DIAMOND ENTERTAINMENT CORP, 10KSB/A, 1999-08-23

DIAMOND ENTERTAINMENT CORP
10KSB/A, 1999-08-23
MOTION PICTURE & VIDEO TAPE DISTRIBUTION

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB/A #1
[ X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended March 31, 1999

[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-17953

-------------------------
DIAMOND ENTERTAINMENT CORPORATION
(Name of small business issuer in its charter)

NEW JERSEY 22-2748019
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

16200 CARMENITA ROAD, CERRITOS CA 90703
(Address of principal executive offices) (Zip Code)

(562) 921-3999
(Issuer's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered under to Section 12(g) of the Exchange Act: Common Stock,
no par value.

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.

The issuer's revenue for the fiscal year ended March 31, 1999 totaled
$4,549,525.

The aggregate market value of registrant's Common Stock held by non-affiliates
based upon the closing bid price on June 30, 1999, as reported by the OTC
Bulletin Board, was approximately $8,493,560.

As of June 30, 1999, there were 56,782,521 shares of the registrant's Common
Stock outstanding.

Transitional Small Business Disclosure Format: Yes [ ] No [ X ]

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FORWARD LOOKING INFORMATION

THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND
INFORMATION RELATING TO THE COMPANY THAT ARE BASED ON THE BELIEFS OF THE COMPANY
OR MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE
TO THE COMPANY OR MANAGEMENT. WHEN USED IN THIS DOCUMENT, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND," "WILL," "PLAN,"
"SHOULD," "SEEK" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY OR ITS
MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
REFLECT THE CURRENT VIEW OF THE COMPANY REGARDING FUTURE EVENTS AND ARE SUBJECT
TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THE RISKS AND
UNCERTAINTIES NOTED. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS
MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED,
ESTIMATED, EXPECTED OR INTENDED. IN EACH INSTANCE, FORWARD-LOOKING INFORMATION
SHOULD BE CONSIDERED IN LIGHT OF THE ACCOMPANYING MEANINGFUL CAUTIONARY
STATEMENTS HEREIN.

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

Diamond Entertainment Corporation (the "Company"), formerly known as
(i) ATI Mark V Products, Inc. and (ii) Trans-Atlantic Video, Inc., was formed
under the laws of the State of New Jersey on April 3, 1986. On July 15, 1991,
the Company completed the acquisition (the "Acquisition") of all of the issued
and outstanding shares of Diamond Entertainment Corporation, a California
corporation (the "California Subsidiary"), and concurrently therewith, the
parent company's name was changed to Diamond Entertainment Corporation. In May,
1999 the Company registered in the state of California to do business under the
name e-DMEC, Inc. The Company's principal executive offices are located at 16200
Carmenita Road, Cerritos, California 90703.

The Company, through the California Subsidiary, markets and sells a
variety of videocassette titles to the budget home video market, principally
through the Company's New Jersey sales office. In February 1997 the Company
acquired a company, now a wholly-owned subsidiary, known as Jewel Products
International, Inc., which is in the business of purchasing and distributing
general merchandise including children's toy products, furniture and personal
computers.

The Company distributes and sells videocassette titles including
certain public domain programs and certain licensed programs. Public domain
programs are video titles that are not subject to copyright protection. Licensed
programs are programs that have been licensed by the Company from a third party
for duplication and distribution, generally on a non-exclusive basis. The
Company markets its video programs to national and regional mass merchandisers,
department stores, drug stores, supermarkets and other similar retail outlets.
They generally sell the Company's products to the public at retail prices
ranging from $1.99 to $9.99 per videocassette. The Company's video products are
also offered by consignment arrangements through one large mail order catalog
company and one retail chain.

Management is committed to acquiring more licensed video titles and
upgrading the quality of its packaging and pre-printed materials in order to
enhance its available products. The Company's program inventory currently
consists of approximately 674 titles, including approximately 401 public domain
programs and 273 licensed programs, comprising motion pictures, cartoons,
educational, sports highlights, computer-literacy and exercise programs. The
Company is continually identifying new titles to add to its program inventory
and intends to expand its selection of licensed programs which have historically
shown a higher profit margin than public domain programs.

Until 1995, the Company was a full-service video product duplicating,
manufacturing, packaging and distribution company, and was engaged in several
distinct video production activities. In April 1995 the Company sold its custom
duplication division, through which the Company duplicated and packaged
videocassettes on a custom-made basis. The Board believed that this transaction
was in the best interest of the Company since it could not compete effectively
in the manufacture and duplication of videotapes. The Company's focus had
changed to development, acquisition and distribution of video-related products
to mass merchandisers and retailers.

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The Company has implemented a plan to reduce its production costs in
order to be more competitive in price. As a consequence, the Company took over
certain final-stage manufacturing processes and implemented new quality control
procedures to ensure its standards of quality. The Company acquired five video
loaders and a shrink-wrap packaging machine. Using this equipment and these new
procedures, the Company hopes to realize up to 20% in production cost savings.
The Company now contracts with several manufacturers/duplicators to duplicate
programs, using Company-supplied masters, copying up to 250 copies of a single
program onto a bulk reel of video tape called a pancake. After duplication, the
pancakes and master tapes are returned to the Company and the Company uses the
video loaders to automatically load, cut and splice the video programs from the
pancake into empty videocassette shells. The videocassettes are then labeled,
packaged, shrink wrapped and boxed for shipment. At least one sample of each
batch of any newly manufactured video products is tested when delivered to the
Company by the duplicator to insure acceptable duplication quality. The Company
has implemented three work-in-process quality control procedures and one final
finished goods inspection procedure prior to all product shipments. Further, the
Company continues its efforts to acquire and license better quality titles and
thus improve the performance of the Company's products in retail stores.

Although there can be no assurances, during fiscal 2000, the Company
proposes to further develop its existing website so that the Company's current
and future products and services including its newly acquired furniture and
computer product lines will be featured on the website. Also, the Company plans
to offer website hosting to other companies on a membership fee basis to enable
such companies to market and sell their products and services on the Company's
website. There can be no assurance that the Company will be able to further
develop its existing website or offer website hosting services successfully or
at all.

PRODUCT LINES

The Company's program inventory consists of a total of nearly 674
titles appealing to all age groups. The programs include cartoons, horror films,
science fiction, dramas, adventure stories, mysteries, musicals, comedies, fairy
tale adaptations, educational programs, sports highlights, instructional and
exercise programs. Public domain programs account for approximately 401 titles,
and licensed programs account for approximately 273 titles of the Company's
program inventory.

MOTION PICTURES - PUBLIC DOMAIN. The Company offers a total of 85
feature motion picture titles including many film classics, such as "Life With
Father," "Meet John Doe," "Pygmalion" and "The Little Princess," which generally
appeal to adult audiences. The Company also markets its own special collection
of favorite performers' "Festivals," including The Three Stooges, Shirley
Temple, Bob Hope, Jack Benny and Milton Berle. The Company has recently added
titles such as "Call of The Wild," "Love Affair," "Thief of Bagdad," "Return of
Rin Tin Tin" and "Seven Alone."

CHILDREN'S PROGRAMS - LICENSED AND PUBLIC DOMAIN. Most of the Company's
cartoons are in the public domain, including 21 cartoon programs redubbed in
Spanish. These programs are generally 30 minutes in length and consist of a
series of cartoons selected by the Company. The Company also markets
approximately 18 children's holiday features, and 49 titles in its Testaments
and Children's Bible series.

EDUCATIONAL PROGRAMS - LICENSED. The Company has licenses to market
approximately 68 educational videos in two categories. For adults, titles
include "Battle of Britain," "The Shores of Iwo Jima," and "Guadalcanal," along
with titles which instruct preschoolers and school age children on topics such
as learning numbers, telling time, simple mathematics, color identification and
other practical skills.

SPORTS PROGRAMS - LICENSED. The Company has licenses to market 16
sports videos including five volumes of "Great Sports Memories" and
"Basketball's Fabulous 50 Stars."

COMPUTER SOFTWARE LEARNING TUTORIAL PROGRAMS - LICENSED. The Company
has licensed approximately 45 titles of computer tutorial videos including
titles such as "Family Guide to the Computer," "Family Guide to the Internet,"
"Windows`98," "Word for Windows," "Mastering WordPerfect," "Mastering Excel for
Windows," and "Make Your Own Web Page."

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The Company continuously seeks to expand its program inventory by
identifying titles which appeal to children and those which include popular
performers, characters or themes. The Company also identifies videos which are
classic films, are educational or instructional videos or which have been
requested by distributors. The Company enters into a licensing agreement with
respect to those programs that are subject to copyright protection or obtains
documentation confirming public domain status from various unaffiliated program
suppliers.

The costs associated with the Company's film masters (used for
duplicating) and artwork (for packaging and advertising) include the purchase
cost of masters, initial fee for rights to duplicate, shooting costs and
developing costs. During the year ended March 31, 1999, the Company acquired
approximately 74 new titles. As of March 31, 1999, the net book value of
Company's film masters and artwork was approximately $201,824. The Company
believes that its film masters and artwork are significant assets since the
Company derives the majority of its revenue from their use.

SUPPLIERS - VIDEO PRODUCTS

The Company's programs are duplicated, and in some cases packaged, by
one CD-ROM and five videotape manufacturers/duplicators located in the United
States. Generally, the Company arranges with these firms to duplicate
Company-supplied masters, then label, package, shrink-wrap and carton the
videocassettes or CD-ROMs. Labels and packaging sleeves are supplied by the
Company. The Company submits its orders and instructions by purchase order with
terms payable within 90 days of delivery. For the year ended March 31, 1999, the
video products business of the Company had purchases from two suppliers that
amounted to approximately $733,000, or 59%, of net purchases. During such period
the percentage of net video product purchases made from such suppliers were 49%
and 10%, respectively. Management believes that, if for any reason it could not
rely on or retain the services of any of its current suppliers, duplicators or
manufacturers, other suppliers would be available in the marketplace.

MARKETS AND CUSTOMERS - VIDEO PRODUCTS

The Company markets its program inventory to large retail chain outlets
and provides each retail chain operator with brochures, advertising materials
and literature describing and promoting the Company's program inventory. The
Company's products are sold through more than ten mass merchandisers such as
Sam's Club, Costco and Best Buy, primarily in the Northeast, the South and the
East Coast. These outlets sell the Company's products to the general public at
retail prices ranging from approximately $1.99 to $9.99 per videocassette. For
the years ended March 31, 1999 and 1998, the Company derived revenue from its
program inventory of approximately $4,133,000 and $6,170,000, respectively. For
the year ended March 31, 1999, the Company had net sales to five customers,
individually having more than 10% of the Company's revenues amounted to
approximately $2,466,000. For the year ended March 31, 1998, the Company had one
customer having more than 10% of the Company's revenue of approximately
$1,012,000. The loss one of these customers would have a material adverse effect
on the financial condition and results of operations of the Company.

The Company's marketing strategy of distributing directly to retail
chain outlets has allowed the Company to market its products at all consumer
levels. In particular, the Company seeks to attract retail customers in
department, drug, discount, electronic, music, toy and book stores as well as
supermarkets and convenience stores. The Company has implemented a new sales
method which seeks to improve the name recognition of the Company as a video
company specializing in educational, children and film classic video titles. In
addition, through its sales program, the Company seeks to place increased focus
on the promotion of sales to major mass merchandising companies which would
increase the delivery of high volume orders. In addition to using independent
sales representatives in certain geographical marketing areas the Company is
developing its existing website to enable it to sell its video and other
products to its current customer base and directly to the retail customer.

The Company derives approximately 89% of its gross revenue from sales
to mass merchandisers and other retail outlets. Approximately 11% of gross
revenue is derived from sales through consignment arrangements with a catalog
company under which the Company delivers tapes to their facilities pending
receipt of orders by customers. The Company only books sales from consignment
sales after the catalog company delivers the actual funds from such sales. Less
than one percent of revenue comes from programs sold on a retail basis directly
to consumers.

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Beginning in fiscal 2000, the Company's marketing strategy and products
will include Digital Video Disk ("DVD") titles in addition to videocassettes
titles. The Company expects that this strategy will help the Company handle the
increasing competitiveness of the entertainment marketplace.

SEASONALITY

The Company generally experiences higher sales of its programs from
September through January due to increased consumer spending around the year-end
holidays. During the year ended March 31, 1999, the Company derived
approximately 51% of its gross revenue from sales during those five months, with
approximately 49% of revenue generated in the other seven months of the year.

LICENSE ARRANGEMENTS

The Company enters into license agreements whereby it acquires from
licensors the right to duplicate and distribute a licensed video program.
Licenses may be exclusive or non-exclusive, but typically are non-exclusive.
Generally, licenses cover specific titles. In return for the grant of certain
rights by the licensor, the Company pays certain advance payments or guarantees
and also royalties. Royalty payments under license agreements typically are
credited against any advances paid. Generally, the Company's licenses are for a
term of between three and seven years. While the Company's efforts to
renegotiate and renew its license agreements have generally been successful,
there can be no assurance that such licenses will be renegotiated or renewed in
the future. The programs that the Company has acquired under license contain
limitations from the licensors regarding the geographic areas to which the
Company can distribute its products and are usually restricted to distribution
and sales in the United States and Canada.

The various licensing agreements that the Company has entered into with
licensors provide for advance payments ranging from $1,500 to $100,000 and
subsequent royalty payments based upon either a per video sold fee or a
percentage of wholesale price fee. During the year ended March 31, 1999, the
Company incurred royalty expenses of approximately $71,000 under its licensing
agreements.

COMPETITION

The Company competes with other distributors of videotapes, including
major film studios and independent production companies. The Company also
competes with manufacturers and distributors of other video formats and DVD. The
Company has been able to compete based on offering low pricing and superior
packaging designs. Most of the companies with which the Company competes are
better established, have broader public and industry recognition, have financial
resources substantially greater than those of the Company and have manufacturing
and distribution facilities better than those which now or in the foreseeable
future will become available to the Company.

JEWEL PRODUCTS INTERNATIONAL, INC.

In May 1997, the Company consummated an agreement and plan of merger
between BDC Acquisition, Inc. ("BDC Acquisition"), a subsidiary of the Company,
and Beyond Design Corporation (subsequently renamed Jewel Products
International, Inc. and referred to herein as "JPI"). JPI became the wholly
owned subsidiary of the Company via reverse merger when BDC Acquisition acquired
all of the issued and outstanding stock of JPI in consideration of the issuance
of an aggregate of 2,427,273 shares of the Company's common stock and the
assumption of certain obligations of JPI. The JPI acquisition was an arms-length
transaction. JPI is in the business of (i) manufacturing one toy product, (ii)
purchasing various other children's toy products from U.S.-based importers or
directly from Asia, (iii) distributing toys to mass merchandisers in the United
States and (iv) purchasing and distributing furniture products and a line of
personal computers. In the fiscal year ended March 31, 1999, revenue realized
from JPI's business amounted to approximately $417,013.

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PRODUCT LINES

At the time of its acquisition, JPI's sole line of business was the
manufacture and sale of its patented Woblong(R) Double Wing Flier, a bi-wing
aerodynamic flying toy. The Woblong, subsequently renamed the Zoombie(R), is a
game of catch intended to compete directly with Frisbee(R), Aerobie(R) and
Whoosh(TM). Since its acquisition in July 1997, JPI has introduced approximately
67 new toy items to its product line. Popular products include various plastic
toy sets (for example, Fire Rescue set, Airport set and City Movers set) and
handheld electronic games. Recently acquired toy products include a line of
plastic animal shaped squirt gun and a radio controlled sports utility vehicle
(SUV). JPI's toy products sell at retail prices ranging from approximately $2.00
to $12.00 per item.

JPI has recently obtained the exclusive marketing rights to purchase
and distribute a line of padded folding chairs and table set, a note book
computer with accessories and a palm-size PC. The furniture set expects to sell
at a retail price of approximately $109.00 to $129.00. The PC computer line
includes the Executive Notebook, model EN2700 that has features and accessories
including Windows '98. The PC computer line also includes a hand held Palmsize
PC with Windows CE, the PD-500C. The Executive Notebook expects to retail for
$900 to $1,200 depending on the model. The retail price for the Palmsize PC has
not yet been determined. The new furniture product line will be purchased
directly from Asia and the computer products from an U.S. based
importer/manufacturer. Both product lines will be distributed to mass
merchandisers in the United States and will also be featured on the Company's
website.

SUPPLIERS - TOY PRODUCTS

For the year ended March 31, 1999, 85% of JPI's supplier purchases were
from one supplier. Since March 31, 1999, the Company has diversified its
supplier base, and makes purchases from seven U.S. suppliers and three suppliers
in China.

MARKETS AND CUSTOMERS

In fiscal year 1998, JPI marketed its products using outside sales
personnel and manufacturer representatives and utilized independent
manufacturer's representatives to reach its customers. During fiscal year 1999,
Company has began to pursue major chain retailers and drug store chains, such as
Target, K-Mart, Toys R Us and Rite Aid primarily using inside direct sales
personnel and is currently in the process of developing chain store
opportunities in Canada.

COMPETITION

JPI competes with other distributors of toy products by concentrating
on the most popular and new products available and offers these toy products for
limited sales period and as demands for products change, JPI can immediately
switch to newer and more popular products. Most of the distributors with which
JPI competes are better established, have a broader product line and industry
recognition, and have financial resources substantially greater then those of
the Company.

SEASONALITY - TOY PRODUCTS

JPI's revenues are very seasonal, depending in large part on the
end-of-year holiday season which begins in September when retailers begin to
stock for Christmas.

GREETING CARD PRODUCTS

In September of 1998, the Company entered into an exclusive
distribution agreement which granted to the Company exclusive distribution
rights it obtained from a licensing and distribution company for a new product
line called CineChrome(TM), which is a trademarked product line utilizing
classic images of licensed properties from film, music, sport, fine art and fine
photography. These classic images are being published on the front cover (in a
greeting card format) using the patented print technology, KromeFX(TM).
KromeFX(TM) is a proprietary printing process, which combines reflectivity,
color vibrancy, depth of image and dimension. The Company derived minimal
revenues from the sale of these products during fiscal 1999.

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The Company has no direct licensing arrangement with Universal Studios
for its CineChrome(TM) product line, however, the exclusive distribution
agreement will enable the Company to manufacture and distribute licensed
Universal Studio properties. In addition to the Universal Studios' images, the
Company's initial series of CineChrome(TM) product will also include various
classic images licensed from Curtis Publishing Co. The distribution for these
images are scheduled for release in the second half of calendar year 1999. The
Company plans to distribute the CineChrome(TM) product line worldwide and expand
the series of images to include a wide variety from other major studios and
licensors. The currently existing product in the CineChrome(TM) product line is
made up of 20 "Saturday Evening Post" Holiday and Special Occasion Gift Cards.
Two sets of ten cards have been made into gift sets and cards can also be sold
separately. Development of 15 Universal Studios images are planned for sale in
fiscal 2000. The Company intends to market the CineChrome(TM) product on its
website and sell directly to retail outlets and corporate OEM customers. There
can be no assurance that the Company will be able to market and distribute
successfully or at all the CineChrome(TM) products on its website or to its
other customers.

SUPPLIERS - GREETING CARD PRODUCT

The Company only source for its CineChrome(TM) products is from one
supplier in Carlsbad, California who owns the patented print technology,
KromeFX(TM). During fiscal 1999, the Company purchased approximately $50,000 in
CineChrome(TM) products from this supplier.

COMPETITION - GREETING CARD PRODUCT

The KromeFX(TM) process which is utilized by the Company's
CineChrome(TM) products, is also available to the Company's competitors who are
in the business of selling posters, trading cards, inserts and other similar
products. The Company under its exclusive distribution contract has the
exclusive rights to use the KromeFX(TM) process in the greeting card format as
long as the Company maintains certain performance criteria. Most of the
companies with which the Company competes including Hallmark, American Greeting
Co. and Gibson are better established, have broader public and industry
recognition, have financial resources substantially greater than those of the
Company and have manufacturing and distribution facilities better than those
which now or in the foreseeable future will become available to the Company.

AMERICAN TOP REAL ESTATE

American Top Real Estate, Inc. ("ATRE") was formed in March 1989 for
the purposes of acquiring, owning and holding real property for commercial
development. ATRE does not engage in any other business operations. The Company
paid $50,000 for a 50% interest in ATRE. The Company's arrangement with its
partners in ATRE requires that all parties contribute capital or loans pro rata
according to their interests whenever required by ATRE for land acquisition,
principal or interest payments, property taxes or other expenses.

Upon sale or development of land, proceeds are used to repay all
related loans and other obligations, with the remaining balance distributed
among the shareholders of ATRE pro rata based on their interests. None of the
other investors in ATRE are otherwise associated or affiliated with the Company,
nor are any of ATRE's co-investors in its real estate holdings associated or
affiliated with the Company. ATRE has interests in two real estate parcels.

Parcel 1 consists of approximately 20 undeveloped acres purchased in
two transactions, in 1989 and 1997. ATRE has a 70% interest in Parcel 1, located
in Clark County, Washington. The total cost of Parcel 1, including financing
expenses and taxes, was approximately $2,300,000 through 1997.

