BRILLIANT DIGITAL ENTERTAINMENT INC, 424B3, 1999-11-24

BRILLIANT DIGITAL ENTERTAINMENT INC
424B3, 1999-11-24
PREPACKAGED SOFTWARE

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PROSPECTUS SUPPLEMENT TO
PROSPECTUS DATED OCTOBER 22, 1999

2,040,000 Shares

BRILLIANT DIGITAL ENTERTAINMENT, INC

Common Stock

This prospectus supplement to the prospectus dated October 22, 1999 of
Brilliant Digital Entertainment, Inc. relates to the offer and sale from time to
time by St. Annes Investments, Ltd. of up to 2,040,000 shares of common stock of
Brilliant Digital Entertainment, Inc.

This prospectus supplement should be read in conjunction with the
prospectus dated October 22, 1999, which is to be delivered with this prospectus
supplement.

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

SEE "CAUTIONARY STATEMENTS AND RISK FACTORS" BEGINNING ON PAGE 18 OF THIS
PROSPECTUS SUPPLEMENT FOR FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK OF
BRILLIANT DIGITAL ENTERTAINMENT, INC.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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

This prospectus supplement is dated November 24, 1999

<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.

<TABLE>
INDEX

<CAPTION>
Page

<S> <C> <C>
PART I FINANCIAL INFORMATION...................................................3

Item 1. Financial Statements....................................................3

Condensed Consolidated Balance Sheet as of September 30, 1999...........3

Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 1999 and September 30, l998............4

Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and September 30, 1998.................5

Notes to Consolidated Financial Statements..............................7

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................12

PART II OTHER INFORMATION......................................................25

Item 2. Changes in Securities and Use of Proceeds..............................25

Item 4. Submission of Matters to Vote of Security Holders......................26

Item 6. Exhibits and Reports on Form 8-K.......................................26
</TABLE>

Page 2
<PAGE>

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

<TABLE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<CAPTION>
SEPTEMBER 30,
1999
-------------
ASSETS (UNAUDITED)
Current assets:
<S> <C>
Cash and cash equivalents................................ $ 1,936
Accounts receivable, net................................. 2,436
Inventory................................................ 117
Other, net............................................... 308
-------------
Total current assets........................................ 4,797
Property, plant and equipment, net.......................... 518
Movie software costs........................................ 275
Software technology......................................... 1,197
Goodwill ................................................... 4,524
Other assets................................................ 358
-------------
Total assets................................................ $ 11,669
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 639
Accrued expenses...................................... 1,640
Related party payable................................. 382
Current portion of notes payable...................... 88
-------------
Total current liabilities................................... 2,749
Notes payable, less current portion......................... 77
Convertible debenture....................................... 250
Other long term liabilities................................. 50
-------------
Total liabilities........................................... 3,126
Commitments and contingencies
Stockholders' equity:
Common stock........................................... 12
Additional paid-in capital............................... 31,313
Accumulated deficit...................................... (22,632)
Cumulative other comprehensive income (loss)............. (150)
-------------
Total stockholders' equity.................................. 8,543
-------------
Total liabilities and stockholders' equity.................. $ 11,669
=============
</TABLE>

See accompanying notes.

Page 3
<PAGE>

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

<CAPTION>
3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED
9/30/99 9/30/98 9/30/99 9/30/98
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)

REVENUE:
<S> <C> <C> <C> <C>
Revenues $ 299 $ 175 $ 633 $ 207
------------ ------------ ------------ ------------

COST OF REVENUES AND EXPENSES:
Cost of revenues........................... 268 50 617 390
Sales & marketing.......................... 250 304 729 1,279
General and administrative................. 1,116 779 2,653 2,027
Research and development................... 1,029 1,297 2,912 2,989
Amortization of software technology and
goodwill .................................. 409 -- 409 --
Depreciation............................... 145 123 415 258
------------ ------------ ------------ ------------
Total cost of revenues and expenses........ 3,217 2,553 7,735 6,943
------------ ------------ ------------ ------------

Income (loss) from operations.............. (2,918 ) (2,378 ) (7,102) (6,736)

OTHER INCOME (EXPENSE):
Export market development grant............ 55 40 182 73
Gain (loss) on foreign exchange............ -- 1 (5) (5)
Debenture expense.......................... -- -- (55) --
Interest income (expense), net............. 29 80 33 337
------------ ------------ ------------ ------------
Total other income (expense)........... 84 121 155 405
------------ ------------ ------------ ------------
Income (loss) before income taxes.......... (2,834) (2,257) (6,947) (6,331)
Provision for income taxes................. -- -- -- --
------------ ------------ ------------ ------------
Net income (loss).......................... (2,834) (2,257) (6,947) (6,331)
Foreign currency translation adjustment
(net of tax effects).................. (53) (58) (27) (54)
----------- ------------- ------------ ------------

Comprehensive income (loss)................ $ (2,887) $ (2,315) $ (6,974) $ (6,385)
============ ============= ============ ============
Basic and diluted net income (loss)
per share................................ $ (0.23) $ (0.24) $ (0.64) $ (0.67)
============ ============ ============ ============
Weighted average number of shares used in
computing basic and diluted net income
(loss) per share....................... 12,373 9,403 10,878 9,403
============ ============ ============ ============
</TABLE>

See accompanying notes.

Page 4
<PAGE>

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

<CAPTION>
Nine Months Ended September
30,
-----------------------------
1999 1998
------------- ------------
(unaudited) (unaudited)
Operating activities
<S> <C> <C>
Net income (loss)............................................ $ (6,947) $ (6,331)

Adjustments to reconcile net income (loss)
to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization........................... 575 482
Amortization of movie software costs.................... 392 349
Amortization of software technology costs............... 171 --
Amortization of goodwill................................ 238 --
Debenture expense and interest.......................... 117 --
Effect of warrants granted.............................. -- 96
Changes in assets and liabilities:
Accounts receivable.................................. (277) 112
Inventory............................................ (42) (40)
Movie software costs................................. -- (797)
Other assets......................................... (84) (120)
Accounts payable and accruals........................ (259) (411)
Other long-term liabilities.......................... (96) --
------------- ------------
Net cash provided by (used in) operating activities.......... (6,212) (6,660)

Investing activities
Cost of Acquisition.......................................... (198) --
Purchases of equipment....................................... (168) (529)
------------- ------------
Net cash used in investing activities........................ (366) (529)

Financing activities
Repayment of notes payable................................... (108) --
Proceeds from issuance of shares............................. 4,574 --
Proceeds from operating lease agreement...................... -- 132
Issuance of convertible debenture, net of costs ............. 965 --
Repayment of debenture....................................... (100) --
------------- ------------
Net cash provided by financing activities ................... 5,331 132

Net increase (decrease) in cash and cash equivalents......... (1,247) (7,057)
Translation adjustments...................................... (4) 72
Cash and cash equivalents at beginning of period............. 3,187 12,338
------------- ------------
Cash and cash equivalents at end of period................... $ 1,936 $ 5,353
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................ $ -- $ 8
============= ============
Income taxes......................................... $ -- $ 17
============= ============
</TABLE>

See accompanying notes.

Page 5
<PAGE>

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:

On April 27,1999, we issued to Roseworth Group, Ltd. a 4% convertible
debenture in the principal amount of $1,000,000. On May 13, 1999, Roseworth
converted $250,000 of the debenture into 76,489 shares of common stock, and on
May 24, 1999, Roseworth converted an additional $500,000 of the debenture into
129,033 shares of common stock. Subsequent to this report on October 8, 1999,
Roseworth converted the remaining $250,000 of the debenture into 95,785 shares
of common stock.

On July 1, 1999, we purchased Trojan Television Limited, a company doing
business as The Auction Channel. In connection with the acquisition, we also
acquired the rights to certain software technology used by The Auction Channel
and a note payable by The Auction Channel to some of its shareholders. The
purchase price for The Auction Channel is subject to adjustment based on the
company's net liabilities as of July 1, 1999, and has not been determined as of
the date of this report. We currently estimate that the total purchase price
will be as follows:

<TABLE>
<CAPTION>
<S> <C>
Value of stock issued.. $3,312,000
Value of warrants
issued................. 1,024,000
Net liabilities assumed 1,596,000
Cash payments.......... 198,000
-----------
Total acquisition...... $6,130,000
===========

The purchase price is attributable to the acquired assets as follow:

Trojan Television
Limited................ $4,233,000
Software technology.... 1,368,000
Note receivable........ 529,000
-----------
Purchase price......... $6,130,000
===========
</TABLE>

In connection with the acquisition, a total of $4,762,000 has been
allocated to goodwill, representing the excess of acquired costs over the fair
market value of The Auction Channel's net assets.

Page 6
<PAGE>

BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
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 that, 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. The
accompanying financial statements should be read in conjunction with the audited
consolidated financial statements of Brilliant Digital Entertainment, Inc.
included in our Form 10-KSB for the fiscal year ended December 31, 1998.

