Rx for Africa 10QSB/A 2007 Q2 Quarterly report (small business) (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB /A

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

o 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 incorporation or organization)	(I.R.S. Employer Identification No.)

462 Seventh Avenue, Suite 1200, New York, NY 10018

(Address of Principal Executive Offices)

(646) 461-3082

(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 o

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, 2006, 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 o NO x

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EXPLANATORY NOTE

We are filing this amendment to Form 10-QSB for the period ended September 30, 2006, filed with the Securities and Exchange Commission on November 21, 2006, to correct the following error:

Stock options to purchase an aggregate 18,833,334 shares of common stock of the Company issued to Officers and Directors during the three months ended June 30, 2005 became vested during the six months ended September 30, 2006. These options were valued at $130,200 and this amount was charged to operations in this amended report. The report as originally filed disclosed 57,500,000 options vesting during the quarter, with an expense of $45,521. The Company’s statement of operations is restated by the difference of $84,679. We also changed the related disclosers regarding the vesting of these options as appropriate. In additional, amortization of the discount to a financing agreement in the amount of $48,423 was credited to additional paid-in capital in the report as originally filed; this amount should be credited to the discount on the financing agreement. We have made that correction in this amended report. We also corrected certain other minor errors in the Form 10-QSB as originally filed.

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

INDEX

Part I. Financial Information

Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2006 (unaudited) (restated) and March 31, 2006	3
Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2006 (unaudited) (restated) and 2005 (Unaudited)	5
Condensed Consolidated Statements of Cash Flows for six months ended September 30, 2006 (unaudited) (restated) and 2005 (Unaudited)	6
Notes to Condensed Consolidated Financial Statements (Unaudited)	8

Item 2: Management's Discussion and Analysis or Plan of Operations	28
Item 3: Controls and Procedures	32

Part II. Other Information

Item 2: Unregistered sales of Equity Securities and Use of Proceeds	32
Item 6: Exhibits	33

Signatures	34

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2006 (Restated)		March 31, 2006
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	304,696	$	20,578
Accounts receivable, net of allowance for doubtful accounts		257,298		154,139
Inventory		889,066		741,923
Due from related parties		8,616		4,845
Prepaid expenses and other current assets		70,131		58,317
Total current assets		1,529,807		979,802

PROPERTY AND EQUIPMENT, less accumulated depreciation		138,731		163,421

FILM MASTERS AND ARTWORK, less accumulated amortization		265,449		409,540

OTHER ASSETS		28,483		28,483

TOTAL ASSETS	$	1,962,470	$	1,581,246

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, 2006 (Restated)			March 31, 2006
	(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft	$	266,939		$	34,781
Accounts payable		924,752			991,996
Related Party - deferred compensation		1,199,130			997,051
Other accrued expenses		373,778			351,155
Provision for estimated sales returns		162,727			152,000
Due to factor		-			32,929
Financing agreement payable		104,729			-
Notes payable - current portion		6,946			3,789
Due to related parties - notes payable		748,074			650,874
Customer deposits		16,300			16,300
Total current liabilities		3,803,375			3,230,875

Note payable, less current portion		1,263			6,315
TOTAL LIABILITIES		3,804,638			3,237,190

STOCKHOLDERS' DEFICIENCY
Convertible preferred stock, no par value; 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	)
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; 800,000,000 shares authorized; 618,262,605 and 597,409,872 issued and outstanding 18,807,939		18,807,939			18,807,939
Additional paid in capital		323,894			-
Deferred compensation - Stock option		-			(5,060	)
Accumulated deficit		(21,773,191	)		(21,258,013	)

TOTAL STOCKHOLDERS' DEFICIENCY		(1,842,168	)		( 1,655,944	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY	$	1,962,470		$	1,581,246

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

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2006 (Restated)			2005			2006 (Restated)			2005
SALES - NET	$	451,350		$	695,997		$	846,045		$	1,658,648

COST OF GOODS SOLD		235,094			411,668			587,424			1,173,741

GROSS MARGIN		216,256			284,329			258,621			484,907

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		294,978			447,604			718,989			952,547

LOSS FROM OPERATIONS		(78,722	)		(163,275	)		(460,368	)		(467,640	)
OTHER INCOME (EXPENSE)
Interest expense		(15,200	)		(11,443	)		(45,279	)		(23,336	)
Interest income		-			53						541
Other income (expense)		-			18,159			(6,331	)		32,802

Total other income (expense)		(15,200	)		6,769			(51,610	)		10,007

NET LOSS BEFORE PROVISION FOR
INCOME TAXES		(93,922	)		(156,506	)		(511,978	)		(457,633	)

PROVISION FOR INCOME TAXES		-			-			(3,200	)		-

NET LOSS	$	(93,922	)	$	(156,506	)	$	(515,178	)	$	(457,633	)

