Incorporated are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase from the Company and the Selling Stockholder the following
respective numbers of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
- --------------------------------------------------------------------------- -----------------
<S> <C>
Credit Suisse First Boston Corporation..................................... 987,500
Cruttenden Roth Incorporated............................................... 987,500
BT Alex. Brown Incorporated................................................ 50,000
CIBC Oppenheimer Corp. .................................................... 50,000
Cowen & Company............................................................ 25,000
Furman Selz LLC............................................................ 50,000
Gerard Klauer Mattison & Co., Inc. ........................................ 25,000
Hambrecht & Quist LLC...................................................... 50,000
Invemed Associates, Inc. .................................................. 50,000
Josephthal & Co. Inc. ..................................................... 25,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated......................... 50,000
Piper Jaffray Inc. ........................................................ 25,000
Charles Schwab & Co., Inc. ................................................ 50,000
Sterne, Agee & Leach, Inc. ................................................ 25,000
Van Kasper & Company....................................................... 25,000
Volpe Brown Whelan & Company, LLC.......................................... 25,000
-----------------
Total................................................................ 2,500,000
-----------------
-----------------
</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 the shares of 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 and the Selling Stockholder have 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 175,000 additional shares from the Company and up
to 200,000 additional shares from the Selling Stockholder at the 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 offered hereby. 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 and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer Shares of the Common
Stock to the public 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 $0.21 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 public offering, the public offering price and concession and
discount to dealers may be changed by the Representatives.

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

72
<PAGE>
a registration statement under the Securities Act of 1933 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 Credit Suisse First Boston Corporation for a period of 90
days after the date of this Prospectus.

The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Securities Exchange Act of 1934 (the "Exchange Act"). Over-Allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of shares of Common
Stock in the open market after the distribution has been completed in order to
cover syndicate short positions. Penalty bids permit the Representatives to
reclaim a selling concession from a syndicate member when the Common Stock
originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Common Stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the American Stock Exchange
or otherwise and, if commenced, may be discontinued at any time.

The shares of Common Stock are listed on the American Stock Exchange under
the symbol "BDE."

Certain securityholders of the Company have agreed that for a period of (i)
180 days after December 4, 1997 in the case of Messrs. Dyne and Bermeister, (ii)
90 days in the case of the Selling Stockholder with respect to 700,118 shares of
Common Stock held by the Selling Stockholder and 120 days after December 4, 1997
with respect to all remaining shares held by the Selling Stockholder and not
sold upon exercise of the Over-allotment Option, and (iii) 90 days after
December 4, 1997 in the case of certain other securityholders of the Company
(each, a "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. Of the approximately 4,578,001 shares of
Common Stock subject to the lock-up provisions, approximately 2,486,801, 500,000
(assuming no earlier sale of such shares of Common Stock by the Selling
Stockholder upon exercise of the Over-allotment Option), and 1,591,200 shares of
Common Stock will become eligible for immediate public sale following expiration
of the 90, 120, and 180 day lock-up periods, respectively, 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
90-day 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.

Averil Associates, a financial advisory firm founded and controlled by Diana
Maranon, has performed various services for the Company, including the
investigation of strategic alternatives and assistance in connection with this
Offering. As consideration for such services rendered by Averil Associates in
connection with this Offering, the Company has agreed to pay Averil Associates a
cash payment of

73
<PAGE>
$180,000 upon consummation of the Offering and has issued to Chloe, an affiliate
of Averil Associates, a warrant to purchase 15,040 shares of Common Stock at an
exercise price equal to 110% of the price to the public of the shares offered in
this Offering. See "Certain Transactions."

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 and the
Selling Stockholder 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 Selling
Stockholder 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 (ONTARIO PURCHASERS)

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.

ENFORCEMENT OF LEGAL RIGHTS

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

74
<PAGE>
TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.

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 December 31, 1996, and for each of the two years in
the period ended June 30, 1996, and the six months ended December 31, 1996 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,
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.

CHANGE IN INDEPENDENT PUBLIC ACCOUNTANT

Effective July 21, 1997, Price Waterhouse LLP was engaged as the independent
certified public accountants for the Company. Price Waterhouse LLP succeeded
Ernst & Young LLP. The decision to change independent certified public
accountants was unanimously approved by the Company's Board of Directors. There
were no disagreements with Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures.

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.

The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files 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

75
<PAGE>
the public reference facilities referred to above as well as certain regional
offices of the Securities and Exchange Commission.

The Securities and Exchange Commission maintains a Web Site which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Securities and Exchange Commission
(such as the Company) at http://www.sec.gov.

76
<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, 1996, December 31, 1996 and September 30, 1997 (unaudited)...... F-3

Consolidated Statements of Operations for the years ended June 30, 1995 and 1996, for the six months ended
December 31, 1995 (unaudited) and December 31, 1996, and the three and nine months ended September 30,
1996 and 1997 (unaudited)................................................................................ F-4

Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended June 30, 1995 and 1996,
the six months ended December 31, 1996 and the nine months ended September 30, 1997 (unaudited).......... F-5

Consolidated Statements of Cash Flows for the years ended June 30, 1995 and 1996, for the six months ended
December 31, 1995 (unaudited) and December 31, 1996, and the three and nine months ended September 30,
1996 and 1997 (unaudited)................................................................................ F-6

Notes to Consolidated Financial Statements................................................................. F-8

FINANCIAL STATEMENTS OF SEGA AUSTRALIA NEW DEVELOPMENTS

Report of Independent Auditors............................................................................. F-24

Balance Sheets as of June 30, 1995 and 1996................................................................ F-25

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-26

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-27

Notes to Financial Statements.............................................................................. F-28