2. STOCKHOLDERS' EQUITY

Options and warrants representing common shares of 1,678,000 and 2,195,000
were excluded from the average number of shares outstanding in the diluted EPS
calculation for the nine months ended September 30, 1998 and 1999, respectively,
because they were anti-dilutive.

On March 30, 1999, we entered into agreements for the sale of 2,132,000
shares of our common stock to seven investors, the closing of which was subject
to several contingencies. The contingencies were waived and the sales of the
shares closed in May 1999, raising aggregate proceeds of $4,311,250. Of the
2,132,000 shares of common stock, 1,880,000 shares were issued to five investors
at $2.00 per share and 252,000 shares were issued to two investors at $2.1875
per share. The purchase prices for the shares were negotiated with each of the
investors. On March 29, 1999, the closing sales price of our common stock was
$2.25 per share, and the lowest sales price of our common stock was $2.1875 per
share. The 1,880,000 shares were issued at a discount to the sales prices of the
common stock to reflect the illiquidity risk associated with the shares. All of
the shares constituted restricted stock that could not be sold in the public
market until the shares were registered under the Securities Act of 1933, as
amended, or until an exemption from registration was available. In October 1999,
we registered with the Commission the resale by the investors of all 2,132,000
of these shares.

On April 27,1999, we issued to Roseworth Group, Ltd. a 4% convertible
debenture in the principal amount of $1,000,000 due on the later of April 27,
2000 or six months following the date the Securities and Exchange Commission
declares effective a registration statement with respect to the resale of the
shares of common stock underlying the debenture. Roseworth Group, Ltd. may
convert the debenture into shares of our common stock at a conversion price for
each share equal to the lower of 95% of its Market Price at the conversion date
or $6.00. On the maturity date of the debenture, the unpaid balance of the
debenture and any accrued and unpaid interest will convert automatically into
shares of common stock at the conversion price on that date. Market Price is
defined as the lowest volume weight adjusted price of our common stock on the
American Stock Exchange (as reported on Bloomberg) during the 10 business days
prior to the business day on which the conversion notice is sent to us. In
connection with the transaction, we paid to Roseworth a fee of $30,000 and
issued to Roseworth 5,883 shares of common stock. We expensed an interest charge
of $66,000 in connection with the issuance of the debenture. On May 13, 1999,
Roseworth converted $250,000 of the debenture into 76,489 shares of common
stock, and on May 24, 1999, Roseworth converted an additional $500,000 of the
debenture into 129,033 shares of common stock. As of September 30, 1999,
$250,000 in principal of the debenture was outstanding.

During June 1999, six of our employees exercised stock options granted to
them under our 1996 Stock Option Plan and purchased 4,375 shares of our common
stock at a purchase price of $1.50 per share. During July and August 1999, an
additional 2,000 shares were purchased by employees upon the exercise of stock
options granted under the 1996 Stock Option Plan. On September 14, 1999, one of
our directors exercised warrants granted to the director in 1996 and purchased
40,222 shares of our common stock at a purchase price of $0.0326 per share.

Page 7
<PAGE>

On May 4, 1999, the Board of Directors approved the grant of stock options
to our directors and executive officers to purchase up to an aggregate 119,375
shares of common stock at an exercise price $4.13 per share. On April 9, 1999,
options to purchase up to 100,000 shares of common stock at an exercise price of
$2.85 per share were issued to an executive officer of our subsidiary, Trojan
Television Limited.

At September 30, 1999, we had 12,450,926 shares of common stock issued and
outstanding, including shares issued in conjunction with the acquisition of
Trojan Television Limited. See discussion below in Note 5.

We believe that our existing funds, cash generated from operations and
proceeds from the securities purchase agreement with St. Annes and the
convertible debentures to be issued to Roseworth Group Ltd. (see discussion
below in Note 7) will be sufficient to fund our working capital requirements for
at least the next twelve months. See "Cautionary Statements and Risk Factors -
If we are unable to raise additional funds, we may be required to defer
completion of Multipath Movie titles and reduce overhead significantly."

3. COMMITMENTS AND CONTINGENCIES

We lease our office and production facilities and some of our office
equipment. We had commitments under our lease agreements for approximately
$627,000 at September 30, 1999. In addition, at September 30, 1999 we had
obligations of $107,000 under licensing commitments. We have an obligation under
our joint venture agreement with KISS Digital, LLC to fund 75% of the
development of a Multipath Movie, up to $900,000.

4. SIGNIFICANT ACCOUNTING POLICIES

CONCENTRATION OF CREDIT RISK

In 1997, we recognized as revenue the minimum royalty of, and recorded in
accounts receivable, $1,973,000 due from Packard Bell NEC in connection with a
distribution agreement. Management is aware that Packard Bell NEC has
significantly delayed distribution of our titles bundled with Packard Bell NEC's
computers. In addition to the delay, Packard Bell NEC has bundled our software
on significantly fewer computers than required. Recently, NEC Corp., Packard
Bell NEC's parent corporation, announced plans to restructure Packard Bell NEC
in the United States and layoff approximately 80% of its work force and withdraw
from the United State's retail PC market. As a result of these factors
management believes that Packard Bell NEC will not be able to comply with the
terms of the distribution agreement with us. Specifically, Packard Bell NEC
agreed to ship our software in approximately 6 million computers, of which
Packard Bell NEC was required to ship 1,973,000 computers within 12 months of
the commencement date, which could be extended for an additional period not to
exceed 6 months. Packard Bell NEC is required to pay a minimum royalty of
$1,973,000, which represents $1 for each of the minimum number of computers that
Packard Bell NEC agreed to ship with our products. Packard Bell NEC has paid us
the sum of approximately $97,000 against the total amount due. We have commenced
legal proceedings against Packard Bell NEC to recover damages resulting from
their failure to perform their obligations under our agreement. There can be no
assurance, however, that we will prevail in these legal proceedings and recover
any amounts due to us under the agreement. Additionally, as a result of Packard
Bell NEC's reduction in operations, even if we prevail in our lawsuit against
Packard Bell NEC there can be no assurance that we will be able to collect any
amounts awarded to us in the proceedings.

5. ACQUISITION OF TROJAN TELEVISION LIMITED

On July 1, 1999, we acquired 1,700,000 common shares of Trojan Television
Limited, which represents 85% of the 2,000,000 outstanding common shares of
Trojan. Trojan does business as The Auction Channel. The Auction Channel is a
London-based company that was founded in 1996. The Auction Channel integrates
live satellite, cable TV and Web broadcasts of auction events conducted by
auction houses, allowing for participants to watch auction events on television
and use the Internet or their telephone to bid simultaneously with people
actually present at the auction house. The Auction Channel has entered into
agreements to provide its services with such major auction houses as Christie's,
Phillips, Bonhams and Brooks. We acquired the common shares of The Auction
Channel by exercising our right to close a share purchase agreement with the
majority shareholders of The Auction Channel. In addition, 19 minority
shareholders holding 246,000 common shares of The Auction Channel have become
parties to the share purchase agreement and have agreed to sell to us their
shares of The Auction Channel. Following our acquisition of the 246,000 shares
from these minority shareholders, we will own 97.3% of the outstanding common
shares of The Auction Channel.

Page 8
<PAGE>

Nine additional shareholders hold the remaining 54,000 outstanding common
shares of The Auction Channel. The majority shareholders have agreed to use
their reasonable efforts to cause each of these additional shareholders to
become a party to the share purchase agreement and sell their shares to us.
Presently, we are actively seeking to acquire the remaining shares in The
Auction Channel from these shareholders.

We will pay the purchase price for The Auction Channel in shares of our
common stock. The final purchase price will be determined following completion
of the audit of financial statements of The Auction Channel, which we expect
will be finalized before December 31, 1999. We estimate that the cash value of
the purchase price will be approximately $4,534,000 plus assumed liabilities of
$1,596,000, which purchase price will be comprised of the following:

o Approximately 311,000 shares of our common stock that we will issue
in exchange for 97.3% of the shares of The Auction Channel, which
shares of our common stock have an estimated value of $1,828,000.
The actual number of shares that we will issue for the shares of The
Auction Channel will be determined following completion of the
audit.

o A total of 175,000 shares of our common stock and warrants to
purchase up to 400,000 shares of our common stock that we issued
to a third party to settle claims of ownership of The Auction
Channel and to acquire a license to computer software and
hardware technology used by The Auction Channel in its business.
All of the warrants are fully vested. Of the warrants, 200,000
have an exercise price of $3.50 per share and expire on December
31, 1999, and 200,000 have an exercise price of $4.00 per share
and expire on June 30, 2000. The common stock has an estimated
value of $1,028,000 and the warrants have an estimated value of
$1,024,000. Of these amounts, $1,368,000 has been allocated to
software technology and $684,000 has been allocated to goodwill.

o A total of $112,000 and 47,000 shares of our common stock that we
paid and issued to certain shareholders of The Auction Channel to
satisfy an outstanding loan and other amounts owed to these
shareholders. The shares of common stock have an estimated value of
$418,000.

o Included in the purchase price are $124,000 of legal fees incurred
in connection with the acquisition which were paid with $86,000 in
cash and 9,540 shares of our common stock, which shares have an
estimated value of $38,000.