NET 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			618,262,605			618,262,605			613,462,201

Diluted		618,262,605			618,262,605			618,262,605			613,462,201

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)

(Restated)

	For the Six Months Ended
	September 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(515,178	)	$	(457,633	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization:		178,096			193,041
Amortization of deferred compensation		5,060			(6,224	)
Stock options vested and expensed		130,200
Provision for doubtful accounts		( 7,911	)		( 2,186	)
Inventory reserve		(332,165	)		(176,659	)

Changes in operating assets and liabilities:
Due from related party		( 3,771	)		-
Accounts receivable		( 95,248	)		( 65,655	)
Inventory		185,022			(778,508	)
Prepaid expenses and other current assets		( 11,814	)		( 21,523	)
Accounts payables		( 67,175	)		855,432
Related party deferred compensation		(202,079	)		( 12,884	)
Other accrued expenses		( 22,623	)		(217,694	)
Provision for estimated sales returns		( 10,727	)		(286,785	)
Deferred revenues		-			-
Customer deposits		-			451,664
NET CASH USED IN OPERATING ACTIVITIES		(251,032	)		(525,614	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		-			( 1,400	)
Purchase of film masters and artwork		( 9,315	)		(166,387	)
Other assets		-			( 18,359	)
NET CASH USED IN INVESTING ACTIVITIES		( 9,315	)		( 186,146	)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft		232,158			7,199
Advance from factor		55,000			365,000
Payments to factor		( 87,998	)		(476,523	)
Proceeds from financing agreement		250,000			-
Proceeds (payments) of notes payable		( 1,895	)		( 3,787	)
Proceeds (payments) of notes payable (related party)		97,200			153,499
Proceeds from the sales of common stock		-			238,177
NET CASH PROVIDED BY FINANCING ACTIVITIES	$	544,464		$	269,167

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)

(Restated)

	For the Six Months Ended
	September 30,
	2006		2005
NET INCREASE IN CASH AND CASH EQUIVALENTS	$	284,118	$	(442,593	)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		20,578		464,425

CASH AND CASH EQUIVALENTS - END OF PERIOD	$	304,696	$	21,832

SUPPLEMENTAL INFORMATION
CASH PAID FOR:
Interest expense	$	30,084	$	15,252
Income taxes	$	-	$	-

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Issuance of Common Stock for interest and liquidated damages owed to Series B preferred shareholders	$	-	$	231,177
Stock Option for non-employee	$	-	$	7,000
Officers options vested	$	130,200	$	-
Discount on financing agreement	$	193,694	$	-

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

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

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:

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

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

Galaxy Net ("Galaxy"), incorporated under the laws of the state of Delaware on July 15, 1998. Galaxy Net was dissolved on April 18, 2006

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, 2007. 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, 2006 and 2005.

Nature of Business

The Company is in the business of distributing and selling videocassette/DVD programs through normal distribution channels throughout the United States.

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, 2006

(Restated)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Nature of Business, (Continued)

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.”

Consignment sales are recognized at the time the consignee sells and ships consignment goods to end customers.

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, 2006, with financial institutions subject to a credit risk beyond the insured amount.

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.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Factored Accounts Receivable

The Company was 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.

On May 2, 2005, the Company terminated its factoring agreement with the factoring company and all obligations owed under the factoring agreement were satisfied and paid in full as of June 30, 2006.

The Company’s obligations to the factor were 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, 2006

(Restated)

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.

Advertising Costs

Advertising costs are expensed as incurred. No advertising costs were incurred in for the six month period ended September 30, 2006 and approximately $62,000 was incurred in the same period a year earlier.

Shipping Costs

Shipping costs are included in Selling and Marketing expenses in the amount of approximately $66,000 and $111,000 for the six month periods ended September 30, 2006 and 2005, respectively.

Reclassification

As of September 30, 2006, 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.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R) we accounted for stock option grant in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" (the intrinsic value method), and accordingly, recognized compensation expense for stock option grants.

Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized in the nine months of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Prior periods were not restated to reflect the impact of adopting the new standard.

A summary of option activity under the Plan as of September 30, 2006, and changes during the period ended are presented below:

	Options			Weighted Average Exercise Price
Outstanding at March 31, 2006		57,500,000		$	0.007
Issued		-
Exercised		-
Forfeited or expired		(1,000,000	)	$	0.007
Outstanding at September 30, 2006		56,500,000		$	0.007

Not exercisable at September 30, 2006		37,666,666		$	0.007
Exercisable at September 30, 2006		18,833,334		$	0.007

Aggregate intrinsic value of options outstanding and exercisable at September 30, 2006 was $0. Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $0.007 as of September 30, 2006, and the exercise price multiplied bythe number of options outstanding. As of September 30, 2006, total unrecognized stock-based compensation expense related to stock options was $271,422. The total fair value of options vested during the six months ended September 30, 2006 was $130,200.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Basic and Diluted Loss Per Share