UNAUDITED PRO FORMA FINANCIAL INFORMATION

Introduction to Unaudited Pro Forma Financial Information.................................................. F-30

Unaudited Pro Forma Statement of Operations for the year ended June 30, 1996............................... F-31

Notes to Pro Forma Financial Statements.................................................................... F-32
</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 December 31, 1996, and the
related statements of operations, stockholders' equity (deficiency), and cash
flows for each of the two years in the period ended June 30, 1996 and the six
months ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Brilliant
Digital Entertainment, Inc. at June 30, 1996 and December 31, 1996, and the
results of its operations and its cash flows for each of the two years in the
period ended June 30, 1996 and for the six months ended December 31, 1996, in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

March 24, 1997
Los Angeles, California

F-2
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER SEPTEMBER
1996 31, 1996 30, 1997
--------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 53,061 $7,590,932 $4,327,874
Accounts receivable (net of allowance for doubtful
accounts of $0 at June 30, 1996, and $93,140 at
December 31, 1996, and $0 at September 30, 1997).... 657,550 80,558 1,973,333
Accounts receivable from related parties.............. -- 28,796 --
Other assets.......................................... 6,863 233,167 67,347
--------- ---------- ----------
Total current assets.................................... 717,474 7,933,453 6,368,554
Property, plant and equipment, net...................... 198,272 345,069 639,253
Development costs....................................... -- -- 403,536
Other assets, net....................................... -- 206,250 263,444
--------- ---------- ----------
Total assets............................................ $ 915,746 $8,484,772 $7,674,787
--------- ---------- ----------
--------- ---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
Accounts payable and accrued expenses................. $ 99,187 $ 890,797 $1,120,682
Deferred revenue...................................... 213,003 164,441 --
Amounts payable to related parties.................... 732,989 83,959 21,904
--------- ---------- ----------
Total current liabilities............................... 1,045,179 1,139,197 1,142,586
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred Stock ($0.001 par value; 1,000,000 shares
authorized; no shares issued or outstanding)........ -- -- --
Common Stock ($0.001 par value; 30,000,000 shares
authorized; 4,420,000 shares issued and outstanding
at June 30, 1996; 7,200,001 shares issued and
outstanding at December 31, 1996; and 7,203,001
shares issued and outstanding at September 30,
1997................................................ 4,420 7,200 7,203
Additional paid-in capital............................ 10,163 11,320,564 11,472,591
Accumulated deficit................................... (119,921) (3,954,884) (4,899,297)
Cumulative translation adjustment..................... (24,095) (27,305) (48,296)
--------- ---------- ----------
Total stockholders' equity (deficiency)................. (129,433) 7,345,575 6,532,201
--------- ---------- ----------
Total liabilities and stockholders' equity
(deficiency).......................................... $ 915,746 $8,484,772 $7,674,787
--------- ---------- ----------
--------- ---------- ----------
</TABLE>

See accompanying notes.

F-3
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------ ------------------------ ------------------------
1995 1996 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Royalties from
licensing
arrangements......... $ 752,108 $ 1,291,015 $ 703,863 $ 93,699 $ 618,297 $ 2,083,904 $ 35,255 $2,048,920
Development fees....... 88,800 585,743 306,956 254,547 518,914 241,322 244,031 7,865
Software sales......... 1,888 177,119 173,227 1,901 1,863 51,524 1,884 --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues....... 842,796 2,053,877 1,184,046 350,147 1,139,074 2,376,750 281,170 2,056,785
Cost of revenues:
Royalties from
licensing
arrangements......... 594,719 254,510 194,825 19,529 75,615 8,198 19,354 44
Development fees....... 60,234 455,414 238,739 165,540 344,162 -- 119,732 --
Software sales......... 986 28,918 -- 792 775 9,172 785 --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of
revenues........... 655,939 738,842 433,564 185,861 410,552 17,370 139,871 44
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit:............ 186,857 1,315,035 750,482 164,286 728,522 2,359,380 141,299 2,056,741
Operating expenses:
Sales and marketing.... 116,435 163,038 35,160 970,592 1,098,500 386,921 968,755 184,812
General and
administrative....... 223,470 365,491 129,159 1,064,771 345,380 1,664,712 139,861 664,960
Research and
development.......... 183,000 174,395 103,278 1,876,825 1,641,315 1,418,229 1,518,337 363,147
Depreciation........... 43,379 101,824 45,410 73,636 86,933 197,774 30,714 80,136
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 566,284 804,748 313,007 3,985,824 3,172,128 3,667,636 2,657,667 1,293,055
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations:............ (379,427) 510,287 437,475 (3,821,538) (2,443,606) (1,308,256) (2,516,368) 763,686
Other income (expense):
Export market
development grant.... -- 122,488 -- -- 125,083 152,280 -- --
Gain (loss) on foreign
exchange
transactions......... -- 13,382 16,944 (503) (4,026) (664) -- 4,204
Interest income........ 707 2,017 186 41,245 2,272 214,567 411 45,272
Interest expense....... (45,133) (94,762) (63,965) (54,167) (50,627) -- (20,881) --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total other income
(expense).......... (44,426) 43,125 (46,835) (13,425) 72,702 366,183 (20,470) 49,476
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... (423,853) 553,412 390,640 (3,834,963) (2,370,904) (942,073) (2,536,838) 813,162
Provision for income
taxes.................. -- -- -- -- -- (2,340) -- (780)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........ $ (423,853) $ 553,412 $ 390,640 $(3,834,963) $(2,370,904) $ (944,413) $(2,536,838) $ 812,382
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per
share.................. $ (0.09) $ 0.12 $ 0.09 $ (0.77) $ (0.52) $ (0.13) $ (0.56) $ 0.11
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average number
of shares used in
computing net income
(loss) per share....... 4,508,380 4,557,000 4,557,000 4,953,299 4,539,320 7,200,333 4,503,960 7,643,464
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>

See accompanying notes.