For purposes of valuing the shares of common stock issued or to be issued
in connection with our acquisition of The Auction Channel, we used the closing
June 30, 1999 consolidated market price of $5.875 per share. These shares have
been included in the weighted average shares outstanding, as if issued on July
1, 1999, the effective date of the acquisition. The purchase method of
accounting was used to record the acquisition of The Auction Channel. A total of
$4,762,000, representing the excess of acquired costs over the fair market value
of Trojan net assets, has been allocated to goodwill and is being amortized over
the estimated useful life of five years. A total of $1,368,000 has been
allocated to software technology and is being amortized over two years. The
allocation of acquired costs to goodwill and software technology are preliminary
and will be finalized upon completion of a formal valuation.

The accompanying unaudited condensed consolidated financial statements
include The Auction Channel's unaudited financial statements for the three-month
period ended September 30, 1999.

In connection with our acquisition of The Auction Channel, we sold 60,000
shares of our common stock for $272,500 in cash.

Page 9
<PAGE>

The following summary of unaudited pro forma combined statement of
operations data for the nine months ended September 30, 1998 and September 30,
1999 reflects our acquisition of The Auction Channel as if the acquisition had
occurred on January 1, 1998.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues............. $ 1,002,000 $ 215,000
Net loss............. $(9,284,000) $ (8,412,000)
Net loss per share... $ (0.75) $ (0.84)
</TABLE>

6. SEGMENT INFORMATION

Effective on July 1, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" in conjunction with the
acquisition of a new line of business, Trojan Television Limited, doing business
as The Auction Channel. Certain information is disclosed, per SFAS No. 131,
based on the way management organizes financial information for making operating
decisions and assessing performance.

We currently have two major lines of businesses: digital animation and
live auction facilitation. Brilliant Digital Entertainment, in the United
States, together with its subsidiary Brilliant Interactive Ideas, in Australia,
is a production and development studio that uses its proprietary software tool
set to create digital entertainment for distribution over the Internet, on
CD-ROM and DVD, as television programming and for home video. Brilliant Digital
Entertainment also offers for sale its proprietary tool, B3D-MAX. The newly
acquired subsidiary, The Auction Channel, is United Kingdom based. This
subsidiary integrates live satellite, cable TV and Web broadcasts of auction
events conducted by auction houses, allowing for participants to watch events on
television and over the Internet and to use the Internet or their telephone to
bid simultaneously with people actually present at the auction house.

The following summary of unaudited pro forma combined balance sheet and
statement of operations data for the three months ended September 30, 1999 is
presented for our Digital Animation and Auction Facilitation segments:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1999 (1)
----------------------
Total Assets:
<S> <C>
Digital Animation...... $ 11,129,000
Auction Facilitation.... 540,000
----------------------
Total Assets......... $ 11,669,000
=====================

Revenues:
Digital Animation....... $ 207,000
Auction Facilitation.... 92,000
--------------------
Total Revenues....... $ 299,000
====================

Income (Loss) from
Operations:
Digital Animation....... $ (2,671,000)
Auction Facilitation.... (246,000)
Other (2)............... 83,000
--------------------
Total Income (Loss).. $ (2,834,000)
====================

<FN>
- ---------------------------
(1) The Auction Channel was acquired on July 1, 1999 and, accordingly, the
segment information is presented for the three months ended September 30,
1999. We did not have segments prior to July 1, 1999.
(2) Consists primarily of interest income and export marketing development
grant income, net of debenture expense.
</FN>
</TABLE>

Page 10
<PAGE>

7. SUBSEQUENT EVENTS

At September 30, 1999, there remained outstanding $250,000 of principal
under the $1,000,000 convertible debenture we issued to Roseworth Group Ltd. on
April 27, 1999. On October 8, 1999, Roseworth converted the remaining $250,000
of principal into 95,785 shares of common stock at $2.61 per share.

On October 29, 1999, we entered into a Debenture and Warrant Purchase
Agreement with Roseworth Group Ltd. and agreed to sell to Roseworth for
$1,500,000 one or more 4% convertible debentures in the aggregate principal
amount of $1,500,000 and warrants to purchase up to 50,000 shares of our common
stock at an exercise price of $5.50 per share. On October 29, 1999, we issued to
Roseworth Group, Ltd. a 4% convertible debenture in the principal amount of
$1,000,000 due on the later of October 29, 2000 or six months following the date
the Securities and Exchange Commission declares effective a registration
statement with respect to the resale of the shares of common stock underlying
the debenture (but in no event later than December 31, 2000). We will issue a 4%
convertible debenture for an additional $500,000 when the Commission declares
the registration statement effective. The warrants currently are exercisable and
terminate 18 months following the effective date of a registration statement
covering the resale of the shares of common stock underlying the warrants.
Roseworth Group, Ltd. may convert the debentures into shares of our common stock
at a conversion price for each share equal to the lower of 95% of its Market
Price at the conversion date or $6.00. On the maturity date of the debentures,
the unpaid balance of the debentures and any accrued and unpaid interest will
convert automatically into shares of common stock at the conversion price on
that date. Market Price is defined as the lowest volume weight adjusted price of
our common stock on the American Stock Exchange (as reported on Bloomberg)
during the 15 business days prior to the business day on which the conversion
notice is sent to us. In connection with the transaction, we will pay to
Roseworth a cash fee of $45,000 and issue to Roseworth shares of common stock
with a market value equal to $30,000.

We have agreed to file a registration statement with the Commission
covering the resale of the shares underlying the debentures and the warrants by
November 30, 1999, to cause the registration statement to become effective
within 90 days thereafter and to maintain the registration effective for up to
three years.

On October 11, 1999, the Board of Directors granted options to purchase up
to 329,625 shares of common stock at an exercise price of $2.9375 per share
under the Brilliant Digital Entertainment 1996 Stock Option Plan. In addition,
on October 27, 1999, the Board of Directors granted options to purchase up to
250,000 shares of common stock at an exercise price of $3.00 per share to the
chief executive officer of The Auction Channel. We have agreed to register the
resale of the shares of common stock underlying these options with the
Commission.

Page 11
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis should be read together with the
Consolidated Financial Statements of Brilliant and the notes to the Consolidated
Financial Statements included elsewhere in this Prospectus Supplement.

THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30,
1998. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES
AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS
DESCRIBED BELOW UNDER THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS."

OVERVIEW

Brilliant is a production and development studio that uses its proprietary
software tool set to create digital entertainment for distribution over the
Internet, on CD-ROM and DVD, as television programming and for home video.
Through our subsidiary, The Auction Channel, we also provide services to auction
houses that enable participants to watch auction events on television and bid
using their telephone or the Internet. We are headquartered in the United States
and were incorporated in July 1996. Initially, we were 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 our wholly owned
subsidiary in August 1996, and we acquired SAND in September 1996. SAND was
established during the second quarter of 1994 by Sega Ozisoft Pty., Ltd., 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.

Our annual and quarterly revenue will depend upon the successful
development, distribution, timing and market acceptance of our interactive
products and upon the costs to distribute and promote these products. Our annual
and quarterly revenue also will depend upon the use by auction houses of our
auction-related products and services. The revenues derived from the production
and distribution of our 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 "Cautionary
Statements and Risk Factors- We will not be able to sell our Multipath Movies if
they do not achieve market acceptance." The commercial success of a Multipath
Movie is also expected to depend upon promotion and marketing, production costs,
impact of competition and other factors. Accordingly, our annual and quarterly
revenues are, and will continue to be, extremely difficult to forecast.

OUR ACQUISITION OF THE AUCTION CHANNEL

On July 1, 1999, we acquired Trojan Television Limited. Trojan Television
Limited is a London-based company doing business as The Auction Channel. Founded
in 1996, The Auction Channel integrates live TV (via satellite and cable) and
Web broadcasts of auction events conducted by auction houses, allowing for
participants to watch events on television and the Internet and to use the
Internet or their telephone to bid simultaneously with people actually present
at the auction house. The Auction Channel has entered into agreements to provide
its services to major auction houses like Christie's, Phillips, Bonhams and
Brooks.