Parcel 2 consists of 5.5 acres of undeveloped property, also in Clark
County, Washington. ATRE's interest in Parcel 2 is 25%. Parcel 2 was purchased
in 1989 for $717,000. Approximately 2.5 acres of Parcel 2 were sold in 1996. The
Company received net proceeds of $121,600 from ATRE during fiscal 1997 relating
to Parcel 2 sales. Approximately 3 acres remain unsold as of the date of this
report.

During the year ended March 31, 1998, ATRE sold approximately 11 acres.
The Company advanced an additional $80,320 to ATRE and received $220,600 from
the proceeds of the parcel of 10 acres as repayment of the advances to ATRE in
fiscal 1999. The Company has subsequently received approximately $400,000 from
ATRE during the period April 1, 1998 through August of 1998 and anticipates
another $50,000 by March 31, 2000.

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At November 30, 1998, ATRE has no binding sales contracts for the
remaining parcels of real estate owned by ATRE as these parcels of land continue
to be developed for commercial use. Contracts that were pending have not closed
due to possible changes in interest rates or possible overall market conditions.
In addition, the Company was advised by ATRE that proceeds realized by ATRE
during fiscal 1998 were reinvested into other parcels to improve the ability to
sell the remaining parcels. In December of 1998, the Company received from a
real estate development specialist an informal valuation reflecting an aggregate
approximate value of $5,200,000 for the remaining ATRE parcels. Although the
Company believes that final sales contracts will be able to be consummated, at
this time it is not possible to predict with any certainty when the closing of
such sales contracts of commercial real estate may occur or whether the proceeds
expected by the Company for their share in this real estate could be
significantly less than anticipated. Therefore, the ultimate realizable value of
the receivable for advances from ATRE could be substantially less than the
preadjusted carrying value of $1,600,000. The Company set up a valuation
allowance in March 1998 of $1,117,788 and accordingly, charged operations for
that amount so that the amount due from ATRE at March 31, 1998 is presented at
the amount of the 1998 subsequent receipts of approximately $500,000. Based upon
the above circumstances the likelihood is that $1,117,788 from future proceeds
from the sale of the ATRE parcels will not be realized by the Company with any
certainty.

On June 2, 1999, ATRE entered into a sales agreement with respect to
0.097 acres of the remaining acres of parcel 1 for approximately $600,000.
However, the ability of ATRE to effect the sale of this parcel of land pursuant
to this agreement or for the Company to realize as of March 31, 1999 50% of the
net proceeds to the Company are uncertain. Therefore, the Company has not
recorded a receivable for this contract based upon closing and cash collection
in prior years.

EMPLOYEES OF THE COMPANY

As of March 31, 1999, the Company and its subsidiaries employed 38
full-time and 3 part-time employees. During the peak season the Company engages
additional part-time or temporary employees to help with the surge for Christmas
season orders. The Company reduces its manufacturing force after the peak season
to improve the profitability of the operations when sales orders decline.
Neither the Company's nor the subsidiaries' employees are unionized. Management
believes that it has good working relations with its employees.

The Company has proprietary technology protecting its product. In
the toys product line, the Woblong(R), subsequently renamed as the Zoombie(R),
is protected by patent claims in the form of a utility patent registered with
the U.S. Patent and Trademark Office. The U.S. Patent number is 5,131,879. In
addition, a design patent was issued on March 9, 1994 - D344,989.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company leases 48,500 square feet at 16200 Carmenita Road in
Cerritos, California under a lease commencing October 1, 1998 and expiring in
June 2002, for use as executive offices and manufacturing and warehouse
facilities. It pays $21,800 per month. Also, the Company leases 1,200 square
feet in Freehold, New Jersey for its sales office for $2,400 per month. This
lease expires October 31, 2001. In addition, the Company leases approximately
22,080 square feet in Cerritos, California ("Cerritos Property") for $9,274 per
month which space was formerly used by the Company for executive offices and
warehousing. The Company sublet the Cerritos Property on January 1, 1999 for a
term that expires on March 31, 2001. The sublease requires the subtenant to pay
the Company $9,494 per month through February 2000, and $9,936 per month through
the remaining term of the Sublease. All of the Company's lease and sublease
agreements are with unaffiliated parties. The Company believes that it has
sufficient space for operations for the next twelve months.

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ITEM 3. LEGAL PROCEEDINGS.

In 1998, the Company was contacted by attorneys for a foreign
manufacturer claiming that a game distributed by JPI infringed on the
manufacturer's trademark and copyright. After internal investigation, the
Company and JPI voluntarily ceased all sales of its allegedly infringing product
and has stored its inventory of the game pending a resolution of the conflict.
The Company places a book value of approximately $450,000 on the stored
inventory. In March 1999, the JPI entered into a settlement agreement with the
manufacturer and distributor and, as part of the settlement, paid the
manufacturer in March and April, 1999, an aggregate of $23,753 for the number of
games sold by JPI and has agreed with the manufacturer in question that JPI may
not sell, ship, or otherwise exchange the games without the manufacturer's
express written permission and in no event may JPI sell the games in the United
States. The Company is searching for a buyer Eastern Europe and South America.

The Company has in the past been named as defendant and co-defendant in
various legal actions filed against the Company in the normal course of
business. All past litigation have been resolved without material adverse impact
on the Company. For the year ended March 31, 1999, there are three civil actions
against the Company. One action is for alleged copyright infringement whereby
the Company has entered into a settlement agreement in February of 1998 to pay
$208,000 over twenty-four months, whereby the Company has made the fifteen
required payments due as of March 31, 1999. The second action is for breach of
service whereby the Company settled for two payments of $4,750 each to be paid
July and August 15, 1999. The third action, the Company has challenged the
alleged suit for copyright infringement.

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

None.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Common Stock is quoted on the OTC Bulletin Board under
the symbol "DMEC." The Company's shares of Preferred Stock are not listed on any
exchange or quoted on the OTC Bulletin Board. The range of high and low bid
information for the Company's Common Stock for each full quarterly period during
the Company's last two fiscal years, is as follows:

PERIOD HIGH BID LOW BID
------ -------- -------

FISCAL 1998
- -----------
1st quarter 0.22 0.13
2nd quarter 0.25 0.09
3rd quarter 0.19 0.04
4th quarter 0.19 0.03
FISCAL 1999
- -----------
1st quarter 0.135 0.041
2nd quarter 0.16 0.055
3rd quarter 0.0625 0.0625
4th quarter 0.125 0.08

These quotations were obtained from OTC Bulletin Board quarterly quote
summaries, and reflect interdealer prices, without retail markup, markdown, or
commission and may not represent actual transactions. On June 30, 1999, the
closing bid price for the Company's Common Stock was $0.1875. As of the same
date, there were 1,614 holders of record of the Company's Common Stock.

The Company has not paid any cash dividends and does not anticipate
paying any cash dividends in the foreseeable future. The Company intends to use
any earnings which it may generate to finance the growth of its business.

The transfer agent for the Company's Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.

SALES OF UNREGISTERED STOCK

In June 1995 Mr. Lu converted approximately $1,131,000 in obligations
of the Company, which he had assumed personally, into 8,212,785 shares of Common
Stock. In August 1995 Jeffrey I. Schillen and Murray T. Scott, each a director
of the Company, agreed to assume $413,400 and $110,240, respectively, of the
obligations assumed by Mr. Lu. In consideration for the assumption of such
obligations, Mr. Lu agreed to assign 3,000,000 and 800,000 of shares of Common
Stock, respectively, to Messrs. Schillen and Scott. The assignment of such
shares was effected during May 1999.

9
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On April 23, 1996 the Board of Directors agreed to reserve 1,000,000
shares of common stock for distribution to Messrs. Lu (as to 600,000 shares) and
Schillen (as to 400,000 shares). Such shares can be purchased for $.25 per
share, in installment payments with a five year promissory note with interest at
6% per annum. As of March 31, 1999 such officers had not purchased any of such
shares.

In April 1996 pursuant to a financing arrangement, three-year warrants
to purchase 1,000,000 shares of Common Stock for $.10 per share were issued to a
lender; such warrants were exercised in June 1996 and thereupon 1,000,000 shares
of Common Stock were issued.

On June 21, 1996 the Company entered into consulting agreements with
three individuals and issued three-year warrants to purchase an aggregate of
400,000 shares of Common Stock as full consideration therefor. Such warrants may
be exercised for $0.25 per share for a period of three years from the date of
issuance. As of March 31, 1999, such individuals had not purchased any of such
shares.

During the quarter ended June 30, 1996 the Company issued 10%
convertible debentures ("10% Debentures") in the original principal amount of
$1,257,988. The principal was convertible into shares of the Company's Common
Stock. Through March 31, 1998, 10% Debentures in the aggregate amount of
$519,848 (including $39,848 in accrued interest and $37,650 in extension
bonuses) had been converted into 7,487,668 shares of the Company's Common Stock.
In June 1998, an additional $91,750 in 10% Debentures had been converted into
2,823,077 additional shares of Common Stock. See "Certain Relationships and
Related Transactions."

In connection with the placement of the 10% Debentures, the Company
issued warrants, exercisable for $0.25 per share, for the purchase of 500,000
shares to each of Peter Benz and George Furla in consideration of their
providing financial consulting services to the Company. On April 9, 1997,
warrants to purchase 46,000 shares of Common Stock were exercised by Peter Benz
in consideration of the payment of $11,500.

Effective May 14, 1997 the Company consummated the merger between a
subsidiary of the Company and Beyond Design Corporation (which has since changed
its name and is referred to herein as "JPI"), pursuant to which the Company
acquired all of the outstanding shares of JPI in exchange for the issuance of
2,427,273 shares of Common Stock and the assumption of certain obligations of
JPI; JPI then became a wholly-owned subsidiary of the Company.

On August 25, 1997, as compensation pursuant to four consulting
agreements, the Company issued 250,000 shares of Common Stock, and warrants to
purchase an aggregate of 2,050,000 shares of Common Stock, exercisable at $0.10
per share. The warrants expire on August 24, 1999. Murray T. Scott, a director
of the Company, received the 250,000 shares of Common Stock and 250,000 of such
warrants. In July 1998 two individuals who received warrants under the
consulting agreements each exercised warrants to purchase 100,000 shares of
Common Stock. All of the issued shares and all of the shares underlying the
warrants were subsequently registered pursuant to the Company's Registration
Statement on Form S-8 filed in September 1997.

The Company executed nine employment agreements effective September 1,
1997, pursuant to which an aggregate of 550,000 shares of Common Stock were
issued, with a deemed value of $11,000, as payment for past services, warrants
for 550,000 shares with an exercise price of $.10 per share. Such shares were
subsequently registered pursuant to the Company's Registration Statement on Form
S-8 filed in September 1997.

On September 1, 1997 each of Messrs. Lu and Schillen were issued shares
of Common Stock and granted warrants as consideration for agreeing to defer
payment of their salaries. Mr. Lu was issued 3,000,000 shares of Common Stock
and granted warrants to purchase an additional 3,000,000 shares of Common Stock
at $0.10 per share through August 24, 2002. Mr. Schillen was issued 750,000
shares of Common Stock and granted warrants to purchase an additional 750,000
shares of Common Stock at $0.10 per share through August 24, 2002. All of such
shares and such warrants were subsequently registered pursuant to the Company's
Registration Statement on Form S-8 filed in September 1997.

10
<PAGE>

On September 24, 1997 the Company renegotiated and extended the 10%
Debentures. As an inducement to have the holders of the 10% Debentures agree to
extend the maturity dates of the 10% Debentures, the principal amount of the
outstanding 10% Debentures ($967,988) on such date was increased by 15%, and the
conversion terms of the 10% Debentures were revised. See "Certain Relationships
and Related Transactions."

On March 11, 1998, the Company issued 347,368 shares of Common Stock to
a salesman in lieu of commissions owed of $66,000.

In July and August of 1998, Mr. Lu was granted additional options to
purchase 6,000,000 shares of Common Stock for $0.10 per share in consideration
of his (i) personal guaranty of the Company's bank line of credit, (ii) loans
made to the Company, (iii) certain fulfillment orders submitted to the Company
and (iv) real estate transactions pertaining to its investment in ATRE. Such
options expire July 9, 2003.

On July 15, 1998, the Company incorporated Galaxynet International,
Inc. ["GalaxyNet"] in the State of Delaware, as a majority-owned subsidiary of
the Company. GalaxyNet intended to develop and sell internet gaming software and
intended to offer its software to internet gaming companies and provide internet
gaming web sites to solicit gambling wagers from primarily, Asian players. The
Company also issued 4,000,000 options exercisable at $.10 per share to an
investor and 6,000,000 options to the Chief Executive Officer exercisable at
$.10 in connection with this project. On July 17, 1998, the Company, along with
GalaxyNet, entered into a memorandum of understanding regarding the raising of
capital in a private offering to raise gross proceeds in the aggregate of
between $3,000,000 and $10,000,000 with an enterprise who would be paid the sum
of 15% of the aggregate proceeds and receive finders options for up to 3,750,000
shares of common stock at exercise prices of between $.10 and $.20 per share.
The private offering period ended September 30, 1998, and was extended until
October 31, 1998. The private offering resulted in raising funding proceeds of
only $250,000. The Company subsequently canceled the project and refunded the
$250,000 to the investor and canceled all the project related options in
November 1998. The company incurred expenses on behalf of GalaxNet for fiscal
1999 of approximately $30,000.

On October 24, 1998, the Company issued 1,499,523 shares of Common
Stock to Mr. Lu pursuant to a settlement agreement between the Company, Mr. Lu
and four consultants. See "Certain Relationships and Related Transactions."

On January 10, 1999, the Company engaged three consultants for a period
of one year to provide advice to undertake for and consult with the Company
concerning management, marketing, consulting, strategic planning, corporate
organization and structure, financial matters in connection with the operation
of the businesses of the Company, expansion of services, acquisitions and
business opportunities. The consultants received option to purchase a total of
4,700,000 of the Company's common stock exercisable at $.05 per share in
exchange for services to be rendered and the options shall expire on December
31, 2000. These options were exercised in February of 1999 for proceeds to the
Company of $275,000.

In February of 1999, the Company converted $640,000 of the debentures
into 8,000,000 shares of common stock. On February 10, 1999, the company
converted the remaining note balance of $172,661 and unpaid interest of $90,415
into 3,018,254 shares of common stock. It was also agreed that the $175,000
extension bonus, which was recorded as a deferred financing cost in February of
1999, could be converted into shares of common stock at an agreed exercise price
subject to market conditions. The Company amortized 20,000 of the extension
bonus a financing expense for the year ended March 31, 1999.

In February 1999, the Company engaged a consulting firm to provide
internet media consulting and public relations services for a period of one
year. The fee for the services to be rendered included a monthly cash fee of
$3,000. The consulting firm also received options to purchase a total of 250,000
shares of the Company's common stock with an exercise price of $.05 per share in
exchange for services to rendered and the options shall expire on February 11,
2001. On May 17, 1999, the consulting firm exercised options for 125,000 shares
of the Company's common stock for services rendered and costs incurred totaling
$6,250.

11
<PAGE>

In March of 1999, the Company received a $50,000 from James Lu and a
total of $250,000 from five investors and issued convertible promissory notes
amounting to $300,000 due in one year with principal and interest paid bimonthly
at an interest rate of 10%. The notes contain certain piggyback and a demand
registration rights with respect to the shares issuable upon conversion of the
notes. The notes are convertible immediately into common stock at the rate of
$.05 per share. Such options expire in March 2002. At March 31, 1999, the
balance of convertible notes therefore $475,000. See "Certain Relationships and
Related Transactions."

On April 12, 1999, the Company entered into three consulting
agreements that will terminate on April 11, 2000 whereby three consultants each
received options for 2,000,000 shares of common stock each which will expire on
April 11, 2000 at an exercise price of $.05 per share. The agreements can be
terminated or extended as agreed to between the parties. The Company recorded
deferred consulting cost of approximately $120,000 in April of 1999. The Company
filed a Form S-8 on May, 1999 registering the 6,000,000 shares of common stock
for these options. On May 20, 1999, the Company received $150,000 in cash and
obtained forgiveness of debt for $150,000 of the convertible debentures for the
issuance of a total of 6,000,000 shares as a result of the options being
exercised.

On May 17, 1999, a consultant exercised options for 125,000 shares of
the Company's common stock for services rendered and costs incurred totaling
$6,250.

On May 25, 1999, options to purchase 1,000,000 shares of Common Stock
at an exercise price of $0.05 per share were issued to Mr. Lu. The options were
issued in consideration of Mr. Lu's negotiations with note holders of the
Company which resulted in the conversion of $903,076 in outstanding principal
and interest into the Company's Common Stock. Such options expire on May 24,
2004.

On May 25, 1999, options to purchase 1,000,000 shares of Common Stock
at an exercise price of $0.05 per share were issued to Mr. Lu. The options were
issued in consideration of Mr. Lu's securing additional financing for the
Company in the form of convertible notes in the principal amount of $350,000.
Such options expire on May 24, 2004. See "Certain Relationships and Related
Transactions."

On May 25, 1999, options to purchase 500,000 shares of Common Stock at
an exercise price of $0.10 per share were issued to Mr. Lu. The options were
issued in consideration of Mr. Lu's negotiations with convertible note holders
of the Company to convert $250,000 of the principal amount of a convertible note
into the Company's Common Stock. Such options expire on May 24, 2004. See
"Certain Relationships and Related Transactions."

On May 25, 1999, options to purchase shares of Common Stock at an
exercise price of $0.10 per share, were issued as follows: 500,000 options were
issued to Mr. Lu and 500,000 options were issued to Mr. Schillen. The options
were issued in consideration of Messrs. Lu's and Schillen's efforts in
concluding an agreement pursuant to which the Company obtained exclusive
distribution rights to certain products. Such options expire on May 24, 2004.
See "Certain Relationships and Related Transactions."

On May 25, 1999, options to purchase shares of Common Stock for $0.05
per share, were issued as follows: 500,000 options were issued to Mr. Lu and
500,000 options were issued to Mr. Schillen. The options were issued in
consideration of Messrs. Lu's and Schillen's efforts in concluding an agreement
for the Company pursuant to which the Company obtained North American
distribution rights to certain products. Such options expire on May 24, 2004.
See "Certain Relationships and Related Transactions."

In April and June of 1999, the Company received $50,000 from an
investor and $100,000 from Mr. Schillen, an officer and director of the Company
and issued additional convertible promissory notes totaling $150,000 due in one
year with principal and interest paid bimonthy at an interest rate of 10%. The
notes are convertible immediately into common stock at the rate of $.05 per
common share. The notes combine certain piggyback and a demand registration
right with respect to the shares issuable upon conversion of the notes.

12
<PAGE>

On June 2, 1999, the Company was advised by one of the convertible
debenture holders of a $100,000 note to waive receipt of bimonthly principal
payments and to continue to receive the bimonthly interest only payments.

In June 1999, the Company entered negotiation with related parties who
were owed approximately $1,900,000 to convert their obligations to an equity
position for shares of the Company's common stock. The Company was continuing
negotiations in July of 1999 to convert related party payables totaling
approximately $1,900,000 into shares of the Company's common stock.

The Company is in negotiations to acquire an entity who is in the
process of creating financial service websites. The Company believes this
transaction will help the Company expand its E-Commerce market. The Company
anticipates the negotiations will be concluded by September 1, 1999 along with
resolving its launching date of the Company's website which has been delayed.

The Company believes that the transactions set forth above were exempt
from registration with the Commission pursuant to either Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering,
Section 3(a)(9) of the Securities Act as a transaction involving an exchange by
an issuer with existing security holders, or Regulation S under the Securities
Act as a transaction that occurred outside the United States. No broker-dealer
or underwriter was involved in the foregoing transactions. All certificates
representing such securities have been or will be appropriately legended.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

YEAR ENDED MARCH 31, 1999 COMPARED WITH THE YEAR ENDED MARCH 31, 1998

RESULTS OF OPERATIONS

The Company's net loss for the year ended March 31, 1999 was approximately
$1,600,000 as compared to a net loss of approximately $1,500,000 for the same
period last year. The primary reason for the net loss was the Company's
operating loss of approximately $1,400,000.

The Company's operating loss for the year ended March 31, 1999 was $1,400,000 as
compared to an operating loss of approximately $193,000 for last year. The
Company's operating loss arose primarily from lower sales of approximately
$4,200,000 and reduced gross profit of approximately $1,540,000, offset by a
reduction in operating expenses of approximately $300,000.

The Company's sales for the years ended March 31, 1999 and 1998, were $4,549,525
and $8,724,149, respectively. The Company's sales decreased by approximately
$4,200,000 from the period year with decreased video and toy product sales of
approximately $2,100,000 each. The lower video product sales for the year ended
March 31, 1999, were primarily the result of lower purchases by three of the
Company's major retailers. One of the Company's major video retailers was sold,
the second retailer experienced financial difficulties and the third opted to
purchase videos from the Company's competitors. The lower toy product sales when
compared to the same period a year earlier was attributed to higher sales
realized from the initial roll out of the Company's new toy line during the
previous year's holiday season. Sales of the Company's products are generally
seasonal resulting in increased sales starting in the third quarter of the
fiscal year. The Company expects the sales to increase in fiscal year ending
March 31, 2000. The Company's sales for the quarter ended March 31, 1999 was
approximately $900,000 as compared to the prior two quarters which averaged
approximately $1,500,000 a quarter. This decrease in the last quarter was
attributable to the selling of certain toy inventory at a reduced selling price
as a result of marketing difficulties. The Company intends on marketing
furniture and personal computers in the second half of fiscal 2000.

