Rx for Africa 10QSB 2003 Q3 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13

OR 15(d) OF THE SECURITIES AND EXCHANGE COMMISSION

For the quarterly period ended December 31, 2002

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

THE SECURITIES EXCHANGE ACT OF 1934.

For transition period from _______________ to _______________

Commission File Number: 0-17953

DIAMOND ENTERTAINMENT CORPORATION

(Exact name of registrant 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, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required

to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during

the preceding 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 [ ]

As of December 31, 2002, there were 477,160,096 shares of common stock

outstanding.

Transitional Small Business Disclosure Format (check one):

YES [ ] NO [X]

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

INDEX

Part I. Financial Information

Item 1: Condensed Financial Statements

Condensed Consolidated Balance Sheet as of December 31, 2002

[Unaudited] and March 31, 2002........................................ 3-4

Condensed Consolidated Statements of Operations for the three months

and nine months ended December 31, 2002 and 2001 [Unaudited].......... 5

Condensed Consolidated Statements of Cash Flows for nine months ended

December 31, 2002 and 2001 [Unaudited]............................... 6-7

Notes to Condensed Unaudited Consolidated Financial Statements...... 8-18

Item 2: Management's Discussion and Analysis or

Plan of Operations.............................................. 19-23

Item 3: Controls and Procedures......................................... 24

Part II. Other Information.............................................. 24

Item 1: Legal Proceedings............................................... 24

Item 2: Changes in Securities........................................... 24

Item 3: Defaults Upon Senior Securities................................. 25

Item 4: Submission of Matters to a Vote of Security Holders............. 25

Item 5: Other Information............................................... 25

Item 6: Exhibits and Reports on Form 8-K................................ 25

Signatures............................................................... 26

Certifications........................................................... 27-28

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, March 31,

2002 2002

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

(Unaudited)

ASSETS

CURRENT ASSETS

Cash and cash equivalents $ 35,316 $ 15,642

Accounts receivable, net of allowance for

doubtful accounts of $167,965 (unaudited)

and $106,858 638,239 356,869

Inventory, net 707,115 964,988

Due from related parties 204,179 268,435

Prepaid expenses and other current assets 3,768 37,272

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

Total current assets 1,588,617 1,643,206

PROPERTY AND EQUIPMENT, less accumulated

depreciation of $1,165,600 (unaudited) and $1,098,195 239,223 296,077

FILM MASTERS AND ARTWORK, less accumulated

amortization of $3,988,200 (unaudited) and $3,956,767 362,822 271,151

INVESTMENT IN EQUITY SUBSIDIARY 60,158 60,158

OTHER ASSETS 28,884 33,703

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

TOTAL ASSETS $ 2,279,704 $ 2,304,295

============ ===========

</TABLE>

The accompanying notes are an integral part of these consolidated financial

statements.

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, March 31,

2002 2002

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

(Unaudited)

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES

Bank/book overdraft $ 207,765 $ 9,823

Accounts payable and accrued expenses 1,834,934 1,479,323

Due to factor 241,941 159,747

Financing agreement payable - 103,777

Notes payable - current portion 37,800 37,800

Due to related parties - notes payable 406,418 666,858

Customer Deposits 22,438 243,624

�� ------------ -----------

Total current liabilities 2,751,296 2,700,952

Notes payable, less current portion 37,800 66,150

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

TOTAL LIABILITIES 2,789,096 2,767,102

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

COMMITMENTS AND CONTINGENCIES (Note 5) - -

STOCKHOLDERS' DEFICIENCY

Convertible preferred stock, no par value; 4,999,863 and

5,000,000 shares authorized; 483,251 issued, 310,328

outstanding 376,593 376,593

Treasury stock (172,923 convertible preferred shares held in

Treasury) ( 48,803) ( 48,803)

Series A convertible preferred stock, $10,000 per share

stated value; 50 shares authorized; 40 issued and outstanding 471,400 471,400

Series B convertible preferred stock, $10,000 per share

stated value; 87 shares authorized; 84 issued and outstanding 1,116,837 1,146,837

Common stock, no par value; 600,000,000 shares authorized;

477,160,096 (unaudited) and 457,634,122 issued and outstanding 17,234,122 17,129,122

Accumulated deficit (19,659,541) (19,537,956)

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

TOTAL STOCKHOLDERS' DEFICIENCY ( 509,392) ( 462,807)

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

TOTAL LIABILITIES AND STOCKHOLDERS'

DEFICIENCY $ 2,279,704 $ 2,304,295

============ ===========

</TABLE>

The accompanying notes are an integral part of these consolidated financial

statements.