CD ROM RETAIL CHANNELS AND DIRECT-TO-RETAIL

We are continuing to establish a limited retail distribution program in
which Multipath Movies are marketed through traditional software publishers and
distributors nationwide. Progress is being made in the retail channel through
our relationship with GT Interactive, who is representing selected titles sold
in jewel case CD-ROM formats. Certain titles are now available in stores such as
Wal-Mart, Target and other mass merchant retailers. In addition to distribution
through GT Interactive, we have entered into a distribution agreement with The
Learning Company to sell 4 boxed titles, including Superman and Gravity Angels,
into computer retail stores. There are, however, numerous obstacles and
uncertainties involved in developing a retail distribution channel. In the past,
we have experienced significant delays in our introduction of titles in the
retail channel. For instance, delays in duplication, packaging and distribution
caused our first movies to begin arriving at retailers at the end of December
1997, after the holiday selling season. Similarly, we

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experienced distribution delays in the fourth quarter of 1998 that caused our
products to reach retail shelves only at the end of December. We cannot
guarantee that similar delays will not occur in the future.

DVD MARKET

We intend to release Multipath Movie titles to the DVD market for
distribution commencing in the first quarter of 2000. We believe that
distributing our titles on DVD will increase the awareness of Multipath Movies
in the retail market. We entered into an agreement with SlingShot, a special
purpose DVD publisher and distributor, in March 1999 in terms of which, we
granted to SlingShot exclusive worldwide rights to distribute 20 of our
Multipath Movies in DVD format. Under the agreement, SlingShot has made an
up-front, non-refundable cash advance and provided a minimum guarantee in
exchange for its exclusive retail DVD distribution rights. OEM and bundled sales
of DVD products will be managed jointly by SlingShot and us. SlingShot will also
use a DVD version of our Digital Projector to drive traffic to our web site. We
have begun delivery of titles to SlingShot for conversion to the DVD format and
have developed a release plan to ensure timely delivery of DVD titles into the
retail channel.

INTERNET AND ONLINE SERVICES

We continue to seek distribution of our Multipath Movies through bundling
arrangements which allow the user to purchase and unlock titles through our
website. In addition to our existing relationships, we have signed an agreement
to distribute certain title previews through Midas Interactive Entertainment BV,
a Netherlands-based publisher and distributor of PC CD-ROM software. We have
entered into online content and distribution arrangements to promote and sell
Multipath Movies. These include arrangements with Excite@Home, @Home Benelux,
DVD Express, Road Runner, Gamestorm and Fox Kids. We currently are pursuing
relationships with other on-line partners but cannot be certain that they will
be concluded. We will continue our efforts to deliver content to the on-line
markets, and we are pursuing opportunities to syndicate and license our content
to these markets. We have made significant progress in reducing the file sizes
of our content and expect this to be a major advantage in our ability to exploit
the on-line marketplace.

B3D - MAX

In addition to consumer product sales and marketing, we are pursuing a
strategy designed to encourage active use of our tools and technology by a broad
market of animators who are currently using 3D Studio Max, an animation and 3D
design software package developed and marketed by Kinetix, a division of
Autodesk. Our B3D - Max tool is a plug-in to 3D Studio Max. It enables animators
to output their animation to be played back in real time on the Internet using
our Digital Projector playback system. B3D - Max is distributed by Digimation
Inc., an authorized distributor of 3D Studio Max plug-ins, and by us directly to
the market. The marketing program is designed to encourage content creation and
distribution on the Internet using B3D - Max, to further encourage use of the
Digital Projector, and through this, to establish broader demand for our other
tools and technology that we intend to release into the market. Animation
content generated using B3D Max can be of any type. The tool is not limited to
the production of entertainment content. It can be applied to the production of
artistic renderings, education, architecture, engineering, e-commerce and other
solutions that require animation. A limited 30-day trial version of the tool has
been released on various Internet sites for use by animators worldwide. The
complete license version is available at a suggested retail price of $495.00 per
user. Other versions of the tool, to be released at a later date, will be sold
or will be the subject of joint venture arrangements.

NON-INTERACTIVE FORMAT FOR TELEVISION, CABLE AND VIDEO

We have progressed with our plans to release some of our Multipath Movies
in non-interactive format as television broadcast/cable programming and home
video features. In January 1999, we entered into an agreement with Kaleidoscope
Media Group for the distribution of GRAVITY ANGELS, a two hour 3D animated
science fiction thriller, to the television broadcast/cable and home video
markets. We attended Mipcom in Cannes (France) where several TV Broadcasters
expressed interest in the rights for their individual territories. The final
rendered property is due for complete and we expect agreements currently under
negotiation to be concluded in the next several months. However, we do not
guarantee that such agreements will be concluded or that the terms of such
agreements, if concluded, will be favorable to us.

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PACKARD BELL

RESULTS OF OPERATIONS

REVENUES. Revenues from the sale of Multipath Movies through retail
outlets are recognized when the product is shipped. Product returns or price
protection concessions that exceed our reserves could materially adversely
affect our business and operating results and could increase the magnitude of
quarterly fluctuations in our operating and financial results. See "Cautionary
Statements and Risk Factors -- Product returns that exceed our anticipated
reserves could result in worse than expected operating results."

We enter into distribution contracts under which we are entitled to fixed
minimum guaranteed payments. The minimum guaranteed payments are recognized as
revenue when the CD-ROM master is delivered to the distributor and the terms of
the sale are considered fixed. Revenues from the sale of electronic tickets to
view Multipath Movies over the Internet are recognized when the tickets are
sold.

Historically, we have derived our revenues from royalties, development
fees and software sales. We license our traditional CD-ROM products to
publishers and distributors in exchange for non-refundable advances and
royalties based on product sales. Royalties based on product sales are due only
to the extent they exceed any associated non-refundable royalty advance.
Royalties related to non-refundable advances are recognized when the CD-ROM
master is delivered to the licensees. Royalty revenues in excess of
non-refundable advances are recognized upon notification by the distributor that
a royalty has been earned by us. Development fees are paid by customers in
exchange for our 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, we recognize the portion of the development fee
allocated to each milestone. Software sales revenues are recognized upon
shipment of product.

Revenues increased from $207,000 for the nine months ended September 30,
1998 to $633,000 for the nine months ended September 30, 1999. This represents
an increase of $426,000. Revenues for the nine months ended September 30, 1999
consist of Multipath Movie retail sales of $307,000, $109,000 of which is from
the XENA-GIRLS JUST WANNA HAVE FUN title, $145,000 earned under a Multipath
Movie technology and content development agreement, $92,000 earned by The
Auction Channel from the sales of live auctions and preview programs for
television transmission, sponsorship of televised auctions and commissions
earned from Internet bidders at televised and Internet only auctions, $56,000
earned from a DVD Multipath Movie development agreement, and $33,000 earned from
services related to the capture of physical motion used in the creation of
animated content. Revenues for nine months ended September 30, 1998 were
primarily the result of $168,000 earned under a Multipath Movie technology and
content development agreement.

COST OF REVENUES. Cost of revenues consists primarily of the amortization
and write-down of capitalized movie software costs for previously released
titles, royalties to third parties and the direct costs and manufacturing
overhead required to reproduce and package software products. Cost of revenues
increased from $390,000 for the nine months

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ended September 30, 1998 to $617,000 for the nine months ended September 30,
1999. The costs of revenues for the nine months of 1998 were primarily a result
of the amortization of $161,000 and a write-down of $145,000 of capitalized
movie software costs for previously released titles. Costs of revenues for the
nine months of 1999 include direct costs, royalties and manufacturing overhead
of $133,000, amortization of capitalized movie software costs of $392,000 and
$92,000 of costs incurred by The Auction Channel in connection with the
production of live auctions and preview programs for televised transmission.

SALES AND MARKETING. Sales and marketing expenses include primarily costs
for salaries, advertising, promotions, brochures, travel and trade shows. Sales
and marketing expenses decreased from $1,279,000 for the nine months ended
September 30, 1998 to $729,000 for the nine months ended September 30, 1999. The
decrease is primarily attributable to a change in our promotional efforts.
However, sales and marketing expenses are expected to increase in future periods
due to the expansion of our sales force, increased marketing efforts and the
addition of The Auction Channel. Marketing expenses for the nine months of 1999
are primarily attributable to an online marketing program which was
discontinued.

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 $2,027,000 for the nine months ended September 30, 1998 to
$2,653,000 for the nine months ended September 30, 1999. This represents an
increase of $626,000 that primarily is attributable to increased professional
fees of $221,000, increased recruiting costs of $174,000 and the addition of
$104,000 in costs attributable to The Auction Channel.

RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and benefits of personnel conducting research and development of
software products. Research and development costs also include costs associated
with creating our traditional CD-ROM software tools and the software tools used
to develop Multipath Movies. There was a decrease of $77,000 in research and
development expenses from $2,989,000 for the nine months ended September 30,
1998 to $2,912,000 for the nine months ended September 30, 1999.