In accordance with SFAS No. 128, “Earnings Per Share,” the basic loss per share is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic net loss per share excludes the dilutive effect of stock options or warrants and convertible notes. Diluted net loss per share was the same as basic net loss per share for all periods presented, since the effect of any potentially dilutive securities is excluded, as they are anti-dilutive due to the Company’s net losses.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basic and Diluted Loss Per Share (Continued)

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

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Net Income (Loss)	$	(93,922	)	$	(156,506	)	$	(515,178	)	$	(457,633	)
Weighted average basic shares outstanding		618,262,605			618,262,605			618,262,605			613,462,201

Dilutive Effect of:
Warrants to purchase common stock		-			-			-			-
Convertible preferred stock		-			-			-			-
Convertible preferred stock		-			-			-			-
Stock Options		-			-			-			-

Weighted average diluted shares outstanding		618,262,605			618,262,605			618,262,605			613,462,201
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, 2006, as their effects would have been anti-dilutive to the loss incurred by the Company:

Options to purchase common stock			18,333,334
Warrants to purchase common stock			135,000,000
Convertible preferred stock			14,500,000
Convertible subordinated notes			0
			167,833,334

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

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 will implement SFAS 123 after December 15, 2005.

Effective January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition method, which requires the measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors including stock options under the New Plan. The Company’s financial statements as of June 30, 2006 and for the three months ended June 30, 2006 reflect the effect of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Share-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Operations during the six months and ended September 30, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested, as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company elected to attribute the value of share-based compensation to expense using the straight-line attribution. There were no options issued to any employees or directors after January 1, 2006 or up to and including September 30, 2006, however, the company had 57,500,000 options which were previously issued to employees and directors which became vested at June 15, 2006 and were valued using Black Scholes at $546,249. Six (6) months of the thirty-six (36) month vesting period was expensed to compensation expense during the six month period ended September 30, 2006 for a total expense of $93,944. The assumptions used for this calculation was a remaining nine (8.71) year term, a 464% volatility, a 3.5% discount rate and an exercise price of $0.007.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

1. Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements (continued)

Upon adoption of SFAS 123(R), the Company elected to value its share-based payment awards granted after January 1, 2006 using the Black-Scholes option-pricing model, which was previously used for its pro-forma information required under SFAS 123. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model requires the input of certain assumptions. The Company’s options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates.

In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 addresses the accounting for recognized servicing assets and servicing liabilities related to certain transfers of the servicer’s financial assets and for acquisitions or assumptions of obligations to service financial assets that do not relate to the financial assets of the servicer and its related parties. SFAS 156 requires that all recognized servicing assets and servicing liabilities are initially measured at fair value, and subsequently measured at either fair value or by applying an amortization method for each class of recognized servicing assets and servicing liabilities. SFAS 156 is effective in fiscal years beginning after September 15, 2006. The adoption of SFAS 156 is not expected to have a material impact on our consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 provides guidance for the recognition, derecognition and measurement in financial statements of tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns. FIN 48 requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Corporation will be required to adopt FIN 48 as of January 1, 2007, with any cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Corporation is currently evaluating the impact of FIN 48 and has not yet determined the effect on its earnings or financial position.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

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.

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 2007. 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.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable as of September 30, 2006 and March 31, 2006, net of allowance for doubtful accounts were $257,298 and $154,139, respectively. Substantially all of the accounts receivable as of September 30, 2006 and March 2005 have been factored and pledged as collateral under the Company’s financing agreement and factor 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, 2006 and March 31, 2006, the Company had an allowance for doubtful accounts of $140,117 and $148,028, respectively.

NOTE 4 - INVENTORY

Inventory consisted of the following as of:

	September 30,			March 31
	2006			2006
Raw materials	$	519,428		$	563,820
Finished goods		799,229			939,859
		1,318,657			1,503,679
Less: valuation allowance		(429,591	)		(761,756	)
Inventory, net	$	889,066		$	714,923

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, 2006			March 31, 2006
DVD Inventory	$	977,956		$	1,121,477
Reserve		(217,358	)		(470,874	)
Net DVD Inventory		760,599			650,603
Video Inventory		334,188			375,691
Reserve		(205,722	)		(284,371	)
Net Video Inventory		128,467			91,320
General Merchandise		6,511			6,511
Reserve		(6,511	)		(6,511	)
Net General Merchandise		-			-
TOTAL INVENTORY		1,318,656			1,503,679
TOTAL RESERVE		(429,591	)		(761,756	)
NET INVENTORY	$	889,066		$	741,923

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 4 - INVENTORY (CONTINUED)

Allowance

An allowance has been established for inventory totaling $429,591. 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.