F-4
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------- ADDITIONAL EARNINGS CUMULATIVE
NO. OF PAID-IN (ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT TOTAL
---------- --------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994........ 4,420,000 $ 4,420 $ 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............. -- -- 1,096,000 -- -- 1,096,000
Initial public offering, net
of expenses of $1,468,000... 2,000,000 2,000 8,530,181 -- -- 8,532,181
Conversion of SAND note....... 780,001 780 1,499,220 -- -- 1,500,000
Grant of stock options........ -- -- 185,000 -- -- 185,000
Foreign exchange
translation................. -- -- -- -- (3,210) (3,210)
Net loss...................... -- -- -- (3,834,963) -- (3,834,963)
---------- --------- ------------- ------------- ----------- -------------
Balance at December 31, 1996.... 7,200,001 7,200 11,320,564 (3,954,884) (27,305) 7,345,575
Grant of warrants
(unaudited)................. -- -- 140,000 -- -- 140,000
Grant of stock options
(unaudited)................. -- -- 12,000 -- -- 12,000
Exercise of stock options
(unaudited)................. 3,000 3 27 -- -- 30
Foreign exchange translation
(unaudited)................. -- -- -- -- (20,991) (20,991)
Net loss (unaudited).......... -- -- -- (944,413) -- (944,413)
---------- --------- ------------- ------------- ----------- -------------
Balance at September 30, 1997
(unaudited)................... 7,203,001 $ 7,203 $ 11,472,591 $(4,899,297) $ (48,296) $ 6,532,201
---------- --------- ------------- ------------- ----------- -------------
---------- --------- ------------- ------------- ----------- -------------
</TABLE>

See accompanying notes.

F-5
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------- ------------------------ ------------------------
1995 1996 1995 1996 1996 1997 1996 1997
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)... $ (423,853) $ 553,412 $ 390,640 $(3,834,963) $(2,370,904) $ (944,413) $(2,536,838) $ 812,382
Adjustments to
reconcile net
income (loss) to
the net cash
provided by (used
in) operating
activities:
Depreciation and
amortization.... 43,379 101,824 45,410 73,636 86,933 417,511 30,714 158,798
Effect of warrants
granted......... -- -- -- 1,096,000 1,096,000 140,000 1,096,000 140,000
Effect of stock
options
granted......... -- -- -- 123,333 -- 12,000 -- 12,000
Effect of SAND
Note............ -- -- -- 1,350,000 1,350,000 -- 1,350,000 --
Changes in
operating assets
and liabilities:
Accounts
receivable.... -- (633,461) (868,785) 551,179 290,210 (1,868,520) 30,311 (1,871,481)
Development
costs......... -- -- -- -- -- (423,797) -- (411,830)
Other assets.... (6,577) (152) 178 (370,838) (768) (112,772) (746) (32,498)
Accounts payable
and
accruals...... (3,181) 37,471 6,323 790,326 60,623 268,121 36,663 340,722
Deferred
revenue....... 66,510 -- -- (49,902) -- (157,610) -- --
Other
liabilities... 7,000 3,203 -- -- 13,365 -- 2,774 --
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in)
operating
activities........ (316,722) 62,297 (426,234) (271,229) 525,459 (2,669,480) 8,878 (851,907)
INVESTING ACTIVITIES
Purchases of
equipment......... (168,619) (110,753) (71,651) (68,630) (51,251) (537,230) (13,112) (205,770)
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities........ (168,619) (110,753) (71,651) (68,630) (51,251) (537,230) (13,112) (205,770)
FINANCING ACTIVITIES
Proceeds from
issuance of
shares............ 175 -- -- 8,532,181 -- 30 -- 30
Repurchase of
shares............ -- (152) -- -- -- -- -- --
Costs related to
offering.......... -- -- -- -- (145,000) -- (145,000) --
Increase in amounts
payable to related
parties........... 1,075,660 711,686 701,958 490,792 814,952 -- 178,721 --
Repayments of
amounts payable to
related parties... (555,870) (672,018) (168,932) (1,143,040) (1,165,790) (57,467) (13,345) (54,912)
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities........ 519,965 39,516 533,026 7,879,933 (495,838) (57,437) 20,376 (54,882)
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
NET INCREASE
(DECREASE) IN CASH
AND CASH
EQUIVALENTS....... 34,624 (8,940) 35,141 7,540,074 (21,630) (3,264,147) 16,142 (1,112,559)
Translation
adjustments....... (2,812) 12,718 1,761 (2,203) 21,387 1,089 16,738 (1,609)
Cash and cash
equivalents at
beginning of
period............ 17,471 49,283 49,283 53,061 86,184 7,590,932 53,061 5,442,042
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end
of period......... $ 49,283 $ 53,061 $ 86,185 $ 7,590,932 $ $85,941 $ 4,327,874 $ 85,941 $ 4,327,874
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Supplemental
disclosure of cash
flow information:
Cash paid during the
period for:
Interest.......... $ -- $ -- $ -- $ 204,463 $ -- $ -- $ -- $ --
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Income taxes...... $ -- $ -- $ -- $ -- $ -- $ 3,118 $ -- $ --
</TABLE>

See accompanying notes.

F-6
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

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

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

See accompanying notes.