In accordance with SFAS No. 86, the results of operations for the nine
months ended September 30, 1999 include Multipath Movie software development
costs and research and development expenses. Technological feasibility of our
original Digital Projector software tool was reached during the third quarter of
1997. Since the date of achieving technological feasibility, the costs of
developing Multipath Movies intended to be viewed on the original projector have
been capitalized. Multipath Movies developed by us after the first quarter of
1998 are intended to be viewed on our new Internet Digital Projector, which we
released in the fourth quarter of 1998. To the extent capitalized Multipath
Movie software costs are attributable to titles that we have begun to ship,
these costs are subject to amortization. We have written off amounts incurred
subsequent to the first quarter of 1998 in the development and production of
Multipath Movies designed to be viewed on the new Digital Projector. As the
technology on which our product is designed to operate is continuously changing,
a reserve against capitalized costs is necessary until shortly before the
release of the title. Therefore, no additional movie development costs are
anticipated to be capitalized in the future.

We are focusing our development of Multipath Movies for the PC. We have
deferred development of Multipath Movies for other platforms, including game
consoles, until warranted by market conditions. This focus allows us to devote
more of our resources to development of Multipath Movie technology and
development of additional titles. We believe that our decision will have no
adverse impact on revenues in the near or medium term.

Development of the software used by The Auction Channel in operating its
live and Internet auction business has been undertaken by third parties. We have
obtained a license to use this software and intend to continue to develop and
improve the software.

AMORTIZATION OF SOFTWARE TECHNOLOGY AND GOODWILL In conjunction with the
purchase of The Auction Channel, goodwill of $4,762,000 was recorded, which
represents the excess of acquired cost over the fair market value of The Auction
Channel's assets and is being amortized over the estimated useful life of five
years. We also allocated $1,368,000 to software technology acquired along with
The Auction Channel, which will be amortized over two years.

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 five years) using the straight-line method. Depreciation expense
increased from $258,000 for the nine months ended September 30, 1998 to $415,000
for the nine months ended September 30, 1999. The increase

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is attributable to the increase in depreciable assets resulting from the growth
of our operations, primarily from production and general overhead activities.
Additionally, in the first quarter 1998, a large portion of BII Australia's
depreciation was considered production overhead, which was capitalized into
movie software costs and amortized based on future anticipated revenue stream.

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. Trade grant revenue
earned was $182,000 for the nine months ended September 30, 1999. Net interest
income decreased from $337,000 for the nine months ended September 30, 1998 to
$33,000 for the nine months ended September 30, 1999. This decrease is due to
the lower cash balances during 1999 and to interest expense incurred in
association with the 4% convertible debenture we issued to Roseworth Group, Ltd.
in April 1999. In addition to the interest, expenses of $55,000 were incurred in
relation to the debenture.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1999, our principal source of liquidity was
approximately $1,936,000 in cash, which we raised primarily through debt and
equity financing.

In March 1999, we entered into a securities purchase agreement with St.
Annes Investment, Ltd. The agreement gives us the right at our election to sell
to the investor up to a total of $6 million of our common stock at a discount to
its Market Price from time to time during the three-year term of the agreement.
Each sale of shares under the agreement is subject to certain minimum and
maximum dollar amounts and certain other conditions, including that the Market
Price of our common stock at the time we give a sale notice is at least $1 per
share and that a registration statement under the Securities Act of 1933, as
amended, covering St. Annes' resale of the shares is in effect at the closing of
the sale. Market Price is defined as the lowest daily volume weight adjusted
price of our common stock (as reported on Bloomberg) for any trading day during
the 10-trading day period ending on the day before the day that we give a sale
notice to St. Annes. The purchase price that we will receive for our shares in
each sale will be 88% of the Market Price of our common stock if the Market
Price is more than $4 per share, and 86% of the Market Price if the Market Price
is $4 per share or less. We have agreed to pay to St. Annes an amount equal to
3% of the purchase price, and to issue to St. Annes shares of common stock
having an aggregate value equal to 2% of the purchase price of the shares of
common stock to be issued and sold to St. Annes under the securities purchase
agreement.

In May 1999, we closed a private placement of 2,132,000 shares of our
common stock, which were issued to seven investors. The private placement raised
aggregate proceeds of $4,311,250. Of the 2,132,000 shares of common stock,
1,880,000 shares were issued to five investors at $2.00 per share and 252,000
shares were issued to two investors at $2.1875 per share.

Net cash used in operating activities during the nine months ended
September 30, 1999 was primarily attributable to a net loss of $6,947,000. Net
cash of $168,000 used in investing activities in the nine months ended September
30, 1999 was due primarily to the purchase of computer equipment. Net cash of
$334,000 used in financing activities for the nine months ended September 30,
1999 was due to the repayment of notes for the financing of office furniture and
computer equipment ($21,000), and for Auction Channel loans ($87,000), plus
$198,000 in acquisition costs. In connection with our acquisition of The Auction
Channel, we sold 60,000 shares of our common stock for $272,500 in cash.

In April 1999, we redeemed a convertible debenture we issued in December
1998 for $100,000 plus accrued interest, and we redeemed a related warrant for
$5,000, and entered into an alternative financing arrangement with St. Annes
Investment, Ltd. as described above.

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We have an obligation under our agreement with Morgan Creek to fund
entirely the development of two Multipath Movies, the first of which, ACE
VENTURA, was developed and shipped in the fourth quarter of 1998. We have an
obligation under our joint venture agreement with Crawfords to jointly fund two
Multipath Movies. Neither we nor Crawfords have been identified any projects for
development and we are doubtful that we will ever develop a project with
Crawfords under our agreement. We have an obligation under our joint venture
agreement with KISS Digital, LLC to fund 75% of the development of a Multipath
Movie up to $900,000. This project currently is in development. We also are
required as of September 30, 1999 to make minimum payments of $107,000 under
various licensing agreements. At September 30, 1999, we had rental commitments
for our offices and production facilities of $627,000 and a promissory note for
the financing of fixed assets in the amount of $104,000 payable over the next 5
years.

We believe that our existing funds, cash generated from operations and
proceeds from the securities purchase agreement with St. Annes, and the
remaining funds to be received from Roseworth under the debenture and warrant
purchase agreement will be sufficient to fund our working capital requirements
for at least the next twelve months. See "Cautionary Statements and Risk Factors
- - If we are unable to raise additional funds, we may be required to defer
completion of Multipath Movie titles and reduce overhead significantly."

YEAR 2000

We are continuing our project to address the potential impact of the Year
2000 problem on the processing of date-sensitive information by our information
technology systems and the information technology systems used by our
significant customers and vendors. The Year 2000 problem is the result of
computer programs being written using two digits to define the applicable year.
As a result, certain computer programs may recognize a date using "0" as the
year 1900 rather than 2000, which could cause miscalculations or system
failures. The objectives of our Year 2000 project are to determine and assess
the risks of the Year 2000 problem and to plan and institute mitigating actions
to minimize those risks to an acceptable level.

In July 1999, we acquired Trojan Television Limited, a London-based
company doing business as The Auction Channel. We are in the process of
evaluating The Auction Channel's internally developed and licensed information
technology systems to determine their Year 2000 compliance. Our Vice President
of Technology is coordinating this process. At this time, we do not know whether
there will be any material Year 2000 issues or significant expenses from the
conversion of The Auction Channel's information systems, databases or programs.
The costs and resources required to address the Year 2000 problem with respect
to The Auction Channel could result in a material financial risk.

We are dependent upon both internally developed and vendor supplied
information systems. Our core operations systems are largely standard package
systems for business management and inventory control, which have been developed
by vendors whose products are widely used in the industry.

We have communicated with our significant customers and vendors to
understand their Year 2000 issues and how they may affect us and to determine
what steps these customers and vendors have taken to prepare and manage their
Year 2000 issues as they relate to us. These customers and vendors include the
host of our web site and significant distributors of our products. We have
tested our product on our website and have not experienced any Year 2000
problems. We are researching the measures our customers and vendors have taken
to address the Year 2000 problem and how any Year 2000 problems experienced by
our customers and vendors will impact us. The failure by any of these third
parties to adequately address the Year 2000 problem could result in disruptions
in the supply or sale of our products, either of which would have a material
adverse effect on our business, financial condition and results of operations.
We plan to devote the necessary resources to resolve all significant Year 2000
issues in a timely manner.

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We are in the process of evaluating our internally developed information
technology systems to determine their Year 2000 compliance. Our Vice President
of Technology is coordinating this process. We do not presently anticipate any
material Year 2000 issues or significant expenses from the conversion of our own
information systems, databases or programs. However, if our current estimates of
the resources required to address and resolve Year 2000 issues prove to be
understated, the additional costs and resources required to address the Year
2000 problem could result in a material financial risk.