Cost of sales for the years ended March 31, 1999 and 1998 were approximately
$3,000,000 and $5,700,000 or 66% and 65% of sales, respectively. The increase in
cost of sales as a percent to sales was primarily the result of reducing certain
toy inventory down to its net realizable values.

Gross profit for the years ended March 31, 1999 and 1998 were approximately
$1,500,000 and $3,000,000, or 34% and 35% of sales, respectively. The decreased
percentage for gross profit as a percent to sales was primarily due to the
write-down of certain toy inventory.

13
<PAGE>

Operating expenses for the years ended March 31, 1999 and 1998 were
approximately $2,900,000 and $3,200,000, respectively. This decrease in
operating expenses of approximately $300,000 was primarily the result of the
Company's cost reduction program.

Bad debt expense for the years ended March 31, 1999 and 1998 were $307,013 and
$152,440, respectively.

Interest expense for the years ended March 31, 1999 and 1998 were $393,050 and
$374,449, respectively. The increase in interest expense in fiscal 1999 over
fiscal 1998 of approximately $20,000 was the result of higher levels of
borrowing. As of March 31, 1999, the outstanding debt of the Company was
approximately $1,960,000, primarily all of which is classified as current.
Interest income for the years ended March 31, 1999 and 1998 were $1,000 and
$129,000, respectively. The lower accounts receivable from ATRE at March 31,
1998, and the subsequent cash payments from ATRE, resulted in lower accrued
interest income for the year ended March 31, 1999 when compared to the same
period a year earlier.

The Company's auditors issued a going concern report for the year ended March
31, 1999. There can be no assurance that management's plans to reduce operating
losses will continue or the Company's efforts to obtain additional financing
will be successful.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital [deficit] at March 31, 1999 was $(2,154,599) as
compared with a working capital [deficit] of $(2,537,031) at March 31, 1998.

This decrease in the working capital [deficit] of approximately $400,000 is
primarily the result of the Company's ability to convert debt of approximately
$1,000,000 to equity during fiscal 1999.

OPERATIONS

For the year ended March 31, 1999, cash utilized for operations was
approximately $2,700,000 as compared to $641,937 of cash generated from
operations for the year ended March 31, 1998. The Company borrowed in June of
1998, approximately $2,700,000 in short term loans from two companies and the
borrowings were used primarily to reduce the Company's accounts payable balance.
The Company intends to utilize future debt or equity financing or debt to equity
conversions to help satisfy past due obligations and to pay down its debt
obligations.

The Company has also been experiencing difficulties in paying its vendors on a
timely basis. These factors create uncertainty whether the Company can continue
as a going concern. The Company's plans to mitigate the effects of the
uncertainties are (i) to create new products with better gross profits, (ii) to
continue to negotiate with several reliable investors to provide the Company
with debt and equity financing for working capital purposes, (iii) to convert
debt to equity and (iv) to continue to negotiate with major vendors for
discounts.

In April of 1998, the Company entered into an agreement with S4C Corporation for
the exclusive rights to distribute a home video tape through December 31, 2003
with total advance payments aggregating a total commitment of approximately
$100,000 and additional royalties due as a percentage of wholesale prices. The
Company paid royalty advances of $84,300 for the year ended March 31, 1999
whereby $39,745 has been earned and expensed.

14
<PAGE>

Beginning in October 1998, the Company entered into a four-year lease expiring
in June 2002, for use as executive offices and manufacturing and warehouse
facilities for approximately $21,800 monthly. The Company leases sales office
space in Freehold, New Jersey for approximately $2,400 per month. This lease
expires on October 31, 2001. Rent expense for this facility was approximately
$28,000 for the year ended March 31, 1999. It also leased for $9,274 per month
office and warehousing space which would expire March 2001. Rent expense for
this facility was approximately $102,000 for the year ended March 31, 1999. The
Company has entered into a sublease for this space with a subtenant beginning
January 1, 1999 which requires the subtenant to pay approximately $9,494 per
month from March 1, 1999 through February 2000, and $9,936 per month from March
1, 2000 through March 31, 2001. The Company also has a one year sublease
agreement, for a total of approximately $10,000 annual rental income, with an
entity whose majority stockholder is the President of the Company.

INVESTING

For the years ended March 31, 1999 and 1998, investments in masters and artwork
were $72,073 and $137,059, respectively. Management continues to seek to acquire
new titles to enhance its product lines.

American Top Real Estate, Inc. ["ATRE"] was formed in March 1989 for the
purposes of acquiring, owning and holding real property for commercial
development. ATRE does not engage in any other business operations. The Company
paid $50,000 for a 50% interest in ATRE. The Company's arrangement with its
partners in ATRE requires that all parties contribute capital or loans pro rata
according to their interests whenever required by ATRE for land acquisition,
principal or interest payments, property taxes or other expenses.

Upon sale or development of land, proceeds are used to repay all related loans
and other obligations, with the remaining balance distributed among the
shareholders of ATRE pro rata based on their interests. None of the other
investors in ATRE are otherwise associated or affiliated with the Company, nor
are any of ATRE's co-investors in its real estate holdings associated or
affiliated with the Company. ATRE has interests in two real estate parcels.

Parcel 1 consists of approximately 20 undeveloped acres purchased in two
transactions, in 1989 and 1997. ATRE has a 70% interest in Parcel 1, located in
Clark County, Washington. The total cost of Parcel 1, including financing
expenses and taxes, was approximately $2,300,000 through 1997.

Parcel 2 consists of 5.5 acres of undeveloped property, also in Clark County,
Washington. ATRE's interest in Parcel 2 is 25%. Parcel 2 was purchased in 1989
for $717,000. Approximately 2.5 acres of Parcel 2 were sold in 1996. The Company
received net proceeds of $121,600 from ATRE during fiscal 1997 relating to
Parcel 2 sales.
Approximately 3 acres remain unsold as of the date of this report.

During the year ended March 31, 1998, ATRE sold approximately 11 acres. The
Company advanced an additional $80,320 to ATRE and received $220,600 from the
proceeds of the parcel of 10 acres as repayment of the advances to ATRE in
fiscal 1998. The Company also received approximately $600,000 from ATRE during
the period April 1, 1998 through March 31, 1999.

15
<PAGE>

At March 31, 1998, ATRE has no binding sales contracts for the remaining parcels
of real estate owned by ATRE as these parcels of land continue to be developed
for commercial use. Contracts that were pending have not closed due to possible
changes in interest rates or possible overall market conditions. In addition,
the Company was advised by ATRE that proceeds realized by ATRE during fiscal
1998 were reinvested into other parcels to improve the ability to sell the
remaining parcels. In December of 1998, the Company received from a real estate
development specialist an aggregate approximate valuation of $5,200,000 for the
remaining ATRE parcels. Although the Company believes that final sales contracts
will be able to be consummated, at this time it is not possible to predict with
any certainty when the closing of such sales contracts of commercial real estate
may occur or whether the proceeds expected by the Company for their share in
this real estate could be significantly less than anticipated. Therefore, the
ultimate realizable value of the receivable for advances from ATRE could be
substantially less than the preadjusted carrying value of $1,600,000. The
Company setup a valuation allowance in the quarter ended March 31, 1998, of
$1,117,788 and accordingly, charged operations for that amount so that the
amount due from ATRE at March 31, 1998 is presented at the amount of the 1998
subsequent receipts of approximately $500,000. Based upon the above
circumstances the likelihood is that $1,117,788 from future proceeds from the
sale of the ATRE parcels will not be realized by the Company with any certainty.
At March 31, 1999, no monies are due from ATRE.

FINANCING

In March 1993 a loan was renegotiated for the sum of $292,058 with principal
payments of $5,000 per month with an interest rate of 10% per annum due November
14, 1999. This note was paid in full on July 15, 1998 for approximately $60,000.
As a result, the Company recorded forgiveness of debt of approximately $66,000
in July 1998.

On May 8, 1995, the Company closed a sales agreement with a Mexican Company, for
$750,000 by allowing credit to the Company for duplication services and received
$750,000 of duplication services in exchange for equipment having a book value
of approximately $630,000. The Company classified the outstanding obligation of
$288,701 at March 31, 1998 as notes payable. This note was repaid in weekly
installments of $12,500 with the final payment made in September of 1998.
Interest expense of approximately $4,127 was recorded for the year ended March
31, 1999.

On August 30, 1996, the Company established a line of credit up to $2,500,000,
whereby, $2,000,000 was backed by pledged receivables and inventory and $500,000
was guaranteed by the Company's President. Interest was at a prime rate plus 3%.
Interest expense from April 1, 1997 through December 31, 1997 was approximately
$148,500. In December 1997, the Company repaid $469,221 on this line of credit
and engaged another financial institution for a $2,500,000 financing
arrangement. This arrangement is also backed by pledged receivables and
inventory. Cost is 1.5% discounted from pledged invoices for every 30 days for
the accounts receivable portion of the line of credit. The portion of the line
of credit backed by inventory is determined by the lesser of $800,000, 25% of
the clients finished toy inventory or 55% of the clients finished videotape
inventory. Interest is charged at 16.18% per annum on this portion of the debt.
This was formalized with the Company in June of 1998. Interest expense from
December 1997 through March 31, 1998 was approximately $27,500. Interest for the
year ended March 31, 1999 was approximately $310,000.

During the quarter ended June 30, 1996, the Company issued convertible
debentures of $1,257,988 with 10% interest per annum and a 7% commission. The
principal amount was convertible in whole or in part into shares of the common
stock of the Company at a conversion price equal to 65% of the average closing
bid price for the common stock for five trading days immediately prior to the
conversion. In no event could the conversion price be less than $.20 per share
or more than $.75 per share. In conjunction with the debentures, the Company
granted 1,000,000 warrants exercisable at $.25 per share to two consultants.
Warrants for 46,000 shares were exercised for $11,500 during the year ended
March 31, 1997. The Company recorded a financing expense of $25,000 for the fair
value of the warrants granted. The fair value of the warrants was determined
based upon the fair value of services received by the Company in May and June of
1996.

16
<PAGE>

As of March 31, 1997, convertible debentures of $290,000 were converted into
1,450,000 shares of the Company's common stock by several off shore companies
under Regulation S and $967,988 of convertible promissory notes payable were
outstanding and in default by the Company. Interest expense of $97,000 and
$24,702 was recorded for the years ended March 31, 1998 and 1997. Subsequent to
September 30, 1997, the Company negotiated a one year extension agreement and
agreed to add 15% to the note as a deferred financing cost of $110,721.

During fiscal March of 1998, convertible debentures of $229,848 were converted
into 6,037,668 shares of the Company's common stock. In June of 1998, a
convertible debenture holder converted a note payable with a balance of $91,750
into 2,823,077 shares of the Company's common stock. This brought total
conversions of $611,598 of debentures into 10,310,745 shares as of November 2,
1998.

On November 2, 1998, convertible debentures with a balance of $848,861 were
reinvested into a new note for $921,851 for a new two year term expiring October
31, 2000 with interest of 10% and an extension bonus of $175,000, which carries
interest of 2.5% per annuum payable $50,000 per month after payment of all prior
and interest and the restructured note. The repayment term was a weekly amount
of $6,250 in 1998 and $12,500 in the years 1999 and 2000. In addition, there was
an acceleration clause of repayments for certain events and a 5% late charge for
any delinquent payments. The notes contained an option to convert the principal
and interest balance into the common stock of the Company subject to certain
pricing calculations. Collateral security included all the assets of the Company
and a personal collection guarantee as additional security to holder after
subordination to primary lender.

In February of 1999, the Company converted $640,000 of the debentures into
8,000,000 shares of common stock. On February 10, 1999, the Company converted
the remaining note balance of $172,661 and unpaid interest of $90,415 into
3,018,254 shares of common stock. It was also agreed that the $175,000 extension
bonus, which was recorded as a deferred financing cost in February of 1999,
could be converted into shares of common stock at an agreed exercise price
subject to market conditions. The Company amortized 20,000 of the extension
bonus as a financing expense for the year ended March 31, 1999. In March of
1999, the Company received a total of $300,000 from an officer and five
investors and issued convertible promissory notes due in one year with principal
and interest paid bimonthly at an interest rate of 10%. The notes are
convertible immediately into common stock at the rate of $.05 per share. At
March 31, 1999, the balance of convertible debentures was therefore $475,000
[See Note 19C and 19G].

For the year ended March 31, 1999 and the five months ended March 31, 1998, the
Company amortized $84,587 and $46,134, respectively, as a non-cash financing
cost, for the convertible debentures which is classified as interest expense.
The convertible notes are secured by the Company's entitlement to any net cash
proceeds derived from its interest in ATRE property [See Note 4B].

Interest expense of approximately $86,000 was recorded for the year ended March
31, 1999.

In August 1997, the Company issued 2,050,000 common stock warrants at an
exercise price of $.10 per share as part of a consulting agreement entered into,
whose term ends August 1999. Deferred consulting costs of $100,000 resulting
from this transaction were recorded at the fair market value of the services
rendered and approximately $50,000 and $31,000 was expensed for the years ended
March 31, 1999 and 1998, respectively.

In October 1997, the Company borrowed $360,000 from an unaffiliated entity with
interest at 10% per year. At March 31, 1998, $185,208 was outstanding on this
obligation. This note was repaid in September of 1998 by weekly payments of
$7,500. Interest expense for the years ended March 31, 1999 and 1998 was $4,712
and $12,708, respectively.

17
<PAGE>

On March 11, 1998, the Company issued 347,368 shares of common stock to a
salesman in lieu of commissions owed of $66,000. On February 25, 1999, the
Company issued 25,000 shares of common stock to a salesman's beneficiary in lieu
of commissions owed of $4,500.

On July 15, 1998, the Company incorporated Galaxynet International, Inc.
["GalaxyNet"] in the State of Delaware, as a majority-owned subsidiary of the
Company. GalaxyNet intended to develop and sell internet gaming software and
intended to offer its software to internet gaming companies and provide internet
gaming web sites to solicit gambling wags from primarily, Asian players. The
Company also issued 4,000,000 options exercisable at $.10 per share to an
investor and 6,000,000 options to the Chief Executive Officer exercisable at
$.10 in connection with this project. On July 17, 1998, the Company, along with
GalaxyNet, entered into a memorandum of understanding regarding the raising of
capital in a private offering to raise gross proceeds in the aggregate of
between and $3,000,000 and $10,000,000 with an enterprise who would be paid the
sum of 15% of the aggregate proceeds and received finders options for up to
3,750,000 shares of common stock at exercise prices of between $.10 and $.20 per
share. The private offering period ended September 30, 1998, and was extended
until October 31, 1998. The private offering resulted in raising funding
proceeds of only $250,000. The Company subsequently canceled the project and
refunded the $250,000 to the investor and canceled all the project related
options in November 1998. The Company incurred expenses on behalf of GalaxyNet
for fiscal 1999 of approximately $30,000.

In July of 1998, the Company raised $80,000 from the exercise of warrants for a
total 1,800,000 shares of the Company's common stock.

In July and August of 1998, the Company granted options to purchase a total of
6,000,000 shares of common stock to the chief executive officer for a new
potential customer, in consideration of certain fulfillment orders submitted to
the Company and loan guarantees. These options may be exercised for $0.10 per
share.

On October 24, 1998, the Company issued 1,499,523 shares of common stock to the
Company's president pursuant to a settlement agreement for a value of $30,000.

On January 10, 1999, the Company engaged three consultants for a period of one
year to provide advice to undertake for and consult with the Company concerning
management, marketing, consulting, strategic planning, corporate organization
and structure, financial matters in connection with the operation of the
businesses of the Company, expansion of services, acquisitions and business
opportunities. The consultants received options to purchase a total of 4,700,000
of the Company's common stock exercisable at $.05 per share in exchange for
services to be rendered and the options shall expire on December 31, 2000. These
options were exercised in February of 1999 for proceeds to the Company of
$275,000.

In February 1999, the Company engaged a consulting firm to provide internet
media consulting and public relations services for a period of one year. The fee
for the services to be rendered included a monthly cash fee of $3,000. The
consulting firm also received options to purchase a total of 250,000 shares of
the Company's common stock with an exercise price of $0.05 per share in exchange
for services to be rendered and the options shall expire on February 11, 2001.
Options for 125,000 shares were exercised in May of 1999 for $6,250.

18
<PAGE>

On April 12, 1999 the Company entered into three consulting agreements that will
terminate on April 11, 2000 whereby three consultants each received options for
2,000,000 shares of common stock each which will expire on April 11, 2000 at an
exercise price of $.05 per share. The agreements can be terminated or extended
as agreed to between the parties. The Company recorded deferred consulting cost
of approximately $150,000 April of 1999. The Company filed a Form S-8 on May 19,
1999 registering the 6,000,000 shares of common stock for these options. On May
20, 1999, the Company received $150,000 in cash and obtained forgiveness of debt
for $150,000 of the convertible debentures for the issuance of a total of
6,000,000 shares as a result of the options being exercised.

On May 25, 1999, the Company approved the granting of options for a total of
4,500,000 shares of common stock exercisable over five years at prices of $.05
and $.10 to two officers for their services in securing additional financing,
obtaining conversion of debentures to equity and their securing new contracts
with new customers in April of 1999. The options expire May 2004.

In April and June of 1999, the Company received $50,000 from an investor and
$100,000 from an officer and issued additional convertible promissory notes
totaling $150,000 due in one year with principal and interest paid bimonthly at
an interest rate of 10%. The notes are convertible immediately into common stock
at the rate of $.05 per common share.

YEAR ENDED MARCH 31, 1998 COMPARED WITH THE YEAR ENDED MARCH 31, 1997

RESULTS OF OPERATIONS

The Company's net loss for the year ended March 31, 1998 was approximately
$1,500,000, and arose primarily as a result of a valuation adjustment of
$1,100,000 for ATRE. The Company's net loss for the year ended March 31, 1997
was approximately $1,300,000, primarily from a loss from operations of
approximately $1,200,000.

The Company's operating loss for the year ended March 31, 1998 was $192,940 as
compared to an operating loss of $1,186,472 for the same period last year. This
decrease in operating loss of approximately $993,000 was primarily attributable
to an increase in gross profit from the prior year of approximately $344,000 and
a reduction in operating expenses of approximately $650,000.

The Company's sales for the years ended March 31, 1998 and 1997 were $8,724,149
and $6,444,586 respectively. The Company's sales increased as a result of its
acquisition of Beyond Design Corporation which accounted for $2,477,792 in
sales. On September 11, 1998, Beyond Design Corporation changed its corporate
name to Jewel Products International, Inc.

Cost of sales for the years ended March 31, 1998 and 1997 were $5,696,810 and
$3,761,175 or 65% and 58% of sales, respectively.

Gross profit for the years ended March 31, 1998 and 1997 were $3,027,339 and
$2,683,411, or 35% and 42% of sales, respectively. The decrease in gross profit
as a percentage of sales from the same period a year ago, was primarily the
result of an increase in product mix in total sales which produced a lower gross
profit percentage. Depreciation and amortization, included in the cost of sales,
for the years ended March 31, 1998 and 1997 were $322,440 and $334,292,
respectively.

Operating expenses for the years ended March 31, 1998 and 1997 were $3,220,279
and $3,869,883, respectively. The decrease in operating expenses of
approximately $650,000 from the period a year earlier was due to the reduction
of selling expenses, G&A expenses and factoring fees of $149,000, $395,000 and
$139,000, respectively, and offset by an increase in bad debt expense of
approximately $33,000. Selling expenses in the fourth quarter of fiscal 1998
increased over $300,000 as compared to the previous nine months due to an
increase in royalty expenses, sales commissions, and related travel costs.

19
<PAGE>

Interest expense for the years ended March 31, 1998 and 1997 were $420,583 and
$267,798, respectively. As of March 31, 1998, the outstanding debt of the
Company was approximately $2,500,000, primarily all of which is classified as
current.

The Company's auditors issued a going concern report. There can be no assurance
that management's plans to reduce working capital deficiency or obtain
additional financing will be successful.

NEW AUTHORITATIVE PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it is designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.

SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.

In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ["SOP"] 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs, and requires that such costs to be expensed as
incurred. SOP 98-5 applies to all nongovernmental entities and is generally
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged in fiscal years for which annual financial statements
previously have not been issued. The adoption of SOP 98-5 is not expected to
have a material impact on results of operations, financial position, or cash
flows of the Company as the Company's current policy is substantially in
accordance with SOP 98-5.

The Financial Accounting Standards Board ["FASB"] has had on its agenda a
project to address certain practice issues regarding Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The FASB
plans on issuing various interpretations of APB Opinion No. 25 to address these
practice issues. The proposed effective date of these interpretations would be
the issuance date of the final Interpretation, which is expected to be in
September 1999. If adopted, the Interpretation would be applied prospectively
but would be applied to plan modification and grants that occur after December
15, 1998. The FASB's tentative interpretations are as follows:

20
<PAGE>

* APB Opinion No. 25 has been applied in practice to include in its
definition of employees, outside members of the board or directors and
independent contractors. The FASB's interpretation of APB Opinion No. 25
will limit the definition of an employee to individuals who meet the
common law definition of an employee [which also is the basis for the
distinction between employees and nonemployees in the current U.S. tax
code]. Outside members of the board of directors and independent
contractors would be excluded from the scope of APB Opinion No. 25 unless
they qualify as employees under common law. Accordingly, the cost of
issuing stock options to board members and independent contractors not
meeting the common law definition of an employee will have to be
determined in accordance with FASB Statement No. 123, "Accounting for
Stock-Based Compensation," and usually recorded as an expense in the
period of the grant [the service period could be prospective, however,
see EITF 96-18].