F-7
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

In August 1996, a newly formed holding company, Brilliant Digital
Entertainment, Inc., incorporated in the State of Delaware (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"). The Company is a production and development studio producing
digital entertainment for distribution over the Internet and on CD-ROM.
Historically, BII Australia developed, produced and marketed interactive
multimedia titles for the education and entertainment markets. The Company
operates, and BII Australia operated, principally in the computer software
industry. BII Australia operated predominantly in Australia with significant
exports to the United States.

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

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

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

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

The accompanying unaudited consolidated financial statements for the three
and nine months ended September 30, 1996 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310 of Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The accompanying unaudited condensed consolidated financial
statements reflect all adjustments which, in the opinion of management, are
considered necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period.

2. SIGNIFICANT ACCOUNTING POLICIES

FOREIGN CURRENCY TRANSLATION

The functional currency of BII Australia is its local currency, Australian
dollars. Assets and liabilities of BII Australia are translated into U.S.
dollars (the reporting currency) using current exchange rates ($0.789 at June
30, 1996, $0.794 at December 31, 1996, and $0.725 at September 30, 1997), and
revenues and expenses are translated into U.S. dollars using average exchange
rates ($0.739 for the year ended June 30, 1995, $0.760 for the year ended June
30, 1996, $0.743 for the six months ended December 31,

F-8
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1995, $0.792 for the six months ended December 31, 1996, $0.776 for the nine
months ended September 30, 1996, $0.761 for the nine months ended September 30,
1997, $0.785 for the three months ended September 30, 1996, and $0.740 for the
three months ended September 30, 1997). The effects of foreign currency
translation adjustments are deferred and included as a component of
stockholders' equity.

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

NET INCOME (LOSS) PER SHARE

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

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128, effective for periods ending after December 15, 1997,
revises the computation and disclosure of earnings per share. Principal among
computation revisions is the replacement of primary earnings per share with
basic earnings per share, which does not consider common stock equivalents. In
addition, SFAS No. 128 modifies certain dilutive computations and replaces fully
diluted earnings per share with diluted earnings per share. Disclosure
requirements include, among others, dual presentation of basic and diluted
earnings per share, along with a reconciliation of the elements used in
computing basic and diluted earnings per share. At this time, the Company does
not expect that the adoption of SFAS No. 128 will have a material impact on the
Company's reported results.

INCOME TAXES

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

RESEARCH AND DEVELOPMENT COSTS

The Company incurs research and development costs relating to the
development of traditional CD-ROM software tools which provide the technical
infrastructure for production of CD-ROM titles produced by the Company. The
Company incurred research and development costs of $183,000, $174,000,

F-9
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$1,877,000, $1,641,000 and $1,418,000 for the fiscal years ended June 30, 1995
and 1996, the six months ended December 31, 1996, and the nine months ended
September 30, 1996 and 1997, respectively. The amount for the six months ended
December 31, 1996 includes $1,350,000 of in-process research and development,
which was expensed in accounting for the SAND acquisition (see Note 3).

The Company's current 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 results in the greater
amortization amount. Prior to the establishment of technological feasibility,
these costs are expensed as incurred. Historically, the Company has expensed all
costs related to the development of both its software tools and Multipath Movie
titles. During the third quarter of 1997, the Company began capitalizing certain
development costs related to the production of Multipath Movies in accordance
with SFAS No. 86. 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."

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. For those
distribution contracts under which the Company is entitled to a fixed minimum
guaranteed amount which has not yet been received, the minimum guaranteed amount
is recognized as revenue when the CD-ROM master is delivered to the distributor.

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, the six months ended December 31, 1996, and the nine months ended
September 30, 1996 and 1997, the Company had experienced no returns on software
sales.

F-10
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF REVENUES

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

DEFERRED REVENUES

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

USE OF ESTIMATES

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

CASH EQUIVALENTS

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

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, short-term investments
and accounts receivable. The Company has investment policies that limit
investments to short-term investment grade securities. Accounts receivable are
principally from distributors and retailers of the Company's products.

The Company analyzes customer receivables to determine the necessity of an
allowance for doubtful accounts. For the years ended June 30, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997, no such allowance was
considered necessary. For the six months ended December 31, 1996 the Company
recorded an allowance for doubtful accounts of $93,140.

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 four years.

F-11
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS

In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS No. 121.") SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995, and requires long-lived assets to be
evaluated for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. The Company adopted SFAS
No. 121 for the six months ended December 31, 1996. The provisions of SFAS No.
121 do not have a material effect on the Company's consolidated results of
operations for that period, or for the nine months ended September 30, 1997.

STOCK OPTIONS

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123.") This new standard defines a fair-value-based
method of accounting for employee stock options or similar equity instruments.
This statement gives entities a choice to recognize related compensation expense
by adopting the new fair-value method or to measure compensation using the
intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25,
the former standard. If the former standard for measurement is elected, SFAS No.
123 requires supplemental disclosure to show the effect of using the new
measurement criteria. The Company has used the measurement prescribed by APB
Opinion No. 25. See Note 5 for supplemental disclosure.

3. ACQUISITION OF SAND

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

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

The SAND Acquisition Agreement also provides that the Company shall pay to
Sega Ozisoft a royalty of 12.5% of "Adjusted Gross Receipts" on the CYBERSWINE
Multipath Movie. Adjusted Gross Receipts is gross receipts received by the
Company on the CYBERSWINE Multipath Movie after deducting any royalties and fees
payable to CYBERSWINE licensors. Pursuant to an agreement between Sega Ozisoft
and the licensor

F-12
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

3. ACQUISITION OF SAND (CONTINUED)
of the characters and content of CYBERSWINE, the Company will be required to pay
to the CYBERSWINE licensor a royalty of 2% of gross revenues less cost of goods
on all sales of CYBERSWINE products.