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

Inventory Reserve Detail:	September 30, 2006			March 31, 2006
Beginning Balance	$	(761,756	)	$	(441,514	)
Provision to Cost of Goods Sold		332,165			(691,805	)
Inventory write-off		-			371,563
Ending Reserve Balance	$	(429,591	)	$	(761,756	)

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,
	2006		2006
a) GJ Products	$	8,337	$	-
b) Due from other related parties		279		-
	$	8,616	$	-
Due to related parties - notes payable:

	September 30,		March 31,
	2006		2006
a) Note payable - American Top Real Estate Co., Inc. (ATRE)	$	582,874	$	582,874
b) Convertible note payable - Jeffrey Schillen		48,000		48,000
c) GJ Products		97,200		20,000
d) James Lu		20,000		-
	$	748,074	$	650,874

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 6 - FINANCING AGREEMENT PAYABLE

Due Financing Agreement Payable:

		September 30, 2006				March 31, 2006
Longview Fund, LC - Revolving note payable		$	104,729			$	-

On June 30, 2006, the Company entered into an Accounts Receivable Revolving Loan Agreement (“Agreement”) with a financial institution located in San Francisco, CA for a revolving accounts receivable line of credit up to $250,000 for a term expiring in twelve months from the date of inception. Under the terms of the Agreement, the Company can borrow up to $250,000 against the Company’s accounts receivable of irrevocable sales made to its customer, excluding any consignment sales or any non-irrevocable sales. The Company is advanced 75% of the face value of the accounts receivable presented for borrowing. The cost of funds borrowed under the Agreement is at 1.67% per month of the outstanding accounts receivable balance presented for borrowing calculated on a daily basis. Cost of Funds borrowed against any accounts receivable in amounts exceeding 75% of its face value is at 2% per month calculated on a daily basis. At the end of each month any excess funds available against the Company’s qualified accounts receivable net of cash receipts from the customer will be advanced to the Company. All of the assets of the Company as of June 30, 2006 and have been collateralized under the security agreement with the lender. The loan Agreement may be terminated by the lender by giving the Company 30 days written notice. Concurrent with this loan, the company granted 100,000,000 warrants to the lender with an expiration date of 6/30/2011 and a $0.0025 exercise price. The fair value of these warrants was $860,000. Given loan proceeds of $250,000, the relative fair value of the warrants was $193,694 and is being treated as a loan discount which is being amortized over the life of the loan (12 months). The amount of $48,423 was amortized to interest expense during the three months ended September 30, 2006.

NOTE 7 - 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 six months ended September 30, 2006 and 2005, royalty expense was $4,597 and $45,374 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.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 8 - STOCKHOLDERS' DEFICIENCY

Common Stock

As of September 30, 2006, 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, 2006 and March 31, 2006, 618,262,605 shares were issued and outstanding.

For the six months ended June 30, 2006, the Company did not issue any of its common stock.

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.

Warrants

On June 30, 2006, in connection with entering into a loan agreement with a financing company located in San Francisco, California, the Company granted the lender, stock warrants to purchase at any time, 100,000,000 shares of the Company’s common stock at an exercise price of $0.0025 per share. The warrants expire on June 30, 2011. The fair value of these warrants was $860,000. Given loan proceeds of $250,000, the relative fair value of the warrants was $193,694 and is being treated as a loan discount which is being amortized over the life of the loan (12 months). The company expensed $93,944 related to the relative fair value of the warrants during the six month period ended September 30, 2006. The warrants were issued for $100 cash and in consideration of the loan agreement entered into by the lender with the Company pursuant to which the lender agreed to loan to the Company up to $250,000. 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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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 8 - STOCKHOLDERS' DEFICIENCY (CONTINUED)

Warrants (continued)

The following schedules summarize warrants for the period ended:

		Warrants Outstanding					Warrants Exercisable
Range of Exercise Prices		Number Outstanding as of September 30, 2006		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable as of September 30, 2006	Weighted Average Exercise Price
	0.012 - .0025		135,000,000	4.16	$	0.005	135,000,000	$	0.005


			135,000,000	4.16	$	0.005	135,000,000	$	0.005

		Warrants Outstanding					Warrants Exercisable
Range of Exercise Prices		Number Outstanding as of March 31, 2006		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable as of March 31, 2006	Weighted Average Exercise Price
	0.012		35,000,000	2.98	$	0.012	35,000,000	$	0.012

	0.070		1,525,000	0.11		0.020	1,525,000		0.020

			36,525,000	2.98	$	0.016	36,525,000	$	0.016

Warrants Granted to Independent Consultant

During the six months ended September 30, 2006, the company did not issue any warrants to consultants.