* Options [or other equity instruments] of a parent company issued to
employees of a subsidiary should be considered options, etc. issued by
the employer corporation in the consolidated financial statements, and,
accordingly, APB Opinion No. 25 should continue to be applied in such
situations. This interpretation would apply to subsidiary companies only;
it would not apply to equity method investees or joint ventures.

* If the terms of an option [originally accounted for as a fixed option]
are modified during the option term to directly change the exercise
price, the modified option should be accounted for as a variable option.
Variable grant accounting should be applied to the modified option from
the date of the modification until the date of exercise. Consequently,
the final measurement of compensation expense would occur at the date of
exercise. The cancellation of an option and the issuance of a new option
with a lower exercise price shortly thereafter [for example, within six
months] to the same individual should be considered in substance a
modified [variable] option.

* Additional interpretations will address how to measure compensation
expense when a new measurement date is required.

YEAR 2000 ISSUE

The Company has attempted to evaluate the impact of the year 2000 issue on its
business and does not expect the amounts to be expensed over the next 12 months
to be material. No such costs have been expensed to date, since the Company
utilizes an off the shelf software package.

The Company commenced in June 1999 communication with its significant vendors
and customers to determine the extent that year 2000 compliance issues of such
parties may affect the Company. At this time, the Company believes that there
will be no disruption in business due to its customers' or vendors' year 2000
readiness. Also in June 1999, the Company commenced testing of its computer
hardware and software including all equipment posing a potential problem. The
Company has not established a contingency plan. There can be no guarantee that
the systems of such other companies will be timely converted without a material
adverse effect on the Company's business, financial condition or results of
operations.

IMPACT OF INFLATION

The Company does not believe that inflation had an impact on sales or income
during the past several years. Increases in supplies or other operating costs
could adversely affect the Company's operations; however, the Company believes
it could increase prices to offset increases in costs of goods sold or other
operating costs.

21
<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

See Index to Consolidated Financial Statements on page F-1.

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

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.

The Company's directors and officers are as follows:
<TABLE>
<CAPTION>

NAME AGE TITLE
- ------------------------------------------------- -------- --------------------------------------------------
<S> <C> <C>
James K.T. Lu................................ 52 Chairman of the Board, President, Chief Executive
Officer, Secretary and Director
Jeffrey I. Schillen.......................... 53 Executive Vice President, Sales and Marketing and
Director
Murray T. Scott.............................. 77 Director

</TABLE>

BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS

Set forth below is a description of the backgrounds of the executive
officers and directors of the Company.

JAMES K.T. LU (Class 2 Director). Mr. Lu has been a director of the
Company since February 1989. Mr. Lu was elected as Chairman of the Board, Chief
Executive Officer and Secretary of the Company as of March 1, 1990. In July
1991, Mr. Lu was appointed to the additional position of President. In order to
involve other executives in the management of the Company, Mr. Lu resigned as
President and Chief Executive Officer in September 1991. Mr. Lu was President
and Chief Executive Officer of the California Subsidiary from 1985 to 1990. In
May 1995, Mr. Lu was reappointed as President of the Company. Mr. Lu received
his B.S.I.E. degree from Chung Yuen University Taiwan in 1969, his M.S.I.E.
degree from the Illinois Institute of Technology in 1972 and a Master of
Business Administration (MBA) from California State University in 1981.

JEFFREY I. SCHILLEN (Class 1 Director). Mr. Schillen was appointed
Executive Vice President of Sales and Marketing of the Company in 1993 and has
been a Director of the Company since its inception in April 1986. From April
1986 to July 1991 Mr. Schillen was the President and Treasurer of the Company.
>From May 1984 to April 1986, Mr. Schillen was President and Chief Operating
Officer of Music Corner Inc., a retail record, tape and video chain he
co-founded. From 1974 to April 1984, Mr. Schillen founded and served as Vice
President in charge of purchasing, store openings and acquisitions of Platter
Puss Records, Inc., a retail record, tape and video chain.

22
<PAGE>

MURRAY T. SCOTT (Class 2 Director). Mr. Scott became a director in
November 1993. Mr. Scott was the President and Chief Executive Officer of
Gregg's Furniture, a custom furniture building business in Victoria, Canada,
from 1958 to 1995. Scott remains involved with Gregg's Furniture in a consulting
and advisory capacity.

All directors hold office for terms of three (3) years and until the
next annual meeting of stockholders scheduled to vote on such class of Directors
and the election and qualification of their respective successors. Directors
receive no compensation for serving on the Board, except for reimbursement of
reasonable expenses incurred in attending meetings. Officers are elected
annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.

Under the certificate of incorporation of the Company ("Certificate of
Incorporation"), the Board of Directors of the Company is divided into three (3)
classes, with each class to be elected by the shareholders every three years.
The Company's Board presently consists of three (3) directors: one (1) Class 1
director whose term expired in 1998, two (2) Class 2 directors whose terms
expired in 1998, which directors were elected for such terms at the Company's
annual meeting of shareholders held August 23, 1996. No director of the Company
has resigned or declined to stand for re-election due to a disagreement on any
matter relating to the Company's operations, policies or practices.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company has no standing audit, nominating or compensation
committee, or any committee performing similar functions.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
that they file.

Except as set forth below, based solely upon a review of Forms 3 and
Forms 4 furnished to the Company pursuant to Rule 16a-3 under the Exchange Act
during its most recent fiscal year and Forms 5 with respect to its most recent
fiscal year, the number of (i) late reports, (ii) transactions that were not
reported on a timely basis during the fiscal year ended March 31, 1999, and
(iii) any known failure to file a required report by officers, directors and
beneficial owners of more than 10% of the Company's common stock is as follows:
James K.T. Lu: two late reports and four transaction not reported on a timely
basis. Such late reports have subsequently been filed to report the transactions
not timely reported. Mr. James K. T. Lu filed reports for July 1998 and March
1999 with a total number four transactions on a timely basis.

ITEM 10. EXECUTIVE COMPENSATION.

The following table sets forth aggregate compensation paid for services
rendered to the Company during the last three fiscal years by the Company to its
Chief Executive Officer ("CEO") and its one most highly compensated executive
officer other than the CEO who served as such at the end of the last fiscal
year.

23
<PAGE>

<TABLE>

SUMMARY COMPENSATION TABLE
<CAPTION>

- -------------------------------- ------------- ------------------------- --------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------- --------------------------------------------
AWARDS PAYOUTS
------------ -------------------------------
SECURITIES ALL OTHER
UNDERLYING LTIP PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) ($) ($)
- -------------------------------- ------------- ----------- ------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
James K.T. Lu (1) 1999 120,000 0 0 0 89,983
President, Chief Executive 1998 78,350 0 0 0 31,572
Officer and Secretary 1997 130,500 0 0 0 33,742
- -------------------------------- ------------- ----------- ------------- ------------ -------------- ----------------
Jeffrey I. Schillen (2) 1999 100,000 0 0 0 13,036
Executive Vice President of 1998 51,500 0 0 0 20,792
Sales and Marketing 1997 93,000 0 0 0 12,547
- -------------------------------- ------------- ----------- ------------- ------------ -------------- ----------------
</TABLE>

(1) Mr. Lu's annual salary is $150,000 during the fiscal year ended March 31,
1999. All Other Compensation for Mr. Lu includes $69,770 of a loan amount
owed to the Company by Mr. Lu which was forgiven by the Company and
treated as a financing cost on the Company's statement of operations. As
of the date of this report, Mr. Lu continues to defer a portion of his
salary.
(2) Mr. Schillen's annual salary is $120,000 during the fiscal year ended
March 31, 1999. As of the date of this report, Mr. Schillen continues to
defer a substantial portion of his salary.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information with respect to the
options granted during the year ended March 31, 1999, for the persons named in
the Summary Compensation Table (the "Named Executive Officers"):

<TABLE>
<CAPTION>
- -------------------------------- --------------------- -------------------- --------------------- --------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- -------------------------------- --------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
James K.T. Lu 6,000,000 86% 0.10 3/31/03
- -------------------------------- --------------------- -------------------- --------------------- --------------------
James K.T. Lu 1,000,000 14% 0.05 3/22/02
- -------------------------------- --------------------- -------------------- --------------------- --------------------
</TABLE>

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

The following table sets forth certain information with respect to
options exercised during 1999 by the Named Executive Officers and with respect
to unexercised options held by such persons at the end of 1999.

<TABLE>
<CAPTION>
- ---------------------------- -------------- -------------- ----------------------------- -----------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED ON VALUE -----------------------------------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- -------------- -------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James K.T. Lu 0 0 5,600,000 4,000,000 (1) 0 0
- ---------------------------- -------------- -------------- ------------- --------------- ------------- ---------------
Jeffrey I. Schillen 0 0 1,150,000 0 0 0
- ---------------------------- -------------- -------------- ------------- --------------- ------------- ---------------
</TABLE>

(1) Unexercisable options to purchase 4,000,000 shares are exercisable by Mr.
Lu upon the occurrence of the following: (i) 2,000,000 shares upon
successfully selling all real estate under development by the Company's
partner ATRE and (ii) 2,000,000 upon successful completion of a video
duplication and fulfillment opportunity and upon the CineChrome Card
Business reaching profitability.

24
<PAGE>

EMPLOYMENT AGREEMENTS

In 1991 the Company entered into employment agreement with each of
Messrs. Lu and Schillen for annual compensation of $150,000 and $90,000,
respectively; both provide for annual adjustments in accordance with the
consumer price index, however, no price index adjustments have ever been made.
Consequently, contracted salary levels remain at $150,000 for Mr. Lu and
$120,000 for Mr. Schillen. Both employment agreements terminate December 31,
2001. See "Summary Compensation Table" above, and the notes thereto.

On April 23, 1996 the Board of Directors agreed to reserve 1,000,000
shares of common stock for distribution to Messrs. Lu and Schillen. Such shares
can be purchased for $.25 per share, in installment payments with a five year
promissory note with interest at 6% per annum. As of March 31, 1998 such
officers had not purchased any of such shares.

In September 1997 as consideration for each of Messrs. Lu and Schillen
agreeing to defer up to 90% of their salaries through March 31, 1998, the
Company issued 3,000,000 shares of Common Stock and warrants to purchase
3,000,000 shares of Common Stock to Mr. Lu, and issued 750,000 shares of Common
Stock and warrants to purchase 750,000 shares of Common Stock to Mr. Schillen.
All of such warrants have an exercise price of $.10 per share. The warrants are
fully vested and were exercisable until March 31, 1999. In March of 1999, the
Company extended the terms until August 24, 2002.

The Company maintains two life insurance policies on Mr. Lu, one for
the benefit of the Company in the amount of $1,000,000 and one for the benefit
of Mr. Lu's designated beneficiary in the amount of $500,000. The Company
maintains a life insurance policy on Mr. Schillen, for the benefit of Mr.
Schillen's designated beneficiary, in the amount of $500,000.

On September 1, 1997 the Company entered into employment agreements
with nine other employees holding key positions. The agreements provided for the
issuance of an aggregate of 550,000 shares of Common Stock with a fair value of
$11,000, as payment for services, warrants for 550,000 shares with an exercise
price of $.10 per share and the semi-monthly compensation of approximately
$14,000 in the aggregate.

None of the employment agreements which the Company has with any of the
executives, indicated above provides for any specific compensation to such
individuals should their respective employment agreements be terminated prior to
expiration of their respective terms.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information as of June 30, 1999, with
respect to the beneficial ownership of the outstanding shares of the Company's
Common Stock and Preferred Stock by (i) each person known by the Company to be
the beneficial owner of more than 5% of the Common Stock or Preferred Stock,
(ii) each director of the Company, (iii) each Named Executive Officer of the
Company; and (iv) all directors and executive officers as a group. Unless
otherwise indicated below, such individuals have the sole power to control the
vote and dispose of such shares of capital stock.

<TABLE>
<CAPTION>
PERCENTAGE OF COMMON
STOCK ASSUMING
COMMON STOCK PERCENTAGE OF PREFERRED CONVERSION OF
NAME OWNED COMMON STOCK STOCK OWNED (1) PREFERRED STOCK (2)
------------------------------------ ------------------ ------------------ ----------------- ----------------------

<S> <C> <C> <C> <C>
James K.T. Lu (3) 21,512,785 27.4% 209,287 27.8%
Diamond Entertainment Corporation
16200 Carmenita Road
Cerritos CA 90703

Jeffrey I. Schillen (4) 7,170,750 9.2% 36,282 9.2%
Diamond Entertainment Corporation
4400 Route 9 South
Freehold, NJ 07728
</TABLE>

25
<PAGE>

PERCENTAGE OF COMMON
STOCK ASSUMING
COMMON STOCK PERCENTAGE OF PREFERRED CONVERSION OF
NAME OWNED COMMON STOCK STOCK OWNED (1) PREFERRED STOCK (2)
------------------------------------ ------------------ ------------------ ----------------- ----------------------

<S> <C> <C> <C> <C>
Murray T. Scott (5) 1,300,000 1.7% 75,796 1.8%
Diamond Entertainment Corporation
16200 Carmenita Road
Cerritos, CA 90703

All directors and officers as a 29,983,535 38.3% 321,365 38.8%
group (3 persons) (6)

</TABLE>

(1) The Preferred Stock entitles the holder to 1.95 votes for each share
owned and each share may be converted into 1.95 shares of Common Stock.
(2) Assumes conversion of shares of Preferred Stock beneficially owned.
(3) Mr. Lu is President, Chief Executive Officer, Secretary and a director of
the Company. Includes 14,100,000 shares of Common Stock issuable upon
exercise of warrants, options and convertible notes.
(4) Mr. Schillen is the Executive Vice President and a director of the
Company. Includes 4,150,000 shares of Common Stock issuable upon exercise
of warrants, options and convertible notes.
(5) Mr. Scott is a director of the Company. Includes 250,000 shares of Common
Stock issuable upon exercise of warrants or options.
(6) Represents 11,483,535 shares of Common Stock outstanding and 18,500,000
shares of Common Stock issuable upon exercise of warrants or options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In May 1995, James Lu, the Company's Chairman, Chief Executive Officer
and President, personally assumed obligations of the Company to three services
providers in the aggregate amount of approximately $1,131,000. The obligations
are secured by all shares of the Company's Common Stock owned or to be owned by
Mr. Lu. In June 1995, Mr. Lu converted such obligations into 8,212,785 shares of
Common Stock. In August 1995 Jeffrey I. Schillen and Murray T. Scott, each a
director of the Company, agreed to assume $413,400 and $110,240, respectively,
of the obligations assumed by Mr. Lu. In consideration for the reassignment of
such obligations, Mr. Lu agreed to assign 3,000,000 and 800,000 of shares of
Common Stock, respectively, to Messrs. Schillen and Scott. The assignment of
such shares was effected during May 1999.

During the quarter ended June 30, 1996 the Company issued 10%
convertible debentures ("10% Debentures") in the original principal amount of
$1,257,988. The principal was convertible into shares of the Company's Common
Stock at a conversion price equal to 65% of the average closing bid price for
the Common Stock for five trading days immediately prior to the conversion.
Through March 31, 1999, 10% Debentures in the aggregate amount of $519,848
(including $39,848 in accrued interest and $37,650 in extension bonuses) had
been converted into 7,487,668 shares of the Company's Common Stock at conversion
prices ranging from $0.026 to $0.20 per share. One of the purchasers of 10%
Debentures was UC Financial, Ltd., which, upon purchasing 10% Debentures, became
the beneficial holder of more than 5% of the Company's Common Stock. Subsequent
to March 31, 1998, an additional $91,750 in 10% Debentures had been converted
into 2,823,077 additional shares of Common Stock.

On August 25, 1997 the Company executed a consulting agreement with
Murray T. Scott, a director of the Company, for long term strategic planning
including development of marketing strategies and development and acquisition of
new products. Mr. Scott's consulting agreement has a term of two years. As
compensation under the agreement, Mr. Scott was issued 250,000 shares of Common
Stock, and warrants to purchase an additional 250,000 shares of Common Stock at
an exercise price of $0.10 per share. Such warrants expire on August 25, 1999.

26
<PAGE>

On September 1, 1997 each of Messrs. Lu and Schillen were issued shares
and granted warrants as consideration for agreeing to defer payment of their
salaries. Mr. Lu was issued 3,000,000 shares of Common Stock and granted
warrants to purchase an additional 3,000,000 shares of Common Stock at $0.10 per
share through March 31, 1999. Mr. Schillen was issued 750,000 shares of Common
Stock and granted warrants to purchase an additional 750,000 shares of Common
Stock at $0.10 per share through March of 1999. The warrants are fully vested
and were exercisable until March 31, 1999. In March of 1999, the Company
extended the terms until August 24, 2002.

On September 24, 1997 the Company renegotiated and extended the
outstanding 10% Debentures. UC Financial, Ltd., one of the 10% Note holders, is
deemed to be a greater-than-five-percent shareholder of the Company. As an
inducement to agreeing to the amended terms of the 10% Debentures, the principal
amount of UC Financial, Ltd.'s 10% Note was increased by 15% from $245,000 to
$281,750, and the conversion terms of the 10% Note were revised. All other
holders of 10% Debentures agreed to similar amendments made to their respective
debentures.

In November and December 1997 Messrs. Lu and Schillen each guaranteed
the obligations of the Company under a new line of credit established with a
financial institution.

In the June 1998 quarter, the Company's subsidiary received a total of
$2,721,860 from related parties to be utilized by the Company to pay a major
supplier of the Company for toy purchases. Subsequently, the related parties
were successful in receiving credits of $743,935 from the toy supplier. These
credits were applied by the related parties to the monies owed by the Company
for the purchases of toys. The Company repaid the related parties $50,000 which
left an outstanding obligation of $1,927,925 as of March 31, 1999. In June 1999,
the Company entered into negotiations with the related parties to convert their
obligations of approximately $1,900,000 to an equity position for shares of the
Company's common stock. The Company was continuing negotiations in July of 1999
to convert related party payables totaling approximately $1,900,000 into shares
of the Company's common stock.

On July 15, 1998, the Company incorporated Galaxynet International, Inc.
["GalaxyNet"] in the State of Delaware, as a majority-owned subsidiary of the
Company. GalaxyNet intended to develop and sell internet gaming software and
intended to offer its software to internet gaming companies and provide internet
gaming web sites to solicit gambling wagers from primarily, Asian players. The
Company also issued 4,000,000 options exercisable at $.10 per share to an
investor and 6,000,000 options to the Chief Executive Officer exercisable at
$.10 in connection with this project. On July 17, 1998, the Company, along with
GalaxyNet, entered into a memorandum of understanding regarding the raising of
capital in a private offering to raise gross proceeds in the aggregate of
between $3,000,000 and $10,000,000 with an enterprise who would be paid the sum
of 15% of the aggregate proceeds and receive finders options for up to 3,750,000
shares of common stock at exercise prices of between $.10 and $.20 per share.
The private offering period ended September 30, 1998, and was extended until
October 31, 1998. The private offering resulted in raising funding proceeds of
only $250,000. The Company subsequently canceled the project and refunded the
$250,000 to the investor and canceled all the project related options in
November 1998. The company incurred expenses on behalf of GalaxNet for fiscal
1999 of approximately $30,000.

27
<PAGE>

On July 30, 1998, the Company and Mr. Lu, President of the Company, on
the one hand, and The EMCO/Hanover Group, Inc. and three individuals
(collectively, the "Consultants") on the other hand, entered into a settlement
agreement ("Settlement Agreement"). The parties were in dispute arising out of
the Company's August 1997 engagement letter ("Engagement Letter") with
Consultants and the agreed-upon payments to Consultants thereunder of cash fees
and a right ("Right") to receive a five percent non-dilutive equity interest in
the Company. In September 1997 an accounting firm issued a valuation letter
stating that the Right entitled the Consultants to purchase 1,499,523 shares of
Common Stock for $0.01 per share. On October 6, 1997 pursuant to an assignment
agreement, 1,499,523 shares of Common Stock owned of record by Mr. Lu (the
"Assigned Shares") were assigned and transferred to the Consultants and the
Consultants agreed to remit all of the Assigned Shares to Mr. Lu and to exercise
the Right no later than October 15, 1997, whereupon Mr. Lu would tender the
Assigned Shares back to the Consultants. Consultants never remitted the Assigned
Shares to Mr. Lu nor did they exercise their Right. Pursuant to the Settlement
Agreement the parties terminated the Engagement Letter and the Right, and
Consultants agreed they would have no further right or claim to receive any
shares of Common Stock pursuant either to the Right or the Engagement Letter, or
to receive any further fee or compensation under the Engagement Letter. Further,
the Company agreed to issue to Mr. Lu 1,499,523 shares of Common Stock, for no
consideration, in order to reimburse him for his assignment and transfer of the
Assigned Shares to Consultants. The Settlement Agreement contained releases of
the Consultants and Mr. Lu.