Pursuant to the SAND Acquisition Agreement, Sega Ozisoft agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company agreed to reimburse Sega Ozisoft from the proceeds of
the Offering for all expenses advanced by Sega Ozisoft for any period after
October 31, 1996, and all expenses in excess of $59,000 per month advanced by
Sega Ozisoft for August, September and October 1996. As of December 31, 1996,
the Company had incurred a total obligation of $84,000 pursuant to this
agreement which amount is included in amounts payable to related parties at
December 31, 1996. During the nine months ended September 30, 1997 the Company
paid $62,000 of the amount due to Sega Ozisoft.

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

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

4. RELATED PARTY TRANSACTIONS

Pacific Interactive Education Pty. Ltd. ("PIE") entered into an oral
agreement with BII Australia whereby Mark Miller, a shareholder and director of
PIE and a director of BII Australia, provides consulting services to BII
Australia. Pursuant to the oral agreement, PIE was paid $23,000, $69,000,
$18,000 and $0 for the fiscal years ended June 30, 1995 and 1996, the six months
ended December 31, 1996, and the nine months ended September 30, 1997,
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 could borrow from PIE pursuant to the loan
agreement was $631,000. The interest rate of the note was 12.5% and the note
plus accrued interest 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 Company's initial public
offering of Common Stock or December 31, 1996. Pursuant to the Note Extension,
PIE and BII Australia increased the maximum amount BII Australia could borrow
under the loan agreement to $710,000. As of June 30, 1996, BII Australia owed
PIE $670,000 including accrued interest in the amount of $149,000. In December
1996, BII Australia repaid PIE in full for the balance outstanding ($733,000,
including accrued interest of $199,000).

F-13
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

4. RELATED PARTY TRANSACTIONS (CONTINUED)
BII Australia periodically purchases certain computer equipment from PIE.
For the fiscal years ended June 30, 1995 and 1996, the six months ended December
31, 1996, and the nine months ended September 30, 1997, BII Australia's
purchases totaled $15,000, $16,000, $8,000 and $0, respectively.

Mark Miller is a shareholder of Multimedia Connexion Pty. Ltd. BII Australia
periodically purchases hardware and software from Multimedia Connexion Pty. Ltd.
For the fiscal years ended June 30, 1995 and 1996, and the nine months ended
September 30, 1997, BII Australia purchased computer equipment totaling $12,000,
$16,000, and $111,000, respectively. No purchases were made during the six
months ended December 31, 1996.

Peter Dodds was a shareholder of BII Australia from inception to May 10,
1996. Mr. Dodds is also a shareholder of Andwhen Pty. Limited ("Andwhen"). Mr.
Dodds provided consulting services to BII Australia in 1995 and 1996. In
exchange for such services, fees of $71,000 and $51,000 were paid to Andwhen for
the years ended June 30, 1995 and 1996, respectively. No consulting fees were
paid during the six months ended December 31, 1996 or the nine months ended
September 30, 1997.

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

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

In November 1995, BII Australia entered into a Distribution Agreement (the
"Consumer Electronics Agreement") with Consumer Electronics Pty. Ltd. ("Consumer
Electronics"). Mark Dyne and Kevin Bermeister are both directors and
shareholders 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 was entitled to receive a non-refundable advance of

F-14
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

4. RELATED PARTY TRANSACTIONS (CONTINUED)
$85,000, of which $21,000 was paid in the fiscal year ended June 30, 1996. In
September 1996, the Company agreed to reduce the remaining advance by 25% in
exchange for an immediate payment of the balance due. On October 15, 1996, the
Company received $48,000 representing the full amount due pursuant to the
re-negotiated terms. The Company anticipates no further receipts pursuant to the
Consumer Electronics Agreement, which expired on December 6, 1996.

Kevin Bermeister and Mark Dyne are both directors and shareholders of
Packard Bell Pty. Ltd. Between February 1994 and June 30, 1996, BII Australia
purchased an aggregate of approximately $38,000 in goods from Packard Bell Pty.
Ltd. During the six months ended December 31, 1996, and the nine months ended
September 30, 1997, BII Australia purchased an additional $9,000 and $7,000,
respectively, 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 was entitled to receive payment for certain assistant production
services. Amounts were payable by Sega Ozisoft upon attainment of mutually
determined milestones. In September 1996, the Company entered into the SAND
Acquisition Agreement (see Note 3) which provided for additional payments for
production services, and which superseded the Development Agreement. As of June
30, 1996, the Company had received $120,000 and had recorded a receivable of
$52,000, which was received in July and August 1996. For the six months ended
December 31, 1996 the Company billed an additional $92,000, of which $29,000 was
receivable at December 31, 1996, and was collected during the nine months ended
September 31, 1997.

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 under the agreement totaled
approximately $25,000 and payments to Monto totaled $12,000. In addition, a
liability to Monto for $7,000 was recorded at June 30, 1996. In the six months
ended December 31, 1996, no additional receipts or payments were made pursuant
to this agreement. During the nine months ended September 30, 1997, the
liability to Monto was reduced to $4,200.

Diana Maranon is a director of the Company. Averil Associates, Inc. ("Averil
Associates"), a financial advisory firm founded and controlled by Ms. Maranon,
has, since November 1995, performed services for the Company including
investigation of strategic alternatives and assistance with the Offering. As
consideration for such services, the Company paid to Averil Associates $25,000
as of June 30, 1996, $200,000 during the six months ended December 31, 1996, and
$22,000 for the nine months ended September 30, 1997, plus out of pocket
expenses. The Company 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. The Company has
committed, upon consummation of the Offering, to a cash payment to Averil
Associates of $180,000 and to a grant to Chloe of warrants to purchase 15,040
shares of Common Stock at an exercise price of 110% of the offering price.