During year ended March 31, 2004, the Company’s board of directors approved the grant of stock warrants to an independent consultant to purchase an aggregate of 35,000,000 shares of its common stock. These options have an exercise price of $0.012 and as of March 31, 2004 all of these option shares were vested. As a result, the Company has recorded $70,000 in consulting expense. These warrants were not issued as part of any of the Company’s registered Stock Option Plans.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 8 - STOCKHOLDERS' DEFICIENCY (CONTINUED)

Common Stock Options

Effective January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition method, which requires the measurement and recognition of compensation expense for all share-based payment awards made to the Company’s employees and directors including stock options under the New Plan. The Company’s financial statements as of September 30, 2006 and for the six months ended September 30, 2006 reflect the effect of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Share-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Operations during the six months and ended September 30, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested, as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company elected to attribute the value of share-based compensation to expense using the straight-line attribution. There were no options issued to any employees or directors after January 1, 2006 or up to and including September 30, 2006.

The following summarizes the common stock option transactions for the periods ended September 30, 2006 and 2005:

Options issued and outstanding not under a stock option plan:

	2006				2005
			Weighted				Weighted
			Average				Average
			Exercise				Exercise
	Options		Price		Options		Price
Outstanding at March 31		14,500,000	$	0.006		14,500,000	$	0.006
Issued		-				-
Exercised		-				-
Forfeited or expired		-				-
Outstanding and exercisable at June 30		14,500,000	$	0.006		14,500,000	$	0.006

	-			-
	-			-
	-			-
Outstanding and exercisable at September 30	14,500,000	$	0.006	14,500,000	$	0.006

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 8 - STOCKHOLDERS' DEFICIENCY (CONTINUED)

Common Stock Options (continued)

Officers/Directors

The options totaling 14,500,000 expire on November 15, 2006.

2005 Equity Compensation Program

On March 1, 2005, the shareholders of the Company adopted its 2005 Equity Compensation Program (the "Program"). The Program is intended to secure for the Company, its direct and indirect present and future subsidiaries, including without limitation any entity which the Company reasonably expects to become a subsidiary (the "Subsidiaries"), and its shareholders, the benefits arising from ownership of the Company's Common Stock, no par value per share ("Common Stock"), by those selected directors, officers, key employees and consultants of the Company and the Subsidiaries who are responsible for future growth. The Program is designed to help attract and retain superior individuals for positions of substantial responsibility with the Company and the Subsidiaries and to provide these persons with an additional incentive to contribute to the success of the Company and the Subsidiaries. In order to maintain flexibility in the award of benefits, the Program is comprised of two parts -- the Incentive Stock Option Program ("Incentive Plan"), and the Supplemental Stock Option Program ("Supplemental Plan"). Each such plan is referred to herein as a "Plan" and all such plans are collectively referred to herein as the "Plans." The grant of an option under one of the Plans shall not be construed to prohibit the grant of an option under any of the other Plans.

Unless any Plan specifically indicates to the contrary, all Plans shall be subject to the general provisions of the Program set forth below under the heading "General Provisions of the Equity Compensation Program" (the "General Provisions").

The Program is administered by the Board of Directors of the Company (the "Board" or the "Board of Directors") or any duly created committee appointed by the Board and charged with the administration of the Program. To the extent required in order to satisfy the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), such committee shall consist solely of "Outside Directors" (as defined herein). The Board, or any duly appointed committee, when acting to administer the Program, is referred to as the "Program Administrator". Any action of the Program Administrator shall be taken by majority vote at a meeting or by unanimous written consent of all members without a meeting. No Program Administrator or member of the Board of the Company shall be liable for any action or determination made in good faith with respect to the Program or with respect to any option granted pursuant to the Program. For purposes of the Program, the term "Outside Director" shall mean a director who (a) is not a current employee of the Company or the Subsidiaries; (b) is not a former employee of the Company or the Subsidiaries who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the then current taxable year; (c) has not been an officer of the Company or the Subsidiaries; and (d) does not receive remuneration (which shall be deemed to include any payment in exchange for goods or services) from the Company or the Subsidiaries, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and the regulations thereunder.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 8 - STOCKHOLDERS' DEFICIENCY (CONTINUED)

Common Stock Options (continued)

2005 Equity Compensation Program(continued)

Subject to the other provisions of this Program, and with a view to effecting its purpose, the Program Administrator shall have the authority: (a) to construe and interpret the Program; (b) to define the terms used herein; (c) to prescribe, amend and rescind rules and regulations relating to the Program; (d) to determine the persons to whom options shall be granted under the Program; (e) to determine the time or times at which options shall be granted under the Program; (f) to determine the number of shares subject to any option under the Program as well as the option price, and the duration of each option, and any other terms and conditions of options; and (g) to make any other determinations necessary or advisable for the administration of the Program and to do everything necessary or appropriate to administer the Program. All decisions, determinations and interpretations made by the Program Administrator shall be binding and conclusive on all participants in the Program and on their legal representatives, heirs and beneficiaries.