In March of 1999, the Company received a $50,000 from James Lu and a
total of $250,000 from five investors and issued convertible promissory notes
amounting to $300,000 due in one year with principal and interest paid bimonthly
at an interest rate of 10%. The notes contain certain piggyback and a demand
registration right with respect to the shares issuable upon conversion of the
notes. The notes are convertible immediately into common stock at the rate of
$.05 per share. Such options expire in March 2002. At March 31, 1999, the
balance of convertible notes therefore $475,000.

At March 31, 1999, the Company was owed approximately $69,000 from the
President of the Company for advances and loans. Simple interest is accrued
monthly at an annual rate of 10% on the outstanding balance. For the years ended
March 31, 1999 and 1998, the Company recorded interest income of $1,170 and
$6,607, respectively. This loan amount is due in December 2001. On March 15,
1999, the unpaid balance of approximately $69,000 was forgiven by the Company in
consideration for the President's 1999 and 1998 personal guarantees for two
leases and promissory notes.

28
<PAGE>

On April 12, 1999 the Company entered into three consulting agreements
that will terminate on April 11, 2000 whereby three consultants each received
options for 2,000,000 shares of common stock each which will expire on April 11,
2000 at an exercise price of $.05 per share. The agreements can be terminated or
extended as agreed to between the parties. The Company recorded deferred
consulting cost of approximately $150,000 in April of 1999. The Company filed a
Form S-8 on May 19, 1999 registering the 6,000,000 shares of common stock for
these options. On May 20, 1999, the Company received $150,000 in cash and
obtained forgiveness of debt for $150,000 of the convertible debentures for the
issuance of a total of 6,000,000 shares as a result of the options being
exercised.

On May 25, 1999, options to purchase 1,000,000 shares of Common Stock
at an exercise price of $0.05 per share were issued to Mr. Lu. The options were
issued in consideration of Mr. Lu's securing additional financing for the
Company in the form of convertible notes in the principal amount of $350,000.
Such options expire on May 24, 2004.

On May 25, 1999, options to purchase shares of Common Stock at an
exercise price of $0.10 per share, were issued as follows: 500,000 options were
issued to Mr. Lu and 500,000 options were issued to Mr. Schillen. The options
were issued in consideration of Messrs. Lu's and Schillen's efforts in
concluding an agreement for the Company pursuant to which the Company obtained
exclusive distribution rights to certain products. Such options expire on May
24, 2004.

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

(a) EXHIBITS

The following is a list of exhibits filed as part of this filing. Where
so indicated by footnote, the exhibits have been previously filed and are hereby
incorporated by reference.

29
<PAGE>

EXHIBIT
NO. DESCRIPTION
- ------- -----------

3.1 (4) Certificate of Incorporation, as amended.
3.2 (4) By-laws, as amended.
4.1 (4) Certificate for shares of Common Stock.
10.1 (3)(2) Employment Agreement effective as of January 1, 1991
between the Company and James K.T. Lu, and Amendment No. 1 to
Employment Agreement, dated September 1, 1997.
10.2 (3)(2) Employment Agreement effective as of August 16, 1991
between the Company and Jeffrey I. Schillen, and Amendment No. 1
to Employment Agreement, dated September 1, 1997.
10.3 (5) Agreement of Merger dated May 13, 1997, between BDC
Acquisition Corp. and Beyond Design Corporation.
10.4 (6) Consulting Agreement dated August 25, 1997 between the Company
and Peter Benz.
10.5 (6) Consulting Agreement dated August 25, 1997 between the Company
and George Furla.
10.6 (6) Consulting Agreement dated August 25, 1997 between the Company
and Al Davis.
10.7 (2)(6) Consulting Agreement dated August 25, 1997 between the Company
and Murray T. Scott.
10.8 (6) Consulting Agreement dated August 25, 1997 among the Company
and Bruce W. Barren and the EMCO/Hanover Group.
10.9 (6) Employment Agreements dated as of September 1, 1997, between
the Company and various employees.
10.10 (3) Standard Sublease Agreement, dated as of July 30, 1998,
between the Company and Shinho Electronics & Communication, Inc.,
for executive offices on Carmenita Road, Cerritos, California.
10.11 (3) Standard Industrial/Commercial Multi-Tenant Lease Agreement,
dated as of November 1, 1995, between the Company and Marquardt
Associates, for offices on Marquardt Avenue, Cerritos,
California.
10.12 (3) Office Lease Agreement dated October 31, 1997, between the
Company and Freehold-Craig Road Partnership, for offices in
Freehold, New Jersey.
10.13 (3) Form of Sublease Agreement between the Company as sublessor
and Vigor Sports, Inc. as subtenant, for offices on Marquardt
Avenue, Cerritos, California.
10.14 (1) 10% Callable Convertible Note, dated March 22, 1999, in the
principal amount of $50,000 issued to Mr. Lu.
10.15 (1) 10% Callable Convertible Note, dated June 3, 1999, in the
principal amount of $100,000 issued to Mr. Schillen.
21.1(1) Subsidiaries of the Registrant.
27 (1) Financial Data Schedule.

- --------------
(1) Filed herewith.
(2) Indicates a management contract or compensatory plan or arrangement
required to be filed.
(3) Incorporated by reference as Registrant's exhibits to the Annual Report on
Form 10-KSB for the year ended March 31, 1998, filed December 24, 1998,
File Number 0-17953.
(4) Incorporated by reference to Registrant's Registration Statement on Form
S-18, File No. 33-33997.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed May 16, 1997, File No. 0-17953.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, filed September 15, 1997, File No. 333-35623.

30
<PAGE>

(b) REPORTS ON FORM 8-K

The Company filed no reports on Form 8-K in the last quarter of the
fiscal year ended March 31, 1999.

31
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

FINANCIALS STATEMENTS

The following consolidated financial statements are included in Item 7:

Independent Auditor's Report........................................F-2

Consolidated Balance Sheet as of March 31, 1999 ....................F-3..F-4

Consolidated Statements of Operations for the years ended
March 31, 1999 and 1998.............................................F-5

Consolidated Statements of Stockholders' Equity [Deficit] for the
years ended March 31, 1999 and 1998.................................F-6

Consolidated Statements of Cash Flows for years ended
March 31, 1999 and 1998.............................................F-7..F-9

Notes to Consolidated Financial Statements..........................F-10.F-29

F-1
<PAGE>

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders of
Diamond Entertainment Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheet of
Diamond Entertainment Corporation and subsidiaries as of March 31, 1999, and the
related consolidated statements of operations, stockholders' equity [deficit],
and cash flows for each of the two fiscal years in the period ended March 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Diamond Entertainment Corporation and subsidiaries as of March 31,
1999, and the results of their operations and their cash flows for each of the
two fiscal years in the period ended March 31, 1999, in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 15 to the consolidated financial statements, the Company has
suffered recurring losses from operations, has a significant working capital
deficiency and has encountered difficulties in paying its creditors on a timely
basis. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 15. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.

MOORE STEPHENS, P.C.
Certified Public Accountants.

Cranford, New Jersey
June 16, 1999

F-2
<PAGE>

ITEM 7: FINANCIALS

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999.
- -------------------------------------------------------------------------------------------------------------------------

<S> <C>
ASSETS:
CURRENT ASSETS:
Cash $ 48,074
Accounts Receivable - Net 793,046
Inventory 2,162,441
Prepaid Expenses 123,092
---------------

TOTAL CURRENT ASSETS 3,126,653
---------------

PROPERTY AND EQUIPMENT:
Leasehold Improvements 34,758
Furniture, Fixtures and Equipment 1,096,238
---------------

Total - At Cost 1,130,996
Less: Accumulated Depreciation 757,714
---------------

PROPERTY AND EQUIPMENT - NET 373,282
---------------

FILM MASTERS AND ARTWORK 3,861,600

LESS: Accumulated Amortization 3,659,776
---------------

TOTAL FILM MASTERS AND ARTWORK - NET 201,824
---------------

OTHER ASSETS:
Investment in ATRE 50,000
Related Party Receivable 39,510
Other Assets 82,873
Deferred Costs 155,000
---------------

TOTAL OTHER ASSETS 327,383
---------------

TOTAL ASSETS $ 4,029,142
===============
</TABLE>

The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.

F-3
<PAGE>

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999.
- -------------------------------------------------------------------------------------------------------------------------

<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT]:
CURRENT LIABILITIES:
Cash Overdraft $ 152,977
Accounts Payable 1,021,059
Accounts Payable - Related Party [4C] [19E] 1,927,925
Notes Payable 1,402,200
Convertible Debentures - Net 475,000
Lease Obligations Payable 24,075
Accrued Expenses 278,016
---------------

TOTAL CURRENT LIABILITIES 5,281,252
---------------

LONG-TERM LIABILITIES:
Lease Obligations Payable 47,819
Notes Payable 12,214
---------------

TOTAL LONG-TERM LIABILITIES 60,033
---------------

TOTAL LIABILITIES 5,341,285
---------------

COMMITMENTS AND CONTINGENCIES [5] [6] --
---------------

STOCKHOLDERS' EQUITY [DEFICIT]:
Convertible Preferred Stock - No Par Value, 5,000,000 Shares Authorized,
483,251 Issued [of which 172,923 are held in Treasury] 376,593

Common Stock - No Par Value, 100,000,000 Shares
Authorized; 50,619,029 Shares Issued and Outstanding 11,801,973

Additional Paid-in Capital (1,156,231)

Accumulated Deficit (12,237,495)
---------------

Sub-Total (1,215,160)
Less: Treasury Stock [Preferred] - At Cost (48,803)
Deferred Costs (48,180)
---------------

TOTAL STOCKHOLDERS' EQUITY [DEFICIT] (1,312,143)
---------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT] $ 4,029,142
===============
</TABLE>

The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.

F-4
<PAGE>

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>

YEARS ENDED
-----------
MARCH 31,
---------
1 9 9 9 1 9 9 8
------- -------

<S> <C> <C>
SALES - NET $ 4,549,525 $ 8,724,149

COST OF SALES 3,020,405 5,696,810
--------------- ---------------

GROSS PROFIT 1,529,120 3,027,339
--------------- ---------------

OPERATING EXPENSES:
Selling Expenses 923,191 1,527,856
General and Administrative Expenses 1,498,883 1,347,355
Factoring Fees 67,051 96,950
Bad Debt Expense 307,013 152,440
Non-Cash Consulting and Compensation Expenses 111,000 95,678
--------------- ---------------

TOTAL OPERATING EXPENSES 2,907,138 3,220,279
--------------- ---------------

OPERATING LOSS (1,378,018) (192,940)
--------------- ---------------

OTHER EXPENSES [INCOME]:
Interest Expense 393,050 374,449
Interest Income - Related Party (1,006) (129,047)
Other Income (41,256) (96,822)
Rental Income - Related Party (6,000) --
Valuation Adjustment for ATRE [4B] (138,773) 1,117,788
Interest Expense - Non-Cash [7D] 84,587 46,134
--------------- ---------------

OTHER EXPENSES - NET 290,602 1,312,502
--------------- ---------------

LOSS BEFORE EXTRAORDINARY ITEM (1,668,620) (1,505,442)

EXTRAORDINARY ITEM - FORGIVENESS OF DEBT 65,968 --
--------------- ---------------

NET LOSS $ (1,602,652) $ (1,505,442)
=============== ===============

BASIC AND DILUTED PER SHARE DATA:
Loss Before Extraordinary Item $ (.05) $ (.08)
Extraordinary Item -- --
--------------- ---------------

NET LOSS PER SHARE - BASIC AND DILUTED $ (.05) $ (.08)
=============== ===============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 34,392,178 20,028,914
=============== ===============

</TABLE>

The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.

F-5
<PAGE>

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------------- --------------------------- ADDITIONAL RETAINED
NUMBER OF NUMBER OF PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL [DEFICIT]
------------- ------------- ------------- ------------- ------------- -------------

<S> <C> <C> <C> <C> <C> <C>
BALANCE - APRIL 1, 1997 483,251 $ 376,593 15,390,941 $ 10,013,334 $ (1,310,231) $ (9,129,401)

Stock Issued for Acquisition of BDC -- -- 2,427,273 17,465 -- --
Stock Warrants Issued [5F, 13D] -- -- -- -- 100,000 --
Shares Issued to Two Officers for
Deferral of Salary [5D] -- -- 3,750,000 75,000 -- --
Shares Issued to Employees for Past
Services -- -- 550,000 11,000 -- --
Shares Issued to Consultant - Signing
Bonus -- -- 250,000 5,000 -- --
Shares Issued in Lieu of Commission [10F] -- -- 347,368 66,000 -- --
Consulting Expense -- -- -- -- -- --
Compensation Expense -- -- -- -- -- --
Debt Converted -- -- 6,037,668 229,848 -- --
Net [Loss] for the year ended March 31, 1998 -- -- -- -- -- (1,505,442)
------------- ------------- ------------- ------------- ------------- -------------

BALANCE - MARCH 31, 1998 483,251 376,593 28,753,250 10,417,647 (1,210,231) (10,634,843)

Convertible Principal Debt Converted
June 1998 [7D] -- -- 2,823,077 91,750 -- --
Convertible Principal Debt and Interest
Converted February 1999 [7D] -- -- 11,018,179 903,076 -- --
Options Issued to Consultants in
January and February 1999 [5F, 13H] -- -- -- -- 33,000 --
Consulting Expense [5D, 5F] -- -- -- -- -- --
Options Issued for Guarantee of Debt [13F] -- -- -- -- 10,000 --
Options Issued for Fulfillment of Order [13F] -- -- -- -- 5,000 --
Consulting Expense - February 1999 for
Change in Exercise Price [5F, 13E] -- -- -- -- 6,000 --
Exercise of Options and Warrants [5F,
13E, 13H] -- -- 6,500,000 355,000 -- --
Settlement Agreement [10G] -- -- 1,499,523 30,000 -- --
Shares Issued in Lieu of Commission [10F] -- -- 25,000 4,500 -- --
Net [Loss] for the year ended March 31, 1999 -- -- -- -- -- (1,602,652)
------------- ------------- ------------- ------------- ------------- -------------

BALANCE - MARCH 31, 1999 483,251 $ 376,593 50,619,029 $ 11,801,973 $ (1,156,231) $(12,237,495)
============= ============= ============= ============= ============= =============
</TABLE>

<TABLE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT] (continued)
- -----------------------------------------------------------------------------------------
<CAPTION>

TREASURY TOTAL
STOCK STOCKHOLDERS'
[PREFERRED] DEFERRED EQUITY
AT COST COSTS [DEFICIT]
----------- ------------- ------------

<S> <C> <C> <C>
BALANCE - APRIL 1, 1997 $ (48,803) $ (14,858) $ (113,366)

Stock Issued for Acquisition of BDC -- -- 17,465
Stock Warrants Issued [5F, 13D] -- (100,000) --
Shares Issued to Two Officers for
Deferral of Salary [5D] -- (75,000) --
Shares Issued to Employees for Past
Services -- -- 11,000
Shares Issued to Consultant - Signing
Bonus -- -- 5,000
Shares Issued in Lieu of Commission [10F] -- -- 66,000
Consulting Expense -- 45,678 45,678
Compensation Expense -- 50,000 50,000
Debt Converted -- -- 229,848
Net [Loss] for the year ended March 31, 1998 -- -- (1,505,442)
----------- ------------- ------------

BALANCE - MARCH 31, 1998 (48,803) (94,180) (1,193,817)

Convertible Principal Debt Converted
June 1998 [7D] -- -- 91,750
Convertible Principal Debt and Interest
Converted February 1999 [7D] -- -- 903,076
Options Issued to Consultants in
January and February 1999 [5F, 13H] -- (33,000) --
Consulting Expense [5D, 5F] -- 79,000 79,000
Options Issued for Guarantee of Debt [13F] -- -- 10,000
Options Issued for Fulfillment of Order [13F] -- -- 5,000
Consulting Expense - February 1999 for
Change in Exercise Price [5F, 13E] -- -- 6,000
Exercise of Options and Warrants [5F,
13E, 13H] -- -- 355,000
Settlement Agreement [10G] -- -- 30,000
Shares Issued in Lieu of Commission [10F] -- -- 4,500
Net [Loss] for the year ended March 31, 1999 -- -- (1,602,652)
----------- ------------- ------------

BALANCE - MARCH 31, 1999 $ (48,803) $ (48,180) $(1,312,143)
=========== ============= ============
</TABLE>

The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.

F-6
<PAGE>

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>

YEARS ENDED
-----------
MARCH 31,
---------
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net [Loss] $ (1,602,652) $ (1,505,442)
--------------- ---------------
Net Cash Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Provided by Operating Activities:
Depreciation 107,084 105,029
Amortization of Film Masters and Artwork 231,599 274,762
Provision for Doubtful Accounts 307,013 68,440
Inventory Reserve 500,000 --
Losses Resulting from Write-off of Fixed Assets,
Film Masters and Artwork and Security Deposits -- 328,416
Amortization of Deferred Compensation 79,000 95,678
Amortization of Extension Cost for Convertible Debentures 84,587 46,134
Fair Value of Shares Issued for Acquisition of BDC -- 17,465
Reduction of Exercise Price to Consultants 6,000 --
Fair Value of Shares Issued to Officer/Employees 15,000 11,000
Fair Value of Shares Issued to Consultant -- 5,000
Fair Value of Shares Issued for Commissions -- 66,000
Interest Income Accrual - ATRE -- (120,000)
Write-down of ATRE Investment -- 1,117,788
Valuation Adjustment of ATRE (138,773)

Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable - Trade 81,449 871,631
Inventory 1,121,231 (1,925,252)
Prepaid Expenses and Deposits 20,173 (28,935)
Other Assets 7,547 --
Accounts Receivable - Related Party 29,684 --
Other Receivables

Increase [Decrease] in:
Accounts Payable (1,590,768) 1,481,090
Related Party Payable -- (20,688)
Deposits -- (322,450)
Accrued Expenses (130,011) 76,271
--------------- ---------------

Total Adjustments 730,815 2,147,379
--------------- ---------------

NET CASH - OPERATING ACTIVITIES - FORWARD (871,837) 641,937
--------------- ---------------

INVESTING ACTIVITIES:
Advances to ATRE -- (80,320)
Repayments by ATRE 588,773 220,600
Payment of Officers' Loans Receivable -- (607,687)
Repayments of Officers' Loan Receivable -- 538,493
Payment of Employee Loans Receivable -- (11,137)
Payment of Entertainmax Receivable -- (19,564)
Capital Expenditures (109,558) (184,645)
Masters and Artwork (72,073) (137,059)
Proceeds from Notes Receivable 30,701 --
--------------- ---------------

NET CASH - INVESTING ACTIVITIES - FORWARD $ 437,843 $ (281,319)

</TABLE>

The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.

F-7
<PAGE>

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED
-----------
MARCH 31,
---------
1 9 9 9 1 9 9 8
------- -------

<S> <C> <C>
NET CASH - OPERATING ACTIVITIES - FORWARDED $ (871,837) $ 641,937
--------------- ---------------

NET CASH - INVESTING ACTIVITIES - FORWARDED 437,843 (281,319)
--------------- ---------------

FINANCING ACTIVITIES:
Proceeds from Notes Payable 6,938,954 7,590,459
Payments of Related Party Loan (50,000) --
Payments of Notes Payable (7,208,630) (8,039,541)
Payments of Lease Payable (11,763) (14,770)
Cash Overdraft 152,977 108,764
Exercise of Options and Warrants 355,000 --
Proceeds from Convertible Debentures 300,000 --
--------------- ---------------

NET CASH - FINANCING ACTIVITIES 476,538 (355,088)
--------------- ---------------

NET INCREASE IN CASH 42,544 5,530

CASH - BEGINNING OF YEARS 5,530 --
--------------- ---------------

CASH - END OF YEARS $ 48,074 $ 5,530
=============== ===============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 300,000 $ 477,105
Income Taxes $ -- $ --

</TABLE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In September 1997, the two officers agreed to defer 90% of their salaries
until further notice, but not beyond March 31, 1998. As consideration, the
Company granted a total of 3,750,000 shares of common stock and warrants to
purchase 3,750,000 shares of the Company's common stock at an exercise price of
$.10 per share. The common shares granted will be fully vested on December 31,
1997 and the warrants are exercisable through August 2002. The Company recorded
$75,000 in deferred costs for the fair value of the shares granted and amortized
$25,000 and $50,000 for the years ended March 31, 1999 and 1998, respectively.
No deferred costs were recorded for the warrants granted as the fair market
value of the underlying common shares was approximately equal to the exercise
price [5D].

In September of 1997, the Company negotiated a one year extension agreement
for the convertible debentures and agreed to add 15% to the debentures as a
deferred financing cost of $110,721, which was amortized in 1998 and 1999 as
interest expense. In addition, the Company negotiated a $175,000 extension
payment in February of 1999 whereby the Company amortized $20,000 as financing
expense as of March 31, 1999.

During fiscal 1998, the Company granted warrants in connection with
consulting agreements and recorded $100,000 in deferred consulting costs and
expensed $50,000 and $30,820 for the years ended March 31, 1999 and 1998,
respectively [5F and 13E].

In July and August of 1998, the Company granted options to the Chief
Executive Officer for 6,000,000 shares of common stock exercisable at $.10 per
share and recorded non-cash compensation expense of $15,000 [13F].

The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.

F-8
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
[CONTINUED]:
During fiscal 1999, $994,826 in convertible debentures were converted into
13,841,256 shares of common stock. During fiscal 1998, $229,848 of convertible
debentures were converted into 6,037,668 shares of common stock [7D].

During fiscal 1999, the Company granted options for 4,950,000 shares of
common stock in connection with four consulting agreements executed in the
fourth quarter of fiscal 1999 and recorded $33,000 in deferred consulting costs
whereby $4,000 was expensed in the year ended March 31, 1999 [5F and 13H].

During fiscal 1999 and 1998, there were retirements of film masters and
artwork for approximately $70,686 and $625,000, respectively. In addition in
fiscal 1999, the Company retired an auto with a book value of approximately
$22,000.

During the year ended March 31, 1999, the Company entered into capital lease
agreements for equipment totaling approximately $70,000.

The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.

F-9
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS - The Company is in the business of distributing and selling
videocassettes, general merchandise, patented toys, furniture, and Cine-Chrome
gift cards, with a web site presence throughout the United States.

PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries all of which are
wholly-owned. Intercompany transactions and balances have been eliminated in
consolidation.

CASH AND CASH EQUIVALENTS - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased. The
Company has no cash equivalents.

REVENUE RECOGNITION - Sales are recorded by the Company when products are
shipped to customers and are shown net of returns and allowances.

INVENTORIES - Inventories are stated at the lower of cost [under the first-in,
first-out method] or market.

DEPRECIATION - Property and equipment are presented at cost less accumulated
depreciation. Depreciation is computed by the straight-line method for all
furniture, fixtures, and equipment over 5-10 years, which represents the
estimated useful lives of the respective asset.

Leasehold improvements are being amortized over the lesser of their estimated
useful lives or the remaining term of the lease.

Depreciation expense for the years ended March 31, 1999 and 1998 is $107,084 and
$105,029, respectively.

On sale or retirement, the asset cost and related accumulated depreciation are
removed from the respective accounts, and any related gain or loss is reflected
in income. Repairs and maintenance are charged to expense when incurred.

FILM MASTERS AND ARTWORK - The cost of film masters and related artwork is
capitalized and amortized using the straight-line method over a three year
period. The Company periodically reviews its estimates of future revenues for
each master and if necessary a revision is made to amortization rates and a
writedown to net realizable value may occur. The net film masters and artwork
are presented on the balance sheet at the net realizable value for each master.
Film masters consist of original "masters" which are purchased for the purpose
of reproduction and sale.

Amortization expense for the years ended March 31, 1999 and 1998 is $230,819 and
$274,762, respectively.

ADVERTISING COSTS - Adverting cost are expensed as incurred. Advertising costs
of $54,718 and $108,904 were expensed for the years ended March 31, 1999 and
1998, respectively.

BAD DEBTS - An allowance for doubtful accounts is computed based on a review of
each individual account receivable and its respective collectibility. The
allowance for doubtful accounts is approximately $221,000 at March 31, 1999.

F-10
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2
- --------------------------------------------------------------------------------

[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]

NET [LOSS] PER SHARE -The FASB issued SFAS No. 128, "Earnings Per Share," in
February 1997. SFAS No. 128 simplifies the earnings per share ["EPS"]
calculations required by Accounting Principles Board ["APB"] Opinion No. 15, and
related interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. The Company has adopted SFAS No. 128, prior period EPS data have been
restated. Basic EPS is based on average common shares outstanding and diluted
EPS include the effects of potential common stock, such as, options and
warrants, if dilutive. The Company has potentially dilutive securities that were
not included in the computation of diluted earnings per share because to do so
would have been anti-dilutive for the periods presented. Such securities may
dilute EPS in future years [See Notes 5D and 13].

USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

STOCK OPTIONS ISSUED TO EMPLOYEES - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation"
on April 1, 1996 for financial note disclosure purposes and will continue to
apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion
No. 25, "Accounting for Stock Issued to Employees" for financial reporting
purposes.

DEFERRED TAXES - There are no material temporary differences that will result in
taxable amounts in future years. The Company has sustained losses in recent
years and has a large net operating loss carryforward. No deferred taxes are
reflected in these financial statements [See Note 9].

CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially subject
the Company to concentrations of credit risk are cash and cash equivalents and
accounts receivable arising from its normal business activities. The Company
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowance is limited. The Company places its cash and
cash equivalents with high credit quality financial institutions. The amount on
deposit in any one institution that exceeds federally insured limits is subject
to credit risk. The Company had no deposits as of March 31, 1999, with financial
institutions subject to a credit risk beyond the insured amount.

[2] ACCOUNTS RECEIVABLE

Accounts receivable at March 31, 1999 net of allowance for doubtful accounts
were approximately $793,000. Substantially all of the accounts receivable at
March 31, 1999, have been pledged as collateral for the line of credit [See Note
7A].

F-11
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3
- --------------------------------------------------------------------------------

[3] INVENTORY

Inventory as of March 31, 1999 consists of:

Raw Materials $ 584,643
Finished Goods 2,077,798
--------------

Total 2,662,441
Allowance (500,000)
--------------

NET INVENTORY $ 2,162,441
------------- ==============

An allowance has been established for the inventory of approximately $500,000.
This reserve is primarily for the anticipated reductions in selling prices
[which are lower than the carrying value] for inventory which has been (a)
restricted to specified distribution territories as a result of settlements in
the last quarter of fiscal 1999 and (b) a rise in certain inventory which may
have past the peak selling season.

[4A] RELATED PARTIES RECEIVABLES

At March 31, 1998, the Company was owed approximately $69,000 from the President
of the Company for advances and loans. Simple interest was accrued monthly at an
annual rate of 10% on the outstanding balance. For the years ended March 31,
1999 and 1998, the Company recorded interest income of $1,170 and $6,607,
respectively. This loan amount was due in December 2001. On March 15, 1999, the
unpaid balance of approximately $69,000 was forgiven by the Company and treated
as a financing cost on the statement of operations in consideration for the
President's 1998 and 1999 personal guarantees for two leases and promissory
notes.

The Company has a receivable of $6,000 from an entity, in which the President of
the Company is a major stockholder. This receivable represents rent due for
space at the Company utilized by the entity. Monthly rental income from this
entity is $800.

[4B] AMERICAN TOP REAL ESTATE ["ATRE"]

The Company paid $50,000 for a 50% interest in ATRE. This investment is
accounted for on the equity method.

In September 1996, a parcel of land was sold and proceeds were retained for
future sewage construction needed for a 20 acre property. The Company received
$121,600 from ATRE for this parcel of land in fiscal 1997.

During the year ended March 31, 1998, ATRE sold approximately 11 acres. The
Company advanced an additional $80,320 to ATRE and received $220,600 from the
proceeds of the parcel of 10 acres as repayment of the advances to ATRE in
fiscal 1998. The Company also received approximately $600,000 from ATRE during
the period April 1, 1998 through March 31, 1999.

F-12
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4
- --------------------------------------------------------------------------------

[4B] AMERICAN TOP REAL ESTATE ["ATRE"] [CONTINUED]

At March 31, 1998, ATRE had binding sales contracts for the remaining parcels of
commercial real estate owned by ATRE as these parcels of land were under
development. In addition, the Company was advised by ATRE that proceeds realized
by ATRE during fiscal 1998 were reinvested into other parcels to improve the
ability to list and sell the remaining parcels. ATRE continues to list these
properties. Management of the Company received communication from a real estate
development specialist in 1998 advising the Company that an aggregate
approximate value of $5,200,000 is calculated for the remaining ATRE parcels.
Although the Company believes that final sales contracts will be able to be
consummated, it is not possible to predict with any certainty when the closing
of these sales contracts of real estate may occur or whether the proceeds
expected by the Company for their share in this real estate could be
significantly less than anticipated. Therefore, the ultimate realizable value of
the receivable for advances from ATRE could be substantially less than the
preadjusted carrying value of $1,600,000. At March 31, 1998, the Company
therefore setup a valuation allowance of $1,117,788 and accordingly, charged
operations for that amount so that the amount due from ATRE at March 31, 1998
was presented at the amount of the anticipated 1998 subsequent receipts of
approximately $500,000. Based upon the above circumstances at March 31, 1998,
the Company believed the likelihood that $1,117,788 from future proceeds from
the sale of the ATRE parcels could not be realized with any certainty [See Note
19D].

[4C] RELATED PARTIES PAYABLE

[5] COMMITMENTS

[A] ROYALTY COMMITMENTS - The Company has entered into various royalty
agreements for licensing of titles for terms of one to seven years. Certain
agreements include minimum guaranteed payments. For the years ended March 31,
1999 and 1998, royalty expense was $73,356 and $79,631, respectively, pursuant
to these agreements.

[B] VIDEO AGREEMENTS - The Company has entered into various agreements to
manufacture, duplicate and distribute videos. Commissions are paid based upon
the number of videos sold.

[C] ACCOUNTS PAYABLE - The Company is currently delinquent on a significant
amount of its accounts payable.

[D] EMPLOYMENT AGREEMENTS - In 1991, two employment agreements were executed for
two officers for annual compensation totaling $240,000. These agreements
terminate in the year 2001 and are adjusted annually in accordance with the
Consumer Price Index. The Board of Directors agreed on April 23, 1996 to reserve
1,000,000 shares of common stock for distribution to two officers of the
Company. The common stock can be purchased in installment payments with a five
year promissory note with interest at 6% per annum. As of March 31, 1999, the
officers did not purchase these shares.

F-13
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5
- --------------------------------------------------------------------------------

[5] COMMITMENTS [CONTINUED]

[D] EMPLOYMENT AGREEMENTS [CONTINUED] - In September 1997, the two officers
agreed to defer 90% of their salaries until further notice, but not beyond March
31, 1998. As consideration, the Company granted a total of 3,750,000 shares of
common stock and warrants to purchase 3,750,000 shares of the Company's common
stock at an exercise price of $.10 per share. The common shares granted vested
during fiscal 1997 and the warrants were exercisable until March 31, 1999. In
March of 1999, the Company extended the term until August 24, 2002. The Company
recorded $75,000 in deferred costs for the fair value of the shares granted and
amortized $25,000 and $50,000 in the years ended March 31, 1999 and 1998,
respectively. No deferred costs were recorded for the warrants granted as the
fair market value of the underlying common shares was approximately equal to the
exercise price. These warrants were not exercised.

In September 1997, the Company entered into employment agreements with nine
employees holding key positions. The agreements provide for an aggregate of
550,000 shares of common stock with a fair value of $11,000 for past services,
warrants for 550,000 shares with an exercise price of $.10 per share and
semi-monthly compensation of approximately $14,000. No deferred costs were
recorded for the warrants granted as the fair market value of the underlying
common shares was approximately equal to the exercise price. These warrants were
not exercised as of March 31, 1999.

[E] SALE OF MULTI MEDIA ASSETS - On May 8, 1995, the Company closed a sales
agreement with a Mexican company, Central Video, for $750,000 by allowing credit
to the Company for future duplication services. The general manager of Central
Video is the former President of the Company. The Company received $750,000 of
duplication services and surrendered equipment having a book value of
approximately $630,000. The Company guaranteed Central Video's general manager a
minimum of $2,500,000 a year of production orders for three years and agreed to
pay Central Video's general manager a 3% commission on orders the Company places
with Central Video. The Company satisfied this obligation in fiscal 1996,
however, in 1997, the Company did not fulfill this obligation and was delinquent
in payments to Central Video. The Company settled this contract with Central
Video in September of 1997. The Company agreed to pay Central Video $12,500 a
week until the total obligation of $740,000 was paid. This settlement dissolved
the production contract and all outstanding payable obligation. As of March 31,
1999, there was no balance owed to Central Video.

[F] FINANCIAL CONSULTANT COMMITMENTS - In June of 1996, the Company engaged
three consultants for a period of two years. The Company will reimburse the
consultants' business expenses not to exceed $750 per month. The financial
consultants received a total of 1,000,000 warrants with an exercise price of
$.25 per share in exchange for services to be rendered. The Company recorded
deferred consulting costs of $50,000 for the fair value of the warrants to
purchase the 1,000,000 shares of common stock and expensed $14,858 and $35,142
for the years ended March 31, 1998 and 1997, respectively. The fair value of the
warrants was determined based upon the fair value of services to be rendered by
the consultant.

In August of 1997, the Company engaged a consulting firm to provide financial
advice for a period of six months. The fee for services included a $7,500 cash
payment, a two percent cash fee on refinancing commitments and a five percent,
non-dilutive equity interest in the Company. The consulting firm was also
entitled to a five percent fee based on the transaction value of any concluded
merger or acquisition introduced by the consulting firm. As of March 31, 1998,
the consulting firm had not concluded any merger or refinancing commitment and
received only the $7,500 cash payment from the Company.

F-14
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6
- --------------------------------------------------------------------------------

[5] COMMITMENTS [CONTINUED]

[F] FINANCIAL CONSULTANT COMMITMENTS [CONTINUED] - In August of 1997, the
Company engaged four consultants for a period of two years to provide assistance
in restructuring and designing the Company's operations and long-term strategic
plan. The consultants received warrants to purchase an aggregate 2,050,000
shares of the Company's common stock at an exercise price of $.10 per share. In
1999, the Company reduced the exercise price to $.05 and recorded a non-cash
additional consulting expense of $40,000 in 1999. The warrants expire at the end
of the two year consulting period. The Company recorded deferred consulting
costs of $100,000 for the fair value of the warrants and expensed approximately
$50,000 and $31,000 for the years ended March 31, 1999 and 1998, respectively.
The fair value of the warrants was determined based upon the fair value of
services to be rendered by the consultant. In addition, the Company also issued
250,000 shares of stock to one of the consultants in consideration of entering
into a two year consulting agreement and recorded $5,000 as a signing bonus. In
July of 1998, the Company raised $20,000 from the exercise of warrants for
200,000 shares of the Company's common stock. The Company received in January
and February of 1999 $60,000 from the exercise of 600,000 options at $.10 per
share.

On January 10, 1999, the Company engaged three consultants for a period of one
year to provide advice to undertake for and consult with the Company concerning
management, marketing, consulting, strategic planning, corporate organization
and structure, financial matters in connection with the operation of the
businesses of the Company, expansion of services, acquisitions and business
opportunities. The consultants received options to purchase a total of 4,700,000
of the Company's common stock exercisable at $.05 per share in exchange for
services to be rendered and the options shall expire on December 31, 2000. The
Company recorded deferred consulting cost of $31,000 and amortized $3,800 for
the year ended March 31, 1999. These options were exercised in February of 1999
for proceeds to the Company of $275,000. The Company filed a Form S-8 in
February of 1999 for these shares of common stock.

In February 1999, the Company engaged a consulting firm to provide internet
media consulting and public relations services for a period of one year. The fee
for the services to be rendered included a monthly cash fee of $3,000. The
consulting firm also received options to purchase a total of 250,000 shares of
the Company's common stock with an exercise price of $0.05 per share in exchange
for services to be rendered and the options shall expire on February 11, 2001.
The Company recorded deferred consulting costs of approximately $2,000 and
amortized $200 for the year ended March 31, 1999. These options were not
exercised as of March 31, 1999. The Company filed a Form S-8 in February of 1999
for these shares of common stock. [19A]

[G] EXCLUSIVE DISTRIBUTION AGREEMENT - In April of 1998, the Company entered
into an agreement with S4C Corporation for the exclusive rights to distribute a
home video tape through December 31, 2003 with total advance payments
aggregating a total commitment of approximately $100,000 and additional
royalties due as a percentage of wholesale prices. The Company paid royalty
advances of $84,300 for the year ended March 31, 1999 whereby $39,745 has been
earned and expensed.

[6] LEASE COMMITMENTS

[A] OPERATING LEASES - The Company leases various office and storage facilities,
automobiles and equipment under operating leases expiring between 1998 and 2002.

The Company leases office space in Freehold, New Jersey for approximately $2,400
per month which expires in October 2001. Total rent expense for the New Jersey
facility was approximately $29,000 for the year ended March 31, 1999.

F-15
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7
- --------------------------------------------------------------------------------

[6] LEASE COMMITMENTS [CONTINUED]

Commencing October 1, 1998 and ending June 2002, the Company entered into a
lease for office, manufacturing and warehouse space for approximately $21,800
per month. Rent expense for this facility for the year ended March 31, 1999 was
approximately $130,000. It also leased for $9,274 per month office and
warehousing space which would expire March 2001. Rent expense for this facility
was approximately $172,000 for the year ended March 31, 1999. The Company has
entered into a sublease for this space with a subtenant beginning January 1,
1999 which requires the subtenant to pay approximately $9,494 per month from
March 1, 1999 through February 2000, and $9,936 per month from March 1, 2000
through March 31, 2001. The Company also has a one year sublease agreement, for
a total of approximately $10,000 annual rental income, with an entity whose
majority stockholder is the President of the Company. Rent expense for the two
California locations for the year ended March 31, 1998 was approximately
$135,000.

The following schedules shows the composition of total rental expense for all
operating leases except those with terms of a month or less that were not
renewed:

YEARS ENDED
-----------
MARCH 31,
---------
1 9 9 9 1 9 9 8
------- -------

Minimum Rentals $ 855,952 $ 200,005
Less: Sublease Rentals 227,856 15,000
-------------- --------------

TOTALS $ 628,096 $ 215,005
------ ============== ==============

The following is the approximate aggregate future minimum rentals for the next
five years for operating leases:

MARCH 31,
2000 $ 395,911
2001 395,911
2002 64,130
2003 --
2004 --
--------------

TOTAL FUTURE MINIMUM LEASE PAYMENTS $ 855,952
----------------------------------- ==============

The operating leases also provide for cost escalation payments.

The total future minimum lease payments of $855,952 does not include sublease
rental income of approximately $240,000 over the next two years.

F-16
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8
- --------------------------------------------------------------------------------

[7] DEBT OBLIGATIONS

<TABLE>

Notes payable consist of the following:
<CAPTION>
M A R C H 31, 1 9 9 9
- ---------------------------------------------------------------------------------------------------------------------
TYPE OF LOAN AMOUNT CURRENT LONG-TERM RATE DUE DATE
------------ ------ ------- --------- ---- --------

<S> <C> <C> <C> <C> <C>
Installment Loan (B) $ -- $ -- $ -- 10% November 14, 1999
Notes Payable (C) -- -- -- 8%
Lines of Credit (A) 1,176,927 1,176,927 -- Various Revolving Line of Credit
Convertible Debenture (D) 475,000 475,000 -- 10% April 30, 2000
Acquired Debt 40,000 40,000 -- Demand
Loan Payable (E) -- -- -- 10%
Loan Payable (F) 17,487 5,273 12,214 9.75%
Notes Payable (G) 180,000 180,000 -- December 10, 1999
------------- ------------- -----------

TOTALS $ 1,889,414 $ 1,877,200 $ 12,214
------ ============= ============= ===========

</TABLE>

[A] LINES OF CREDIT - On August 30, 1996, the Company established a line of
credit up to $2,500,000, whereby, $2,000,000 was backed by pledged receivables
and inventory and $500,000 was guaranteed by the Company's President. Interest
was at a prime rate plus 3%. Interest expense from April 1, 1997 through
December 31, 1997 was approximately $148,500. In December 1997, the Company
repaid $469,221 on this line of credit and engaged another financial institution
for a $2,500,000 financing arrangement. This arrangement is also backed by
pledged receivables and inventory. Cost is 1.5% discounted from pledged invoices
for every 30 days for the accounts receivable portion of the line of credit. The
portion of the line of credit backed by inventory is determined by the lesser of
$800,000, 25% of the clients finished toy inventory or 55% of the clients
finished videotape inventory. Interest is charged at 16.18% per annum on this
portion of the debt. This was formalized with the Company in June of 1998.
Interest expense from December 1997 through March 31, 1998 was approximately
$27,500. Interest for the year ended March 31, 1999 was approximately $340,000.

[B] INSTALLMENT LOAN - In March 1993 a loan was renegotiated for the sum of
$292,058 with principal payments of $5,000 per month with an interest rate of
10% per annum due November 14, 1999. This note was paid in full on July 15,1998
for approximately $60,000. As a result, the Company recorded forgiveness of debt
of approximately $66,000 in July 1998, which is classified as an extraordinary
item on the statement of operations. During the years ended March 31, 1999 and
1998, interest expense was approximately $3,000 and $12,500, respectively.

[C] NOTE PAYABLE FOR EQUIPMENT - On May 8, 1995, the Company closed a sales
agreement with a Mexican Company, for $750,000 by allowing credit to the Company
for duplication services and received $750,000 of duplication services in
exchange for equipment having a book value of approximately $630,000. The
Company classified the outstanding obligation as notes payable. This note was
repaid in weekly installments of $12,500 with the final payment made in
September of 1998. Interest expense of $4,127 and $40,000 was recorded for the
years ended March 31, 1999 and 1998, respectively.

[D] CONVERTIBLE DEBENTURES PAYABLE - During the quarter ended June 30, 1996, the
Company issued convertible debentures of $1,257,988 with 10% interest per annum
and a 7% commission. The principal amount was convertible in whole or in part
into shares of the common stock of the Company at a conversion price equal to
65% of the average closing bid price for the common stock for five trading days
immediately prior to the conversion. In no event could the conversion price be
less than $.20 per share or more than $.75 per share. In conjunction with the
debentures, the Company granted 1,000,000 warrants exercisable at $.25 per share
to two consultants. Warrants for 46,000 shares were exercised for $11,500 during
the year ended March 31, 1997. The Company recorded a financing expense of
$25,000 for the fair value of the warrants granted. The fair value of the
warrants was determined based upon the fair value of services received by the
Company in May and June of 1996.

F-17
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9
- --------------------------------------------------------------------------------

[7] DEBT OBLIGATIONS [CONTINUED]

[D] CONVERTIBLE DEBENTURES PAYABLE [CONTINUED] - Convertible debentures of
$290,000 were converted into 1,450,000 shares of the Company's common stock by
several off shore companies under Regulation S during fiscal 1997 and $967,988
of convertible promissory notes payable were outstanding and in default by the
Company at March 31, 1997. Subsequent to September 30, 1997, the Company
negotiated a one year extension agreement and agreed to add 15% to the note as a
deferred financing cost of $110,721.

On November 2, 1998, convertible debentures with a balance of $831,436 were
reinvested into a new note for $921,851 for a new two year term expiring October
31, 2000 with interest of 10% and an extension bonus of $175,000, due November
1999, which carries interest of 2.5% per annum payable $50,000 per month after
payment of all prior interest and the restructured note. The repayment term was
a weekly amount of $6,250 in 1998 and $12,500 in the years 1999 and 2000. In
addition, there was an acceleration clause of repayments for certain events and
a 5% late charge for any delinquent payments. The notes contained an option to
convert the principal and interest balance into the common stock of the Company
subject to certain pricing calculations. Collateral security included all the
assets of the Company and a personal collection guarantee as additional security
to holder after subordination to primary lender.

Interest expense of approximately $86,000 and $97,000 was recorded for the years
ended March 31, 1999 and 1998, respectively.

[E] LOAN PAYABLE - In October 1997, the Company borrowed $360,000 from an
unaffiliated entity with interest at 10% per year. At March 31, 1998, $185,208
was outstanding on this obligation, which was repaid in full in September of
1998 by weekly payments of $7,500. Interest expense for the years ended March
31, 1999 and 1998 was $4,712 and $12,708, respectively.

[F] LOAN PAYABLE - In March of 1999, the Company incurred a thirty-six month
secured car loan with interest of 9.75% and monthly payments of $562.

[G] NOTE PAYABLE - In March of 1999, the Company received a promissory note for
$217,094 with ten monthly installments of principal and interest of $23,333 each
commencing March 9, 1999. As of March 31, 1999, the Company owed $180,000
principal on this obligation. This note is guaranteed by the President of the
Company and is subordinated to the line of credit.

F-18
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #10
- --------------------------------------------------------------------------------

[8] CAPITAL LEASES

The Company is the lessee of equipment under capital leases expiring in various
years through 2002. The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the assets. The assets are depreciated over the lower of their related
lease terms or their estimated productive lives. Depreciation of assets under
capital leases is included in depreciation expense for 1998 and 1999.

Following is a summary of property held under capital leases as of March 31,
1999:

Furniture, Fixtures and Equipment $ 87,081
Less: Accumulated Depreciation 10,584
--------------

TOTAL $ 76,497
----- ==============

Minimum future lease payments under capital leases as of March 31, 1999 for each
of the next five years and in the aggregate are:

YEAR ENDING
- -----------
MARCH 31,
---------
2000 $ 34,960
2001 34,960
2002 20,179
2003 --
2004 --
-------------

Total Minimum Lease Payments 90,099
Less: Amount Representing Interest 18,205

PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS $ 71,894
------------------------------------------- ============

[9] INCOME TAXES

The Company has net operating loss carryforwards of approximately $8,387,000
which expire through the year 2013. As a result of these carryforwards, the
Company has a deferred tax asset of approximately $3,354,800, which has been
offset by a valuation allowance of $3,354,800 resulting in a deferred asset of
$-0-. Future tax benefits related to this loss have not been recognized because
its realization is not assured. No current or deferred federal or state income
taxes have been provided for. The increase in the valuation allowance for the
year ended March 31, 1999 was $653,000.

As of March 31, 1999, the approximate amount of the net operating loss income
tax carryforwards and their expiration dates are as follows:

EXPIRATION
IN YEARS ENDING NET OPERATING LOSS
MARCH 31, CARRYFORWARDS
--------- -------------

2007 $ 1,317,000
2008 2,693,000
2009 2,015,000
2010 288,000
2011 1,300,000
2012 150,000
2013 624,000
--------------

TOTAL $ 8,387,000
----- ==============

F-19
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11
- --------------------------------------------------------------------------------

[10] CAPITAL STOCK

[A] AUTHORIZED SHARES - The Board of Directors agreed on April 23, 1996 to
increase its authorized shares to 100,000,000 shares of common stock and
5,000,000 shares of preferred stock, which was approved at the August 23, 1996
annual shareholders meeting.

[B] PREFERRED STOCK - The preferred stock has no (i) dividend rights, (ii)
sinking fund provisions, (iii) rights of redemption, (iv) classification
provisions for voting, (vi) preemptive rights, (vi) liability to further calls
or to assessments by the Company, or (vii) any provision discriminating against
any existing or prospective holder. Holders of shares of preferred stock are not
entitled to any dividend preference. In the event of liquidation, holders of
shares of preferred stock shall be entitled to a preference of $.01 per share,
and any other remaining proceeds of liquidation shall be distributed shares and
shares alike to holders of all capital stock. The issued and outstanding
preferred stock are restricted and have not been registered.

[C] CONVERSION OF DEBENTURES PAYABLE - During the quarter ended June 30, 1996,
the Company issued convertible debentures of $1,257,988 with 10% interest per
annum and a 7% commission. The principal amount was convertible in whole or in
part into shares of the common stock of the Company at a conversion price equal
to 65% of the average closing bid price for the common stock for five trading
days immediately prior to the conversion. In no event could the conversion price
be less than $.20 per share or more than $.75 per share. In conjunction with the
debentures, the Company granted 1,000,000 warrants exercisable at $.25 per share
to two consultants. Warrants for 46,000 shares were exercised for $11,500 during
the year ended March 31, 1997. The Company recorded a financing expense of
$25,000 for the fair value of the warrants granted. The fair value of the
warrants was determined based upon the fair value of services received by the
Company in May and June of 1996. As of March 31, 1997, convertible debentures of
$290,000 were converted into 1,450,000 shares of the Company's common stock by
several off shore companies under Regulation S and $967,988 of convertible
promissory notes payable were outstanding and in default by the Company.
Interest expense of $97,000 and $24,702 was recorded for the years ended March
31, 1998 and 1997. Subsequent to September 30, 1997, the Company negotiated a
one year extension agreement and agreed to add 15% to the note as a deferred
financing cost of $110,721.

F-20
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12
- --------------------------------------------------------------------------------

[10] CAPITAL STOCK [CONTINUED]

[C] CONVERSION OF DEBENTURES PAYABLE [CONTINUED] - In February of 1999, the
Company converted $640,000 of the debentures into 8,000,000 shares of common
stock. On February 10, 1999, the Company converted the remaining note balance of
$172,661 and unpaid interest of $90,415 into 3,018,254 shares of common stock.
It was also agreed that the $175,000 extension bonus, which was recorded as a
financing cost in February of 1999, could be converted into shares of common
stock at an agreed exercise price subject to market conditions. In March of
1999, the Company additionally received a total of $300,000 from one officer and
five investors and issued convertible promissory notes due in one year with
principal and interest paid bimonthly at an interest rate of 10%. The notes are
convertible immediately into common stock at the rate of $.05 per share. At
March 31, 1999, the balance of convertible debentures was therefore $475,000
[See Note 19C and 19F].

[D] EMPLOYMENT AGREEMENTS - In September 1997, two officers agreed to defer 90%
of their salaries until further notice, but not beyond March 31, 1998. As
consideration, the Company granted a total of 3,750,000 shares of common stock
and warrants to purchase 3,750,000 shares of the Company's common stock at an
exercise price of $.10 per share. The common shares granted vested during fiscal
1997 and the warrants were exercisable until March 31, 1999. In March of 1999,
the Company extended the term until August 24, 2002. The Company recorded
$75,000 in deferred costs for the fair value of the shares granted and amortized
$25,000 and $50,000 in the years ended March 31, 1999 and 1998, respectively. No
deferred costs were recorded for the warrants granted as the fair market value
of the underlying common shares was approximately equal to the exercise price.

In September 1997, the Company entered into employment agreements with nine
employees holding key positions. The agreements provide for an aggregate of
550,000 shares of common stock with a fair value of $11,000 for past services,
warrants for 550,000 shares with an exercise price of $.10 per share, and
semi-monthly compensation of approximately $14,000. The agreements will continue
for an indefinite period of time.

[E] FINANCIAL CONSULTANTS - In fiscal 1998, the Company issued 250,000 shares of
stock to one of its consultants in consideration of entering into a two year
consulting agreement and recorded compensation of $5,000.

[F] STOCK IN LIEU OF COMMISSIONS - On March 11, 1998, the Company issued 347,368
shares of common stock to a salesman in lieu of commissions owed of $66,000. On
February 25, 1999, the Company issued 25,000 shares of common stock to a
salesman's beneficiary in lieu of commissions owed of $4,500.

[G] ADDITIONAL STOCK ISSUANCES - On October 24, 1998, the Company issued
1,499,523 shares of common stock to the Company's president pursuant to a
settlement agreement for a value of $30,000.

[11] EARNINGS PER SHARE

Earnings per share is based on the weighted average number of common shares
outstanding as restated to include the number of shares issued in the business
combination with TAV reflecting conversion for a preferred share of stock into
1.95 shares of common stock. The effect of warrants and options is included when
dilutive. Exercise of the options and warrants could potentially dilute basic
EPS in the future.

F-21
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13
- --------------------------------------------------------------------------------

[12] MAJOR SUPPLIER

For the year ended March 31, 1998, the Company had purchases from three
suppliers that amounted to approximately 83% of net purchases. These suppliers
accounted for 52%, 20% and 11% of fiscal 1998 net purchases. For the year ended
March 31, 1999, the Company had purchases from two suppliers that amounted to
approximately 59% of net purchases. These suppliers accounted for 49% and 10% of
fiscal 1999 net purchases.

Loss of these suppliers would not significantly adversely affect the company
because management believes sufficient replacement vendors exist in the open
market.

[13] STOCK OPTIONS AND WARRANTS

[A] 1988 STOCK OPTION PLAN APPROVED - On October 12, 1988, the Company's
directors and stockholders approved the Company's 1988 Stock Option Plan [the
"Option Plan"] authorizing the granting of incentive options and non-qualified
options. The incentive options are intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended. Pursuant to the Option Plan, options
to purchase up to 10,000 shares of common stock may be granted to officers,
directors and key employees of the Company. The Stock Option Committee,
consisting of Messrs. Lu and Schillen, is responsible for determining the
individuals who will be granted options, the number of shares to be subject to
each option, the option price per share, and the exercise period of each option.
The option price will not be less than the fair market value of the Company's
common stock on the date the option is granted. Options may be exercised by
payment of cash. No option will have a term in excess of ten years.

[B] CONSULTING AGREEMENT - FISCAL 1997 - In June 1996, the Company issued
1,000,000 common stock warrants at an exercise price of $.25 per share as part
of a consulting agreement entered into, which term ends June 1998. Deferred
compensation of $50,000 resulting from this transaction was recorded at the fair
market value of the services rendered. These warrants expire in April of 1999.

[C] CONVERTIBLE DEBENTURES - CONSULTING AGREEMENTS - In April 1996, in
connection with the convertible debentures, the Company entered into two
separate consulting agreements. As per the terms of both contracts, the Company
issued 1,000,000 common stock warrants [500,000 warrants per contract] at an
exercise price of $.25 per share of which 46,000 shares were issued as a result
of the exercise of warrants during the year ended March 31, 1997. These warrants
expire in April of 1999.

[D] OFFICERS' COMPENSATION - FISCAL 1998 - In September 1997, the two officers
agreed to defer 90% of their salaries until further notice, but not beyond March
31, 1998. As consideration, the Company granted a total of 3,750,000 shares of
common stock and warrants to purchase 3,750,000 shares of the Company's common
stock at an exercise price of $.10 per share. The common shares granted vested
during fiscal 1997 and the warrants were exercisable until March 31, 1999. In
March of 1999, the Company extended the term until August 24, 2002. The Company
recorded $75,000 in deferred costs for the fair value of the shares granted and
amortized $25,000 and $50,000 in the years ended March 31, 1999 and 1998,
respectively. No deferred costs were recorded for the warrants granted as the
fair market value of the underlying common shares was approximately equal to the
exercise price. These warrants were not exercised.

F-22
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #14
- --------------------------------------------------------------------------------

[13] STOCK OPTIONS AND WARRANTS [CONTINUED]

[E] CONSULTING AGREEMENT - FISCAL 1998 - In August 1997, the Company issued
2,050,000 common stock warrants at an exercise price of $.10 per share as part
of a consulting agreement entered into, whose term ends August 1999. Deferred
consulting costs of $100,000 resulting from this transaction was recorded at the
fair market value of the services rendered and approximately $50,000 and $31,000
was expensed for the years ended March 31, 1999 and 1998, respectively. In July
of 1998, the Company raised $20,000 from the exercise of warrants for 200,000
shares of the Company's common stock. In January of 1999, the Board reduced the
exercise price for two of the consultants, who each has 600,000 warrants, from
$.10 per share to $.05 per share. The Company recorded additional non-cash
consulting expense of $6,000 for this transaction. The consultants exercised
these warrants in February of 1999 and the Company realized proceeds of $60,000.

[F] OPTIONS ISSUED TO CHIEF EXECUTIVE OFFICER - FISCAL 1999 - In July and August
of 1998, the Company granted options to purchase a total of 6,000,000 shares of
common stock to the Chief Executive Officer for a potential customer, in
consideration of certain fulfillment orders submitted to the Company, and his
personal guarantee on the Company's loan agreements and loans made to the
Company. The Company recorded a $15,000 expense. These options may be exercised
for $.10 per share until March 2003.

[G] CANCELLATION OF OPTIONS - On July 15, 1998, the Company incorporated
Galaxynet International, Inc. ["GalaxyNet"] in the State of Delaware, as a
majority-owned subsidiary of the Company. GalaxyNet intended to develop and sell
internet gaming software and intended to offer its software to internet gaming
companies and provide internet gaming web sites to solicit gambling wages from
primarily, Asian players. The Company also issued 4,000,000 options exercisable
at $.10 per share to an investor and 6,000,000 options to the Chief Executive
Officer exercisable at $.10 in connection with this project. On July 17, 1998,
the Company, along with GalaxyNet, entered into a memorandum of understanding
regarding the raising of capital in a private offering to raise gross proceeds
in the aggregate of between $3,000,000 and $10,000,000 with an enterprise who
would be paid the sum of 15% of the aggregate proceeds and received finders
options for up to 3,750,000 shares of common stock at exercise prices of between
$.10 and $.20 per share. The private offering period ended September 30, 1998,
and was extended until October 31, 1998. The private offering resulted in
raising funding proceeds of only $250,000. The Company subsequently canceled the
project and refunded the $250,000 to the investor and canceled all the project
related options in November 1998. The Company incurred expenses on behalf of
GalaxyNet for fiscal 1999 of approximately $30,000.

[H] CONSULTANT AGREEMENTS - FISCAL 1999 - On January 10, 1999, the Company
engaged three consultants for a period of one year to provide advice to
undertake for and consult with the Company concerning management, marketing,
consulting, strategic planning, corporate organization and structure, financial
matters in connection with the operation of the businesses of the Company,
expansion of services, acquisitions and business opportunities. The consultants
received options to purchase a total of 4,700,000 of the Company's common stock
exercisable at $.05 per share in exchange for services to be rendered and the
options shall expire on December 31, 2000. These options were exercised in
February of 1999 for proceeds to the Company of $275,000.

In February 1999, the Company engaged a consulting firm to provide internet
media consulting and public relations services for a period of one year. The fee
for the services to be rendered included a monthly cash fee of $3,000. The
consulting firm also received options to purchase a total of 250,000 shares of
the Company's common stock with an exercise price of $0.05 per share in exchange
for services to be rendered and the options shall expire on February 11, 2001.
These options were not exercised as of March 31, 1999 [See Note 19E].

The Company recorded deferred consulting cost of $33,000 for these 1999
consulting agreements and amortized $4,000 as consulting expense for the year
ended March 31, 1999.

F-23
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #15
- --------------------------------------------------------------------------------

[13] STOCK OPTIONS AND WARRANTS [CONTINUED]

[I] SUMMARY - The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, for
stock warrants issued to officers, employees, and consultants in accounting for
its warrants. Compensation expense has been recognized for the Company's
stock-based compensation in the amounts of $100,000 and $95,678 for the years
ended March 31, 1999 and 1998, respectively. The exercise price for all stock
warrants issued to these individuals during fiscal years 1999 and 1998 were
below the market price of the Company's stock at the date of grant.

A summary of the activity under the plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
OFFICERS AND EXERCISE CONTRACTUAL
EMPLOYEES CONSULTANTS SHARES PRICE LIFE
--------- ----------- ------ ----- ----

<S> <C> <C> <C> <C> <C>
OUTSTANDING - MARCH 31, 1997 1,000,000 2,000,000 3,000,000 $ .15
----------------------------

Granted 4,550,000 2,050,000 6,600,000 .08
Exercised -- (46,000) (46,000) (.08)
Forfeited/Expired -- -- -- --
------------- ------------- --------------

OUTSTANDING - MARCH 31, 1998 5,550,000 4,004,000 9,554,000 .12
----------------------------

Granted 6,000,000 4,950,000 10,950,000 .07
Exercised -- (6,500,000) (6,500,000) .08
Forfeited/Expired -- -- -- --
------------- ------------- --------------

OUTSTANDING - MARCH 31, 1999 11,550,000 2,454,000 14,004,000
---------------------------- ============= ============= ==============

EXERCISABLE - MARCH 31, 1999 7,550,000 2,454,000 10,004,000 $ .10 4 Years
---------------------------- ============= ============= ============== ============== =============

</TABLE>

Weighted average fair value of options granted during fiscal 1999 and 1998 was
$.10 and $.12, respectively.

Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123, for the shares under employee warrants for the years ended March
31, 1999 and 1998, net loss per share would have been as follows:

1 9 9 9 1 9 9 8
------- -------
Net Loss:
As Reported $ (1,602,652) $ (1,505,442)
============== ==============

Pro Forma $ (2,011,662) $ (1,835,742)
============== ==============

Basic Earnings Per Share:
As Reported $ (.05) $ (.08)
============== ==============

Pro Forma $ (.06) $ (.09)
============== ==============

F-24
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #16
- --------------------------------------------------------------------------------

[13] STOCK OPTIONS AND WARRANTS [CONTINUED]

[I] SUMMARY [CONTINUED] - The fair value used in the pro forma data was
estimated by using an option pricing model which took into account as of the
grant date, the exercise price and the expected life of the option, the current
price of the underlying stock and its expected volatility, expected dividends on
the stock and the risk-free interest rate for the expected term of the option.
The following is the average of the data used for the following items.

RISK-FREE EXPECTED EXPECTED
INTEREST RATE EXPECTED LIFE VOLATILITY DIVIDENDS
------------- ------------- ---------- ---------

<S> <C> <C> <C>
6 2.5 Years 144% None
</TABLE>

[14] LITIGATION

The Company has in the past been named as defendant and co-defendant in various
legal actions filed against the Company in the normal course of business. All
past litigation have been resolved without material adverse impact on the
Company. For the year ended March 31, 1999, there are three civil actions
against the Company. One action is for alleged copyright infringement whereby
the Company has entered into a settlement agreement in February of 1998 to pay
$208,000 over twenty-four months, whereby the Company has made the fifteen
required payments due as of March 31, 1999. The second action is for breach of
service whereby the Company settled for two payments of $4,750 each to be paid
July and August 15, 1999. The third action, the Company has challenged the
alleged suit for copyright infringement.

[15] GOING CONCERN

The Company's financial statements are prepared in conformity with generally
accepted accounting principles, which contemplates the realization of assets and
settlements of liabilities in the normal course of business and continuation of
the Company as a going concern. The Company has incurred net losses of
$1,602,652 and $1,505,442 for the years ended March 31, 1999 and 1998,
respectively, and has a working capital deficit at March 31, 1999 of $2,154,599.
The Company has also been experiencing difficulties in paying its vendors on a
timely basis. These factors create uncertainty whether the Company can continue
as a going concern. The Company's plans to mitigate the effects of the
uncertainties are (i) to create new products with better gross profits, (ii) to
continue to negotiate with several reliable investors to provide the Company
with debt and equity financing for working capital purposes, (iii) to convert
debt to equity and (iv) to continue to negotiate with major vendors for
discounts [See Notes 19 and 20].

Management believes that these plans can be effectively implemented in the next
twelve months. The Company will continue to seek additional financing from
private sources to supplement its cash needs for the next twelve months during
the implementation of these plans to achieve profitability. The Company's
ability to continue as a going concern is dependent on the implementation and
success of these plans. The financial statements do not include any adjustments
in the event the Company is unable to continue as a going concern. There can be
no assurance that management's plans to reduce operating losses or obtain
additional financing to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.

[16] MAJOR CUSTOMERS

For the years ended March 31, 1999 and 1998, the Company had net sales to five
customers that amounted to approximately $2,466,000 or 54% and net sales to one
customer of $3,140,000 or 36% of net sales, respectively.

F-25
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #17
- --------------------------------------------------------------------------------

[17] SEGMENT INFORMATION

The following information is presented as a result of the Company adopting SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."

At March 31, 1999, the Company offers different products which are evaluated
separately in assessing performance and allocating resources. These products
have been reflected as two reportable segments, video products and general
merchandise.

VIDEO PROGRAMS AND OTHER LICENSED PRODUCTS - The Company distributes and sells
videocassette titles including certain public domain programs and certain
licensed programs. The Company markets its video programs to national and
regional mass merchandisers, department stores, drug stores, supermarkets and
other similar retail outlets. Also, in September of 1998, the Company entered
into a distribution agreement for a new product called Cine Chrome utilizing
classic images of licensed properties. The Company derived minimal revenues from
the sale of Cine Chrome products in fiscal 1999.

GENERAL MERCHANDISE - The Company through its wholly-owned subsidiary, Jewel
Products International, Inc. ["JPI"] manufacturers, purchases and distributes
toy products to mass merchandisers in the U.S., commencing fiscal 1999. The
Company anticipates in fiscal 2000 to purchase and distribute furniture products
and a line of personal computers. The Company offers the toy products for
limited sales periods and as demands for products change, JPI switches to newer
and more popular products.

The following financial information is reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources. Interest expense is allocated based on revenues.
<TABLE>
<CAPTION>

YEAR ENDED MARCH 31, 1999
-------------------------------------------------------
VIDEO
PROGRAMS
AND OTHER
LICENSED GENERAL
PRODUCTS MERCHANDISE CONSOLIDATED
-------- ----------- ------------

<S> <C> <C> <C>
Revenues $ 4,132,512 $ 417,013 $ 4,549,525
Operating [Loss] (710,045) (667,973) (1,378,018)
Interest Expense 357,023 36,027 393,050
Interest Income - Related Party 914 92 1,006
Depreciation and Amortization - Fixed Assets 71,022 36,062 107,084
Amortization Masters and Artwork 231,599 -- 231,599
Capital Expenditures 109,233 325 109,558
Masters and Artwork - Expenditures 72,073 -- 72,073
Total Assets 3,141,302 887,840 4,029,142

</TABLE>

[18] FAIR VALUE OF FINANCIAL INSTRUMENTS

At March 31, 1999, financial instruments include cash, accounts receivable,
accounts payable, loans to and from related parties and debt. The fair values of
cash, accounts receivable, accounts payable and loans to and from related
parties approximates carrying value because of the short-term nature of these
instruments. The fair value of debt approximates carrying value since the
interest rates approximates the Company's cost of capital.

F-26
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #18
- --------------------------------------------------------------------------------

[19] SUBSEQUENT EVENTS

[A] CONSULTING AGREEMENTS - On April 12, 1999 the Company entered into three
consulting agreements that will terminate on April 11, 2000 whereby three
consultants each received options for 2,000,000 shares of common stock each
which will expire on April 11, 2000 at an exercise price of $.05 per share. The
agreements can be terminated or extended as agreed to between the parties. The
Company recorded deferred consulting cost of approximately $120,000 in April of
1999. The Company filed a Form S-8 on May 19, 1999 registering the 6,000,000
shares of common stock for these options. On May 20, 1999, the Company received
$150,000 in cash and obtained forgiveness of debt for $ 150,000 of the
convertible debentures for the issuance of a total of 6,000,000 shares as a
result of the options being exercised.

[B] ADDITIONAL OPTIONS - On May 25, 1999, the Company approved the granting of
options for a total of 4,500,000 shares of common stock exercisable over five
years at prices of $.05 and $.10 to two officers for their services in securing
additional financing, obtaining conversion of debentures to equity and their
securing new contracts with new customers in April of 1999. The options expire
May 2004. The Company recorded compensation expense of approximately $180,000 in
May of 1999.

[C] CONVERTIBLE DEBENTURES - In April and June of 1999, the Company received
$50,000 from an investor and $100,000 from an officer and issued additional
convertible promissory notes totaling $150,000 due in one year with principal
and interest paid bimonthly at an interest rate of 10%. The notes are
convertible immediately into common stock at the rate of $.05 per common share.

[D] ATRE - On June 2, 1999, ATRE entered into a sales agreement for
approximately $600,000. The ability of this agreement to close or for the
Company to realize as of March 31, 1999 50% of the net proceeds to the Company,
however, are uncertain. Therefore, the Company has not recorded a receivable for
this contract [See Note 4B].

[E] OPTIONS EXERCISED - On May 17, 1999, a consultant exercised options for
125,000 shares of the Company's common stock for services rendered and costs
incurred totaling $6,250 [See Note 13H].

[F] WAIVER OF PRINCIPAL PAYMENT - On June 2, 1999, the Company was advised by
one of the convertible debenture holders of a $100,000 note that the bimonthly
principal payments were being waived and the paying of the bimonthly interest
would continue [See Note 7D].

[20] SUBSEQUENT EVENTS [UNAUDITED]

[A] DEBT CONVERSIONS - The Company is continuing negotiations in July of 1999 to
convert related party payables totaling approximately $1,900,000 into shares of
the Company's common stock.

[B] PROPOSED ACQUISITION OF WEBSITE SERVICES - The Company is in negotiations to
acquire an entity who is in the process of creating financial service websites.
The Company believes this transaction will help the Company expand its
E-Commerce market. The Company anticipates the negotiations will be concluded by
September 1, 1999 along with resolving its launching date of the Company's
website which has been delayed.

F-27
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #19
- --------------------------------------------------------------------------------

[21] NEW AUTHORITATIVE PRONOUNCEMENTS

* APB Opinion No. 25 has been applied in practice to include in its
definition of employees, outside members of the board or directors and
independent contractors. The FASB's interpretation of APB Opinion No. 25
will limit the definition of an employee to individuals who meet the common
law definition of an employee [which also is the basis for the distinction
between employees and nonemployees in the current U.S. tax code]. Outside
members of the board of directors and independent contractors would be
excluded from the scope of APB Opinion No. 25 unless they qualify as
employees under common law. Accordingly, the cost of issuing stock options
to board members and independent contractors not meeting the common law
definition of an employee will have to be determined in accordance with
FASB Statement No. 123, "Accounting for Stock-Based Compensation," and
usually recorded as an expense in the period of the grant [the service
period could be prospective, however, see EITF 96-18].

F-28
<PAGE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #20
- --------------------------------------------------------------------------------

[21] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED]

* Options [or other equity instruments] of a parent company issued to
employees of a subsidiary should be considered options, etc. issued by the
employer corporation in the consolidated financial statements, and,
accordingly, APB Opinion No. 25 should continue to be applied in such
situations. This interpretation would apply to subsidiary companies only;
it would not apply to equity method investees or joint ventures.

* If the terms of an option [originally accounted for as a fixed option] are
modified during the option term to directly change the exercise price, the
modified option should be accounted for as a variable option. Variable
grant accounting should be applied to the modified option from the date of
the modification until the date of exercise. Consequently, the final
measurement of compensation expense would occur at the date of exercise.
The cancellation of an option and the issuance of a new option with a lower
exercise price shortly thereafter [for example, within six months] to the
same individual should be considered in substance a modified [variable]
option.

* Additional interpretations will address how to measure compensation expense
when a new measurement date is required.

. . . . . . . . . . . . . .

F-29
<PAGE>

SIGNATURES

In accordance with Section 13 of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.

DIAMOND ENTERTAINMENT CORPORATION

Dated: August 23, 1999 By: /S/ JAMES K.T. LU
--------------------------------------------
James K.T. Lu
President, Chief Executive Officer,
Principal Executive Officer and Director

Dated: August 23, 1999 By: /S/ FRED U. ODAKA
--------------------------------------------
Fred U. Odaka
Chief Financial Officer, Principal Financial
Officer and Principal Accounting Officer

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

SIGNATURE TITLE DATE

<S> <C> <C>
/S/ JAMES K.T. LU President, Chief Executive July 14, 1999
- ----------------------------- Officer, Secretary and Director
James K.T. Lu

/S/ JEFFREY I. SCHILLEN Executive Vice President July 14, 1999
- ----------------------------- and Director
Jeffrey I. Schillen

/S/ MURRAY T. SCOTT Director July 14, 1999
- -----------------------------
Murray T. Scott

</TABLE>

<PAGE>

DIAMOND ENTERTAINMENT CORPORATION

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION
- ----------- -----------

10.14 10% Callable Convertible Note, dated March 22, 1999, in
the principal amount of $50,000, issued to Mr. Lu.

10.15 10% Callable Convertible Note, dated June 3, 1999, in
the principal amount of $100,000 issued to Mr. Schillen.

21.1 Subsidiaries of Registrant.

27 Financial Data Schedule.

<PAGE>

EXHIBIT 10.14

THE SECURITIES UNDERLYING THIS CALLABLE, CONVERTIBLE NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), IN RELIANCE
UPON REGULATION D. SUCH SECURITIES MAY NOT BE CONVERTED, OFFERED, SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT.

DIAMOND ENTERTAINMENT CORPORATION
CALLABLE CONVERTIBLE NOTE

$50,000 Cerritos, California
March 22, 1999

FOR VALUE RECEIVED, the undersigned, DIAMOND ENTERTAINMENT CORPORATION,
a New Jersey corporation (the "Company"), promises to pay James K. T. Lu an
individual ("Payee"), or to its registered assigns, the principal sum of fifty
thousand ($50,000) dollars on March 22, 2000 ("Maturity Date"), or one year from
date of execution with 10% stated interest on the unpaid principal balance.

1. PAYMENT. Payment of principal shall be made in bi-monthly
installments in lawful money of the United States of America and shall be made
at the principal address of the Payee or at such other place as such Payee shall
have designated to the Company in writing for such purpose. Late bi-monthly
payments will assessed a 6% late charge fee after giving five (5) business days
to cure the late payment status. The first payment is due and payable on May 1,
1999.

The Company expressly waives presentment for payment, notice of
dishonor, protest, notice of protest and diligence in collection, and agrees
that if, after demand of Payee, this Note is not paid in accordance with the
terms hereof, the Company shall pay all costs and expenses of collection,
including reasonable attorneys' fees.

2. CONVERSION. The original face amount of this Note is convertible at
the election of the Payee in whole or in part, at any time from the date of this
Note, by notice thereto given by the Payee to the Company.

This Note will be convertible into the Company's Common Stock, no par
value per share (the "Common Stock"), at a conversion price equal to $0.05 per
share and the option rights to convert will expire on March 22, 2002.

The Conversion Price shall be adjusted upon the occurrence of certain
events as more fully described in Section 7 hereof.

This Note shall be deemed to have been surrendered for conversion and
converted at the close of business on the date on which the Company receives it
or a designated agent of the Company with a notice of election to convert duly
executed. Within seven (7) days after conversion, the Company shall issue and
deliver to the person or persons so entitled, a certificate or certificates of
its Common Stock evidencing the number of shares into which this Note shall have
been converted.

<PAGE>

This Note and Common Stock issuable upon conversion of this Note and
all accrued interest (unpaid) thereon, may not be offered, sold, transferred,
pledged or hypothecated unless the Company shall have been supplied with
evidence reasonably satisfactory to it that such offer or transfer is not in
violation of the Securities Act of 1933, as amended (the "Act") and any
applicable state laws.

The Common Stock to be issued upon conversion of this Note has been
reserved for issuance upon conversion thereof, and when issued will be duly
authorized, validly issued, fully paid and non-assessable and with any required
legend in compliance with Rule 144 of the Securities Act of 1933, as amended.

3. PIGGY BACK RIGHTS. If the Company files one or more Registration
Statements (the "Registration Statement") within six (6) years from the date of
this note, the Company will use its best efforts to include all the underlying
Common Stock into which this note is convertible in such Registration Statement,
subject to the terms ands conditions of the Subscription Agreement executed by
the Payee as of the date hereof.

4. DEMAND REGISTRATION RIGHTS. Notwithstanding the Piggy Back Rights
described in Paragraph 3 above, if, within six (6) months from the date hereof,
the Company has not called the Note or filed a Registration Statement to offer
Payee the Piggy Back Rights provided for therein, the Payee may demand that the
Company file, at its expense, the appropriate Registration Statement to include
all, but not less than all, of the shares of the Company's common stock issuable
upon conversion of the Payee's Note, subject to the terms and conditions of the
Subscription Agreement executed by the Payee as of the date hereof.

5. COMPANY'S RIGHT TO CALL. The Company, within 30 days after giving
Holder written notice, shall have the right to call the Note at a premium of
1.10 % of any outstanding balance of this Note at the end of the said 30 days
notice period.

6. HOLDER'S RIGHT IF COMPANY CALLS. If the Company elects to call the
Note, the Holder hereof must surrender his Note for the premium.

7. ADJUSTMENT TO CONVERSION PRICE. The Conversion Price and the number
of shares of Common Stock issuable upon the conversion of this Note, are subject
to adjustment from time to time upon the occurrence of any of the events
specified in this Paragraph 7.

A. In case the Company shall (i) pay a dividend in shares of Common
Stock or make a distribution in shares of Common Stock, (ii) subdivide its
outstanding shares of Common Stock, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, or (iv) issue by
reclassification of its shares of Common Stock other securities of the Company
the number of shares of Common Stock purchasable upon conversion of this Note
immediately prior thereto shall be adjusted so that the Payee of this Note shall
be entitled to receive the kind and number of shares of Common Stock or other
securities of the Company that he would have owned or have been entitled to
receive after the happening of any of the events described above, had this Note
been converted immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this sub-paragraph A.
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.

<PAGE>

B. Whenever the number of shares of Common Stock issuable upon the
conversion of this Note is adjusted, as herein provided, the Conversion Price
shall be adjusted by multiplying such Conversion Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of shares
of Common Stock issuable upon the Conversion of this Note immediately prior to
such adjustment, and of which the denominator shall be the number of shares of
Common Stock so issuable immediately thereafter.

C. If the Company consolidates with or merges into another
corporation or transfers all or substantially all of its assets, the Payee shall
thereafter be entitled upon conversion of this Note to purchase, with respect to
each share of Common Stock purchasable hereunder immediately prior to the date
upon which such consolidation or merger becomes effective, the securities or
property to which a holder of shares of Common Stock is entitled upon such
consolidation or merger, without any change in, or payment in addition to the
Conversion Price in effect immediately prior to such merger or consolidation,
and the Company shall take such steps in connection with such consolidation or
merger as may be necessary to ensure that all of the provisions of this Note
shall thereafter by applicable, as nearly as reasonably may be, in relation to
any securities or property deliverable upon the conversion of this Note. The
Company shall not effect any such consolidation, merger or asset transfer unless
prior to the consummation thereof the successor corporation (if other than the
Company) resulting therefrom shall assume by written agreement executed and
mailed to the registered Payee at his address shown on the books and records of
the Company, the obligation to deliver to such Payee any such securities or
property as in accordance with the foregoing provisions such Payee shall be
entitled to purchase.

D. For the purpose of this Paragraph, the term "shares of Common
Stock" shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Note, or (ii) any other class of stock resulting
from successive changes or reclassification of such shares consisting solely of
change in par value, or from par value to no par value, or from no par value to
par value.

E. Upon the happening of any event requiring an adjustment of the
Conversion Price, the Company shall forthwith give written notice thereof to the
registered Payee of this Note, stating the adjusted Conversion Price and the
adjusted number of shares of Common Stock or other securities or property
issuable upon the exercise hereof resulting from such event and setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based. The Board of Directors of the Company shall determine the
adjusted Conversion Price and the securities or property purchasable upon
conversion. If any voluntary dissolution, liquidation, or winding up of the
Company is proposed, the Company shall give at least 20 days written notice of
such proposal to the registered Payee hereof stating the date of which such
event is to take place and the date (which shall be at least 20 days after
giving of such notice) as of which the holders of shares of Common Stock of
record shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such dissolution, liquidation, or winding up takes
place. The notices pursuant to this paragraph shall be given any first class
mail, postage prepaid, addressed to the registered Payee of this Note at the
address appearing in the records of the Company.

F. Irrespective of any adjustments pursuant to this Paragraph 7, to
the Conversion Price or to the number of shares or other securities or other
property obtainable upon conversion of this Note, this Note may continue to
state the Conversion Price at the same price and number of shares stated herein.

<PAGE>

8. SECURED INTEREST. This note is secured by all the assets of Diamond
Entertainment Corporation. A National Financing Statement (Form UCC1) will be
filed with the California Secretary of State upon execution of this Agreement.
The Company and Holder both agree that this Note is subordinated to all senior
notes of the Company executed prior to the date of this Note, and is
subordinated to the Company's current and future primary senior lines of
Financing and Bank obligations in priority.

9. GOVERNING LAW. This Note shall be governed by and construed and
enforced in accordance with the internal laws of the State of California.

10. NOTICES. All notices and payments to the holder hereof and all
notices to the Company shall be given in writing by delivery to any
international air courier service, postage prepaid, addressed: (i) if to the
Payee, 707 S. Heatherglen Circle, Anaheim Hills, CA 92808 or (ii) if to the
Company, Diamond Entertainment Corporation 16200 Carmenita Road, Cerritos, CA
90703, attention of Jeffry I. Schillen or at such other address as the Company
may specify by notice given to the holder as herein provided. Any notice given
hereunder by the Company with respect to the change of such address shall be
given at least five (5) business days prior to the date upon which such change
is to become effective, and shall specify such date.

Diamond Entertainment Corporation

By: /S/ JEFFRY I. SCHILLEN
-------------------------------------------
Jeffry I. Schillen,
Executive Vice President of Sales
and Marketing

<PAGE>

EXHIBIT 10.15

DIAMOND ENTERTAINMENT CORPORATION
CALLABLE CONVERTIBLE NOTE

$100,000 Cerritos, California
June 3, 1999

FOR VALUE RECEIVED, the undersigned, DIAMOND ENTERTAINMENT CORPORATION,
a New Jersey corporation (the "Company"), promises to pay Jeffrey I. Schillen an
individual ("Payee"), or to its registered assigns, the principal sum of one
hundred thousand ($100,000) dollars on June 3, 2000 ("Maturity Date"), or one
year from date of execution with 10% stated interest on the unpaid principal
balance.

The Conversion Price shall be adjusted upon the occurrence of certain
events as more fully described in Section 7 hereof.

<PAGE>

6. HOLDER'S RIGHT IF COMPANY CALLS. If the Company elects to call the
Note, the Holder hereof must surrender his Note for the premium.

<PAGE>

E. For the purpose of this Paragraph, the term "shares of Common
Stock" shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Note, or (ii) any other class of stock resulting
from successive changes or reclassification of such shares consisting solely of
change in par value, or from par value to no par value, or from no par value to
par value.

<PAGE>

9. GOVERNING LAW. This Note shall be governed by and construed and
enforced in accordance with the internal laws of the State of California.

10. NOTICES. All notices and payments to the holder hereof and all
notices to the Company shall be given in writing by delivery to any
international air courier service, postage prepaid, addressed: (i) if to the
Payee, 48 St. Lawrence Way, Marlboro, NJ 07746 or (ii) if to the Company,
Diamond Entertainment Corporation 16200 Carmenita Road, Cerritos, CA 90703,
attention of its Chairman, James Lu or at such other address as the Company may
specify by notice given to the holder as herein provided. Any notice given
hereunder by the Company with respect to the change of such address shall be
given at least five (5) business days prior to the date upon which such change
is to become effective, and shall specify such date.

Diamond Entertainment Corporation

By: /S/ JAMES LU
---------------------------------
James Lu, Chairman

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

Subsidiary Name Interest Held State of
By Registrant Incorporation

Diamond Entertainment Corporation 100% California
Jewel Products International, Inc. 100% California
Grand Duplication Corporation 100% California

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to these statements.
</LEGEND>
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 48,074
<SECURITIES> 0
<RECEIVABLES> 1,014,391
<ALLOWANCES> 221,345
<INVENTORY> 2,162,441
<CURRENT-ASSETS> 3,126,653
<PP&E> 1,130,996
<DEPRECIATION> 757,714
<TOTAL-ASSETS> 4,029,142
<CURRENT-LIABILITIES> 5,281,252
<BONDS> 0
0
376,593
<COMMON> 11,801,973
<OTHER-SE> (13,490,709)
<TOTAL-LIABILITY-AND-EQUITY> 4,029,142
<SALES> 4,549,525
<TOTAL-REVENUES> 4,549,525
<CGS> 3,020,405
<TOTAL-COSTS> 2,907,138
<OTHER-EXPENSES> (187,035)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 477,637
<INCOME-PRETAX> (1,602,652)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,602,652)
<DISCONTINUED> 0
<EXTRAORDINARY> 65,968
<CHANGES> 0
<NET-INCOME> (1,602,652)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)

</TABLE>