Readers are cautioned that this Year 2000 disclosure contains
forward-looking statements. Readers should understand that the dates on which we
believe the Year 2000 project will be completed are based upon management's best
estimates. These estimates were derived utilizing numerous assumptions of future
events, including the availability of certain resources, third party
modification plans and other factors. There can be no guarantee, however, that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of our Year 2000 compliance
project. A delay in specific factors that might cause differences between the
estimates and actual results include, but are not limited to:

o the availability and cost of personnel trained in these areas;
o the ability of locating and correcting all relevant computer code;
o timely responses to and corrections by third parties and suppliers;
and
o the ability to implement interfaces between any new systems and
systems not being replaced.

Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third
parties and the inter-connection of national and international businesses, we
cannot ensure that we will be able to timely and cost effectively resolve
problems associated with the Year 2000 issue, which may effect our operations
and business, or expose us to third party liability.

CAUTIONARY STATEMENTS AND RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE THE MATERIAL
ONES FACING OUR COMPANY. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IF
THIS OCCURS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY
LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.

WE WILL NOT BE ABLE TO SELL OUR MULTIPATH MOVIES IF THEY DO NOT ACHIEVE
MARKET ACCEPTANCE. Each Multipath Movie is an individual artistic work, and its
ability to generate sales primarily will be determined by consumer reaction,
which is unpredictable. To generate sales, we must develop stories and
characters that capture the attention and imagination of consumers and license
recognized characters and properties from third parties for use in our Multipath
Movies. We cannot be certain that we will be able to do so. Other factors that
influence our ability to generate revenues from our Multipath Movies include:

o consumer reluctance to initiate time consuming downloads of data
necessary to view our products;
o our marketing strategies;
o the quality of our products and competing products;
o critical reviews; and
o the availability of alternative forms of entertainment and leisure
time activities.

WE HAVE EXPERIENCED, AND MAY CONTINUE TO EXPERIENCE, REDUCED REVENUES DUE
TO DELAYS IN THE INTRODUCTION AND DISTRIBUTION OF OUR PRODUCTS. We cannot be
certain that we will be able to meet our planned release dates for our new
Multipath Movies. If we cannot begin to ship an important new product during the
scheduled quarter, our revenues would likely be reduced in that quarter. In the
past, we have experienced significant delays in our introduction of some new
products. For instance, delays in duplication, packaging and distribution caused
our first Multipath Movies, CYBERSWINE, POPEYE AND THE QUEST FOR THE WOOLLY
MAMMOTH, NIGHT OF THE WEREWOLF and the HALLOWEEN PARTY to begin arriving at
retailers at the end of December 1997, after the 1997 holiday selling season.
Similarly, we experienced distribution delays in the fourth quarter of 1998 that
caused our products to reach retail shelves only at the end of December, after
the 1998 holiday selling season. As a result, we experienced fewer sales of
these products than we would have if the products were in stores during the
holiday selling seasons, which had a materially adverse effect on our operating
results for the 1997 and 1998 fourth quarters. It is likely in the future that
delays will continue to occur and that some new products will not be released in
accordance with our internal development schedule or the expectations of public
market analysts and investors.

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

IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DEFER
COMPLETION OF MULTIPATH MOVIE TITLES AND REDUCE OVERHEAD SIGNIFICANTLY. We
believe that our existing funds, cash generated from operations, proceeds from
our future sales of common stock to St. Annes under the securities purchase
agreement and the remaining funds to be received from Roseworth under the
debenture and warrant purchase agreement will be sufficient to fund our working
capital requirements for at least the next twelve months. Following the third
quarter of fiscal 2000, we may need to raise additional funds through debt or
equity financing or by other means. We cannot be certain that additional
financing will be available at the time we need additional funds or that, if
available, it can be obtained on terms that we deem favorable. If necessary
funds are not available, we may be required to defer completion of Multipath
Movie titles and reduce overhead significantly, which could have a material
adverse effect on our business. Additionally, our stockholders may be diluted if
we raise additional funds through the sale of our stock.

OUR SOFTWARE DISTRIBUTORS AND PUBLISHERS, OUR OEM PROVIDERS AND THE
LICENSORS FROM WHOM WE OBTAIN RIGHTS TO OUR STORIES AND CHARACTERS MAY CAUSE US
TO DELAY THE RELEASE OF OUR PRODUCTS, WHICH MAY RESULT IN LOWER PRODUCT SALES
AND LOWER REVENUES THAN ANTICIPATED. Our distribution relationships with
software distributors and publishers and OEM providers, and our licensing
arrangements with companies that own the stories or characters used in many of
our Multipath Movies, contain potentially burdensome provisions. These
provisions may affect our ability to release our products, which would adversely
affect our revenues, for a number of reasons, such as:

o A software distributor or a licensor of a story or character may, in
the exercise of its product approval rights, arbitrarily require
expensive and time consuming changes to our products, which may cause
a delay in the release of the products; and
o An OEM provider could change the shipping schedule of the equipment
with which our products are bundled, and thereby cause a delay in
their distribution.

One delay has already occurred. Packard Bell NEC, which agreed to
distribute our initial Multipath Movie CYBERSWINE and other movies selected by
us bundled with Packard Bell computers, significantly delayed the introduction
of CYBERSWINE beyond the initially anticipated launch date. Packard Bell NEC
also delayed the release of POPEYE AND THE QUEST FOR THE WOOLLY MAMMOTH, NIGHT
OF THE WEREWOLF and the HALLOWEEN PARTY bundled on Packard Bell computers beyond
the initially anticipated launch dates. As a result, these Multipath Movies were
not available to consumers on Packard Bell computers as early as we initially
anticipated, and we experienced fewer sales of these Multipath Movies and lower
revenues than we expected.

WE MAY NOT BE ABLE TO COLLECT FROM PACKARD BELL NEC ANY OF THE AMOUNTS
CURRENTLY DUE TO US UNDER OUR DISTRIBUTION AGREEMENT. In 1997, we recognized as
revenue the minimum royalty of, and recorded in accounts receivable, $1,973,000
due from Packard Bell NEC in connection with a distribution agreement.
Management believes that Packard Bell NEC will not be able to comply with the
terms of the distribution agreement with us. Packard Bell NEC has paid us the
sum of approximately $97,000 against the total amount due under the distribution
agreement. We have commenced legal proceedings against Packard Bell NEC to
recover damages resulting from their failure to perform their obligations under
our agreement. There can be no assurance, however, that we will prevail in these
legal proceedings and recover any amounts due to us under the agreement.
Additionally, NEC Corp., Packard Bell NEC's parent corporation, recently
announced plans to restructure Packard Bell NEC in the United States and layoff
approximately 80% of its work force and withdraw from the United State's retail
PC market. As a result of Packard Bell NEC's reduction in operations, even if we
prevail in our lawsuit against Packard Bell NEC there can be no assurance that
we will be able to collect any amounts awarded to us in the proceedings.

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<PAGE>

WE MAY NOT BE ABLE TO LICENSE STORIES AND CHARACTERS THAT APPEAL TO
CONSUMERS FOR USE IN OUR MULTIPATH MOVIES, WHICH IS NECESSARY FOR OUR MULTIPATH
MOVIES TO SELL WELL IN THE MARKET. We use stories and characters developed by
third parties in our Multipath Movies. If we cannot license stories and
characters that appeal to consumers at prices or upon terms or conditions that
we consider acceptable, we may not be able to develop Multipath Movies that
consumers will purchase. To have access to appealing stories and characters for
use in our Multipath Movies, we will need to continue to develop new
relationships and maintain existing relationships with the licensors of these
stories and characters. Many licensors are reluctant to grant broad licenses
covering multiple formats, like the Internet and television, to companies
without a proven track record in the particular industry. When rights are
available, there is often significant competition for licenses.

IF THE VENDOR WE USE TO DELIVER MULTIPATH MOVIES THROUGH OUR INTERNET SITE
EXPERIENCES AN INTERRUPTION IN SERVICE, WE WILL NOT BE ABLE TO SELL MOVIES
THROUGH OUR INTERNET SITE UNTIL SERVICE RESUMES. We presently use a single
vendor to deliver Multipath Movies through our Internet site. Any significant
interruption in service provided by this vendor could interrupt sales and
delivery of Multipath Movies and adversely affect our ability to conduct this
portion of our business and maintain customer satisfaction.

IF WE CANNOT OBTAIN CD-ROM AND DVD MANUFACTURING AND PACKAGING SERVICES ON
A TIMELY BASIS, WE MAY NOT BE ABLE TO TIMELY DELIVER OUR CD-ROM AND DVD PRODUCTS
TO DISTRIBUTORS AND RETAILERS AND OUR SALES WILL BE ADVERSELY AFFECTED. We use
third party vendors to press CD-ROM and DVD disks, assemble purchased product
components, print product packaging and user manuals and package finished
products in connection with the retail distribution of our Multipath Movies. We
do not have contractual agreements with any of our third party vendors, which
may result in our inability to secure adequate services in a timely manner. If
we cannot obtain adequate manufacturing services, we will not be able to timely
produce and deliver our CD-ROM and DVD products to distributors and retail
stores for ultimate sale to consumers, which will adversely affect our sales and
operating results.