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months Ended Nine Months Ended

December 31, December 31,

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

2002 2001 2002 2001

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

SALES - net $ 1,200,233 $ 1,136,728 $2,897,447 $3,179,347

COST OF GOODS SOLD 642,571 714,470 1,812,772 1,975,994

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

GROSS PROFIT 557,662 422,258 1,084,675 1,203,353

SELLING, GENERAL AND ADMINISTRATIVE

EXPENSES 429,680 430,067 1,129,300 1,150,121

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

INCOME (LOSS) FROM OPERATIONS 127,982 ( 7,809) ( 44,625) 53,232

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

OTHER INCOME (EXPENSE)

Interest expense ( 45,818) ( 73,105) (133,962) (250,237)

Other income (expense) 56,957 38,634 57,002 50,500

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

Total other income (expense) 11,139 ( 34,471) ( 76,960) (199,737)

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

INCOME (LOSS) BEFORE PROVISION FOR

INCOME TAXES 139,121 ( 42,280) ( 121,585) (146,505)

PROVISION FOR INCOME TAXES - - - -

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

NET INCOME (LOSS) $ 139,121 $ ( 42,280) $ ( 121,585) $ (146,505)

=========== =========== =========== ==========

NET INCOME (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 477,160,096 261,180,000 471,511,359 214,708,260

=========== =========== =========== ===========

Diluted 587,160,096 261,180,000 471,511,359 214,708,260

=========== =========== =========== ===========

</TABLE>

The accompanying notes are an integral part of these consolidated financial

statements.

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

For the Nine Months Ended

December 31,

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

2002 2001

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

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss $(121,585) $(146,505)

Adjustments to reconcile net loss to net cash provided by

(used in) operating activities

Depreciation and amortization 98,838 65,483

Provision for doubtful accounts 61,107 27,000

Inventory reserve (284,453) -

Changes in certain assets and liabilities (Increase) decrease in:

Due from related parties 64,257 ( 79,650)

Accounts receivable (342,478) (311,963)

Inventory 542,326 207,264

Prepaid expenses and other current assets 33,504 ( 50,385)

Other assets 4,819 26,713

Increase (decrease) in

Due to factor (159,747) -

Accounts payable and accrued expenses 566,053 (274,888)

Customer deposits (221,186) -

Other - ( 10,057)

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

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 241,455 (546,988)

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

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property and equipment ( 10,551) ( 16,925)

Purchase of film masters and artwork (123,104) (153,355)

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

NET CASH USED IN INVESTING ACTIVITIES (133,655) (170,280)

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

CASH FLOWS FROM FINANCING ACTIVITIES

Increase (decrease) in bank overdraft - 224,681

Net proceeds of financing agreement 138,164

Proceeds (payments) of notes payable ( 28,350) ( 82,972)

Proceeds (payments) of notes payable (related party) (260,440) ( 41,963)

Proceeds from convertible debentures - 28,500

Payments on capital leases - ( 17,600)

Proceeds from the exercise of options 62,500 214,000

Proceeds from issuance of Series B

Preferred Stock - 478,985

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

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ( 88,126) 803,631

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

</TABLE>

The accompanying notes are an integral part of these consolidated financial

statements.

<TABLE>

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(UNAUDITED)

For the Nine Months Ended

December 31,

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

2002 2001

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

NET INCREASE IN CASH AND CASH EQUIVALENTS 19,674 86,363

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 15,642 29,900

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

CASH AND CASH EQUIVALENTS - END OF PERIOD $ 35,316 116,263

=========== ==========

SUPPLEMENTAL INFORMATION

CASH PAID FOR:

Interest expense $ 136,024 $ 153,770

=========== ==========

Income taxes $ - $ -

=========== ==========

</TABLE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

For the nine months ended December 31, 2002:

On May 6, 2002, one share of the Company's Series B Preferred Stock was

converted into 1,351,351 shares of the Company's common stock at the conversion

price of $0.0074.

On May 23, 2002, two shares of the Company's Series B Preferred Stock were

converted into 3,174,603 of the Company's common stock at the conversion price

of $0.0063.

On September 13, 2002, the Company issued 2,500,000 shares of its common stock

at an exercise price of $0.005 upon the exercise of options in settlement of

$12,500 in accounts payable.

The accompanying notes are an integral part of these consolidated financial

statements.

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

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) 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.

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, 2003. 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, 2002.

Nature of Business

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

The Company is in the business of distributing and selling videocassettes,

general merchandise, patented toys, furniture, and Cine-Chrome gift cards,

through normal distribution channels throughout the United States and

through a web site. As of March 31, 2002 and 2001, 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 PROGRAMS AND OTHER LICENSED PRODUCTS

The Company distributes and sells videocassette and DVD 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.

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

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 general merchandise products including toy products, train

cases, and other miscellaneous products to mass merchandisers in the United

States. The Company offers the toy products for limited sale periods and as

demand for products change, the Company switches to newer and more popular

products.

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.

Reclassification

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

As of December 31, 2002, certain prior year amounts have been reclassified

to conform with current presentation.

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.

Shipping and handling charges are included in net sales, with the related

costs included in selling, general and administrative expenses.

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.