F-15
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

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

Gary Barber is a director of the Company and a shareholder of Morgan Creek
Productions, Inc. From May 1989 until July 1997, Mr. Barber was employed by
Morgan Creek Productions, Inc. From January 1995 until July 1997, he was Vice
Chairman and Chief Operating Officer of Morgan Creek Productions, Inc. In
September 1996, the Company entered into a strategic relationship with Morgan
Creek Interactive, Inc. ("Morgan Creek"), an affiliate of Morgan Creek
Productions, Inc., to provide creative product for the Company's Multipath
Movies. Pursuant to the agreement between the Company and Morgan Creek, the
Company is obligated to fund entirely the development of two Multipath Movies.
The first project commenced under this agreement is a thirteen episode comedy
adventure series featuring the Ace Ventura character.

5. STOCKHOLDERS' EQUITY

COMMON STOCK

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

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

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

F-16
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

5. STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK

The Company is authorized to issue 1,000,000 shares of Preferred Stock, par
value $0.001 per share. As of June 30, 1996, December 31, 1996, and September
30, 1997 no shares were issued or outstanding. The Board of Directors has the
authority to issue the authorized and unissued Preferred Stock in one or more
series with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights which adversely affect the
voting power or other rights of the holders of the Company's Common Stock.

WARRANTS

During September 1996 the Company entered into two strategic agreements with
terms that provided for the issuance of warrants to purchase a total of 685,000
shares of the Company's Common Stock. Warrants to purchase 600,000 shares of
Common Stock are exercisable at $5, the initial public offering price of the
Company's Common Stock. Additionally, 35,000 and 50,000 of the warrants are
exercisable at $4.00 and $5.20, respectively. The warrants expire in September
1999. The value of the warrants is calculated to be approximately $1,096,000 and
this value represented an expense charge to operations with a corresponding
credit to stockholders' equity in the six months ended December 31, 1996.

In September 1997, the Company issued warrants to purchase an additional
200,000 shares of the Company's Common Stock, exercisable at $10, to Packard
Bell NEC in connection with an amendment to the distribution agreement between
the companies. The warrants expire in February 1999. The value of the warrants
is calculated to be approximately $140,000 and this value represented an expense
charge to operations with a corresponding credit to stockholders' equity.

1996 STOCK OPTION PLAN

The Company adopted a Stock Option Plan (the "1996 Plan") which became
effective on September 13, 1996. Each director, officer, employee or consultant
of the Company or any of its subsidiaries is eligible to be considered for the
grant of awards under the 1996 Plan. The maximum number of shares of Common
Stock that may be issued pursuant to awards granted under the 1996 Plan is
1,080,000, subject to certain adjustments to prevent dilution. Any shares of
Common Stock subject to an award which for any reason expires or terminates
unexercised are again available for issuance under the 1996 Plan. The maximum
number of shares of Common Stock with respect to which options or rights may be
granted under the 1996 Plan to any executive or other employee during any fiscal
year is 100,000, subject to certain adjustments to prevent dilution.

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

F-17
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

5. STOCKHOLDERS' EQUITY (CONTINUED)
employees vest over a four year period. In connection with these employee stock
options, deferred compensation of $60,000 is included in other assets at
December 31, 1996. Although any award that was duly granted may thereafter be
exercised or settled in accordance with its terms, no shares of Common Stock may
be issued pursuant to any award made after September 13, 2006.

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

The fair value of the options as examined at the date of grant based on a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1997: interest rates of 6.6%; dividend yields of 0%;
volatility factors of the expected market price of the Company's common stock of
38.8%; and expected life of the options of 3 years. These assumptions resulted
in a weighted average fair value of $2.80 per share for stock options granted in
1996.

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

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

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

6. COMMITMENTS AND CONTINGENCIES

In March 1995, BII Australia entered into an agreement with Monto whereby
Monto paid BII Australia a nonrefundable fee of approximately $180,000 to
develop a series of two CD-ROM interactive magazine programs based on a
television series. BII Australia will distribute the completed software packages
and is obligated to pay to Monto 50% of the net receipts from the sale of the
software packages.

F-18
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of June 30, 1996, net receipts totaled $25,000 and payments to Monto totaled
$12,000. In addition, a liability to Monto of $7,000 was recorded at June 30,
1996. In the six months ended December 31, 1996, no additional receipts or
payments were made pursuant to this agreement. During the nine months ended
September 30, 1997, the liability to Monto was reduced to $4,200.

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

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

During the nine months ended September 30, 1997 the Company entered into
non-cancellable operating leases for its premises, which require payments of
approximately $225,000 for each of the next three years, and approximately
$70,000 for each of the subsequent two years.

7. INCOME TAXES

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

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

F-19
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

7. INCOME TAXES (CONTINUED)
The significant components of the net deferred tax asset recorded in the
accompanying consolidated balance sheet as of June 30, 1996 and December 31,
1996 are as follows:

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

The Company recorded a valuation allowance amounting to the entire deferred
tax asset balance.

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31,
--------------------- ---------------------
1995 1996 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal income tax
rate................... 34.0% 34.0% 34.0% 34.0%
State income tax, net of
Federal benefit........ -- -- -- --
Foreign and U. S. tax
effect attributable to
foreign operations..... -- 2.0 2.0 --
Effect of net operating
loss and net operating
loss carryforward...... (34.0) (36.0) (36.0) (34.0)
--------- --------- --------- ---------
Effective income tax
rate................... 0.0% 0.0% 0.0% 0.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

F-20
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER SEPTEMBER
1996 31, 1996 30, 1997
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and Equipment.................. $ 350,000 $ 568,000 $ 836,000
Leasehold Improvements................... -- -- 148,000
Furniture and Fixtures................... 12,000 16,000 61,000
--------- ----------- -----------
362,000 584,000 1,046,000
Less accumulated depreciation............ (164,000) (239,000) (407,000)
--------- ----------- -----------
$ 198,000 $ 345,000 $ 639,000
--------- ----------- -----------
--------- ----------- -----------
</TABLE>

9. OTHER INCOME AND EXPENSE

Other income for the fiscal year ended June 30, 1996, and the nine months
ended September 30, 1996 and 1997 include an export market development grant of
$122,000, $125,083 and $152,280, respectively, from the Australian Trade
Commission for participating in certain export activities. Interest expense for
each of the years ended June 30, 1995 and 1996 and for the six months ended
December 31, 1995, and the three and related to the note payable to PIE (see
Note 4). Interest expense for the six months ended December 31, 1996 included
$49,000 related to PIE and $5,000 related to Reefknot (see Note 4).

10. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS

The Company's operations for the years ended June 30, 1995 and 1996, the six
months ended December 31, 1995 and 1996, and the nine months ended September 30,
1995 consisted solely of the operations of BII Australia. The operations of BII
Australia are in Australia, with significant exports to the United States. In
September 1997, the Company recognized revenue under a distribution agreement
with a significant U.S. customer. The following schedule sets forth the revenues
and accounts receivable of the Company by geographic area:

<TABLE>
<CAPTION>
UNITED
STATES AUSTRALIA OTHER
------------ ---------- ----------
<S> <C> <C> <C>
Year ended June 30, 1995:
Revenues from unaffiliated customers..................................... $ 46,000 $ 2,000 $ --
Revenues from affiliated customers....................................... 635,000 160,000 --
------------ ---------- ----------
Total revenues........................................................... $ 681,000 $ 162,000 $ --
------------ ---------- ----------
------------ ---------- ----------

Year ended June 30, 1996:
Revenues from unaffiliated customers..................................... $ 932,000 $ 258,000 $ 235,000
Revenues from affiliated customers....................................... 316,000 264,000 49,000
------------ ---------- ----------
Total revenues........................................................... $1,248,000 $ 522,000 $ 284,000
------------ ---------- ----------
------------ ---------- ----------
</TABLE>

F-21
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

10. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (CONTINUED)

<TABLE>
<CAPTION>
UNITED
STATES AUSTRALIA OTHER
------------ ---------- ----------
<S> <C> <C> <C>
Six months ended December 31, 1995:
Revenues from unaffiliated customers (unaudited)......................... $ 715,000 $ 48,000 $ 233,000
Revenues from affiliated customers (unaudited)........................... 130,000 30,000 28,000
------------ ---------- ----------
Total revenues (unaudited)............................................... $ 845,000 $ 78,000 $ 261,000
------------ ---------- ----------
------------ ---------- ----------

Six Months ended December 31, 1996:
Revenues from unaffiliated customers..................................... $ 68,000 $ 184,000 $ 8,000
Revenues from affiliated customers....................................... -- 63,000 27,000
------------ ---------- ----------
Total revenues........................................................... $ 68,000 $ 247,000 $ 35,000
------------ ---------- ----------
------------ ---------- ----------

Nine Months ended September 30, 1996:
Revenues from unaffiliated customers (unaudited)......................... $ 272,000 $ 336,000 $ 2,000
Revenues from affiliated customers (unaudited)........................... 186,000 296,000 47,000
------------ ---------- ----------
Total revenues (unaudited)............................................... $ 458,000 $ 632,000 $ 49,000
------------ ---------- ----------
------------ ---------- ----------

Nine Months ended September 30, 1997:
Revenues from unaffiliated customers (unaudited)......................... $2,125,000 $ 196,000 $ 56,000
Revenues from affiliated customers (unaudited)........................... -- -- --
------------ ---------- ----------
Total revenues (unaudited)............................................... $2,125,000 $ 196,000 $ 56,000
------------ ---------- ----------
------------ ---------- ----------

Accounts Receivable as of:
June 30, 1996............................................................ $ 413,000 $ 223,000 $ 22,000
------------ ---------- ----------
------------ ---------- ----------
December 31, 1996........................................................ $ 81,000 $ -- $ --
------------ ---------- ----------
------------ ---------- ----------
September 30, 1997 (unaudited)........................................... $1,973,000 $ -- $ --
------------ ---------- ----------
------------ ---------- ----------
</TABLE>

For each of the periods shown above, all of the operating expenses of the
Company were incurred and paid in Australia, with the exception of royalties due
to third parties incurred in September 1997, and certain corporate expenses
since September 1996. The identifiable assets of the Company, other than
accounts receivable and corporate assets, are predominantly related to the
operations in Australia.

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

F-22
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

10. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
(Frontline Agency, 17% or $60,000; Interplay Productions, Inc., 17% or $60,000;
Sega Ozisoft, 18% or $62,000; and Golden Dolphin Productions Pty. Ltd., 35% or
$122,000). In the nine months ended September 30, 1996, three customers
accounted for more than 10% of total revenues (Ocean of America,Inc., 30% or
$348,000; Packard Bell Electronics, Inc., 16% or $186,000; and Golden Dolphin,
11% or $122,000). For the nine months ended September 30, 1997, one customer
accounted for more than 10% of total revenues (Packard Bell NEC, 83% or
$1,973,000).