IF WE ARE UNABLE TO DEVELOP A RETAIL SALES CHANNEL, EFFECTIVELY COMPETE
FOR RETAIL SHELF SPACE AND NEGOTIATE FAVORABLE TERMS WITH RETAILERS, OUR RETAIL
SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED. To be profitable, we
anticipate that a significant amount of sales of Multipath Movies will need to
be made by traditional retailers. We may not be able to achieve significant
retail sales at prices favorable to us. We have no prior experience in
developing or managing a retail sales channel or selling products in retail
stores. We are currently expending significant resources to develop a retail
sales channel, which expenditures must be made before we realize any significant
retail sales. The competition for shelf space in retail stores is intense. We
expect that our products will constitute a small percentage of a retailer's
sales volume, and we cannot be certain that retailers will provide our 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 increasingly are in a better position to negotiate
favorable terms of sale, including terms relating to price discounts, product
return rights and cooperative market development funds. Increased competition
could result in loss of shelf space for our products at retail stores, as well
as significant price competition, any of which could adversely affect our sales
volume and the price we receive for our products.

WE MAY ENCOUNTER PROBLEMS IN CONNECTION WITH OUR ACQUISITION OF THE
AUCTION CHANNEL, WHICH MAY INCREASE THE COSTS OF THE ACQUISITION AND DISTRACT
MANAGEMENT'S ATTENTION FROM OPERATING THE COMBINED BUSINESS. In July 1999, we
acquired Trojan Television Limited, a London-based company doing business as The
Auction Channel. The Auction Channel integrates live satellite, cable TV and Web
broadcasts of auction events conducted by auction houses, allowing for
participants to watch auction events on television and use the Internet or their
telephone to bid simultaneously with people actually present at the auction
house. We have very little experience in acquiring businesses and will likely
encounter difficulties in integrating The Auction Channel's operations with our
existing operations, which may result in unexpected costs and adversely affect
our operating results. In addition, the integration will require the dedication
of management resources, which may temporarily distract management's attention
from the day-to-day operations of the two companies and adversely affect our
operating results. Some of the difficulties we expect to encounter include,
among others, those related to:

o integrating Brilliant's and The Auction Channel's management staffs;
o retaining The Auction Channel's key management and technical
personnel; and
o coordinating the operation of geographically separated organizations
with distinct cultures.

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<PAGE>

THE AUCTION CHANNEL MAY NEVER BE PROFITABLE, WHICH WILL ADVERSELY AFFECT
OUR CONSOLIDATED OPERATIONS. The Auction Channel commenced operations in July
1996 and, accordingly, has a limited operating history upon which to evaluate
its future prospects. There can be no assurance that The Auction Channel will
achieve profitability or implement its business strategy. The Auction Channel
had net losses of approximately $310,000 in fiscal 1997, $521,000 in fiscal 1998
and $2,139,000 for the fiscal year ended June 30, 1999, and an accumulated
deficit of $2,970,000 as of June 30, 1999 relating to net losses from the period
from July 1, 1996 through fiscal 1997, fiscal 1998 and fiscal 1999. We expect
that The Auction Channel will continue to sustain losses at least for the next
twelve months.

IF THE AUCTION CHANNEL LOSES ITS LICENSE TO THE COMPUTER SOFTWARE AND
HARDWARE TECHNOLOGIES IT USES IN ITS BUSINESS, THE AUCTION CHANNEL MAY NOT BE
ABLE TO CONTINUE TO SELL ITS PRODUCTS AND SERVICES. Many of the underlying
computer software and hardware technologies used by The Auction Channel are
licensed from Articulate UK Limited. The Auction Channel has, with respect to
these technologies, a worldwide license, with rights to exploit and improve the
software, patents, technology, documentation and know how developed or owned or
licensable by Articulate UK. If The Auction Channel loses its rights to the
computer software and hardware technologies it licenses from Articulate UK as a
result of a dispute with Articulate UK or otherwise, The Auction Channel will
not be able to continue to sell its products and services. If this occurs, The
Auction Channel's revenues will be substantially reduced.

PRODUCT RETURNS THAT EXCEED OUR ANTICIPATED RESERVES COULD RESULT IN WORSE
THAN EXPECTED OPERATING RESULTS. At the time we ship our products to retailers,
we will establish reserves, including reserves that estimate the potential for
future product returns. Product returns or price protection concessions that
exceed our reserves could increase the magnitude of quarterly fluctuations in
our operating and financial results. Furthermore, if we incorrectly assess the
creditworthiness of customers who receive our products on credit, we could be
required to significantly increase the reserves previously established. We
cannot be certain that any future write-offs will not occur or that amounts
written off will not have a material adverse effect on our business and depress
the market price of our common stock. Actual returns to date have been within
management's estimates.

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

o shipping schedules for PC hardware with which Multipath Movies are
bundled;
o the introduction or enhancement of software products by us and our
competitors;
o our ability to produce and distribute retail packaged versions of
Multipath Movies in advance of peak retail selling seasons;
o the introduction or availability of new computer hardware to be used
with our products; and
o the timing of orders from major customers.

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

BECAUSE WE ARE SUBJECT TO SEASONAL BUYING PATTERNS, IF WE DO NOT ACHIEVE
STRONG FOURTH QUARTER SALES OUR REVENUES AND OPERATING RESULTS FOR THE ENTIRE
FISCAL YEAR WILL LIKELY BE ADVERSELY AFFECTED. The entertainment software
business is highly seasonal. Typically, demand for entertainment software
products and net revenues are highest during the year-end holiday buying season,
decline in the first calendar quarter and are lowest in the second and third
calendar quarters. As a result, a disproportionate share of our net revenues
historically has been generated in the fourth quarter of our fiscal year. If we
do not have strong fourth quarter sales, our revenues and operating results for
the entire fiscal year will likely be adversely affected. We expect our revenues
and operating results will continue to reflect these seasonal factors.

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<PAGE>

IF WE DO NOT IMPROVE OUR SOFTWARE TOOLS TO PRODUCE NEW, MORE ENHANCED
MULTIPATH MOVIES, OUR REVENUES WILL BE ADVERSELY AFFECTED. The software tools
that enable us to create Multipath Movies have been developed over the past
three years. Additional refinement of these tools may be necessary to continue
to enhance the Multipath Movie format. If we cannot develop improvements to
these software tools, our Multipath Movies may not obtain or maintain market
acceptance and our revenues will be adversely affected.

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

TO DEVELOP PRODUCTS THAT CONSUMERS DESIRE, WE MUST MAKE SUBSTANTIAL
INVESTMENTS IN RESEARCH AND DEVELOPMENT TO KEEP UP WITH THE RAPID TECHNOLOGICAL
DEVELOPMENTS THAT ARE TYPICAL IN OUR INDUSTRY. The entertainment software market
and the PC industry are subject to rapid technological developments. To develop
products that consumers desire, we must continually improve and enhance our
existing products and technologies and develop new products and technologies
that incorporate these technological developments. We cannot be certain that we
will have the financial and technical resources available to make these
improvements. We must make these improvements while remaining competitive in
terms of performance and price. This will require us to make substantial
investments in research and development, often times well in advance of the
widespread release of the products in the market and any revenues these products
may generate.

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

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

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

o variations in quarterly operating results;
o the gain or loss of significant contracts;
o changes in management;
o announcements of technological innovations or new products by us or
our competitors;
o recommendations by securities industry analysts;
o dilution to existing stockholders resulting from the issuance of
additional shares of common stock; and
o short sales and hedging of our common stock.

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

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<PAGE>

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

BECAUSE OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT PORTION OF OUR COMMON
STOCK, THEY MAY BE ABLE TO INFLUENCE STOCKHOLDER VOTES AND DISCOURAGE OTHERS
FROM ATTEMPTING TO ACQUIRE US. As of July 22, 1999, our officers and directors
owned, in total, approximately 17.8% of the outstanding shares of our common
stock. As a result, our officers and directors are able to exert influence over
the outcome of all matters submitted to a vote of the holders of our common
stock, including the election of our Board of Directors. The voting power of
these officers and directors could also discourage others from seeking to
acquire control of us through the purchase of our common stock, which might
depress the price of our common stock.