Inventory

---------

Inventory is stated at the lower of cost or market utilizing the first-in,

first-out method. Inventory consists primarily of videocassettes, general

merchandise, patented toys, and Cine-Chrome gift cards.

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Bank Overdraft

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

The Company maintains overdraft positions at certain banks. Such overdraft

positions are included in current liabilities.

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.

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.

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.

Net Loss Per Share

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

SFAS No. 128, "Earnings Per Share," requires presentation of basic loss per

share ("Basic LPS") and diluted loss per share ("Diluted LPS"). The

computation of basic loss per share is computed by dividing loss available

to common stockholders by the weighted average number of outstanding common

shares during the period. Diluted loss per share gives effect to all

dilutive potential common shares outstanding during the period. The

computation of diluted LPS does not assume conversion, exercise or

contingent exercise of securities that would have an anti-dilutive effect

on losses. As of December 31, 2002, the weighted average common shares

outstanding would have been increased by 117,500,000 shares for the nine,

months if the issued and exercisable stock options would have been

dilutive.

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Segment Disclosure

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

SFAS No. 131, "Disclosure about Segments of an Enterprise and Related

Information," was issued, which changes the way public companies report

information about segments. SFAS No. 131, which is based on the selected

segment information, requires quarterly and entity-wide disclosures about

products and services, major customers, and the material countries in which

the entity holds assets and reports revenues.

Comprehensive Loss

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

Comprehensive loss consists of net loss only.

Recent Accounting Pronouncements

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

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset

Retirement Obligation." SFAS No. 143 is effective for fiscal years

beginning after June 15, 2002, and will require companies to record a

liability for asset retirement obligations in the period in which they are

incurred, which typically could be upon completion or shortly thereafter.

The FASB decided to limit the scope to legal obligations and the liability

will be recorded at fair value. The effect of adoption of this standard on

the Company's results of operations and financial positions is being

evaluated.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the

Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for

fiscal years beginning after December 15, 2001. It provides a single

accounting model for long-lived assets to be disposed of and replaces SFAS

No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived

Assets to Be Disposed Of." There were no effects from the adoption of this

standard on the Company's results of operations and financial positions.

In April 2002, the FASB issued Statement No. 145, "Rescission of FASB

Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and

Technical Corrections." This Statement rescinds FASB Statement No. 4,

"Reporting Gains and Losses from Extinguishment of Debt", and an amendment

of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to

Satisfy Sinking-Fund Requirements" and FASB Statement No. 44, "Accounting

for Intangible Assets of Motor Carriers". This Statement amends FASB

Statement No. 13, "Accounting for Leases", to eliminate an inconsistency

between the required accounting for sale-leaseback transactions and the

required accounting for certain lease modifications that have economic

effects that are similar to sale-leaseback transactions. The Company does

not expect the adoption to have a material impact to the Company's

financial position or results of operations.

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31 , 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (continued)

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

In June 2002, the FASB issued Statement No. 146, "Accounting for Costs

Associated with Exit or Disposal Activities." This Statement addresses

financial accounting and reporting for costs associated with exit or

disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue

No. 94-3, "Liability Recognition for Certain Employee Termination Benefits

and Other Costs to Exit an Activity (including Certain Costs Incurred in a

Restructuring)." The provisions of this Statement are effective for exit or

disposal activities that are initiated after December 31, 2002, with early

application encouraged. The Company does not expect the adoption to have a

material impact to the Company's financial position or results of

operations.

In October 2002, the FASB issued Statement No. 147, "Acquisitions of

Certain Financial Institutions--an amendment of FASB Statements No. 72 and

144 and FASB Interpretation No. 9", which removes acquisitions of financial

institutions from the scope of both Statement 72 and Interpretation 9 and

requires that those transactions be accounted for in accordance with

Statements No. 141, Business Combinations, and No. 142, Goodwill and Other

Intangible Assets. In addition, this Statement amends SFAS No. 144,

Accounting for the Impairment or Disposal of Long-Lived Assets, to include

in its scope long-term customer-relationship intangible assets of financial

institutions such as depositor- and borrower-relationship intangible assets

and credit cardholder intangible assets. The requirements relating to

acquisitions of financial institutions is effective for acquisitions for

which the date of acquisition is on or after October 1, 2002. The

provisions related to accounting for the impairment or disposal of certain

long-term customer-relationship intangible assets are effective on October

1, 2002. The adoption of this Statement did not have a material impact to

the Company's financial position or results of operations as the Company

has not engaged in either of these activities.

In December 2002, the FASB issued Statement No. 148, "Accounting for

Stock-Based Compensation--Transition and Disclosure", which amends FASB

Statement 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. In

addition, this Statement amends the disclosure requirements of Statement

123 to require prominent disclosures in both annual and interim financial

statements about the method of accounting for stock-based employee

compensation and the effect of the method used on reported results. The

transition guidance and annual disclosure provisions of Statement 148 are

effective for fiscal years ending after December 15, 2002, with earlier

application permitted in certain circumstances. The interim disclosure

provisions are effective for financial reports containing financial

statements for interim periods beginning after December 15, 2002. The

adoption of this statement did not have a material impact on the Company's

financial position or results of operations as the Company has not elected

to change to the fair value based method of accounting for stock-based

employee compensation.