F-23
<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-24
<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-25
<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,
1994 CUMULATIVE
(INCEPTION) MARCH 1, 1994
THROUGH YEAR ENDED JUNE 30, (INCEPTION)
JUNE 30, ------------------------ THROUGH JUNE
1994 1995 1996 30, 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-26
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)

STATEMENTS OF CASH FLOWS

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-27
<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

F-28
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1996

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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).

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.

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.

F-29
<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 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, as if this
transaction had occurred as of the beginning of the period presented, for
purposes of the statement of operations data. There is no material pro forma
effect for the six months ended December 31, 1996. As such, no pro forma
statement of operations has been included for that period. The Unaudited Pro
Forma Financial Information does not give effect to any transactions other than
that 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 transaction in fact occurred on such date, 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-30
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

YEAR ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
BRILLIANT
AS SAND AS PRO FORMA PRO FORMA
REPORTED REPORTED ADJUSTMENTS ADJUSTMENTS PRO FORMA
--------- --------- ------------- ----------- ---------
(NOTES 1 AND
2) (NOTE 3)
<S> <C> <C> <C> <C> <C>
Revenues:
Royalties............................. $1,291,015 $ -- $ -- $ -- $1,291,015
Development fees...................... 585,743 -- -- (172,542) 413,201
Software sales........................ 177,119 -- -- -- 177,119
--------- --------- ------------- ----------- ---------
Total revenues...................... 2,053,877 -- -- (172,542) 1,881,335
Cost of revenues........................ 738,842 -- -- -- 738,842
--------- --------- ------------- ----------- ---------
1,315,035 -- -- (172,542) 1,142,493

Operating expenses:
Sales and marketing................... 163,038 -- -- -- 163,038
General and administrative............ 365,491 89,903 (89,903) -- 365,491
Research and development.............. 174,395 668,467 681,533 (172,542) 1,351,853
Depreciation.......................... 101,824 -- -- -- 101,824
--------- --------- ------------- ----------- ---------
804,748 758,370 591,630 (172,542) 1,982,206
Income (loss) from operations........... 510,287 (758,370) (591,630) -- (839,713

Other:
Export market development grant....... 122,488 -- -- -- 122,488
Gain on foreign exchange
transactions........................ 13,382 -- -- -- 13,382
Interest income....................... 2,017 -- -- -- 2,017
Interest expense...................... (94,762) -- -- -- (94,762)
--------- --------- ------------- ----------- ---------
43,125 -- -- -- 43,125
Income (loss) before income taxes....... 553,412 (758,370) (591,630) -- (796,588)
Provision for income taxes.............. -- -- -- -- --
--------- --------- ------------- ----------- ---------
Net income (loss)....................... $ 553,412 $(758,370) $(591,630) $ -- $(796,588)
--------- --------- ------------- ----------- ---------
--------- --------- ------------- ----------- ---------
Net income (loss) per share............. $ 0.12 $ (0.15)
--------- ---------
--------- ---------
Common shares used in calculating net
income (loss) per share............... 4,557,000 780,001 5,337,001
--------- ------------- ---------
--------- ------------- ---------
</TABLE>

See Notes to Unaudited Pro Forma Financial Information.

F-31
<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 was reduced to $0.
Common Stock was increased by $780 and additional paid in capital was increased
by $1,499,220.

NOTE 2:

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 3:

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-32
<PAGE>
INSIDE BACK COVER:

MAKING MULTIPATH MOVIES

SCRIPTING

SCRIPNAV, one of the Company's proprietary software tools assists scriptwriters
in developing Multipath Movie scripts, which may have hundreds of branching plot
lines.

CREATIVE DESIGN

Talent, character design, set design, props, sound and music are all elements of
the creative design process.

VOICE/SOUND

The Company's proprietary TALKTRACK matches dialogue tracks produced by voice
actors to each character's lip movements. Music and sound effects are added.

MODEL/WORLD BUILDING

Talented graphic artists and 3-D modelers create new characters using software
modeling packages, including 3-D MAX and Softimage.

TEXTURING/LIGHTING

Patterns, textures, finish and color are added to the sets and characters to
provide realistic features and life-like appearances. Lighting and shading are
added to enhance depth and motion.

BLOCK/CAMERA/EDITING

The Company's ScuD engine is used to layup, edit, film and synchronize timing
for each scene. Multiple virtual cameras provide the director control and
flexibility throughout the production process.

SPECIAL EFFECTS ANIMATION

Special sound and visual effects are added.

RENDERED OUTPUT

Mr. Copy arranges, reorders, compresses and decompresses, and optimally
organizes files for playing of the Multipath Movie by the DigitalProjector.
<PAGE>
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No dealer, salesperson or other person has been authorized to give any
information 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 subsequent
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
1997 Developments......................................................... 6
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 22
Price Range of Common Stock............................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Selected Historical and Pro Forma
Consolidated Financial Data.............................................. 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 32
Management................................................................ 55
Certain Relationships and Related
Transactions............................................................. 62
Principal and Selling Stockholders........................................ 66
Description of Capital Stock.............................................. 68
Shares Eligible For Future Sale........................................... 70
Underwriting.............................................................. 72
Notice to Canadian Residents.............................................. 74
Legal Matters............................................................. 75
Experts................................................................... 75
Change in Independent Public Accountant................................... 75
Additional Information.................................................... 75
Index to Consolidated Financial Statements................................ F-1
</TABLE>

[LOGO]

2,500,000 Shares
Common Stock

($.001 par value)

P R O S P E C T U S

Credit Suisse First Boston

Cruttenden Roth
Incorporated

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