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

OUR SALE OF SHARES TO ST. ANNES AT A PRICE BELOW THE MARKET PRICE OF OUR
COMMON STOCK WILL HAVE A DILUTIVE IMPACT ON OUR STOCKHOLDERS. We have entered
into a securities purchase agreement with St. Annes Investments, Ltd. that
allows us to sell to St. Annes up to $6,000,000 worth of shares of our common
stock at a discount to the then-prevailing market price of our common stock. If
the market price is $4.00 or less, St. Annes will receive a discount equal to
14% of the market price, and if the market price is greater than $4.00, St.
Annes will receive a discount equal to 12% of the market price. Additionally, we
have agreed to issue to St. Annes as a fee shares of common stock having an
aggregate market price equal to 2% of the purchase price of the shares of common
stock that are issued and sold to St. Annes under the securities purchase
agreement. Accordingly, the issuance of shares under the securities purchase
agreement will have a dilutive impact on our stockholders. As a result, our net
income or loss per share could be materially decreased in future periods, and
the market price of our common stock could be materially and adversely affected.

The table below sets forth the number of shares and the percentages of our
common stock that St. Annes would own if we elected to sell the entire
$6,000,000 worth of stock under the purchase agreement. The share amounts and
the percentages include the shares St. Annes will receive as a fee under the
securities purchase agreement. The share amounts and the percentages are based
on our closing share price of $3.4375 on September 8, 1999, and on assumed
closing share prices of $2.58, $1.72 and $0.86, which prices represent a 25%,
50% and 75% decline, respectively, in our September 8, 1999 closing share price.
The percentages are also based on 11,915,999 shares of our common stock
outstanding on September 8, 1999.

<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
DECLINE IN ASSUMED OF
SEPTEMBER 8, 1999 CLOSING SHARES OF OUTSTANDING
CLOSING PRICE PRICE COMMON STOCK COMMON STOCK
------------------- ------------ ------------- --------------
<S> <C> <C> <C>
-- $ 3.44 2,063,007 14.8%
25% $ 2.58 2,750,676 18.8%
50% $ 1.72 4,125,925 25.7%
75% $ 0.86 8,252,028 40.9%
</TABLE>

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WE MAY NOT BE ABLE TO SELL THE ENTIRE $6,000,000 WORTH OF SHARES OF OUR
COMMON STOCK TO ST. ANNES WITHOUT OBTAINING STOCKHOLDER APPROVAL, WHICH MAY
REQUIRE THAT WE SEEK ALTERNATIVE SOURCES OF FINANCING THAT MAY NOT BE AVAILABLE
ON TERMS FAVORABLE TO US. Under the rules of the American Stock Exchange, we
cannot sell to St. Annes under our securities purchase agreement more than
1,881,800 shares of common stock unless we obtain stockholder approval of the
issuance of shares in excess of this amount. Accordingly, if the average price
at which we sell our stock to St. Annes under the securities purchase agreement
is less than $3.19 per share, we will not be able to sell the entire $6,000,000
worth of shares of our common stock to St. Annes without first obtaining
stockholder approval. If we are unable to obtain stockholder approval, or if we
choose not to pursue stockholder approval, we may be required to seek
alternative sources of financing to fund our working capital requirements. We
cannot guarantee that additional financing will be available or that, if
available, it can be obtained on terms favorable to us and our stockholders.

DECREASES IN THE PRICE OF OUR COMMON STOCK COULD INCREASE SHORT SALES OF
OUR COMMON STOCK BY THIRD PARTIES, WHICH COULD RESULT IN FURTHER REDUCTIONS IN
THE PRICE OF OUR COMMON STOCK. Our sales of common stock to St. Annes at a
discount to the market price of our common stock could result in reductions in
the market price of our common stock. Downward pressure on the price of our
common stock could encourage short sales of the stock by third parties. Material
amounts of short selling could place further downward pressure on the market
price of the common stock. A short sale is a sale of stock that is not owned by
the seller. The seller borrows the stock for delivery at the time of the short
sale, and buys back the stock when it is necessary to return the borrowed
shares. If the price of the common stock declines between the time the seller
sells the stock and the time the seller subsequently repurchases the common
stock, then the seller sold the shares for a higher price then he purchased the
shares and may realize a profit.

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<PAGE>

PART II

OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In June 1999, the Registrant sold 60,000 shares of common stock to Harris
Toibb for $272,500. Mr. Toibb covenanted that he acquired the shares for his own
account for investment purposes only and not with a view to any distribution of
the shares, and that he was an "accredited investor" as that term is defined
under Rule 501(a)(4) of Regulation D promulgated by the Commission under the
Securities Act. The issuance and sale of these securities was exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) of the Securities Act (in accordance with Rule 506 of Regulation
D) as a transaction not involving any public offering.

In July 1999, the Registrant sold an aggregate of 38,612 shares of common
stock to three investors as partial consideration for the sale of indebtedness
in the amount of 335,082.62 British Pounds owed to the investors by Trojan
Television Limited. Each of these investors covenanted that it acquired the
shares for its own account for investment purposes only and not with a view to
any distribution of the shares, and that he was an "accredited investor" as that
term is defined under Rule 501(a)(4) of Regulation D promulgated by the
Commission under the Securities Act. The issuance and sale of these securities
was exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act (in accordance
with Rule 506 of Regulation D) as a transaction not involving any public
offering.

In July 1999, the Registrant issued warrants to purchase 400,000 shares of
common stock to iBidLive, N.V. Of these warrants, 200,000 are exercisable at
$3.50 per share and expire on December 31, 1999, and 200,000 are exercisable at
$4.00 per share and expire on June 30, 2000. The warrants were issued as partial
consideration for the settlement of claims against Trojan Television Limited by
affiliates of iBidLive, N.V. pursuant to a settlement agreement dated as of
April 30, 1999. iBidLive covenanted that it acquired the warrants for its own
account for investment purposes only and not with a view to any distribution of
the warrants, and that it was an "accredited investor" as that term is defined
under Rule 501(a)(4) of Regulation D promulgated by the Commission under the
Securities Act. The issuance and sale of these securities was exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) of the Securities Act (in accordance with Rule 506 of Regulation
D) as a transaction not involving any public offering.

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<PAGE>

In September 1999, the Registrant sold 40,500 shares of common stock to
Chiltern Group PLC in payment of $162,000 in investment banking fees owed by the
Registration to Chiltern Group PLC. Chiltern covenanted that it acquired the
shares for its own account for investment purposes only and not with a view to
any distribution of the shares, and that it was an "accredited investor" as that
term is defined under Rule 501(a)(4) of Regulation D promulgated by the
Commission under the Securities Act. The issuance and sale of these securities
was exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act (in accordance
with Rule 506 of Regulation D) as a transaction not involving any public
offering.

In September 1999, the Registrant sold 9,540 shares of common stock to HAL
Nominees Limited in payment of $38,000 in legal owed by the Registrant to HAL
Nominees Limited. HAL Nominees covenanted that it acquired the shares for its
own account for investment purposes only and not with a view to any distribution
of the shares, and that it was an "accredited investor" as that term is defined
under Rule 501(a)(4) of Regulation D promulgated by the Commission under the
Securities Act. The issuance and sale of these securities was exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) of the Securities Act (in accordance with Rule 506 of Regulation
D) as a transaction not involving any public offering.

In September 1999, the Registrant sold 8,566 shares of common stock to
Wendy L. Paige in payment of approximately $55,200 in legal fees owed by Trojan
Television Limited to Ms. Paige. Ms. Paige covenanted that she acquired the
shares for her own account for investment purposes only and not with a view to
any distribution of the shares, and that she was an "accredited investor" as
that term is defined under Rule 501(a)(4) of Regulation D promulgated by the
Commission under the Securities Act. The issuance and sale of these securities
was exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act (in accordance
with Rule 506 of Regulation D) as a transaction not involving any public
offering.

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

At the Registrant's 1999 Annual Meeting of Stockholders held on July 22,
1999, the Registrant's stockholders (a) elected Mark Dyne, Kevin Bermeister and
Diana Maranon to serve as Class III Directors of Registrant for three years and
until their respective successors have been elected, and (b) approved an
amendment to the Registrant's 1996 Stock Option Plan to increase from 1,080,000
to 2,500,000 the maximum number of shares of common stock that may be issued
pursuant to awards granted under the plan.

Each Director was elected by a vote of 7,112,458 shares in favor of, and
295,100 shares withheld from voting for, that Director. At the annual meeting,
7,026,563 shares were voted in favor of, 346,065 shares were voted against, and
34,930 shares were withheld from voting on the amendment to the Registrant's
1996 Stock Option Plan. There were no broker non-votes at the annual meeting.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

27.1 {Omitted}

(b) Reports on Form 8-K.

Current Report on Form 8-K filed on July 1, 1999, reporting under
Item 5 the Registrant's proposed acquisition of substantially all of
the shares of capital stock of Trojan Television Limited, and
including therewith historical financial statements of Trojan
Television Limited and pro forma financial statements as if the
acquisition had occurred.

Current Report on Form 8-K filed on July 14, 1999, reporting under
Items 2 and 7 the Registrant's acquisition of substantially all of
the shares of capital stock of Trojan Television Limited, and
including therewith historical financial statements of Trojan
Television Limited and pro forma financial statements giving effect
to the acquisition.

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