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (continued)

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

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of

Variable Interest Entities." Interpretation 46 changes the criteria by

which one company includes another entity in its consolidated financial

statements. Previously, the criteria were based on control through voting

interest. Interpretation 46 requires a variable interest entity to be

consolidated by a company if that company is subject to a majority of the

risk of loss from the variable interest entity's activities or entitled to

receive a majority of the entity's residual returns or both. A company that

consolidates a variable interest entity is called the primary beneficiary

of that entity. The consolidation requirements of Interpretation 46 apply

immediately to variable interest entities created after January 31, 2003.

The consolidation requirements apply to older entities in the first fiscal

year or interim period beginning after June 15, 2003. Certain of the

disclosure requirements apply in all financial statements issued after

January 31, 2003, regardless of when the variable interest entity was

established. The Company does not expect the adoption to have a material

impact to the Company's financial position or results of operations.

NOTE 2 - GOING CONCERN

As reflected in the accompanying consolidated financial statements, the

Company 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.

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

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 our 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 our new general

merchandise line of products.

-- Utilize our 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 our 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.

-- Internet e-Commerce and keep our pricing competitive.

The Company believes it has adequate cash resources to sustain its

operations through the third quarter of fiscal 2003, when it expects to

generate a positive cash flow. The Company is continuing to negotiate with

several reliable investors to provide the Company with debt and equity

financing for working capital purposes. The principal objective of the

Company is to implement the above strategies during fiscal 2003. 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.

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

NOTE 3 - INVENTORY

Inventory consisted of the following as of:

December 31,

2002

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

Raw materials $ 408,290

Finished goods 874,383

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

$ 1,282,673

Less: valuation allowance (575,558)

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

Inventory, net $ 707,115

==============

Allowance

---------

An allowance has been established for inventory totaling $575,558. 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

legal settlements; and

(b) inventory, which has passed its peak selling season.

NOTE 4 - 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:

December 31,

2002

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

a) Loan due from - Officer $ 161,679

b) GJ Products 42,500

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

$ 204,179

============

Due to related parties - notes payable:

December 31,

2002

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

a) Note payable - ATRE $ 306,418

b) Convertible note payable - Jeffrey Schillen 100,000

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

$ 406,418

============

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

NOTE 5 - COMMITMENTS AND CONTIGENCIES

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 December 31, 2002 and 2001,

royalty expense was $13,236 and $14,751, respectively, pursuant to these

agreements. For the nine months ended December 31, 2002 and 2001, royalty

expense was $52,854 and $25,763 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.

Litigation

----------

In June of 2001, the Company was named as a defendant by one of our

suppliers who filed bankruptcy under Chapter 7. The bankruptcy court

brought legal action against the Company to recover $100,000 the Company

borrowed from the supplier in April of 1999, plus applicable interest. In

accordance with the loan, the Company made four separate payments to the

supplier during April and May 1999 totaling $101,166 in principal and

interest. As of December 31, 2001, the Company reflected one check in the

amount of $25,116 still outstanding. On March 6, 2001, the Company entered

into a stipulation for settlement and dismissal whereby it agreed to pay

$2,500 within ten (10) days after entry of an order approving the

settlement. The stipulation for settlement and dismissal was approved by

the court and a settlement payment of $2,500 was made on May 8, 2002 and on

May 15, 2002, the adversary action was dismissed.

On November 4, 2002, the Company received notification of a lawsuit filed

against the Company in the Superior Court of New Jersey to recover $62,524

including reimbursement of expenses incurred by a law firm that was engaged

by the Company in connection with a merger that the Company completed in

April 1997. Previously, on November 12, 1999, the Company entered into a

settlement agreement with the plaintiff to settle the outstanding balance

of $92,524 for $60,000 payable in three installment payments of $20,000. In

1999 and 2000, we made payments totaling $30,000. On January 15, 2003, the

Company entered into an Agreement of Compromise, Settlement and Mutual

Release ("Agreement") with the plaintiff, whereby the Company agreed to

settle the entire amount owed of $62,524 by making one payment of $15,000

by no later than January 17, 2003. The Company made the $15,000 payment on

January 16, 2003 and in consideration of the payment made by the Company,

and as part of the Agreement, the plaintiff agreed to execute a Stipulation

of Dismissal of the Court Action with the appropriate court.

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

NOTE 6 - STOCKHOLDERS' DEFICIENCY

Common Stock

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

As of December 31, 2002, the aggregate number of shares of common stock

that the Company has authority to issue is 600,000,000 shares with no par

value. As of December 31, 2002 and March 31, 2002, 477,160,096 and

457,634,142 shares were issued and outstanding.