The maximum aggregate number of shares of Common Stock issuable pursuant to the Program is 65,000,000 shares. No one person participating in the Program may receive options for more than 25,000,000 shares of Common Stock in any calendar year. All such shares may be issued under any Plan, which is part of the Program. If any of the options (including incentive stock options) granted under the

Program expire or terminate for any reason before they have been exercised in full, the unissued shares subject to those expired or terminated options shall again be available for purposes of the Program. Any shares of Common Stock delivered pursuant to the Program may consist, in whole or in part, of authorized and unissued shares or treasury shares.

All directors, officers, employees and consultants of the Company and the Subsidiaries are eligible to participate in the Program. The term "employee" shall include any person who has agreed to become an employee and the term "consultant" shall include any person who has agreed to become a consultant.

2005 Equity Compensation Program

The Program became effective March 1, 2005, when approved by the shareholders of the Company. The Program shall continue in effect for a term of ten years from the date that the Program is adopted by the Board of Directors, unless sooner terminated by the Board of Directors of the Company. As of March 31, 2005 no options were granted under the Program.

The following summarizes the common stock option transactions for the six months ended September 30, 2006 and fiscal year ended March 31, 2006.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

NOTE 8 - STOCKHOLDERS' DEFICIENCY (CONTINUED)

Common Stock Options (continued)

2005 Equity Compensation Program (continued)

Options issued and outstanding under a stock option plan:

	2006					2005
				Weighted				Weighted
				Average				Average
				Exercise				Exercise
	Options			Price		Options		Price
Outstanding at March 31		57,500,000		$	0.007		-
Issued		-					58,100,000	$	0.007
Exercised		-					-
Forfeited or expired		(1,000,000	)	$	0.007		-
Outstanding at June 30		56,500,000		$	0.007		58,100,000	$	0.007

Not exercisable at June 30		37,666,666		$	0.007		58,100,000	$	0.007
Exercisable at June 30		18,833,334		$	0.007		-
Issued		-					58,100,000	$	0.007
Exercised		-					-
Forfeited or expired		-		$	0.007		-
Outstanding at September 30		56,500,000		$	0.007		58,100,000	$	0.007

Not exercisable at September 30		37,666,666		$	0.007		58,100,000	$	0.007
Exercisable at September 30		18,833,334		$	0.007		-

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 with an exercise price of $0.007 per share. These options vest at a rate of one-third upon each anniversary date of their issuance. During the three months ended June 30, 2006, one-third, or 18,833,334 of these options, became vested. The Company charged the amount of $130,200 to operations representing the fair value of these shares at the time they were issued. These options were valued using the Black-Scholes valuation model; the assumptions for this calculation were: a 10 year term; 154% volatility; 3.50% discount rate; and an exercise price of $0.007.

NOTE 9 - - CHANGES TO PREVIOUSLY REPORTED FINANCIAL STATEMENTS

The following table indicates the primary changes to the Company’s financial statements for the three months ended June 30, 2006 compared to the report as originally filed. There were other small corrections of errors and reclassifications made to the amended financial statements which are not considered material to the financial statements taken as a whole.

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DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Restated)

The following table indicates the change to the Company’s statement of operations in this amended report compared to the report as originally filed:

	Originally
	Reported			Change			Amended
Balance sheet:

Financing agreement payable	$	56,306		$	48,423		$	104,729
Additional paid-in capital		287,638			36,256			323,894
Accumulated deficit	$	(21,688,512	)	$	(84,679	)	$	(21,773,191	)

Statement of operations:

For the three months ended September 30, 2006: No material changes.

For the six months ended September 30, 2006:

	Originally
	Reported			Change			Amended
Selling, general, and administrative expenses	$	640,641		$	78,348		$	718,989

Other income and (expense)		-			(6,331	)		(6,331	)

Net profit (loss)	$	(430,499	)	$	(84,679	)	$	(515,178	)

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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, 2006 included in its Annual Report on Form 10KSB and its Form 10QSB for the three months period ended June 30, 2006. 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.

EXECUTIVE SUMMARY

During six months period ended September 30, 2006 and 2005, the Company was in the distribution and sales of DVD/video programs and other licensed programs.

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, 2006, DVD program sales and videocassette program sales represented 93% and 7% of total sales respectively compared to 76% and 24%, respectively, for the same periods a year earlier. For the six months ended September 30, 2005, videocassette and DVD program sales decreased by 38% and 82%, respectively, when compared to the six months period ended September 30, 2005. The decrease in sales volume was the result of lower volume of sales orders received from our major customers.

During the six months ended September 30, 2006, 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 49% 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 2007, 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.

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2005:

NET SALES

Net sales for the Company were $451,350 for the three months ended September 30, 2006 compared to $695,997 for the three months ended September 30, 2005, representing a decrease of $244,647 or approximately 35%. DVD program net sales were approximately $443,000 for the quarter ended September 30, 2006, as compared to approximately $584,000 for the quarter ended September 30, 2005, representing a decrease of approximately 24%. Videocassette net sales were approximately $8,000 for the quarter ended September 30, 2006, as compared to approximately $116,000 for the quarter ended September 30, 2005, a decrease of approximately 93%. 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 MARGIN

Gross margin was $216,256 for the three months ended September 30, 2006 compared to $284,329 for the three months ended September 30, 2005. The lower gross margin of $68,073 was primarily the result of decreased sales. For the three months ended September 30, 2006 and 2005 the gross profit as a percentage of sales was 48% and 41%, respectively. The increase of the gross profit as a percentage to sales of 7% was primarily the result of higher margins realized from our DVD programs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the three months ended September 30, 2006 and 2005 were $294,978 and $447,604, respectively. The decrease in selling expenses of approximately $152,626 or approximately 34% was primarily caused by the lower expenditures for commission, royalty, advertising, freight, salaries, rent and salex taxes, offset by higher accounting fees.

INTEREST EXPENSE

Interest expense for the three months ended September 30, 2006 and 2005 was $15,200 and $11,390 respectively. The increase in interest expense of $3,810 or approximately 33% was primarily the result of increased levels of borrowing.

OTHER INCOME AND EXPENSE

Other income (expense) for the three months ended September 30, 2006 was expense of $0 compared to other income of $18,159 for the three months ended September 30, 2005.. The increased income of $18,159 was the result of settlement discounts in the same period a year earlier.

NET LOSS

For the reasons above, the Company's net loss for the three months ended September 30, 2006 was $93,922 compared to net loss of $156,506 for the same period last year, which was an decreased loss of $62,584.

SIX MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THE SIX MONTHS ENDED SEPTEMBER 30, 2005:

NET SALES

Net sales for the Company were $846,045 for the six month period ended September 30, 2006 compared to $1,658,648 for the same period of the prior year, a decrease of $812,603 or approximately 49% For the six months period ended September 30, 2006 and 2005, DVD program net sales were approximately $783,000 and $1,264,000, respectively. Videocassette net sales, were approximately $63,000 and $116,000, respectively, for the six month period ended September 30, 2006 and 2005. The lower DVD program sales of approximately $481,000 was the result of lower volume of orders received from our major customers. The reduced videocassette sales of approximately $53,000 was primarily caused by the industry shift from videocassette programs to DVD programs.

GROSS MARGIN

Gross margin for the six months ended September 30, 2006 and 2005 was $258,621 and $484,907 or 31% and 29% of sales, respectively. The lower gross margin of approximately $226,000 was primarily the result of decreased sales volume. The increase of the gross profit percentage when compared to sales of 2%, was primarily the result of discounted prices and sales price erosion experienced in our DVD line of products during the same period a year earlier.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the six months ended September 30, 2006 and 2005 were $718,989 and $952,547, respectively, a decrease of $233,558 or approximately 25%. The decrease was attributable mainly to lower expense levels in commissions, royalty expense, advertising, sales promotion, freight costs, salaries, rent, and legal fees, offset by increases in accounting fees and stock option compensation expense.

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INTEREST EXPENSE

Interest expense for the six months ended September 30, 2006 and 2005 was $45,279 and $22,795 respectively, an increase of $22,484 or approximately 99%. The increase in interest expense was primarily the result of increased interest resulting from our new financing arrangement entered into in June of 2006.

OTHER INCOME AND EXPENSE

Other income (expense) for the six months ended September 30, 2006 was expense of ($6,331) compared to other income of $32,802 for the six months ended September 30, 2005.. The increased expense of $(39,133) was the result of settlement discounts in the same period a year earlier.

NET LOSS

For the reasons above, our net loss for the six months ended September 30, 2006 was $515,178 compared to a net loss of $457,633 for the same period of the prior year, an increased loss of $57,545 or approximately 13%.

LIQUIDITY AND CAPITAL RESOURCES

The Company has four primary sources of capital which include 1) cash provided by operations, 2) a revolving loan 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 arrangements with related parties. Although there can be no assurance, management believes that its currently projecteed revenues will continue to support its operations during remaining months of fiscal year 2007. If cash flow was not adequate, and no other source of capital was available to the Company, the Company would have to sell its business and assets or enter into a merger with a viable merger candidate. The Company has identified a potential merger candidate and is currently negotiating terms and conditions of the merger agreement. As part of this negotiation the Company is seeking working capital to satisfy its delinquent accounts payables to its vendors. As of the date of this report the Company has not signed a letter of intent with the merger candidate.

Accounts Receivable Revolving Loan Agreement. On May 2, 2005, the Company terminated its factoring agreement with the Greystone Financial Services, LP and all obligations owed under the factoring agreement were satisfied and paid in full as of June 30, 2006. On June 30, 2006, the Company entered into an Accounts Receivable Revolving Loan Agreement (“Agreement”) with financial institution located in San Francisco, CA for a revolving accounts receivable line of credit up to $250,000 for a term expiring in twelve months from the date of inception. Under the terms of the Agreement, the Company can borrow up to $250,000 against the Company’s accounts receivable of irrevocable sales made to its customer, excluding any consignment sales or any non-irrevocable sales. The Company is advanced 75% of the face value of the accounts receivable presented for borrowing. The cost of funds borrowed under the Agreement is at 1.67% per month of the outstanding accounts receivable balance presented for borrowing calculated on a daily basis. Cost of Funds borrowed against any accounts receivable in amounts exceeding 75% of its face value is at 2% per month calculated on a daily basis. At the end of each month any excess funds available against the Company’s qualified accounts receivable net of cash receipts from the customer will be advanced to the Company. All of the assets of the Company as of June 30, 200 and have been collateralized under the security agreement with the lender. The loan Agreement may be terminated by the lender by giving the Company 30 days written notice. Concurrent with this loan, the company granted 100,000,000 warrants to the lender with an expiration date of 6/30/2011 and a $0.0025 exercise price. The fair value of these warrants was $860,000. Given loan proceeds of $250,000, the relative fair value of the warrants was $193,694 and is being treated as a loan discount which is being amortized over the life of the loan (12 months). Given that the loan was entered into on the last day of the quarter, no expense has been taken during the quarter.

Factoring Agreements. On August 30, 1996, the Company entered into a factoring 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 factoring 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.

On May 2, 2005, the Company terminated its factoring agreement with the factoring company and all obligations owed under the factoring agreement were satisfied and paid in full as of June 30, 2006. The Company in June 2006 paid the factor a $7,500 early termination fee upon terminating the factoring agreement.

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Related party loan. 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. During the six month period ended September 30, 2006, the Company did not borrow any funds from its principal shareholder. The balance owed to ATRE at September 30, 2006 and March 31, 2006 was approximately $583,000.

Effective January 1, 2006, ATRE agreed to waive charging future interest of 10% per annum on the loan. The company does not anticipate a demand by ATRE for repayment of its loan to the company in the near future. The Company during the six months period ended September 30, 2006, borrowed approximately $77,000 and $20,000 from GJ Products and James Lu, respectively. The related party notes payable balances due to GJ Products and Mr. Lu at September 30, 2006 were $97,200 and $20,000, respectively.

On September 30, 2006 the Company had assets of approximately $1,962,000 compared to $1,581,000 on March 31, 2006. The Company had a total stockholder's deficiency of approximately $1,842,000 on September 30, 2006, compared to a deficiency of $1,656,000 on March 31, 2006, a increase of approximately $186000 for the six months ended September 30, 2006, primarily the result company’s net loss of approximately $515,000, offset by paid in capital of approximately $324,000.

As of September 30, 2006 the Company's working capital deficit decreased by approximately $26,000 from a working capital deficit of approximately $2,251,000 at March 31, 2006, to a working capital deficit of approximately $2,273,000 at September 30, 2006. The decrease in working capital deficit was attributable primarily to increases primarily in cash, accounts receivable, inventor and decreases accounts payable, due factor offset primarily by increases cash overdraft, related party deferred compensation and other miscellaneous items.

For the six months ended September 30, 2006, the Company had no issuance of its common stock.

Operations

For the six months period ended September 30, 2006, cash flows used in operating activities was $251,032 compared to $525,614 during the six months period ended September 30, 2005. The Company over the six months period ended September 30, 2006, implemented an over all spending reduction in operating activities resulting in a significant reduction in cash flows used.

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.

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Investing

For the six months ended September 30, 2006 and 2005, the Company had investments in masters and artwork of $9,315 and $166,387 respectively. Management expects to continue to seek to acquire new titles to enhance its product lines to increase future orders.

Financing

Cash flows provided by for financing activities were $544,464 during the six months period ended September 30, 2006 compared to $269,167 during the six months period ended September 30, 2005 principally as a result of the proceeds from financing agreement of $250,000.

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 six months, 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, 2006 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, 2006. 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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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.

Item 6. Exhibits

31.1	Certification of the Principal Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a), furnished herewith.
32.1	Certification of the Principal 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: June 27, 2008	By: /s/ Mulugetta Bezzabeh, Phd
	Mulugetta Bezzabeh, Phd
	Principal Executive Officer and Principal Financial Officer

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Rx for Africa (RXAF) Inactive 10QSB/A2007 Q2 Quarterly report (small business) (amended)