Rx for Africa (RXAF) 10QSB 2006 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT UNDER SECTION 13

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

OR

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF

THE EXCHANGE ACT

For transition period from _______________ to _______________

Commission File Number: 0-17953

DIAMOND ENTERTAINMENT CORPORATION

(Exact Name of Small Business Issuer as Specified in its Charter)

NEW JERSEY	22-2748019
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

800 Tucker Lane, Walnut California, California 91789

(Address of Principal Executive Offices)

(909) 839-1989

(Issuer's telephone number)

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 [  ]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of September 30, 2005, there were 618,262,605 shares of common stock, no par value, outstanding, and 483,251 shares of convertible preferred stock, no par value.

Transitional Small Business Disclosure Format (check one):

YES [  ]    NO [X]

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

INDEX

Part I. Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2005
[Unaudited] and March 31, 2005	3-4
Condensed Consolidated Statements of Operations for the three months
and six months ended September 30, 2005 and 2004 [Unaudited]	5
Condensed Consolidated Statements of Cash Flows for six months ended
September 30, 2005 and 2004 [Unaudited].	6-7
Notes to Condensed Consolidated Financial Statements [Unaudited].	8-20
Item 2: Management's Discussion and Analysis or Plan of Operations	21-27
Item 3: Controls and Procedures.	27
Part II. Other Information	27
Item 2: Unregistered sales of Equity Securities and Use of Proceeds	27
Item 6: Exhibits	28
Signatures	29

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,		March 31,
	2005		2005
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	21,832	$	464,425
Accounts receivable, net of allowance for doubtful accounts of $29,928 and $32,114		549,291		481,450
Inventory		1,779,858		824,691
Due from related parties		10,392		10,392
Prepaid expenses and other current assets		95,166		73,643
Total current assets		2,456,539		1,854,601
PROPERTY AND EQUIPMENT, less accumulated depreciation of $874,548 and $835,095		139,801		177,854
FILM MASTERS AND ARTWORK, less accumulated amortization of $4,695,267 and $4,541,679		568,812		556,013
OTHER ASSETS		92,483		74,124
TOTAL ASSETS	$	3,257,635	$	2,662,592

The accompanying notes are an integral part of these consolidated financial statements.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

	September 30, 2005			March 31, 2005
	(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft	$	54,299		$	61,498
Accounts payable		1,115,889			260,457
Related Party - deferred compensation		861,662			874,546
Other accrued expenses		358,407			576,101
Provision for estimated sales returns		175,000			461,785
Due to factor		192,587			304,110
Notes payable - current portion		7,578			6,946
Due to related parties - notes payable		481,873			328,374	��
Customer Deposits		467,964			16,300
Total current liabilities		3,715,259			2,890,117
Note payable, less current portion		6,315			10,734
TOTAL LIABILITIES		3,721,574			2,900,851
STOCKHOLDERS' DEFICIENCY
Convertible preferred stock, no par value; 5,000,000 and 5,000,000 shares authorized; 483,251 issued (of which 172,923 are held in treasury)		376,593			376,593
Treasury stock		(48,803	)		(48,803	)
Deferred Compensation - Stock Option		(6,224	)		-
Series A convertible preferred stock, $10,000 per share stated value; 50 shares authorized; 40 issued and outstanding		471,400			471,400
Common stock, no par value; 600,000,000 shares authorized; 597,409,872 and 489,057,359 issued and outstanding		18,807,939			18,569,762
Accumulated deficit		(20,064,844	)		(19,607,211	)
TOTAL STOCKHOLDERS' DEFICIENCY		(463,939	)		(238,259	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY	$	3,257,635		$	2,662,592

The accompanying notes are an integral part of these consolidated financial statements.

4

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
SALES - net	$	695,997		$	1,752,790		$	1,658,648		$	3,165,434
COST OF GOODS SOLD		411,668			1,166,598			1,173,741			1,913,262
GROSS PROFIT		284,329			586,192			484,907			1,252,172
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		447,604			345,093			952,547			836,838
PROFIT (LOSS) FROM OPERATIONS		(163,275	)		241,099			(467,640	)		415,334
OTHER INCOME (EXPENSE)
Interest expense		(11,443	)		(46,481	)		(23,336	)		(118,891	)
Interest income		53			-			541			-
Other income (expense)		18,159			22,423			32,802			35,750
Total other income (expense)		6,769			(24,058	)		10,007			(83,141	)
NET PROFIT (LOSS) BEFORE PROVISION FOR INCOME TAXES		(156,506	)		217,041			(457,633	)		332,193
PROVISION FOR INCOME TAXES		-			-			-			(1,000	)
NET PROFIT (LOSS)	$	(156,506	)	$	217,041		$	(457,633	)	$	331,193
NET PROFIT (LOSS) PER SHARE -
Basic	$	(0.00	)	$	0.00		$	(0.00	)	$	0.00
Diluted	$	(0.00	)	$	0.00		$	(0.00	)	$	0.00
WEIGHTED AVERAGE COMMON EQUIVALENT SHARES OUTSTANDING -
Basic		618,262,605			597,409,072			613,462,201			597,409,072
Diluted		618,262,605			649,297,183			613,462,201			639,782,226

The accompanying notes are an integral part of these consolidated financial statements.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Six Months Ended September 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(457,633	)	$	331,193
adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		193,041			128,562
Provision for doubtful accounts		(2,186	)		(56,539	)
Inventory reserve		(176,659	)		175,000
Changes in certain assets and liabilities (increase) decrease in:
Due from related party		-			(3,503	)
Accounts receivable		(65,655	)		485,536
Inventory		(778,508	)		(786,161	)
Prepaid expenses and other current assets		(21,523	)		(71,336	)
Accounts payables		855,432			(64,884	)
Related party deferred compensation		(12,884	)		15,000
Other accrued expenses		(217,694	)		292,500
Provision for estimated sales returns		(286,785	)		-
Deferred revenues		-			(42,005	)
Customer Deposits		451,664			(63,356	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(519,390	)		340,007
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(1,400	)		(75,847	)
Purchase of film masters and artwork		(166,387	)		(184,056	)
Other assets		(18,359	)		(24,301	)
NET CASH USED IN INVESTING ACTIVITIES		(186,146	)		(284,204	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdraft		(7,199	)		(65,302	)
Advance from factor		365,000			1,529,491
Payments to factor		(476,523	)		(2,046,928	)
Proceeds (payments) of notes payable		(3,787	)		2,569
Proceeds (payments) of notes payable (related party)		153,499			581,000
Deferred compensation - stock option		(6,224	)		-
Proceeds from the sales of common stock		238,177			163,526
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		262,943			164,356

The accompanying notes are an integral part of these consolidated financial statements.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(UNAUDITED)

	For the Six Months Ended September 30,
	2005			2004
NET INCREASE IN CASH AND CASH EQUIVALENTS	$	(442,593	)	$	220,159
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		464,425			109,295
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	21,832		$	329,454
SUPPLEMENTAL INFORMATION
CASH PAID FOR:
Interest expense	$	15,252		$	109,556
Income taxes	$	-		$	16,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of series B preferred stock into common stock	$	-		$	1,100,364
Conversion of series B preferred stock into common stock	$	-		$	35,000
Issuance of Common Stock for interest and liquidated damages owed to Series B preferred shareholders	$	231,177			-
Stock Option for non-employee	$	7,000			-

The accompanying notes are an integral part of these consolidated financial statements.

7

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Diamond Entertainment Corporation (the "Company"), organized under the laws of the State of New Jersey on April 3, 1986 and its wholly owned subsidiaries:

1) Jewel Products International, Inc. ("JPI") incorporated under the laws of the state of California on November 25, 1991;

2) Saledirect123.com ("Sales Direct") formerly known as Grand Duplication ("Grand"), incorporated under the laws of the state of California on August 13, 1996; and

3) Galaxy Net ("Galaxy"), incorporated under the laws of the state of Delaware on July 15, 1998.

4) E-DMEC Corporation ("e-DMEC") incorporated under the laws of the state of California on April 30,1985.

All intercompany transactions and balances have been eliminated in consolidation.

Interim Financial Statements

The accompanying consolidated financial statements include all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the periods presented. Interim results are not necessarily indicative of the results to be expected for the full year ending March 31, 2006. The consolidated financial statements should be read in conjunction with the consolidated financial statements included in the annual report of the Company on Form 10-KSB for the year ended March 31, 2005 and 2004.

Nature of Business

The Company is in the business of distributing and selling videocassette/DVD programs, and general merchandise, through normal distribution channels throughout the United States. As of September 30, 2005 and 2004, the Company's management evaluated its operations by two separate product lines to assess performance and the allocation of resources. These product lines have been reflected as two reportable segments as follows:

1. VIDEO/DVD PROGRAMS

The Company distributes and sells videocassette and DVD titles, including certain public domain programs and certain licensed programs. The Company markets its video and DVD programs to national and regional mass merchandisers, department stores, drug stores, supermarkets and other similar retail outlets.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Nature of Business, (Continued)

2. GENERAL MERCHANDISE

The Company, through its wholly owned subsidiary, JPI, purchases and distributes its general merchandise products to mass merchandisers in the U.S. The Company offers its products for limited sale periods and as demand for products change, the Company switches to newer and more popular products. The company did not record any sales of its general merchandise during the six months period ended September 30, 2005.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the periods presented. Actual results could differ from those estimates.

Revenue Recognition

The Company records sales when products are shipped to customers and are shown net of estimated returns and allowances. Customer deposits and credits are deferred until such time products are shipped to customers. The Company grants certain distributors limited rights of return and price protection on unsold products. Product revenue on shipments to distributors that have rights of return and price protection is recognized upon shipment by the distributor. Revenue from the sale of films is recognized upon meeting all recognition requirements of SoP 00-2, “Accounting by Producers or Distributors of Films.”

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

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 Company's 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 with high quality financial institutions and at times may exceed the FDIC $100,000 insurance limit. The Company had no deposits as of September 30, 2005, with financial institutions subject to a credit risk beyond the insured amount.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventory

Inventory is stated at the lower of cost or market utilizing the first-in, first-out method. Inventory consists primarily of videocassettes, DVDs and general merchandise.

Property and Equipment

Property and equipment is presented at historical cost less accumulated depreciation. Depreciation is computed utilizing the straight-line method for all furniture, fixtures and equipment over a five-year period, which represents the estimated useful lives of the respective assets. Leasehold improvements are being amortized over the lesser of their estimated useful lives or the term of the lease.

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. Film masters consist of original "masters", which are purchased for the purpose of reproducing DVD’s and/or videocassettes that are sold to customers and consist of primarily public domain titles, often thirty or more years old. In the Company’s experience sales of old films are not likely to be substantially greater in the early years than when the Company first includes such films in its catalogue. Consequently, the Company has elected to allocate its costs for the film masters and artwork over a period of three years using the straight-line method.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value of asset less cost to sell.

The Company is obligated to repurchase transferred receivables under its agreement with its factor, and therefore the transaction does not qualify as a sale under the terms of Financial Accounting Standards Board Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. FASB 140 requires that a transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale. The following conditions must be met in order for FASB 140 to be applicable: a) the assets must be isolated from the transferor, b) the transferee has the right to pledge or exchange the assets, and c) the transferor does not maintain effective control over the assets.

The Company’s obligations to the factor are collateralized by all of the Company’s accounts receivable inventories, equipment, investment property, deposit accounts and financial instruments

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Royalty Advances

The Company’s agreements with licensors generally provide it with exclusive publishing rights and require it to make advance royalty payments that are recouped against royalties due to the licensor based on contractual amounts on product sales adjusted for certain related costs. Advances which have not been recovered through earned royalties are recorded as an asset. The Company continually evaluates the recoverability of advance royalty payments and charges to cost of sales the amount that management determines is probable that will not be recouped at the contractual royalty rate.

Bank Overdraft

The Company maintains overdraft positions at certain banks. Such overdraft positions are included in current liabilities.

Offering Costs

Offering costs consist primarily of professional fees. These costs are charged against the proceeds of the sale of Series A and B convertible preferred stock in the periods in which they occur.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs were approximately $62,000 and $57,000 for the six month periods ended September 30, 2005 and 2004, respectively.

Shipping Costs

Shipping costs are included in Selling and Marketing expenses in the amount of approximately $111,000 and $101,000 for the six month periods ended September 30, 2005 and 2004, respectively.

Reclassification

As of September 30, 2005, certain prior year amounts have been reclassified to conform with current presentation.

Fair Value of Financial Instruments

For certain of the Company's financial instruments, including accounts receivable, bank overdraft and accounts payable and accrued expenses, the carrying amounts approximate fair value, due to their relatively short maturities. The amounts owed for long-term debt also approximate fair value because current interest rates and terms offered to the Company are at current market rates.

Stock-Based Compensation

The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees". Under APB 25, the Company does not recognize compensation expense related to options issued under the Company's employee stock option plans, unless the option is granted at a price below market price on the date of grant.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation (continued)

In 1996, SFAS No. 123 "Accounting for Stock-Based Compensation", became effective for the Company. SFAS No. 123, which prescribes the recognition of compensation expense based on the fair value of options on the grant date, allows companies to continue applying APB 25 if certain pro forma disclosures are made assuming hypothetical fair value method, for which the Company uses the Black-Scholes option-pricing model to calculate disclosures under APB 25.

For non-employee stock based compensation, the Company recognizes an expense in accordance with SFAS No. 123 and values the equity securities based on the fair value of the security on the date of grant. For stock-based awards, the value is based on the market value for the stock on the date of grant and if the stock has restrictions as to transferability, a discount is provided for lack of tradability. Stock option awards are valued using the Black-Scholes option-pricing model.

Income Taxes

Income taxes are provided for based on the liability method of accounting pursuant to SFAS No. 109, "Accounting for Income Taxes." The liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the reported amount of assets and liabilities and their tax basis.

Comprehensive Income

The Company adopted SFAS No. 130, "Reporting Comprehensive Income.” SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and unrealized gains (losses) on available for sale marketable securities and is presented in the consolidated statements of shareholders' equity and comprehensive income. The Statement requires only additional disclosures in the consolidated financial statements and does not affect the Company's financial position or results of operations. 

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings (Loss) per Share

The following table provides the basic and diluted income (loss) per share computations:

	Three Months Ended					Six Months Ended
	September 30,					September 30,
	2005			2004		2005			2004
Net Income (Loss)	$	(156,506	)	$	217,041	$	(457,633	)	$	331,193
Weighted average basic shares outstanding		618,262,605			597,409,072		613,462,201			597,409,072
Dilutive Effect of:
Warrants to purchase common stock		-			14,707,207		-			6,843,750
Convertible preferred stock		-			294,812		-			294,812
Convertible preferred stock		-			14,661,063		-			13,009,563
Stock Options		-			22,225,029		-			22,225,029
Weighted average diluted shares outstanding		618,262,605			649,297,183		613,462,201			639,782,226
Basic earnings (loss) per share		.00			.00		.00			.00
Diluted earnings (loss) per share		.00			.00		.00			.00

Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities.

The following potentially dilutive shares were excluded from the diluted loss per share calculation for the quarter ended September 30, 2005, as their effects would have been anti-dilutive to the loss incurred by the Company:

Options to purchase common stock	72,850,000
Warrants to purchase common stock	36,525,000
Convertible preferred stock	43,340,183
Convertible subordinated notes	20,004,400
	172,719,583

Recent Accounting Pronouncements

In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement and recognition guidance in EITF 03-1 until after further deliberations by the FASB. The disclosure requirements are effective only for annual periods ending after June 15,

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (continued)

2004. The Company has evaluated the impact of the adoption of the disclosure requirements of EITF 03-1 and does not believe it will have an impact to the Company's overall consolidated results of operations or consolidated financial position. Once the FASB reaches a final decision on the measurement and recognition provisions, the Company will evaluate the impact of the adoption of EITF 03-1.

In September 2004, the EITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the proposed statement. The proposed statement will clarify the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and investments accounted for under the cost method. The Company is currently evaluating the effect of this proposed statement on its financial position and results of operations.

In November 2004, the Financial Accounting Standards Board Statement issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4", which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and charges regardless of whether they meet the criterion of "so abnormal" that was originally stated in Accounting Research Bulletin No. 43, chapter 4. In addition, SFAS No. 151 requires that the allocation of fixed production overheads to conversion costs be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not expect the implementation of this new standard to have a material impact on its financial position, results of operations and cash flows.

In December 2004, the FASB issued a revision to SFAS 123, "Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95," that addresses the accounting for share-based payment transactions in which a Company receives employee services in exchange for either equity instruments of the Company or liabilities that are based on the fair value of the Company's equity instruments or that may be

settled by the issuance of such equity instruments. This statement would eliminate the ability to account for share-based compensation transactions using the intrinsic method that the Company currently uses and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of operations. The effective date of this standard is for periods beginning after December 15, 2005. The Company has determined that the adoption of SFAS 123R will result in the Company having to recognize additional compensation expense related to the options or warrants granted to employees, and it will have an impact on the Company’s net earnings in the future. This standard requires expensing the fair value of stock option grants and stock purchases under employee stock purchase plan.

In December 2004, the Financial Accounting Standards Board Statement issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29", which amends Opinion 29 by eliminating the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 151 is effective for a fiscal year beginning after June 15, 2005, and implementation is done prospectively. Management does not expect the implementation of this new standard to have a material impact on its financial position, results of operations and cash flows.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (continued)

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in nondiscretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. Management does not expect the implementation of this new standard to have a material impact on our financial position, results of operations and cash flows.

In March 2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based Payment"("SAB 107"), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff's views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on our consolidated financial statements.

NOTE 2 - GOING CONCERN

As reflected in the accompanying consolidated financial statements, while the Company was marginally profitable during the current year, the Company historically has incurred recurring losses from operations, negative cash flows from operations, a working capital deficit and is delinquent in payment of certain accounts payable. These matters raise substantial doubt about the Company's ability to continue as a going concern.

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company's ability to continue to raise capital and generate positive cash flows from operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence.

Management plans to take, or has taken, the following steps that it believes will be sufficient to provide the Company with the ability to continue in existence and mitigate the effects of the uncertainties.

15

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 2 - GOING CONCERN (CONTINUED)

The Company has implemented a plan to increase its overall market share of core business and its general merchandise line products, and to expand into the contract replication, duplication and packaging business. The Company has implemented the following goals and strategies to achieve its plan:

· Attain leadership in the market segment of high quality budget priced distribution of videocassettes and DVD titles.

· Expand the Company’s association with firms in China to source and handle QA functions for its general merchandise line of products and market a wide selection of high quality, low price general merchandise and sundry items from China.

· Re-establish sales to club type stores with the Company’s new general merchandise line of products.

· Utilize the Company’s relationship with mass merchandisers to introduce and market its general merchandise line of products.

· Continue to seek out additional financing sources to support the expected growth in the Company’s general merchandise line of products.

· Avoid direct competition with larger competitors who sell in the same product categories as the Company, by offering higher quality budgeted price products.

· Continue to acquire new videocassette and DVD titles for distribution.

· Expand the Company’s internet e-Commerce.

The Company believes it has adequate cash resources to sustain its operations through the fourth quarter of fiscal 2006. The Company is continuing to negotiate with several reliable investors to provide the Company with debt and equity financing for working capital purposes. Although the Company believes that the outlook is favorable, there can be no assurance that market conditions will continue in a direction favorable to the Company.

NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable as of September 30, 2005 and March 31, 2005, net of allowance for doubtful accounts were $549,291 and $481,450, respectively. Substantially all of the accounts receivable as of September 30, 2005 and March 2005 have been factored and pledged as collateral under a factoring agreement.

The Company reviews accounts receivable periodically during the year for collectability. An allowance for bad debt expense and sales returns is established for any receivables whose collection is in doubt or for estimated returns.

As of September 30, 2005 and March 31, 2005, the Company had an allowance for doubtful accounts of $264,855 and $481,450, respectively.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 4 - INVENTORY

Inventory consisted of the following as of:

	September 30,			March 31
	2005			2005
Raw materials	$	838,666		$	612,783
Finished goods		1,206,047			653,422
		2,044,713			1,266,205
Less: valuation allowance		(264,855	)		(441,514	)
Inventory, net	$	1,779,858		$	824,691

The following are the components of the Company’s inventory balance together with the applicable reserve for each of the respective categories and periods:

Inventory By Classification:	September 30, 2005			March 31, 2005
DVD Inventory	$	1,367,122		$	835,282
Reserve		(145,323	)		(66,383	)
Net DVD Inventory		1,221,799			768,899
Video Inventory		671,049			424,381
Reserve		(113,032	)		(368,631	)
Net Video Inventory		558,017			55,749
General Merchandise		6,542			6,542
Reserve		(6,500	)		(6,500	)
Net General Merchandise		42			42
TOTAL INVENTORY		2,044,713			1,266,205
TOTAL RESERVE		(264,855	)		(441,514	)
NET INVENTORY	$	1,779,858		$	824,691

Allowance

An allowance has been established for inventory totaling $264,855. This reserve is primarily for the anticipated reductions in selling prices (which are lower than the carrying value) for inventory that has been primarily inventory, which has passed its peak selling season.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 4 - INVENTORY (CONTINUED)

Allowance (continued)

The following table sets forth the activity recorded in our inventory allowance balance for the applicable periods:

Inventory Reserve Detail:	September 30, 2005			March 31, 2005
Beginning Balance		441,514		$	228,479
Provision to Cost of Goods Sold		176,431			384,116
Inventory write-off		(353,090	)		(171,081	)
Ending Reserve Balance		264,855			441,514

NOTE 5 - RELATED PARTY TRANSACTIONS

The Company has related party transactions with several officers, directors and other related parties. The following summarizes related party transactions.

Due from related parties:

		September 30,	March 31,
		2005	2005
Loan due from - Officer	$	10,392	-

Due to related parties - notes payable:

		September 30,		March 31,
		2005		2005
a) Note payable - ATRE	$	411,873	$	278,374
b) Convertible note payable - Jeffrey Schillen		50,000		50,000
c) GJ Products		20,000		-
	$	481,873	$	328,374

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

NOTE 6 - COMMITMENTS AND CONTINGENCIES

Royalty Commitments

The Company has entered into various royalty agreements for licensing of titles with terms of one to seven years. Certain agreements include minimum guaranteed payments. For the three months ended September 30, 2005 and 2004, royalty expense was $ 25,193 and $3,894, respectively, pursuant to these agreements. For the six months ended September 30, 2005 and 2004, royalty expense was $45,374 and $4,525 respectively, pursuant to these agreements.

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.

NOTE 7 - STOCKHOLDERS' DEFICIENCY

Common Stock

As of September 30, 2005, the aggregate number of shares of common stock that the Company has authority to issue is 800,000,000 shares with no par value. As of September 30, 2005 and March 31, 2005, 618,262,605 shares were issued and outstanding..

For the six months ended September 30, 2005, the Company had the following significant issuance of its common stock:

On May 9, 2005 the Board of Directors of the Company approved the issuance of 23,117,733 shares of the Company’s common stock upon conversion of liquidated damages and interest by the five shareholders totaling an aggregate of $231,177 which accrued in connection with the sale of the Company’s Series B preferred shares, at the agreed upon conversion price of $0.01 per share. The Company was previously unable to issue such shares of common stock until the shareholders of the Company approved the increase in the authorized number of shares of common stock on March 1, 2005.

Stock Options

The Company accounts for its stock-based compensation plan based on Accounting Principles Board ("APB") Opinion No. 25, Financial Interpretation No. 44, and SFAS 123, "Accounting for Stock-Based Compensation.” For the three and nine month period ending June 30, 2005 and 2004,the Company has not changed to the fair value method and continued to use APB Opinion No. 25 for measurement and recognition of any expense related to employee stock based transactions. All non-employee stock option and warrant grants are accounted for under the fair value method. As such, compensation expense for employee stock option and warrant grants would be recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price.

The FASB issued SFAS No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This statement amends SFAS No.123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. Pursuant to SFAS No.123, the Company would expense the fair market value of stock options newly granted to third parties and disclose the pro forma results based on the fair value of options/warrants granted to employees.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2005

7.Stockholders’ Deficiency (continues)

Stock Options (continued)

No stock-based employee compensation cost is reflected in net income (loss), as all options granted to employees had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

	September 30, 2005
Net income (loss) as reported	$	(457,633	)
Deduct: total stock-based compensation as determined under fair value based method.		( 11,103	)
Pro forma net income (loss)	$	(468,736	)
Basic earnings (loss) per share:
As reported	$	(.00	)
Pro forma	$	(.00	)
Diluted earnings (loss) per share:
As reported	$	(.00	)
Pro forma	$	(.00	)

During the three months ended June 30, 2005, the Company’s Board of Directors approved the grant of stock options to employees, directors and independent consultants to purchase an aggregate of 58,100,000 shares of its common stock. These options have an exercise price of $0.007 and as of June 30, 2005, none of these option shares were vested. As a result, the Company has recorded $7,000 in “Deferred Compensation,” which will be amortized on a straight-line basis to expense over the three-year vesting period of the options. For the three months ended June 30, 2005, an amount of $194 has been amortized to expense.

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Item 2: Management's Discussion and Analysis or Plan of Operations

This Form 10-QSB 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.

The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related footnotes for the year ended March 31, 2005 included in its Annual Report on Form 10KSB and its Form 10QSB for the three months period ended June 30, 2005. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.

SIX MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE SIX MONTHS ENDED SEPTEMBER 30, 2004:

Results of Operations

EXECUTIVE SUMMARY

During six months period ended September 30, 2005 and 2004, Diamond Entertainment Corporation d/b/a e-DMEC (the "Company" or "DMEC") operated in two principal industries, a) distribution and sales of DVD/video programs and other licensed programs and b) distribution of certain general merchandise.

DMEC markets and sells a variety of videocassette and DVD (Digital Video Disc) titles to the budget home video and DVD market. Our videocassette and DVD titles include 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 us from a third party for duplication and distribution, generally on a non-exclusive basis. We market our video programs to national and regional mass merchandisers, department stores, drug stores, supermarkets and other similar retail outlets. Our video and DVD products are also offered by consignment arrangements through one large mail order catalog company and one retail chain. Videocassette titles are duplicated in-house and we sub-contract out to U.S. based vendors all replication of our DVD programs.

We are continuing to acquire new licensed video and DVD titles and upgrading the quality of packaging and pre-printed materials in order to enhance our products. During the six months ended September 30, 2004, DVD program sales and videocassette program sales represented 83% and 17% of total sales respectively compared to 77% and 23%, respectively, for the same periods a year earlier. For the six months ended September 30, 2004, videocassette and DVD program sales decreased by 47% and 48%, respectively, when compared to the six months period ended September 30, 2004. The decrease in sales volume was the result of lower volume of sales orders received from our major customers.

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During the six months ended September 30, 2005, the lower demand for our DVD and videocassette programs from our major customers was the primary reason for our decrease in total sales of approximately 48% when compared to the same period a year earlier.

Management believes the higher demand for its Videocassette and DVD product line will increase the overall sales for the Company during the remaining months of fiscal year 2006, however, there is no assurance that this trend will continue nor will the Company be able to maintain its current gross profit margins due to increased competition.

The Company's wholly owned subsidiary Jewel Products International, Inc. ("JPI") is in the business of distributing certain general merchandise. During the six months period ended September 30, 2006, JPI did not record any sales of general merchandise products and during the same period a year earlier JPI had minimal sales.

NET SALES

Net sales for the Company were approximately $1,659,000 for the six month period ended September 30, 2004 as compared to approximately $3,165,000 for the same period a year earlier. For the six months period ended September 30, 2005 and 2004, DVD program net sales were approximately $1,264,000 and $2,422,000, respectively. Videocassette net sales, were approximately $116,000 and $743,000, respectively, for the six month period ended September 30, 2005 and 2004. The lower DVD program sales of approximately $1,158,000 was the result of lower volume of orders received from our major customers. The reduced videocassette sales of approximately $627,000 was primarily caused by the industry shift from videocassette programs to DVD programs.

GROSS PROFIT

Gross profit for the six months ended September 30, 2005 and 2004 was approximately $586,000 and $1,252,000 or 29% and 40% of sales, respectively. The lower gross margin of approximately $666,000 was primarily the result of decreased sales volume. The decrease of the gross profit percentage when compared to sales of 11%, was primarily the result of liquidating our videocassette inventory at discounted prices and sales price erosion experienced in our DVD line of products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling expenses for the six months ended September 30, 2005 and 2004 were approximately $417,000 and $408,000, respectively. The increase in selling expenses of approximately $9,000 was attributable mainly to higher expense levels in royalties and sales promotion, offset by lower commission expenses.

General Administrative expenses for the six months ended September 30, 2005 and 2004 were approximately $535,000 and $428,000, respectively. The increase in general administrative expenses of approximately $107,000 was primarily the result of increases in salaries, accounting fees and bad debt which were offset by decreases in travel expense and factor expense.

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OTHER INCOME AND EXPENSE

Interest expense for the six months ended September 30, 2005 and 2004 was approximately $23,000 and $119,000 respectively. The decrease in interest expense of approximately $96,000 was primarily the result of increased interest resulting from our factoring arrangement and other short term loans.

Other income for the six months ended September 30, 2005 and 2004 was approximately $33,000 and 36,000 respectively. The increase in other income of approximately $3,000 was primarily the result of lower vendor cash discounts earned.

OPERATING INCOME AND LOSS

Our operating loss for the six months period ended September 30, 2005 was approximately $468,000 as compared to an operating profit of approximately $415,000 for the same period last year. The decrease in the Company's operating profit of approximately $883,000 arose primarily from a decrease in gross profit of approximately $767,000 and an increase in operating expenses of approximately $116,000.

NET PROFIT (LOSS) BEFORE PROVISON FOR INCOME TAXES

The Company's net loss before income taxes for the six months ended September 30, 2005 was approximately $458,000 as compared to a net profit of approximately $416,000 for the same period last year. The primary reason for the net loss before provision for income taxes at September 30, 2005, was the Company's operating loss of approximately $468,000 and other income and (expense) of approximately $10,000.

The Company's auditors issued a going concern report for the year ended March 31, 2005. 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.

THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2004:

NET SALES

Net sales for the Company was approximately $696,000 for the quarter ended September 30, 2004 as compared to approximately $1,753,000 for the quarter ended September 30, 2004, representing an decrease of approximately 60%. DVD program net sales were approximately $584,000 for the quarter ended September 30, 2005, as compared to approximately $1,104,000 for the quarter ended September 30, 2004, representing a decrease of approximately 47%. Videocassette net sales were approximately $116,000 for the quarter ended September 30, 2005, as compared to approximately $649,000 for the quarter ended September 30, 2004, a decrease of approximately 82%. The industry shift from videocassette programs to DVD programs together with decreased orders placed by our major customers for DVD and videocassette products.

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GROSS PROFIT

Gross profit was approximately $284,000 for the three months ended September 30, 2005 as compared to approximately $586,000 for the three months ended September 30, 2004. The lower gross margin of approximately $302,000 was primarily the result of decreased sales. For the three months ended September 30, 2005 and 2004 the gross profit as a percentage of sales was 41% and 33%, respectively. The increase of the gross profit as a percentage to sales of 8% was primarily the result of higher margins realized from our video programs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling expenses for the three months ended September 30, 2005 and 2004 were approximately $204,000 and $169,000, respectively. The increase in selling expenses of approximately $34,000 was primarily caused by the higher royalty, advertising and freight expenses offset by lower sales commissions.

General and administrative expenses for the three months ended September 30, 2005 and 2004 were approximately $243,000 and $176,000, respectively. The increase in general administrative expenses of approximately $67,000 was primarily the result of higher provision for bad debts.

OTHER INCOME AND EXPENSE

Interest expense for the three months ended September 30, 2005 and 2004 was approximately $11,000 and $47,000 respectively. The decrease in interest expense of approximately $36,000 was primarily the result of decreased levels of borrowing.

Other income for the three months ended September 30, 2005 and 2004 was approximately $18,000 and $22,000 respectively. The decrease in other income of approximately $4,000 was primarily the result of lower vendor cash discounts earned.

OPERATING INCOME

Our operating loss for the three months ended September 30, 2005 was approximately $163,000 as compared to an operating profit of approximately $241,000 for the same period last year. The decrease in the Company's operating profit of approximately $404,000 arose primarily from a decrease in gross profit of approximately $302,000 and an increase in operating expenses of approximately $102,000.

NET PROFIT (LOSS) BEFORE PROVISON FOR INCOME TAXES

The Company's net loss before income taxes for the three months ended September 30, 2005 was approximately $156,000 as compared to a net profit of approximately $217,000 for the same period last year. The primary reason for the net loss before provision for income taxes at September 30, 2005, was the Company's operating loss of approximately $163,000 and other income and (expense) of approximately $7,000.

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LIQUIDITY AND CAPITAL RESOURCES

The Company has four primary sources of capital which include 1) cash provided by operations, 2) a factoring arrangement with a financial institution to borrow against the Company's trade accounts receivable, 3) funds derived from the sale of its common stock and 4) a loan arrangement with a related party bearing interest at 10%. Although there can be no assurance, management believes that cash flow provided by operations and short term borrowings from a related party will be adequate to operate the business for the next twelve months.

Factoring Agreements. On August 30, 1996, the Company entered into a financing agreement with a financial institution for a maximum borrowing of up to $2,500,000. The agreement called for a factoring of the Company's accounts receivable, and an asset-based note related to the Company's inventories. Subsequently, on October 29, 1999, the financial institution sold its financing agreement covering the factoring of the Company's accounts receivable to a factoring institution located in Dallas, Texas. The original financial institution retained the asset-based note related to the Company's inventories which was subsequently retired by the Company. Substantially all assets of the Company have been pledged as collateral for the borrowings. The cost of funds for the accounts receivable portion of the borrowings with the new factor is a 1.5% discount from the stated pledged amount of each invoice for every 30 days the invoice is outstanding. Substantially all of the accounts receivable as of September 30, 2005 and March 31, 2005 have been factored or pledged as collateral under the factoring agreement.

As of September 30, 2005 and March 31, 2005 the amount due factor was approximately $193,000 and $190,000, respectively. The decrease of approximately $304,000 was the primarily result of the decrease sales to customers that are eligible for factoring.

Related party loan. During the six month period ended September 30, 2005, the Company borrowed from its principal shareholder, American Top Real Estate Co., Inc. ("ATRE"), approximately $232,000, which was utilized as working capital. The balance owed to ATRE at September 30, 2005 and March 31, 2005 was approximately $412,000 and $278,000, respectively.

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 50% of the issued and outstanding common stock of ATRE. Subsequent loan participation by the investors in ATRE reduced the Company's shareholder interest to 7.67%. The Company's 2003 operations include a write-down of its investment in ATRE, which reduced the Company's investment in ATRE to zero, net of taxes. The write-down resulted from the operating results of ATRE which reduced the Company's investment in ATRE to zero and, as a consequence, the Company's future financial results will not be negatively affected by ATRE's ongoing operations. The Company has no obligation to fund future operating losses of ATRE.

25

On September 30, 2005 the Company had assets of approximately $3,257,000 compared to $2,662,000 on March 31, 2005. The Company had a total stockholder's deficiency of $464,000 on September 30, 2005, compared to a deficiency of $238,000 on March 31, 2005, an increase of approximately $226,000. The increase in stockholder's deficiency was the result of recording the net loss of approximately $458,000 for the six months ended September 30, 2005, offset by the conversion to common stock of series B-Preferred interest and liquidated damages owed to shareholders of approximately $231,000, together with the recording of non-employee stock options totaling approximately $7,000.

As of September 30, 2005 and March 31, 2005 the Company's inventory was approximately $1,780,000 and $825,000, respectively. The increase in inventory of approximately $955,000 was primarily the result of an inventory build-up of approximately $779,000 to meet the projected sales increase for the third fiscal quarter ending December 31, 2005, and a decrease in the inventory reserve for obsolescence of approximately $176,000.

As of September 30, 2005 the Company's working capital deficit increased by approximately $223,000 from a working capital deficit of approximately $1,036,000 at March 31, 2005, to a working capital deficit of approximately $1,259,000 at September 30, 2005. The increase in working capital deficit was attributable primarily to increases in inventory and accounts receivable and decreases in accrued expenses, provision for estimated sales return and amounts due factor in the aggregate amount totaling approximately $1,639,000 offset by a decrease in cash and an increase in amounts due to related parties and accounts receivable totaling approximately $1,903,000. The remaining decrease to the working capital deficit of approximately $41,000 occurred in miscellaneous areas, including changes in assets.

For the six months ended September 30, 2005, the Company had the following significant issuance of its common stock:

On May 9, 2005 the Board of Directors of the Company approved the issuance of 23,117,733 shares of the Company’s common stock upon conversion of liquidated damages and interest by the five shareholders totaling an aggregate of $231,177 which accrued in connection with the sale of the Company’s Series B preferred shares, at the agreed upon conversion price of $0.01 per share. The Company was previously unable to issue such shares of common stock until the shareholders of the Company approved the increase in the authorized number of shares of common stock on March 1, 2005.

Operations

Cash flows used in operating activities was approximately $519,000 during the six months period ended September 30, 2005 compared to cash flows provided by operating activities of approximately $340,000 during the six months period ended September 30, 2004. Cash used in operating activities for the six months period ended September 30, 2005 was primarily attributable to increases in the Company's net loss and inventory, and decrease in amount accrued expenses and provision for estimated sales returns, offset by increases in accounts payable, depreciation and amortization, and customer deposits.

The Company has also been experiencing difficulties in paying its vendors on a timely basis. These factors create uncertainty as to whether the Company can continue as a going concern.

Investing

For the six months ended September 30, 2005 and 2004, investments in masters and artwork were approximately $166,000 and $184,000, respectively. Management continues to seek to acquire new titles to enhance its product lines.

26

Financing

Cash flows provided by financing activities was approximately $263,000 during the six months period ended September 30, 2005 compared to approximately $164,000 during the six months period ended September 30, 2004.

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.

Item 3: Controls and Procedures

The President/Co-CEO and the Chief Financial Officer of the Company have established and are currently maintaining disclosure controls and procedures for the Company. The disclosure controls and procedures have been designed to ensure that material information relating to the Company is made known to them as soon as it is known by others within the Company.

Our President/Co-CEO and our Chief Financial Officer conduct updates and review and evaluate the effectiveness the Company's disclosure controls and procedures and have concluded, based on their evaluation as of the end of the period covered by this Report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. During the last fiscal quarter, there has been no change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, these controls.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:

Common Stock

On May 9, 2005 the Board of Directors of the Company approved the issuance of 23,117,733 shares of the Company’s common stock upon conversion of liquidated damages and interest by the five shareholders totaling an aggregate of $231,177 which accrued in connection with the sale of the Company’s Series B preferred shares, at the agreed upon conversion price of $0.01 per share. The Company was previously unable to issue such shares of common stock until the shareholders of the Company approved the increase in the authorized number of shares of common stock on March 1, 2005. The Company claims exemption from registration of such issuance based on Section 4(2) of the Securities Act of 1933, as amended, inasmuch as the transaction was a non-public offering and sale of securities.

Common Stock Options

On June 16, 2005, the Board of Directors of the Company approved the granting of 58,100,000 options to purchase the Company's common stock under the Incentive Plan of the 2005 Equity Compensation Program to the select employees, officers, directors and a consultant of the Company expiring no later than 10 years from the date the options were granted. The effective date of such options being granted was June 16, 2005, at an exercise price of $.007 per share. Such stock options granted vest in three annual installments commencing one year after the date of grant. Options were granted, James Lu, the President, Jeffrey Schillen the Executive Vice President and Fred Odaka, Chief Financial Officer of the Company to purchase 25,000,000, 12,150,000 and 5,000,000 shares, respectively, and 5,000,000 and 2,500,000 options were granted to Murray Scott and Jerry Lan, respectively, who are Directors of the Company. The remaining balance of 7,450,000 options was granted to six employees and one consultant of the Company. The Company claims exemption from registration of such issuance based on Section 4(2) of the Securities Act of 1933, as amended, inasmuch as the transaction was a non-public offering and sale of securities.

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Item 6. Exhibits

31.1 Certification of the Co-Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a), furnished herewith.

31.2 Certification of the Co-Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a), furnished herewith.

31.3 Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a), furnished herewith.

32.1 Certification of the Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2 Certification of the Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.3 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

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SIGNATURES

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

DIAMOND ENTERTAINMENT CORPORATION

Dated: November 14, 2005 By: /s/ James K.T. Lu

James K.T. Lu

President and Co-Chief

Executive Officer

Dated: November 14, 2005 By: /s/ Fred U. Odaka

Fred U. Odaka

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

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