For the nine months ended December 31, 2002, the Company had the following

significant issuance of its common stock:

On May 5, 2002, the Company issued 7,500,000 shares of common stock

from the exercise of 7,500,000 options at an exercise price of $0.005.

Net proceeds amounted to $37,500.

On May 6, 2002, one share of the Company's Series B Preferred Stock

was converted into 1,351,371 shares of the Company's common stock at

the conversion price of $0.0074.

Common Stock

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

On May 23, 2002, two shares of the Company's Series B Preferred Stock were

converted into 3,174,603 of the Company's common stock at the conversion

price of $0.0063.

On July 18, 2002, the Company issued 3,000,000 shares of common stock from

the exercise of 3,000,000 options at an exercise price of $0.005. Net

proceeds amounted to $15,000.

On September 13, 2002, the Company issued 4,500,000 shares of common stock

from the exercise of 4,500,000 options at an exercise price of $0.005. The

Company received $10,000 in cash for the exercise of 2,000,000 of these

options and the Company issued 2,500,000 shares of its common stock upon

the exercise of the remaining options in settlement of $12,500 in accounts

payable.

NOTE 7 - SEGMENT INFORMATION

The following financial information is reported on the basis that is used

internally for evaluating segment performance and deciding how to allocate

resources. During three months period ended December 31, 2002 and 2001, and

the nine months period ended December 31, 2002 and 2001, the company

operated in two principal industries:

a) Video programs and other licensed products

b) General merchandise

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

NOTE 7 - SEGMENT INFORMATION, Continued

<TABLE>

Three Months Ended Nine Months Ended

December 31, December 31,

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

2002 2001 2002 2001

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

Revenues:

Video programs and other

licensed products $ 1,199,455 $ 1,126,493 $ 2,843,018 $ 3,160,255

Merchandise 778 10,235 54,429 19,092

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

$ 1,200,233 $ 1,136,728 $ 2,897,447 $ 3,179,347

=========== =========== =========== ===========

Cost Of Goods Sold:

Video programs and other

licensed products $ 642,027 $ 674,382 $ 1,769,248 $ 1,874,199

Merchandise 544 40,088 43,524 101,795

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

$ 642,571 $ 714,470 $ 1,812,772 $ 1,975,994

=========== =========== =========== ===========

Profit (Loss) before taxes:

Video programs and other

licensed products $ 84,605 $ ( 4,826) $ ( 155,496) $ ( 10,321)

Merchandise 54,516 ( 37,454) 33,911 (136,184)

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

$ 139,121 $ ( 42,280) $ ( 121,585) $ (146,505)

=========== =========== =========== ===========

Depreciation and amortization:

Video programs and other

licensed products $ 33,009 $ 37,939 $ 98,838 $ 114,203

Merchandise - - - 131

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

$ 33,009 $ 37,939 $ 98,838 $ 114,334

=========== =========== =========== ===========

Segment assets:

Video programs and other

licensed products $ 3,644,665 $ 4,137,894 $ 3,644,665 $ 4,137,894

Merchandise (1,364,961) (1,666,431) (1,364,961) (1,666,431)

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

$ 2,279,704 $ 2,471,463 $ 2,279,704 $ 2,471,463

=========== =========== =========== ===========

Expenditure for segment assets:

Video programs and

other licensed products $ 59,742 $ 40,887 $ 123,104 $ 153,355

Merchandise - - - -

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

$ 59,742 $ 40,887 $ 123,104 $ 153,355

=========== =========== =========== ===========

</TABLE>

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

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, 2002 included in its Annual Report on Form 10KSB and its Form

10QSB for period ended June 30, 2002 and September 30, 2002. 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.

NINE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH THE NINE MONTHS ENDED DECEMBER

31, 2001:

Results of Operations

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

The Company's net loss for the nine months ended December 31, 2002 was

approximately $122,000 as compared to a net loss of approximately $147,000 for

the same period last year. The primary reason for the net loss at December 31,

2002, was the Company's operating loss of approximately $45,000 and interest

expense of approximately $134,000, offset by other income of approximately

$57,000.

The Company's operating loss for the nine months ended December 31, 2002 was

approximately $45,000 as compared to an operating profit of approximately

$53,000 for the same period last year. The decrease in the Company's operating

profit of approximately $98,000 when compared to an operating profit of

approximately $53,000 for the same period a year earlier arose primarily from

decreased operating expenses of approximately $21,000 offset by a decrease in

gross profit of approximately $119,000.

The Company's sales for the nine months ended December 31, 2002 and 2001, were

approximately $2,897,000 and $3,179,000 respectively. The Company's sales

decreased, by approximately $282,000 from the same period a year earlier with

decreases in DVD product sales of approximately $147,000 and videocassette

product of approximately $224,000, offset by increases in general merchandise

products of approximately $89,000. The lower DVD product sales when compared to

the same period a year earlier was primarily attributable to unit sales price

erosion. The decrease in videocassettes sales was primarily the result of

decreased orders placed by our customers and selling our older videocassette

inventory at reduced prices. The higher sales in our general merchandise product

line were primarily caused by the increased sales of our old toy inventory at

liquidation prices and the sale of approximately $46,000 of our new train case

product. We expect our sales to improve in fiscal year ending March 31, 2003

resulting from sales of new DVD products and from the expansion in our general

merchandise product line. Sales of the Company's products are generally seasonal

resulting in increased sales starting in the third quarter of the fiscal year.

Cost of sales for the nine months ended December, 2002 and 2001 were

approximately $1,813,000 and $1,976,000 or 63% and 62% of sales, respectively.

The decrease in cost of goods of approximately $163,000 was primarily the result

of lower sales volume realized from our DVD and videocassette products. The

decrease in the cost of sales as a percentage to sales of approximately 1% when

compared to the same period a year earlier, was primarily the result of unit

sales price erosion of our DVD product.

Gross profit for the nine months ended December 31, 2002 and 2001 was

approximately $1,085,000 and $1,203,000, or 37% and 38% of sales, respectively.

The lower gross margin of approximately $118,000 was primarily the result of

decreased sales volume. The reduction of the gross profit percentage when

compared to sales of 1%, was primarily the result of sales price erosion of our

DVD product.

Selling, General and Administrative expenses for the nine months ended December

31, 2002 and 2001 were approximately $1,129,000 and $1,150,000, respectively.

The, decrease of approximately $21,000 was the result of decreases in general

administrative expenses of approximately $31,000 offset by increases in selling

expense of approximately $10,000.

General Administrative expenses for the nine months ended December 31, 2002 and

2001 were approximately $694,000 and $725,000, respectively. The decrease in

general administrative expenses of approximately $31,000 was primarily the

result of lower salaries, legal expenses, and accounting expenses, offset by

higher consulting expense, and dividend expense related to our Series A and B

preferred stock.

Selling expenses for the nine months ended December 31, 2002 and 2001 were

approximately $435,000 and $425,000, respectively. The increase in selling

expenses of approximately $10,000 was attributable mainly to higher expense

levels in salaries and royalties expense, offset by lower commission expense and

advertising expense.

Interest expense for the nine months ended December 31, 2002 and 2001 was

approximately $134,000 and $250,000 respectively. The decrease in interest

expense of approximately $116,000 was the result of lower levels of borrowings.

As of December 31, 2002, the outstanding debt of the Company was approximately

$724,000 of which, approximately $38,000 is classified as current.

THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH THE THREE MONTHS ENDED

DECEMBER 31, 2001:

Results of Operations

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

The Company's net profit for the three months ended December 31, 2002 was

approximately $139,000 as compared to a net loss of approximately $42,000 for

the same period last year. The primary reason for the net profit at December 31,

2002, was the Company's operating profit of approximately $128,000 and other

income and expense of approximately $11,000.

The Company's operating profit for the three months ended December 31, 2002 was

approximately $128,000 as compared to an operating loss of approximately $8,000

for the same period last year. The increase in the Company's operating profit of

approximately $136,000 when compared to an operating loss for the same period a

year earlier of $8,000 arose from the increase in gross profit of approximately

$136,000.

The Company's sales for the three months ended December 31, 2002 and 2001, were

approximately $1,200,000 and $1,137,000 respectively. The Company's sales

increased by approximately $63,000 from the same period a year earlier with

decreased DVD product sales of approximately $79,000 and an increase in

videocassette product of approximately $161,000, offset by decreases in general

merchandise products of approximately $19,000. The lower DVD product sales when

compared to the same period a year earlier was primarily attributable to unit

sales price erosion. The increase in videocassettes sales was primarily the

result of increased orders placed by our customers. The Company did not have

significant sales for general merchandise products for the three months ended

December 31, 2002.

Cost of sales for the three months ended December 31, 2002 and 2001 were

approximately $643,000 and $715,000 or 54% and 63% of sales, respectively. The

decrease in cost of goods of approximately $72,000 was mainly the result of

higher sales volume realized from our videocassette products having lower unit

costs. The decrease in the cost of sales as a percentage to sales of

approximately 9% when compared to the same period a year earlier, was primarily

the result of selling videocassette product having lower unit costs.

Gross profit for the three months ended December 31, 2002 and 2001 was

approximately $558,000 and $422,000, or 46% and 37% of sales, respectively. The

higher gross margin of approximately $136,000 was primarily the result of

increase sales of higher margin videocassette products resulting in an increase

of 9% as a percentage of sales.

Selling, general and administrative expenses for the three months ended

December 31, 2002 and 2001 were approximately $430,000 for each of the period,

respectively. Increases in general administrative expenses of approximately

$6,000 were offset by decreases in selling expense in the same amount.

General administrative expenses for the three months ended December 31, 2002 and

2001 were approximately $254,000 and $248,000, respectively. The increase in

general administrative expenses of approximately $6,000 was primarily the

result of higher levels of consulting expense, bad debt expense and dividend

expense related to our Series A and B preferred stock partially offset by lower

salaries and legal and accounting expenses.

Selling expenses for the three months ended December 31, 2002 and 2001 were

approximately $175,000 and $182,000, respectively. The decrease in selling

expenses of approximately $6,000 was attributable mainly to lower expense

levels in commission expense, advertising expense and outgoing freight costs,

partially offset by higher salaries and royalty expenses.

Interest expense for the three months ended December 31, 2002 and 2001 was

approximately $46,000 and $73,000 respectively. The decrease in interest expense

of approximately $8,000 was primarily the result of lower levels of borrowings.

The Company's auditors issued a going concern report for the year ended March

31, 2002. 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

On December 31, 2002 the Company had assets of $2,279,704 compared to $2,304,295

on March 31, 2002. The Company had a total stockholder's deficiency of $509,392

on December 31, 2002, compared to a deficiency of $462,807 on March 31, 2002, an

increase of $46,585. The increase in stockholder's deficiency was the result of

recording the net loss of $121,585 for the nine months ended December 31, 2002,

offset by the sale of the Company's common stock upon exercise of stock options

for $75,000.

As of December 31, 2002 the Company's working capital deficit increased by

approximately $104,000 from a working capital deficit of approximately

$1,058,000 at March 31, 2002, to a working capital deficit of approximately,

$1,162,000 at December 31, 2002. The increase in the working capital deficit was

the attributable primarily to increases in accounts payable and accrued

expenses of approximately $637,000 and decreases in notes payable and customer

deposit totaling approximately $482,000, which were offset by increases in

accounts receivable of approximately $281,000 and decreases in inventory, due

from related party and other miscellaneous areas totaling approximately

$332,000.

Operations

----------

Cash flows provided by operating activities was approximately $241,000 during

the nine months period ended December 31, 2002 compared to cash flows used for

operating activities of approximately $547,000 during the nine months period

ended December 31, 2001. Cash provided by operating activities was primarily

attributable to decreases in inventory, accounts payable and the Company's net

loss offset by decreases in inventory reserve, accounts receivable 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 nine months ended December 31, 2002 and 2001, investments in masters and

artwork were approximately $123,000 and $153,000, respectively. Management

continues to seek to acquire new titles to enhance its product lines.

Financing

-----------

Cash flows used for financing activities was approximately $64,000 during the

nine months period ended December 31, 2002 compared to cash flows provided by

financing activities of approximately $804,000 during the six months period

ended December 31, 2001.

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.

Forward Looking Statements

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

Forward looking statements are within the meaning of Section 27A of the

Securities Act of 1933, as amended, and Section 21E of the Securities Exchange

Act of 1934, as amended. Stockholders are cautioned that all forward-looking

statements involve risks and uncertainty, including without limitation, the

ability of us to implement our new plan to attain our primary goals as discussed

above under "Operations". Although we believe the assumptions underlying the

forward-looking statements contained herein are reasonable, any of the

assumptions could be inaccurate, and therefore, there can be no assurance that

the forward-looking statements contained in the report will prove to be

accurate.

CRITICAL ACCOUNTING POLICY AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of

Operations discusses the Company's consolidated financial statements, which have

been prepared in accordance with accounting principles generally accepted in the

United States of America. The preparation of these financial statements requires

management to make estimates and assumptions that affect the reported amounts of

assets and liabilities at the date of the financial statements and the reported

amounts of revenues and expenses during the reporting period. On an on-going

basis, management evaluates its estimates and judgments, including those related

to revenue recognition, accrued expenses, financing operations, and

contingencies and litigation. Management bases its estimates and judgments on

historical experience and on various other factors that are believed to be

reasonable under the circumstances, the results of which form the basis for

making judgments about the carrying value of assets and liabilities that are not

readily apparent from other sources. Actual results may differ from these

estimates under different assumptions or conditions. The most significant

accounting estimates inherent in the preparation of the Company's financial

statements include estimates as to the appropriate carrying value of certain

assets and liabilities which are not readily apparent from other sources,

primarily allowance for doubtful accounts receivables, accruals for other costs,

and the classification of net operating loss and tax credit carry forwards

between current and long-term assets. These accounting policies are described at

relevant sections in this discussion and analysis and in the notes to the

consolidated financial statements included in our Annual Report on Form 10-KSB

for the fiscal year ended March 31, 2002.

Item 3: Controls and Procedures

Our Co-Chief Executive Officer and Chief Financial Officer (the "Certifying

Officers") are responsible for establishing and maintaining disclosure controls

and procedures for the Company.

The Certifying Officers have designed such disclosure controls and procedures to

ensure that material information is made known to them, particularly during the

period in which this report was prepared.

The Certifying Officers have evaluated the effectiveness of the Company's

disclosure controls and procedures within 90 days of the date of this report and

believe that the Company's disclosure controls and procedures are effective

based on the required evaluation. There have been no significant changes in

internal controls or in other factors that could significantly affect internal

controls subsequent to the date of their evaluation, including any corrective

actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

In June of 2001, we were named as a defendant by one of our suppliers who filed

bankruptcy under Chapter 7. The bankruptcy court brought legal action against us

to recover $100,000 we borrowed from the supplier in April of 1999, plus

applicable interest. In accordance with the loan, we made four separate payments

to the supplier during April and May 1999 totaling $101,166 in principal and

interest. As of December 31, 2001, we reflected one check in the amount of

$25,116 still outstanding. On March 6, 2001, we entered into a stipulation for

settlement and dismissal whereby we agreed to pay $2,500 within ten (10) days

after entry of an order approving the settlement. The stipulation for settlement

and dismissal was approved by the court and a settlement payment of $2,500 was

made on May 8, 2002 and on May 15, 2002, the adversary action was dismissed.

On November 4, 2002, we received notification of a lawsuit filed against us in

the Superior Court of New Jersey to recover $62,524 including reimbursement of

expenses incurred by a law firm that was engaged by us in connection with a

merger that we completed in April 1997. Previously, on November 12, 1999, we

entered into a settlement agreement with the plaintiff to settle the outstanding

balance of $92,524 for $60,000 payable in three installment payments of $20,000.

In 1999 and 2000, we made payments totaling $30,000. On January 15, 2003, the

Company entered into an Agreement of Compromise, Settlement and Mutual Release

("Agreement") with the plaintiff, whereby the Company agreed to settle the

entire amount owed of $62,524 by making one payment of $15,000 by no later than

January 17, 2003. The Company made the $15,000 payment on January 16, 2003 and

in consideration of the payment made by the Company, and as part of the

Agreement, the plaintiff agreed to execute a Stipulation of Dismissal of the

Court Action with the appropriate court.

Item 2. Changes in Securities.

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

On August 8, 2002, the Registrant, terminated its client-auditor relationship

with the Registrant's independent public accountants, Merdinger, Fruchter, Rosen

& Corso, P.C.(MFRC). On August 8, 2002, the Registrant's Board of Director's

approved the engagement of Stonefield Josephson, Inc. to serve as the Company's

independent public accountants and to be the principal accountants to conduct

the audit of the Company's financial statements for the fiscal year ending March

31, 2003, replacing the firm of Merdinger, Fruchter, Rosen & Corso, P.C. who had

been engaged to audit the Company's financial statements for the fiscal years

ended March 31, 1999, 2000, 2001, and 2002. MFRC's report on the Registrant's

financial statements during the two most recent fiscal years contained no

adverse or disclaimer of opinion, however it did contain a going concern

explanatory paragraph. Management of the Company knows of no past disagreements

with the former accountants on any matter of accounting principles or practices,

financial statement disclosure, or auditing scope, or procedure, which

disagreements, if not resolved to the satisfaction of MFRC, would have caused it

to make a reference to the subject matter of the disagreement in connection with

its reports.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits

99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.

Section 1350 as Adopted Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section

1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

None.

SIGNATURES

In accordance with Section 13 or 15(A) 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: February 19, 2002 By: /s/ Jeffrey I. Schillen

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

Jeffrey I. Schillen

Executive Vice President and Co-Chief

Executive Officer

Dated: February 19, 2002 By: /s/ Fred U. Odaka

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

Fred U. Odaka

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

CERTIFICATION

I, Jeffery I. Schillen, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Diamond Entertainment

Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue

statement of a material fact or omit to state a material fact necessary to make

the statements made, in light of the circumstances under which such statements

were made, not misleading with respect to the period covered by this quarterly

report;

3. Based on my knowledge, the financial statements, and other financial

information included in this quarterly report, fairly present in all material

respects the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for

establishing and maintaining disclosure controls and procedures (as defined in

Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material

information relating to the registrant, including its consolidated subsidiaries,

is made known to us by others within those entities, particularly during the

period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and

procedures as of a date within 90 days prior to the filing date of this

quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of

the disclosure controls and procedures based on our evaluation as of the

Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our

most recent evaluation, to the registrant's auditors and the audit committee of

registrant's board of directors (or persons performing the equivalent

functions):

a) all significant deficiencies in the design or operation of internal controls

which could adversely affect the registrant's ability to record, process,

summarize and report financial data and have identified for the registrant's

auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other

employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this

quarterly report whether or not there were significant changes in internal

controls or in other factors that could significantly affect internal controls

subsequent to the date of our most recent evaluation, including any corrective

actions with regard to significant deficiencies and material weaknesses.

Date: February 19, 2002

By: /s/ Jeffrey I. Schillen

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

Jeffrey I. Schillen

Title: Executive Vice President and

Co-Chief Executive Officer

CERTIFICATION

I, Fred U. Odaka, certify that: