As filed with the Securities and Exchange Commission on December 22, 2000.
Registration No. 333-51996

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------------------
DIAMOND ENTERTAINMENT CORPORATION
(Name of small business issuer in its charter)

New Jersey 7819 22-2748019
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)

800 Tucker Lane, Walnut, California 91789
(909) 839-1989
(Address and telephone number of registrant's principal executive offices)
----------------------------------
James K.T. Lu, President
Diamond Entertainment Corporation
800 Tucker Lane, Walnut, California, CA 91789 (909) 839-1989
(Name, address and telephone number of agent for service)

Copies to:
Neil R.E. Carr, Esquire
Williams, Mullen, Clark & Dobbins
900 17th Street, N.W., Suite 700
Washington, D.C. 20006
Telephone: (202) 293-0213 Facsimile: (202) 293-5939
-------------------------------------
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of the registration statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. |X|

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

CALCULATION OF REGISTRATION FEE
-------------------------------

- ---------------------------------------------------------------------------------------------------------
Proposed Proposed
Title of each Class of Amount to be Maximum Maximum Amount of
Securities to be Registered Registered Offering Price Aggregate Registration
Per Share Offering Price Fee
- ---------------------------------------------------------------------------------------------------------

Common Stock, no par value, issuable
upon conversion of Series A Convertible
Preferred Stock 11,875,000 (3) $0.017 (1) $201,875 $53.30
- ---------------------------------------------------------------------------------------------------------
Common Stock, no par value, issuable
upon exercise of warrants 1,525,000 (3) $0.07 (2) $106,750 $28.18
- ---------------------------------------------------------------------------------------------------------
Total Registration Fee: $81.48(4)
- ---------------------------------------------------------------------------------------------------------

(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended
("Securities Act"), on the basis of the average of the bid and asked
prices on December 8, 2000, as reported by the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board.
(2) The exercise price of the warrants, used for purpose of calculating the
amount of the registration fee in accordance with Rule 457(g) under the
Securities Act
(3) Pursuant to Rule 416 under the Securities Act, this Registration
Statement covers any additional shares of common stock, no par value
per share, which may become issuable by reason of the antidilution
provisions of the warrants.
(4) Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

PROSPECTUS Subject to completion, dated December __, 2000

DIAMOND ENTERTAINMENT CORPORATION
Up to 13,400,000 shares of common stock

This prospectus covers the resale of up to 11,875,000 shares that may
be issued to the selling stockholders upon conversion of our outstanding shares
of Series A Convertible Preferred Stock and the resale of up to 1,525,000 shares
that may be issued upon exercise of certain outstanding warrants that were
issued in connection with the sale of our Series A Convertible Preferred Stock.
The shares of common stock covered by this prospectus may be sold from time to
time for the account of the selling stockholders, which holders are listed under
the heading "Selling Stockholders." We will bear the expense of the registration
of the shares of common stock and the selling stockholders will bear the cost of
any commissions, transfer taxes and similar expenses.

The conversion price of our Series A Convertible Preferred Stock is
subject to adjustment because it is calculated on the basis of the lesser of
$.08 per share or 78% of the closing bid price of our common stock during any
five trading days during the ten trading days preceding the date of conversion.
The actual number of shares of common stock that the selling stockholders will
receive upon conversion of the Series A Convertible Preferred Stock will depend
upon the future market price of our common stock as of the date the selling
stockholders convert their Series A Convertible Preferred Stock but may not
exceed an aggregate of 11,875,000 shares.

Our common stock is quoted on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board under the symbol "DMEC." On December 8, 2000,
the closing bid price of our common stock was $.016.

All of the proceeds of the sale of the shares offered hereby will be
received by the selling stockholders. We will use the proceeds from the exercise
of the warrants, if any, for general working capital purposes.

Investing in our common stock involves substantial risks. See "Risk
Factors" beginning on page 6.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of the prospectus. Any representation to the contrary is a
criminal offense.

The date of this prospectus is December __, 2000

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and
other information with the SEC. We have also filed with the SEC a registration
statement on Form SB-2 to register the common stock being offered in this
prospectus. This prospectus which forms a part of the registration statement
does not contain all of the information included in the registration statement.
For further information about us and the shares of common stock offered by this
prospectus you should refer to the registration statement and its exhibits.
Because information about contracts referred to in this prospectus is not always
complete, you should read the full contracts which are filed as exhibits to the
registration statement.

You may read and copy any document we file at the SEC's public
reference rooms in Washington, D.C., New York, and Chicago. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. We file
our information electronically with the SEC, so you can also review our filings
by accessing the web site maintained by the SEC at http://www.sec.gov.

TABLE OF CONTENTS
Page
Where You Can Find More Information...................................... 2
Prospectus Summary....................................................... 3
Selected Consolidated Financial
Information........................................................... 4
Risk Factors............................................................. 6
Forward Looking Statements............................................... 13
Issuance of Common Stock Upon Conversion
of Our Series A Convertible Preferred Stock and Certain Warrants...... 14
Determination of Offering Price......................................... 14
Use of Proceeds.......................................................... 15
Capitalization........................................................... 15
Price Range of Common Stock.............................................. 16
Dividend Policy.......................................................... 16
Management's Discussion and Analysis..................................... 17
Business................................................................. 34
Management............................................................... 46
Executive Compensation................................................... 48
Certain Relationships and
Related Transactions.................................................. 51
Principal Stockholders................................................... 55
Selling Stockholders..................................................... 57
Description of Securities................................................ 58
Plan of Distribution..................................................... 63
Legal Matters............................................................ 64
Experts.................................................................. 64
Index to Financial Statements............................................ F-1

You should rely only on the information contained in this prospectus or
any supplement. We have not authorized anyone to provide you information
different from that contained in this prospectus. The selling stockholders will
not make any offer or sale of these shares in any state where offers and sales
are not permitted. The information contained in this prospectus is accurate only
as of the date of this prospectus regardless of the time of delivery of this
prospectus or of any sale of common stock.

PROSPECTUS SUMMARY

You should read the following summary in conjunction with the more
detailed information and financial statements and notes thereto appearing
elsewhere in this prospectus. Each prospective investor is urged to read this
prospectus in its entirety.

About Diamond Entertainment

We market and sell a variety of videocassette and DVD titles to the
budget home video and DVD markets, principally through our New Jersey sales
office. We also purchase and distribute general merchandise including children's
toy products and furniture.

We distribute and sell videocassette and DVD titles including public
domain and licensed programs. Public domain programs are 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 and DVD programs to national and
regional mass merchandisers, department stores, drug stores, supermarkets and
other similar retail outlets. Our videocassette products are generally sold to
the public at retail prices ranging from $1.99 to $9.99 per videocassette and
our DVD products are generally sold at retail prices ranging from $6.99 to $9.99
per DVD. Our products are also offered by consignment arrangements through one
large mail order catalog company and one retail chain.

We manufacture one toy product and distribute other toy products to
certain mass merchandisers in the U.S. We also distribute furniture that we
import from Asia.

We were incorporated under the laws of the State of New Jersey on April
3, 1986. In April 2000, we registered in the state of California to do business
under the name e-DMEC, Inc. All references to "we," "our" or "Diamond
Entertainment" refer to Diamond Entertainment Corporation doing business as
"e-DMEC, Inc." and its subsidiaries. Our executive offices are located at 800
Tucker Lane, Walnut, California 91789. Our telephone number is (909) 839-1989.
Our website address is www.e-dmec.com. Information contained in our web site
does not constitute part of this prospectus.

The Offering

Common stock offered by selling
stockholders.............................. Up to 13,400,000 shares

Common stock outstanding on
November 22, 2000......................... 69,634,029 shares (1)

Use of proceeds...........................We will not receive any proceeds from
the sale of the common stock. We will
use the proceeds from the exercise of
the warrants, if any, for general
working capital purposes.

OTC Bulletin
Board symbol.............................."DMEC"

- -----------------
(1) Assumes no issuance of shares underlying outstanding shares of Series A
Convertible Preferred Stock, options, warrants and convertible notes
and debentures, including: (i) an aggregate of 17,750,000 shares
underlying outstanding options; (ii) 6,824,134 shares underlying
warrants; (iii) 5,000,000 shares issuable upon conversion of 10%
convertible promissory notes in the original aggregate principal amount
of $250,000.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The selected consolidated statement of operations data for the years
ended March 31, 1999 and 2000 and the consolidated balance sheet data for the
year ended March 31, 2000 are derived from our audited consolidated financial
statements included elsewhere in this prospectus. The selected consolidated
statement of operations data for the six months ended September 30, 2000 and
1999, and the consolidated balance sheet data as of September 30, 2000, are
unaudited. In the opinion of management, unaudited data includes all
adjustments, consisting principally of normal recurring adjustments, necessary
for a fair presentation of such information when read in conjunction with our
audited financial statements. Historical results are not necessarily indicative
of the results of operations for future periods and the results of interim
periods are not necessarily indicative of the results for a full year. The
following data is qualified in its entirety by and should be read in conjunction
with "Management's Discussion and Analysis" and the Consolidated Financial
Statements and notes thereto included elsewhere in this prospectus.

Year Ended March 31, Six Months Ended
-------------------- ----------------
September 30
------------
1996 1997 1998 1999 2000 1999 2000
--------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)

Consolidated Statement of
Operations Data:

Revenues................ $ 9,117 $ 6,445 $ 8,724 $ 4,373 $ 3,828 $ 1,673 $ 1,474
--------- ---------- ---------- ---------- ---------- ---------- ----------
Cost of Goods Sold 5,678 3,761 5,697 2,934 3,348 1,160 921
--------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, General and
administrative......... 4,010 3,870 3,220 3,887 4,056 1,562 914
--------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations (571) (1,186) (193) (2,448) (3,576) (1,049) (361)
--------- ---------- ---------- ---------- ---------- ---------- ----------
Other income
(expense)............ (105) (117) (1,312) (332) (361) (299) (161)
--------- ---------- ---------- ---------- ---------- ---------- ----------
Loss Before Extraordinary
Item (676) (1,303) (1,505) (2,780) (3,937) (1,348) (522)
--------- ---------- ---------- ---------- ---------- ---------- ----------
Extraordinary Item (expense) 390 -- -- 66 -- -- --
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss................ $ (286) $ (1,303) $ (1,505) $ (2,714) $ (3,937) $ (1,348) $ (522)
========= ========== ========== ========== ========== ========== ==========
Preferred Dividend -- -- -- -- -- -- (11)
--------- ---------- ---------- ---------- ---------- ---------- ----------
Net Loss Attributable to
Common Shares $ (286) $ (1,303) $ (1,505) $ (2,714) $ (3,937) $ (1,348) $ (533)
========= ========== ========== ========== ========== ========== ==========
Basic and diluted loss
per share............ $ (.03) $ (.08) $ (.08) $ (.08) $ (.07) $ (.02) $ (.01)
========= ========== ========== ========== ========== ========== ==========
Number of shares used in
computing loss per share.. 8,605,246 16,287,280 20,028,914 34,392,178 59,375,234 57,461,529 66,650,696
========= =========== ========== ========== ========== ========== ==========

Selected Financial Data, continued

As of
As of March 31, September 30,
--------------- --------------
1996 1997 1998 1999 2000 2000
--------- ---------- ---------- ---------- ---------- ----------
(in thousands)

Consolidated
Balance Sheet Data:

Cash, cash equivalents
and marketable securities... $ -- $ -- $ 6 $ 48 $ -- $ --
--------- ---------- ---------- ---------- ---------- ----------
Accounts receivable - net... 1,540 2,122 1,182 562 421 557
--------- ---------- ---------- ---------- ---------- ----------
Inventory - net 1,353 1,858 3,784 2,249 1,095 1,083
--------- ---------- ---------- ---------- ---------- ----------

Total current assets ....... 2,972 4,094 5,114 2,934 1,633 1,875
--------- ---------- ---------- ---------- ---------- ----------
Property and equipment, net. 239 222 302 373 267 302
--------- ---------- ---------- ---------- ---------- ----------
Total current liabilities... 4,684 6,817 7,651 5,178 5,164 5,067
--------- ---------- ---------- ---------- ---------- ----------
Total long-term debt........ 152 104 10 120 282 258
--------- ---------- ---------- ---------- ---------- ----------
Stockholders equity (deficit) $ 617 $ (113) $ (1,194) $ (1,461) $ (3,321) $ (2,956)
--------- ---------- ---------- ---------- ---------- ----------

RISK FACTORS

An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and other information
contained in this prospectus before deciding to invest in our common stock. The
risks described below are not the only ones facing our company. Additional risks
not presently known to us or which we currently consider immaterial may also
adversely affect our company. If any of the following risks actually occur, our
business, financial condition and operating results could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you could lose a part of your investment.

We Have a History of Operating Losses and Expect Continued Losses

Since our inception through September 30, 2000, we have incurred
cumulative losses of approximately $18,183,213. Also, we lost $3,937,358 in 2000
and $2,714,223 in 1999 and $532,789 and $1,348,647, respectively, in the six
months ended September 30, 2000 and 1999. A "going concern" opinion was rendered
by our auditors in connection with our financial statements for the years ended
March 31, 2000, and 1999. Management believes that we have sufficient working
capital to meet our requirements through December 2000 but that we will require
not less than $500,000 in order to meet our working capital requirements for the
succeeding 12 months. Sources for such funds could be any of (i) sale of our
products, (ii) conversion of outstanding debt into equity, or (iii) proceeds of
future financings or borrowings, including one or more public or private
offerings of debt or equity securities. There can be no assurance that funds
from these or any other sources will be forthcoming. For these reasons there is
a substantial question about our ability to operate as a going concern.

We are Significantly Leveraged and May Need Additional Capital

We had stockholders' deficiency of $18,183,213 and a negative net
tangible book value of approximately $3,343,000 at September 30, 2000.
Consequently, we are significantly leveraged. We anticipate that the funds
generated from the sale of the Series A Convertible Preferred Stock and funds
generated internally will be sufficient to meet our cash requirements for the
next [3] months. However, in the event that cash generated from operations is
less than anticipated or operating or other costs are more than anticipated, we
may require additional capital to meet our cash requirements. There can be no
assurance such capital will be available or, if available, that it will be
obtainable on terms favorable to us. In addition, approximately $217,000 of our
indebtedness is repayable on or before December 31, 2000. We may be required to
raise substantial additional financing in order to repay such indebtedness and
to implement our business plan and/or issue additional equity or convertible
securities. There can be no assurance that any such financing will be available
on acceptable terms or at all, or that the issuance of securities in that
connection would not be highly dilutive to existing stockholders.

We Have Experienced a Substantial Decrease in Our Sales Revenues

Sales revenues were approximately $4.4 million in fiscal 1999 and
approximately $3.8 million in fiscal 2000, a decrease of approximately 12.5%.
Sales revenues were approximately $8.7 million in fiscal 1998 and $4.4 million
in fiscal 1999, a decrease of approximately 47.9%. Moreover, sales revenues were
approximately $1.5 million for the six months ended September 30, 2000 and $1.7
million for the six months ended September 30, 1999, a decrease of approximately
12%. These sales declines were primarily the result of lower purchases from
certain of our major customers. While we are working to improve sales by
converting 50% or more of our sales to DVD products, increasing the number of
our major customers and acquiring new video and DVD titles, there are no
assurances that a decline in our revenues will not continue. Any such further
decline may further adversely affect our financial condition and the market
price for our common stock.

We Have Experienced Difficulties in Paying Our Suppliers on a Timely Basis

We have had difficulties in paying our suppliers and other vendors on a
timely basis. As a result we have been required to pay for certain products or
services on a cash basis and this has and may continue to affect our ability to
fulfill certain customer orders. A difficulty in fulfilling customer orders
could adversely affect our relationship with our customers and may have an
adverse affect on our results of operations.

We Face Intense Competition

The videocassette and DVD distribution industry is intensely
competitive and highly fragmented. We compete with many other distributors and
manufacturers in the budget home video and DVD markets. We also face intense
competition from other distributors of toy products. Most of our competitors
have significantly greater financial, manufacturing and marketing resources than
we do.

We Face a Risk Because of the Minimal Barriers to Entry into Our Business and
Lack Copyright Protection for Certain of the Programs We Distribute

Approximately 63% of our program inventory are public domain programs
and are not our exclusive property. Any competitor may easily enter our business
by reproducing and distributing public domain programs, including those marketed
by us. In addition, we may be subject to legal action by third-parties claiming
that our duplication and marketing of a program is violating the claimant's
rights in the program.

We are Dependent on Certain Significant Customers

For the year ended March 31, 2000, our two largest customers accounted
for an aggregate of approximately 29% of our revenues and 56% of our revenues
during the period ended September 30, 2000. For the year ended March 31, 1999,
our two largest customers accounted for approximately 25% of our revenues. We
expect these customers to continue to account for a significant portion of our
business. The loss of any of these customers could have a material adverse
effect on our results of operations.

Our Business is Seasonal

We customarily derive approximately 48% of our annual gross revenues
from sales of programs and other videos during the period from September through
January due primarily to the increased volume associated with the Christmas
holiday season. Accordingly, the results of operations for each three month
period ending June 30, are not necessarily indicative of the results that may be
expected for the full fiscal year.

We are Vulnerable to Foreign Conditions

We import certain of the raw materials for our video products, our DVD
products and certain of our general merchandise products. Accordingly, we are
vulnerable to the possibility of stoppages, delays or interruptions of supplies
due to foreign conditions, such as shipping delays, acts of war, political
instability or restrictions on foreign trade over which we have no control.

We Depend on Key Personnel

Our success depends upon the contributions of our key management
personnel including James K.T. Lu, President, Jeffrey I. Schillen, Executive
Vice President, and Fred U. Odaka, Chief Financial Officer. If we lose the
services of any such personnel we could be delayed in or precluded from
achieving our business objectives. We have key-man life insurance on Mr. Lu in
the amount of $1,000,000, but do not have key-man life insurance for Mr.
Schillen or Mr. Odaka.

We Can Consummate Acquisitions Without Prior Stockholder Review or Approval

Generally speaking, under current laws applicable to us, we will be
able to execute and consummate acquisitions of other businesses without prior
stockholder review of financial statements or other information concerning the
business to be acquired. Moreover, our stockholders typically will not have the
opportunity to vote upon acquisitions proposed to be consummated by us.

We Have Never Paid Dividends

We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."

We Face Uncertainty Regarding Proprietary Rights

We use several unregistered trademarks and tradenames in our business,
including "e-DMEC." Our business may be adversely affected if such proprietary
rights are misappropriated.

Dilutive Effect of Conversion of Series A Preferred Stock and Warrants

As of the date of this prospectus, there are outstanding a total of 50
shares of Series A Convertible Preferred Stock. Each share has a stated value of
$10,000 and is convertible into shares of our common stock, at any time after
August 9, 2000, at the option of their holders. The conversion price of our
Series A Convertible Preferred Stock is equal to the lesser of $.08 and 78% of
the average of the closing bid price on any of the five trading days during the
ten trading days preceding the date of conversion. In the event the conversion
price decreases, the number of shares of our common stock to be issued upon
conversion will increase proportionately. However, the Series A Convertible
Preferred Stock may not be converted into more than 11,875,000 shares of common
stock. In addition, we may issue up to 1,525,000 shares upon exercise of the
warrants issued to certain selling stockholders. Increased sales volume of our
of common stock could cause the market price of our common stock to drop.

Shares Eligible for Future Sale May Adversely Affect the Market Price of Our
Common Stock

A substantial number of shares of our common stock are eligible for
future sale in the public market. These include 12,214,499 shares that are
outstanding as of November 22, 2000 as well as 29,574,135 shares that may be
issued upon exercise of outstanding stock options, warrants and convertible
notes and debentures. In addition, if we sell a substantial number of shares of
our common stock in the public market following this offering, or if the public
perceives that we might do so, the market price of our common stock could drop
because of such sales. Sales of shares of our common stock held by our
affiliates could have similar adverse effects on the market price of our common
stock. The issuance of shares of our common stock in the future also could have
a material adverse effect on our ability to raise equity capital. See
"Description of Capital Stock."

Current Stockholders May Be Diluted if We Make Future Equity Issuances or if
Outstanding Options, Convertible Securities and Outstanding Debt Are Exercised
For or Converted Into Shares of Common Stock

"Dilution" refers to the reduction in the voting effect and
proportionate ownership interest of a given number of shares of common stock as
the total number of outstanding shares increases. Our issuance of additional
stock, convertible preferred stock and convertible debt may result in dilution
to the interests of shareholders and may also result in the reduction of our
stock price. The sale of a substantial number of shares into the market, or even
the perception of that sales could occur, could depress the price of our common
stock.

We have issued a substantial number of compensatory options and
warrants to directors, employees and consultants who perform services for us.
The exercise of such options and warrants may result in additional dilution.
Also, such issuances have and may continue to cause our net loss per share to
increase and result in substantial non-cash charges. As a result, the market
price of our common stock could further drop. In addition, if we issue shares of
common stock upon conversion of our Series A Convertible Preferred Stock, the
shares will be issued at a discount to their then-prevailing market price. These
discounted sales could cause the market price of our common stock to drop. See
"Issuances of Common Stock Upon Conversion of Our Outstanding Series A
Convertible Preferred Stock and Certain Warrants." We may find it more difficult
to raise additional equity capital if it should be needed for our business while
options, warrants and convertible securities are outstanding. At any time at
which holders of the options, warrants or convertible securities might be
expected to exercise them, we would probably be able to obtain additional
capital on terms more favorable than provided by those securities. Also, certain
holders of convertible debt securities, including Messrs. Lu and Schillen, have
the right to require registration under the Securities Act of the shares of
common stock that are issuable upon conversion of the convertible securities.
The cost of effecting any required registration may be substantial.

Our Stock Price is Volatile

The stock market from time to time experiences significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may cause the market price
of our common stock to drop. In addition, the market price of our common stock
is highly volatile. Factors that may cause the market price of our common stock
to drop include:

o fluctuations in our results of operations;

o timing and announcements of new customer orders, new products, or
those of our competitors;

o changes in stock market analyst recommendations regarding our common
stock;

o failure of our results of operations to meet the expectations of stock
market analysts and investors;

o acquisition of new products or videocassette or DVD titles;

o increases in the number of outstanding shares of our common stock
resulting from sales of new shares, or the exercise of warrants, stock
options or convertible securities;

o reluctance of any market maker to make a market in our common stock;

o changes in investors' perception of the videocassette and DVD
distribution industry generally; and

o general stock market conditions.

There is a Limited Existing Market for Our Common Stock

Our common stock is quoted on the NASD OTC Bulletin Board under the
symbol "DMEC." No assurance can be made that an active market will continue for
our common stock.

Our Common Stock is Subject to the SEC's Penny Stock Regulations

The common stock will be subject to the SEC's "penny stock" rules.
These regulations define a "penny stock" to be any equity security that has a
market price (as defined) of less than $5.00 per share, subject to certain
exceptions, including securities listed on Nasdaq. For any transaction involving
a penny stock, unless exempt, these rules require the delivery, prior to the
transaction, of a disclosure schedule prepared by the SEC relating to the penny
stock market. The broker-dealer also must disclose the commissions payable to

both the broker-dealer and the registered underwriter, current quotations for
the securities, information on the limited market in penny stocks and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. In addition, the
broker-dealer must obtain a written acknowledgment from the customer that such
disclosure information was provided and must retain such acknowledgment for at
least three years. Further, monthly statements must be sent disclosing current
price information for the penny stock held in the account. The penny stock rules
also require that broker-dealers engaging in a transaction in a penny stock make
a special suitability determination for the purchaser and receive the
purchaser's written consent to the transaction prior to the purchase. The
foregoing rules may materially and adversely affect the liquidity for the market
of our common stock. Such rules may also affect the ability of broker-dealers to
sell our common stock, the ability of holders of such securities to obtain
accurate price quotations and may therefore impede the ability of holders
(including, specifically, the purchasers in this offering) of our common stock
to sell such securities in the secondary market.

Certain Provisions of Our Charter and Bylaws May Discourage Mergers and Other
Transactions

Certain provisions of our certificate of incorporation and bylaws may
make it more difficult for someone to acquire control of us. These provisions
may make it more difficult for stockholders to take certain corporate actions
and could delay or prevent someone from acquiring our business. These provisions
could limit the price that certain investors might be willing to pay for shares
of our common stock. See "Description of Capital Stock."

Our Board of Directors May Issue Additional Shares of Preferred Stock Without
Shareholder Approval

Our certificate of incorporation authorizes the issuance of up to
5,000,000 shares of preferred stock of which 1,000,000 have been designated as
Preferred Stock and 50 have been designated as Series A Convertible Preferred
Stock. Accordingly, our board of directors may, without shareholder approval,
issue one or more new series of preferred stock with rights which could
adversely affect the voting power or other rights of the holders of outstanding
shares of preferred stock or common stock. In addition, the issuance of
additional shares of preferred stock may have the effect of rendering more
difficult, or discouraging, an acquisition or change of control of Diamond
Entertainment. Although we do not have any current plans to issue any additional
shares of preferred stock, we may do so in the future.

Our Directors and Executive Officers Own a Substantial Percentage of Our Common
Stock

Our directors and executive officers beneficially own approximately
29.94% (25.73% after completion of this offering) of our outstanding common
stock. These stockholders, if they acted together, could exert substantial
control over matters requiring approval by our stockholders. These matters would
include the election of directors and the approval of mergers or other business
combination transactions. This concentration of ownership may discourage or
prevent someone from acquiring our business. See "Principal Stockholders."

Further, our board of directors is classified into three classes and
directors that are members of each class serve a staggered three year term. Such
classification of the Board of Directors was implemented for the purpose of
maintaining continuity of management and of the Board of Directors. However, our
directors were all elected at the 2000 annual meeting of stockholders for a
concurrent term of three years. See "Management."

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve a
number of risks and uncertainties. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "intends, "plans," "should," "seeks," "pro forma,"
"anticipates," "estimates," "continues," or other variations thereof (including
their use in the negative), or by discussions of strategies, plans or
intentions. Such statements include but are not limited to statements under the
captions "Risk Factors," "Management's Discussion and Analysis," "Business" and
elsewhere in this prospectus. A number of factors could cause results to differ
materially from those anticipated by such forward-looking statements, including
those discussed under "Risk Factors" and "Business."

In addition, such forward-looking statements are necessarily dependent
upon assumptions and estimates that may prove to be incorrect. Although we
believe that the assumptions and estimates reflected in such forward-looking
statements are reasonable, we cannot guarantee that our plans, intentions or
expectations will be achieved. The information contained in this prospectus,
including the section discussing risk factors, identifies important factors that
could cause such differences.

The cautionary statements made in this prospectus are intended to be
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligations to update such forward-looking
statements or to update the reasons why actual results could differ materially
from those anticipated in such forward-looking statements.

ISSUANCE OF COMMON STOCK
UPON CONVERSION OF OUR SERIES A CONVERTIBLE PREFERRED STOCK
AND CERTAIN WARRANTS

On May 11, 2000, we entered into a securities purchase agreement with
certain of the selling stockholders. Under that agreement, we issued and sold a
total of 50 shares of Series A Convertible Preferred Stock for aggregate
consideration of $500,000, or $10,000 per share. Commencing August 9, 2000, the
Series A Convertible Preferred Stock is convertible into our common stock at the
lesser of $.08 and 78% of the average of the closing bid prices of our common
stock on any five trading days during the ten trading days preceding the date of
conversion. A premium at the rate of 6% per annum is payable on the Series A
Convertible Preferred Stock in the form of additional shares of common stock
upon conversion of the Series A Convertible Preferred Stock. In no event can all
50 shares of Series A Convertible Preferred Stock (including the premium) be
converted into more than 11,875,000 shares of our common stock.

In connection with the sale of the Series A Convertible Preferred
Stock, we issued an aggregate of 1,500,000 warrants to purchase shares of our
common stock to The May Davis Group, Inc., and certain designees of May Davis,
and an additional 25,000 warrants to purchase our shares to Butler Gonzalez,
LLP, counsel to May Davis. May Davis acted as placement agent for the sale of
the Series A Convertible Preferred Stock. The warrants are exercisable at a
price of $.07 per share for a period of five years.

Pursuant to a registration rights agreement we entered into with the
selling stockholders who purchased our Series A Convertible Preferred Stock, we
have filed a registration statement under the Securities Act, of which this
prospectus forms a part, in order to permit the selling stockholders to resell
to the public any shares that they acquire upon conversion of the Series A
Convertible Preferred Stock and that are acquired upon exercise of the warrants
referred to above. The number of shares that we have registered has been
determined on the basis of the number of shares that would be issuable upon
conversion of the Series A Convertible Preferred Stock as of November 22, 2000,
subject to the maximum number of shares of common stock that may be issued upon
such conversion plus the number of shares issuable upon exercise of the
warrants. We are required to pay a penalty if the registration statement of
which this prospectus forms a part is not declared effective on or before
October 9, 2000. The amount of the penalty is 1 1/2% of the liquidation value of
a share for each month or part thereof that the registration is not effective.
As of the date of this prospectus, we have paid aggregate penalties to the
holders of our Series A Convertible Preferred Stock of approximately $15,000.

DETERMINATION OF OFFERING PRICE

The common stock offered by this prospectus may be offered for sale
from time to time in transactions on the NASD's OTC Bulletin Board, in
negotiated transactions, or otherwise, or by a combination of these methods, at
fixed prices which may be changed, at market prices at the time of sale, at
prices related to market prices or negotiated prices. As such, the offering
price is indeterminate as of the date of this prospectus.

USE OF PROCEEDS

The proceeds from the sale of the shares will be received directly by
the selling stockholders. No proceeds will be received by us from the sale of
the shares offered hereby.

However, we will receive the proceeds, if any, relating to the exercise
of the warrants. The exercise price of the warrants is $.07 per share. We
propose using the proceeds of the exercise of the warrants, if any, for general
working capital purposes.

CAPITALIZATION

The following table sets forth our capitalization as of September 30,
2000.

Long-term obligations:
Notes payable, less current portion $ 52,112
Notes payable related party, less current portion 100,000
Convertible Debentures, less current portion 100,000
Capital lease obligations, less current portion 5,788

Total long-term obligations 257,900

Stockholders' equity:

Preferred Stock, no par value: 5,000,000 shares
authorized, 483,301 shares outstanding 809,593
Common Stock, no par value; 600,000,000 shares
authorized, 69,634,029 shares outstanding 14,466,035

Accumulated deficit (18,183,213)
Treasury stock (48,803)

Total stockholders' deficiency (2,956,388)

Total capitalization $ 2,698,488
=============

PRICE RANGE OF COMMON STOCK

Our common stock is quoted on the NASD's OTC Bulletin Board under the
symbol "DMEC." The range of high and low bid information for our common stock
for each full quarterly period during our last two fiscal years and for the
first quarter of fiscal 2001, is as follows:

Period High Bid Low Bid
------ -------- -------
Fiscal 1999
- -----------
1st quarter 0.135 0.041
2nd quarter 0.16 0.055
3rd quarter 0.0625 0.0625
4th quarter 0.125 0.08
Fiscal 2000
1st quarter 0.24 0.06
2nd quarter 0.19 0.06
3rd quarter 0.11 0.02
4th quarter 0.20 0.05
Fiscal 2001
1st quarter 0.125 0.045
2nd quarter 0.067 0.024

These quotations were obtained from the NASD's OTC Bulletin Board
quarterly quote summaries, and reflect interdealer prices, without retail
markup, markdown, or commission and may not represent actual transactions. On
November 22, 2000, the closing bid price for our common stock was $.025. As of
the same date, there were 2,450 holders of record of our common stock.

The transfer agent for our common stock is Continental Stock Transfer &
Trust Company, New York, New York.

DIVIDEND POLICY

We have never paid any cash dividends on our common stock. We intend to
retain all earnings, if any, for use in our business operations and in the
expansion of our business and do not anticipate paying cash dividends on our
common stock in the future. Declaration and payment of future dividend, if any,
will be at the sole discretion of our board of directors.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Six Months Ended September 30, 2000, Compared With Six Months Ended September
30, 1999

Overview

During the six months ended September 30, 2000, we continued to
implement our operational changes to meet our primary goals in generating
profits in fiscal 2001, and to position Diamond Entertainment as a going concern
to generate positive cash flow starting the fourth quarter of fiscal year 2001.
We have made strong gains towards converting 50% of our video products sales to
higher margin DVD format sales during fiscal year 2001. During the quarters
ended June 30, 2000 and September 30, 2000, DVD product sales accounted for
approximately 8% and 30% of total sales, respectively. We have also reduced
operating expenses by approximately $648,000 during the six month period ended
September 30, 2000 when compared to the same period a year earlier.

Although we believe that the outlook is favorable, there can be no
assurance that market conditions will continue in a direction favorable to us.

Results of Operations

Our net loss before preferred dividend for the six months ended
September 30, 2000 was approximately $522,000 as compared to a net loss of
approximately $1,349,000 for the same period last year. The primary reason for
the net loss was our operating loss of approximately $361,000.

Our operating loss for the six months ended September 30, 2000 was
$361,000 as compared to an operating loss of approximately $1,049,000 for the
same period last year. The decrease in our operating loss arose primarily from
decreased operating expenses of approximately $648,000, and an increase in gross
profit of approximately $40,000.

Our sales for the six months ended September 30, 2000 and 1999, were
approximately $1,473,000 and $1,673,000 respectively. Our sales decreased by
approximately $200,000 from the same period a year earlier with decreased video
product sales and toy products of approximately $37,000 and $163,000,
respectively. The lower video and toy product sales when compared to the same
period a year earlier was attributable to lower demand from our major customers
resulting from primarily, the lack of new products. We plan to acquire new
titles for videocassette and DVD products over the remainder of fiscal year
2001. Sales of our products are generally seasonal resulting in increased sales
starting in the third quarter of the fiscal year.

Cost of sales for the six months ended September 30, 2000 and 1999 were
$921,000 and $1,160,000 or 63% and 69% of sales, respectively. The decrease in
cost of goods of approximately $239,000 was due to lower sales volume offset by
higher DVD product margins.

Gross profit for the six months ended September 30, 2000 and 1999 was
approximately $553,000 and $513,000, or 37% and 31% of sales, respectively. The
higher gross margin of approximately $40,000 was primarily the result of product
mix moving towards the higher margin DVD product line offset by lower sales
volume.

Operating expenses for the six months ended September 30, 2000 and 1999
were approximately $914,000 and $1,562,000, respectively. This decrease in
operating expenses of approximately $648,000 was the result of our lower expense
levels in general administrative, selling, bad debt, and non-cash consulting and
compensation. General administrative expenses for the six months ended September
30, 2000 and 1999 were approximately $593,000 and $768,000, respectively. The
decrease in general administrative expenses of approximately $175,000 was
primarily the result of lower expense levels of office rent, salaries, and
payroll related costs. Selling expenses for the six months ended September 30,
2000 and 1999 were approximately $215,000 and $508,000, respectively. The
decrease in selling expenses of approximately $293,000 was attributable mainly
to lower expense levels in salaries, royalty expense, freight, advertising and
sales promotion related expenses. Non-cash consulting and compensation expenses
for the six months ended September 30, 2000 and 1999 were approximately $70,000
and $286,000, respectively. The decrease of approximately $216,000 resulted
primarily from the lower costs associated with the issuance of stock options to
consultants and employees. Bad debt expense for the six months ended September
30, 2000 and 1999 were approximately $91,000 and $66,000, respectively. Interest
expense for the six months ended September 30, 2000 and 1999 were $161,000 and
$308,000 respectively. The decrease in interest expense of approximately
$147,000 was the result of lower levels of borrowings together with lower
non-cash interest expenses associated with issuance of stock options. As of
September 30, 2000, our outstanding debt was approximately $3,802,000 of which
approximately $3,544,000 is classified as current.

Our auditors issued a going concern report for the year ended March 31,
2000. There can be no assurance that management's plans to reduce operating
losses will continue or our efforts to obtain additional financing will be
successful.

Year Ended March 31, 2000 Compared With the Year Ended March 31, 1999

Restatement and Correction of Errors

Our consolidated balance sheet and related consolidated statements of
operations, stockholders' deficiency and cash flows for the year ended March 31,
1999, were re-audited. As the result of this re-audit, we have restated our
fiscal year 2000 financial statements to expense $255,000 of deferred costs,
which were incurred due to the issuance of stock options. Also, the 2000
financial statements have been adjusted to reflect cumulative adjustments of
$308,209 for 1999 restatements, which have decreased the net loss.

We have restated our March 31, 1999 financial statements to reflect
adjustments increasing our net loss by approximately $1,123,000. The
management's discussion and analysis set forth in this section are based upon
the restated financials for the two years ended March 31, 2000.

The financial statements for the period ended March 31, 1999, were
restated as a result of the following:

1. In 1999, we issued convertible debentures for $175,000 and $100,000 to an
unrelated third party and a $50,000 convertible debenture to our President.
Since the debentures are convertible into restricted shares of our common stock
at a rate below market price of our common stock on the date of issuance of the
debentures, the first 20% of the below market price was attributed to the lack
of tradability of the shares, due to restrictions on sale and the remainder of
the below market price was attributed to financing costs. The additional amount
of financing cost for such debentures was calculated to be $105,000, $73,600 and
$37,600, respectively. We did not record the effect of this matter in our
financial statements. The effect on the financial statements was a $216,200
increase in common stock and a corresponding increase in selling, general and
administrative expense.

2. In 1999, we converted $145,959 of accrued interest into 3,445,011 shares of
our common stock at a conversion rate below the market price of our common
stock. We recorded additional interest expense of $157,987 for the difference
between the conversion price and the market price of our common stock. The
effect on the financial statements was a $157,987 increase in common stock and a
corresponding increase in selling, general and administrative expense.

3. Our equity investment was recorded at a value of $50,000 when the book value
was approximately $7,500. The effect on the financial statements was a $42,500
decrease in the investment and a corresponding decrease in the valuation
adjustment for the investment.

4. We had $175,000 of deferred costs associated with a loan fee, which was being
amortized over the life of the loan. The amortization expense for 1999 was
understated by $16,468. The effect on the financial statements was a $16,468
decrease in total assets and a corresponding increase in selling, general and
administrative expense.

5. In 1999, we had approximately $176,000 of consignment sales recorded as
accounts receivable. The effect on the financial statements was a $176,000
decrease in sales and $86,000 decrease in cost of goods sold for a $90,000
decrease in the gross profit.

6. In 1999, we issued 1,524,523 shares of common stock for services rendered.
The shares were valued at $34,500. However, the market value of the common stock
on the date of issuance was $49,905. The effect on the financial statements was
a $15,405 increase in common stock and a corresponding increase in selling,
general and administrative expense.

7. In 1999, we granted an option to purchase 7,150,000 shares of our common
stock to consultants. The options were valued at $39,000. However, the estimated
market value of the options was $430,426. The effect on the financial statements
was a $391,426 increase in common stock and a corresponding increase in selling,
general and administrative expense.

8. In 1999, we granted an option to purchase 4,000,000 shares of our common
stock to employees. We have elected to account for employee stock options under
APB 25 and recorded an intrinsic expense of $15,000 for these options since the
option price was below the market price of our common stock on the date of
grant. However, the actual expense had been calculated to be $160,000. The
effect on the financial statements is a $145,000 increase in common stock and a
corresponding increase in selling, general and administrative expense.

9. As of March 31, 1999, we had $48,180 of deferred costs, which were incurred
due to the issuance of stock options to consultants. Since the consultants were
100% vested in the options, we have determined that the associated cost of the
options have no future value to us. The effect on the financial statements was a
$48,180 decrease in total assets and a corresponding increase in selling,
general and administrative expense.

Results of Operations

Our net loss for the year ended March 31, 2000 was approximately
$3,937,000 as compared to a net loss of approximately $2,714,000 for the same
period last year. The primary reason for the net loss was our operating loss of
approximately $3,576,000.

Our operating loss for the year ended March 31, 2000 was $3,576,000 as
compared to an operating loss of approximately $2,448,000 for last year. The
increase in our operating loss of approximately $1,128,000 arose primarily from
reduced gross profit of approximately $959,000, and increased non-cash expenses
in connection with the issuance of equity instruments as compensation and other
fees of approximately $450,000, offset by a reduction in other operating
expenses of approximately $281,000.

Our sales for the years ended March 31, 2000 and 1999, were $3,828,261
and $4,373,303 respectively. Our sales significantly decreased by approximately
$545,000 from the prior year with decreased video and toy product sales of
approximately $351,000 and $194,000, respectively. The lower video product sales
for the year ended March 31, 2000, were primarily the result of our suspending
most of our acquisition of new video titles until January of 2000, which is when
we received favorable responses substantiating market acceptance for certain
video titles in DVD, and the cancellation of a significant holiday order from a
major chain store during October 1999. The lack of new video titles and the
cancellation of the major holiday order forced us to sell our existing inventory
at much reduced prices to generate cash for our operation, which also
contributed the lower sales dollar volume during the fiscal year ended March 31,
2000. The lower toy product sales when compared to the prior year were primarily
attributed to lower volume purchases from our major toy customer and sales of
slower moving toy products at sales prices below previous year's market prices.
Sales of our products are generally seasonal resulting in increased sales
starting in the third quarter of the fiscal year. We expect the sales to
increase in fiscal year ending March 31, 2001. Our sales for the quarter ended
March 31, 2000, were approximately $633,000 as compared to the prior two
quarters which averaged approximately $1,248,000 a quarter. This decrease in the
last quarter was primarily attributable to the lack of new video titles
mentioned above and the sale of video and toy product inventories at reduced
selling prices.

Cost of sales for the years ended March 31, 2000 and 1999 were
approximately $3,348,000 and $2,934,000 or 88% and 67% of sales, respectively.
The significant increase in cost of sales as a percentage of sales of 21% was
primarily the result of lower sales prices charged to customers for video and
toy products and the reduction of certain video and slow moving toy inventory
down to its net realizable value. During fiscal year 2000, we generated custom
duplication sales of approximately $618,000 having cost of sales 89% of sales
which also contributed to the increase in cost of sales as a percentage of
sales.

Gross profit for the years ended March 31, 2000 and 1999 were
approximately $480,000 and $1,439,000, or 12% and 33% of sales, respectively.
The significant decrease in the gross profit as a percentage of sales was
primarily due to the reduction in our selling prices on video and toy products,
lower margin custom duplication sales and the write-down of certain video and
toy inventory.

Operating expenses for the years ended March 31, 2000 and 1999 were
approximately $4,056,000 and $3,887,000, respectively. This increase in
operating expenses of approximately $169,000 was primarily the result of
increases in non-cash expenses in connection with the issuance of equity
instruments as compensation and other fees of approximately $450,000, and offset
by lower selling and general administrative expenses of approximately $215,000
and $66,000, respectively. The lower general and administrative expenses of
approximately $66,000 was primarily the result of higher expense levels in
facility rent of approximately $147,000, offset by a decrease in bad debt of
approximately $213,000. The lower level of selling expenses of approximately
$215,000 was primarily attributable to lower expenses in marketing and sales
salaries and sales commissions of approximately $123,000 and $80,000,
respectively.

Bad debt expense for the years ended March 31, 2000 and 1999 were
approximately $99,000 and $312,000, respectively, a decrease of approximately
$213,000.

Interest expense for the years ended March 31, 2000 and 1999 were
$418,524 and $463,905, respectively. The decrease in interest expense in fiscal
2000 over fiscal 1999 of approximately $45,000 was primarily the result of lower
levels of accounts receivable and asset based borrowings. As of March 31, 2000,
our outstanding debt was approximately $3,940,000 of which approximately
$282,000 is classified as long term.

Year Ended March 31, 1999 Compared with the Year Ended March 31, 1998

Results of Operations

Our net loss for the year ended March 31, 1999 was approximately
$2,700,000 as compared to a net loss of approximately $1,869,000 for the same
period last year. The primary reason for the net loss was our operating loss of
approximately $2,448,000.

Our operating loss for the year ended March 31, 1999 was approximately
$2,448,000 as compared to an operating loss of approximately $557,000 for the
prior year. Our operating loss arose primarily from lower sales of approximately
$4,400,000 and reduced gross profit of approximately $1,600,000, offset by a
reduction in operating expenses of approximately $400,000.

Our sales for the years ended March 31, 1999 and 1998, were $4,373,303
and $8,724,149, respectively. Our sales decreased by approximately $4,400,000
from the prior year with decreased video and toy product sales of approximately
$2,200,000 each. The lower video product sales for the year ended March 31,
1999, were primarily the result of lower purchases by three of our major
retailers. One of our major video retailers was sold, the second retailer
experienced financial difficulties and the third opted to purchase videos from
our competitors. The lower toy product sales when compared to the same period a
year earlier was attributed to higher sales realized from the initial roll out
of our new toy line during the previous year's holiday season. Sales of our
products are generally seasonal resulting in increased sales starting in the
third quarter of the fiscal year. We expect the sales to increase in fiscal year
ending March 31, 2000. Our sales for the quarter ended March 31, 1999 were
approximately $800,000 as compared to the prior two quarters which averaged
approximately $1,500,000 a quarter. This decrease in the last quarter was
attributable to the selling of certain toy inventory at a reduced selling price
as a result of marketing difficulties.

Cost of sales for the years ended March 31, 1999 and 1998 were
approximately $2,900,000 and $5,700,000 or 66% and 65% of sales, respectively.
The increase in cost of sales as a percent of sales was primarily the result of
reducing certain toy inventory down to its net realizable values.

Gross profit for the years ended March 31, 1999 and 1998 were
approximately $1,400,000 and $3,000,000, or 34% and 35% of sales, respectively.
The decreased percentage for gross profit as a percent of sales was primarily
due to the write-down of certain toy inventory.

Operating expenses for the years ended March 31, 1999 and 1998 were
approximately $4,000,000 and $3,600,000, respectively. This increase in
operating expenses of approximately $400,000 was primarily the result of the
increase in non-cash expenses in connection with the issuance of equity
instruments as compensation and other fees of approximately $500,000 offset by a
net decrease in other operating expenses of approximately $100,000.

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

Interest expense for the years ended March 31, 1999 and 1998 were
$463,905 and $420,583, respectively. The increase in interest expense in fiscal
1999 over fiscal 1998 of approximately $43,000 was the result of higher levels
of borrowing. As of March 31, 1999, our outstanding debt was approximately
$1,960,000, primarily all of which is classified as current. Interest income for
the years ended March 31, 1999 and 1998 was $1,000 and $129,000, respectively.
The lower accounts receivable from ATRE at March 31, 1998, and the subsequent
cash payments from ATRE, resulted in lower accrued interest income for the year
ended March 31, 1999 when compared to the same period a year earlier.

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

Liquidity and Capital Resources

Our working capital deficit at September 30, 2000 was $3,192,185 as
compared with a working capital deficit of $2,473,275 at September 30, 1999.
This increase in the working capital deficit of approximately $719,000 is
primarily the result of lower levels of accounts receivable, inventory and
deferred consulting costs, offset by decreased borrowing.

Our working capital deficit at March 31, 2000 was $3,531,291 as
compared with working capital deficit of $2,244,472 at March 31, 1999. This
increase in the working capital deficit of approximately $1,287,000 is primarily
the result of lower levels of accounts receivable and inventory. As a result of
lower sales recorded during the fourth quarter of fiscal 2000, when compared to
sales in the same quarter a year earlier, accounts receivable were lower by
approximately $140,000. Inventory at March 31, 2000 was approximately $1,100,000
as compared with approximately $2,200,000 at March 31,1999. This decrease in
inventory of approximately $1,100,000 was the result of our liquidation of our
slower moving video and toy inventories at prices at or below our actual cost,
together with lower inventory requirements and a write down of certain video and
toy inventory.

Operations

For the six months ended September 2000, cash utilized for operations
was approximately $440,000 as compared to $321,000 for the six months ended
September 30, 1999. Net cash provided by financing activities during the six
months ended September 30, 2000, and 1999 were approximately $498,000 and
$264,000, respectively.

We have also been experiencing difficulties in paying our vendors on a
timely basis. These factors create uncertainty whether we can continue as a
going concern.

In the third quarter of fiscal 2001 we will require additional
financing. A back-up plan is being considered in case this planned financing is
not in place when required. We will have an alternative cash flow plan to react
to this situation. Our principal objective is to have the above back-up plan and
required financing implemented in fiscal 2001, which will lead to a profitable
operation if they are successfully implemented, and will be subject to market
and other conditions. Although we believe that the outlook is favorable, there
can be no assurance that market conditions will continue in a direction
favorable to us.

For the year ended March 31, 2000, cash utilized for operations was
approximately $398,000 as compared to $2,887,000 for the year ended March 31,
1999. Net cash provided by financing activities during the year ended March 31,
2000 and 1999 were approximately $483,000 and $2,474,000 respectively.

In June of 1998, we borrowed approximately $2,700,000 in short term
loans from two companies and the borrowings were used primarily to reduce our
accounts payable balance. On October 1, 1999, the balance of these loans totaled
approximately $1,880,725 and during the quarter ended December 31, 1999, we
converted these short term loans into one year 7% Convertible Promissory Notes
of $1,071,225 and $809,500 each, both due on September 30, 2000. We subsequently
extended those notes through September 1, 2001. We intend to utilize future debt
or equity financing or debt to equity conversions to help satisfy past due
obligations and to pay down our debt obligations.

In fiscal year 2000 we continued to operate at a loss and our working
capital was substantially reduced. As a result, we have formulated a new plan
which has as its primary goals 1) generating an operating profit in fiscal 2001,
with the turn around complete in the second quarter and 2) positioning e-DMEC as
a going concern which can generate positive cash flow starting the fourth
quarter and allowing us to operate as a significant company in the distribution
of home video cassettes, DVDs and general merchandise business. In order to
achieve these objectives, we propose to undertake operating changes in fiscal
2001. These include:

o We are seeking to obtain additional debt or equity financing. In the event
that we secure such financing, the first $500,000 to $600,000 will be used
to expand our product line and increase sales. Any amounts over this will
be used to pay down notes payable to a related party. We have no agreement
nor any assurance that we will be able to secure any such financing.

o Extend the maturity date for a $100,000 convertible debenture and $150,000
of notes payable to a related party, in order to reduce our cash
requirements.

o Convert approximately $1,051,000 of convertible debentures and
approximately $810,000 of related party notes payable in order to reduce
our cash requirements.

o Convert approximately 50% of our video products to DVD format in order to
keep current with existing demand and technology. The new products are
estimated to increase overall sales by approximately 18%, which will add to
the overall gross profit margin by approximately 13%.

o Reduce operating expense to the lowest level possible, as we have relocated
our office and warehouse facilities in order to reduce annual rent expense
by approximately $250,000.

o Evaluate the lowest level of employee requirements to operate effectively,
as we have reduced our payroll and payroll related expenses by
approximately $350,000.

We believe we have adequate cash resources to sustain our operations
through the second quarter of fiscal 2001.

In August of 1999, we entered into an agreement with American Champion
Media, Inc., for the exclusive rights to distribute a workout video titled
"Strong Mind, Fit Body," starring Joe Montana in all formats of video and DVD.
The initial term of the agreement is two years. Royalty payments can range
between $2.50 to $3.75 depending on the length of the program and quantities
sold. We completed development of this product in July 2000. Because of a lack
of market interest, on October 31, 2000, we cancelled the agreement with
American Champion and have no further liability under the agreement.

In December of 1999, we entered into an agreement with Romagosa
International Merchandising, S.L., for a full length animated feature titled
"Don Quixote," for the exclusive rights to distribute video and DVD units in the
United States and Canada and their possessions. We paid advance royalties of
$7,500 for the year ended March 31, 2000 and $7,500 in June of 2000.

Beginning in October 1998, we entered into a four-year lease expiring in
June 2002 for use as executive offices and manufacturing and warehouse
facilities for approximately $21,800 monthly. During March 2000, our lessor
brought action against us to recover delinquent rental payment and penalties
arising from the termination of this lease. The action against us resulted in a
stipulated judgment whereby we agreed to pay $72,000.00 at 10% interest by
paying $6,600.00 per month for twelve consecutive months beginning April 1, 2000
through March 1, 2001. There is a penalty clause for a failure to pay in a
timely manner which increases the total amount to $119,000 with immediate
acceleration in the event of a default under the stipulated judgment. The
required payments through June 30, 2000 all have been made in a timely manner
and there have been no defaults. We leased a sales office space in Freehold, New
Jersey for approximately $2,400 per month. This lease was to expire on October
31, 2001, however, in March of 2000 we successfully negotiated the termination

of this lease by forfeiting the lease rental deposits of $4,800. Rent expense
for this facility was approximately $20,000 for the year ended March 31, 2000.
Also we leased for $9,274 per month office and warehousing space which would
expire March 2001. Rent expense for this facility was approximately $111,283 for
the year ended March 31, 2000. We have entered into a sublease for this space
with a subtenant beginning January 1, 1999 which requires the subtenant to pay
approximately $9,494 per month from March 1, 1999 through February 2000, and
$9,936 per month from March 1, 2000 through March 31, 2001.

Investing

For the six months ended September 30, 2000 and 1999, investments in
masters and artwork were $34,300 and $26,692, respectively. Management continues
to seek to acquire new titles to enhance its product lines.

For the years ended March 31, 2000 and 1999, investments in masters and
artwork were $64,419 and $72,073, respectively. Management continues to seek to
acquire new titles to enhance its product lines.

American Top Real Estate, Inc. 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. We paid
$50,000 for a 50% interest in ATRE. Our arrangement with our partners in ATRE
requires that all parties contribute capital or loans pro rata according to
their interests whenever required by ATRE for land acquisition, principal or
interest payments, property taxes or other expenses.

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

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

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

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

On November 28, 1998, we were advised by ATRE that it had no binding
sales contracts for the remaining parcels of real estate owned by ATRE as these
parcels of land continue to be developed for commercial use. Contracts that were
pending have not closed due to possible changes in interest rates or possible
overall market conditions. In addition, we were advised by ATRE that proceeds
realized by ATRE during fiscal 1998 were reinvested into other parcels to
improve the ability to sell the remaining parcels. In December 1998, we received
from a real estate development specialist an informal valuation reflecting an
aggregate approximate valuation of $5,200,000 for the remaining ATRE parcels.
Although we believed that final sales contracts would be able to be consummated,
at this time it is not possible to predict with any certainty when the closing
of such sales contracts of commercial real estate may occur or whether the
proceeds expected by us for their share in this real estate could be
significantly less than anticipated. Therefore, the ultimate realizable value of
the receivable for advances from ATRE could be substantially less than the
preadjusted carrying value of $1,600,000. We set up a valuation allowance in the
quarter ended March 31, 1998, of $1,117,788 and, accordingly, charged operations
for that amount so that the amount due from ATRE at March 31, 1998 was presented
at the amount of the 1998 subsequent receipts of approximately $500,000. Based
upon the above circumstances the likelihood is that $1,117,788 from future
proceeds from the sale of the ATRE parcels will not be realized by us with any
certainty. At March 31, 1999, no monies were due from ATRE.

In June 1998, we borrowed approximately $809,500 from ATRE to finance
certain purchases of toy products. During the quarter ended December 31, 1999,
we converted the amount borrowed of $809,500 into a one year 7% Convertible
Promissory Note due on September 30, 2000. During the year ended March 31, 2000,
we borrowed $600,500 from ATRE and paid back $81,000. We owed ATRE approximately
$478,900 in short term notes at March 31, 2000.

On June 2, 1999, ATRE entered into a real estate sale agreement for
approximately $60,000 and in September 1999, entered into a sales agreement for
another parcel of the remaining acres for approximately $550,000. During June
2000, the sales agreement for $600,000 entered into on June 2, 1999 was canceled
by the buyer who forfeited the $25,000 purchase deposit to ATRE. On September
19, 2000, ATRE closed the sale for one parcel of the remaining acres for
$550,000. The net proceeds of this sale was applied against ATRE's outstanding
mortgage loan which was collateralized by the property sold. ATRE had previously
repaid to us all past loans it borrowed from us including all applicable
interest and at September 30, 2000, we owed ATRE $568,800 in accumulated loans
it received, consisting of proceeds from ATRE's mortgage loans and partial
proceeds from parcels previously sold. ATRE believes the remaining parcels will
be sold and continues to list the properties with its real estate agent. Future
sales are contingent on market conditions and there can be no assurance that
ATRE will sell the remaining parcels within the next one to three years.

Financing

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

On August 30, 1996, we established a line of credit up to $2,500,000,
whereby, $2,000,000 was backed by pledged receivables and inventory and $500,000
was guaranteed by our President. Interest was at a prime rate plus 3%. Interest
expense from April 1, 1997 through December 31, 1997 was approximately $148,500.
In December 1997, we repaid $469,221 on this line of credit and engaged another
financial institution for a $2,500,000 financing arrangement. This arrangement
is also backed by pledged receivables and inventory. Cost is 1.5% discounted
from pledged invoices for every 30 days for the accounts receivable portion of
the line of credit. The portion of the line of credit backed by inventory is
determined by the lesser of $800,000, 25% of the clients finished toy inventory
or 55% of the clients finished videotape inventory. Interest is charged at
16.18% per annum on this portion of the debt. This was formalized in June of
1998. Interest expense from December 1997 through March 31, 1998 was
approximately $27,500. The Company reported total interest for the years ended
March 31, 2000 and 1999 of approximately $419,000 and $464,000, respectively.

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

As of March 31, 1997, the 10% debentures of $290,000 were converted
into 1,450,000 shares of our common stock by several offshore companies under
Regulation S and $967,988 of convertible promissory notes payable were
outstanding and in default by us. Interest expense of $97,000 and $24,702 was
recorded for the years ended March 31, 1998 and 1997. Subsequent to September
30, 1997, we negotiated a one year extension agreement and agreed to add 15% to
the note as a deferred financing cost of $110,721.

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

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

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

In the June 1998 quarter, our subsidiary received a total of $2,721,860
from related parties to be utilized by us to pay a major supplier for toy
purchases. Subsequently, the related parties were successful in receiving
credits of $743,935 from the toy supplier. These credits were applied by the
related parties to the monies owed by us for the purchases of toys. We repaid
the related parties $50,000 which left an outstanding obligation of $1,927,925
as of March 31, 1999.

We negotiated and intended in July of 1999 to convert this outstanding
related party payables into shares of our common stock. On August 5, 1999, the
option to convert was canceled.

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

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

In February of 1999, we converted $640,000 of the 10% debentures into
8,000,000 shares of common stock. On February 10, 1999, we converted the
remaining balance of $172,661 and unpaid interest of $90,415 into 3,018,254
shares of common stock. It was also agreed that the $175,000 extension bonus,
which was recorded as a deferred financing cost in February of 1999, could be
converted into shares of common stock at an agreed exercise price subject to
market conditions. We amortized $20,000 and $155,000 of the extension bonus as a
financing expense for the year ended March 31, 1999 and March 31, 2000,
respectively. During the year ended March 31, 2000, $175,000 extension bonus and
accrued interest of $13,125 was converted into 3,500,000 shares of our common
stock.

In March and June 1999, we issued callable convertible notes for
$50,000 and $100,000 to James Lu and Jeffrey I. Schillen, respectively. The
notes bear interest at 10% per year with principal and interest due on the first
anniversary of the date of issuance. Each note has been extended for an
additional year. The notes also call for any amount of the outstanding principal
to be converted into restricted shares of our common stock at the option of the
lenders at a conversion rate of $0.05 per share. As of March 31, 2000, neither
of the debentures had been converted.

In March of 1999, we received a total of $150,000 from three investors
and issued promissory notes due in one year with principal and interest paid
bimonthly at an interest rate of 10%. The notes could be used as proceeds for
the exercised options held by the investors. During the year ended March 31,
2000, the note holders used the $150,000 and accrued interest of $2,500 as funds
to exercise their common stock options for a total aggregate of 3,000,000 shares
of our common stock.

In March and April of 1999, we issued two convertible notes for
$100,000 and $50,000, respectively. The notes bear interest at 10% with
principal and interest due on the first anniversary of the date of issuance. The
notes also call for any amount of the outstanding principal to be converted into
restricted shares of our common stock at the option of the lender at a
conversion rate of $0.05 per share. As of March 2000, one investor converted the
$50,000 note into 1,000,000 shares of our common stock.

As of March 31, 2000, the outstanding balance of convertible notes was
$100,000, which the lender extended the due date to March 2001. On June 2, 1999,
we were advised by the convertible note holder of the $100,000 note to waive
receipt of bimonthly principal payments and to continue to receive the bimonthly
interest only payments.

On April 12, 1999, we engaged three consultants for a period of one
year each to provide managerial and strategic planning for financial matters and
our expansion. The consultants received options to purchase an aggregate of
6,000,000 shares of our common stock exercisable at $0.05 per share in exchange
for services to be rendered and the options were to expire on April 11, 2000.
The options had an aggregate fair value at date of grant of approximately
$291,000. These options were exercised in April 1999 by the forgiveness of
$150,000 of notes payable, executed in March 1999 and cash proceeds of $150,000.

On May 25, 1999, we issued to our President, as a bonus, options to
purchase 2,500,000 and 1,000,000 shares of our common stock at $0.05 and $0.10
per share, respectively. The options expire on May 24, 2004. The options had an
aggregate fair market value at date of grant of approximately $681,000. These
options had not been exercised as of the date of this prospectus.

On May 25, 1999, we issued to our V.P. of Sales and Marketing, as a
bonus, options to purchase 500,000 and 500,000 shares of our common stock at
$0.05 and $0.10 per share, respectively. The options expire on May 24, 2004. The
options had an aggregate fair market value at date of grant of approximately
$194,000. These options had not been exercised as of the date of this
prospectus.

In July 1999, we engaged a consultant for a period of one year to
provide managerial and strategic planning for financial matters and expansion.
The consultant received an option to purchase 1,000,000 shares of our common
stock exercisable at $0.10 per share in exchange for services to be rendered and
the option will expire on July 8, 2001. The option had an aggregate fair value
at date of grant of approximately $40,000. These options had not been exercised
as of the date of this prospectus.

On July 13, 1999, we engaged a consultant for a period of one year to
provide advice to undertake for and consult with us concerning managerial and
strategic planning for financial matters and our expansion. The consultant
received an option to purchase 1,000,000 shares of our common stock exercisable
at $0.10 per share in exchange for services to be rendered and the option will
expire on July 12, 2002. The option had an aggregate fair value at date of grant
of approximately $127,000. These options had not been exercised as of the date
of this prospectus.

On August 2, 1999, we engaged two consultants for a period of one year
to provide advice to undertake for and consult with us concerning management,
marketing, consulting, strategic planning, corporate organization and structure,
financial matters in connection with the operation of our businesses, expansion
of services, acquisitions and business opportunities. The consultants received
options to purchase a total of 1,965,000 of our common stock exercisable at $.05
per share in exchange for services to be rendered and the options were to expire
on August 2, 2000. The options had an aggregate fair value at date of grant of
approximately $202,000. The options were exercised during the year ended March
31, 2000 by the forgiveness of $36,250 of principal and interest of debt
outstanding for 725,000 shares and $50,000 cash and the forgiveness of $12,000
of accounts payable for 1,240,000 shares.

During the quarter ended December 31, 1999, we converted approximately
$1,880,725 in related party payables into one year 7% Convertible Promissory
Notes of $1,071,225 and $809,500 each, both due on September 30, 2000. The terms
of the new convertible notes allow us to make partial principal and interest
payments from time to time and the holders of the convertible notes have the
option to request such payments of the indebtedness evidenced by the notes
either in the lawful money of the United States or in an equivalent value
consisting of our common stock. The number of shares to be used, is determined
by dividing the payment amount by the average twenty day bid price for our
common stock during the twenty trading days prior to the date of such payment
date. Also, during the quarter ended December 31, 1999, the related party to
which $1,071,225 was owed by us, effected a transaction under which all its
outstanding shares of common stock were sold to a party unrelated to us. At
March 31, 2000, the balance of the Convertible Promissory Note to the unrelated
party was $1,050,775 as a result of our recording payments toward the note in
March 2000 and by offsetting $20,450 in money owed to us by the unrelated party.
The notes were subsequently extended through September 1, 2001.

On May 11, 2000, we entered into a securities purchase agreement with
eight investors and sold 50 shares of Series A Convertible Preferred Stock to
the investors for total consideration of $500,000, or $10,000 per share. The May
Davis Group, Inc., acted as placement agent for the offering. May Davis received
a placement fee of $40,000 and we issued warrants to purchase 1,500,000 shares
of common stock to May Davis and certain designees of May Davis and warrants to
purchase 25,000 shares of common stock to Butler Gonzalez, LLP, counsel to May
Davis. The warrants are exercisable at a price of $.08 per share.

Commencing August 9, 2000, the Series A Convertible Preferred Stock is
convertible into shares of our common stock and automatically converts into
common stock on April 12, 2002. The conversion price of our Series A Convertible
Preferred Stock is the lower of $.08 per share or 78% of the average of the
closing bid prices of our common stock on any five trading days in the ten
trading day period preceding the date of conversion. The conversion price of the
Series A Convertible Preferred Stock is also adjusted in the event of stock
dividends, stock splits, recapitalizations, reorganizations, consolidations,
mergers or sales of assets. The Series A Convertible Preferred Stock also
provides for a premium upon conversion of the Series A Convertible Preferred
Stock at the rate of 6% per annum payable in additional shares of our common
stock. In no event can the Series A Convertible Preferred Stock be converted
into more than 11,875,000 shares of our common stock. Additional features of the
Series A Convertible Preferred Stock include a redemption feature at our option,
commencing September 8, 2000, of shares of Series A Convertible Preferred Stock
having a stated value of up to $100,000, a mandatory redemption feature upon the
occurrence of certain events such as a merger, reorganization, restructuring,
consolidation or similar event, and a liquidation preference over our common
stock in the event of our liquidation, winding up or dissolution. The Series A
Convertible Preferred Stock does not provide any voting rights, except as may be
required by law.

We are required to file a registration statement to register the common
stock issuable upon conversion of the Series A Convertible Preferred Stock under
the Securities Act to provide for the resale of the common stock. We are
required to keep such registration statement effective until all of the shares
have been resold.

New Authoritative Pronouncements

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

SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1998. Initial application of SFAS No. 133 should be as
of the beginning of a fiscal quarter; on that date, hedging relationships must
be designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. We do
not currently have any derivative instruments and we are not currently engaged
in any hedging activities.

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

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

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

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

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

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

Year 2000 Issue

During the year ended March 31, 2000, we conducted an assessment of
issues related to the Year 2000 and determined that it was necessary to modify
or replace portions of our software in order to ensure that our computer systems
would properly utilize dates beyond December 31, 1999. We completed Year 2000
systems modifications and conversions during the year ended March 31, 2000.
Costs associated with becoming Year 2000 compliant were not material. At this
time, we cannot determine the impact that the Year 2000 issue will have on our
key customers or suppliers. If our customers or suppliers do not convert their
systems to become Year 2000 compliant, we may be adversely impacted. We are
addressing these risks in order to reduce the impact on us. As of the date of
this report, we did not experience any disruption to operations or any other
problems relating to the Year 2000 issue.

Impact of Inflation

We do 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 our operations; however, we believe it could increase
prices to offset increases in costs of goods sold or other operating costs.

BUSINESS

General

We market and sell a variety of videocassette and DVD (Digital Video
Disc) titles to the budget home video and DVD markets, principally through our
New Jersey sales office. During fiscal 2000, we introduced a new line of
greeting cards under our trademark CineChrome (TM). In February 1997, we
acquired a company, now a wholly-owned subsidiary, known as Jewel Products
International, Inc., which is in the business of purchasing and distributing
general merchandise including children's toy products and furniture.

The increasing consumer demand for DVDs offers a new business
opportunity for e-DMEC. In a study entitled "World DVD Planning Report" and
published recently by "Strategy Analytics," the report concluded that DVDs will
become the standard home video format within five years, largely replacing VHS
cassettes, and that DVD video disc shipments, in calendar year 2000, will reach
nearly 400 million units, and continue to soar to 2.3 billion by 2004, or a
market of $44 billion per annum. With identical distribution and marketing
channels as our video products, we are able to immediately introduce our new DVD
line to our retailers and distributors who have been conducting business with us
over the past ten years. While DVD is still in the infant stage of its product
life cycle, we anticipate that the product will offer easier market penetration
and higher profit margins.

We distribute and sell videocassette and DVD titles including certain
public domain programs and certain licensed programs. Public domain programs are
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 programs to
national and regional mass merchandisers, department stores, drug stores,
supermarkets and other similar retail outlets. Generally, we sell our
videocassette products to the public at retail prices ranging from $1.99 to
$9.99 per videocassette and our DVD products at retail prices ranging from $6.99
to $9.99. Our products are also offered on consignment arrangements through one
large mail order catalog company and one retail chain. Sales of our CineChrome
greeting cards during fiscal 2000 and the first fiscal quarter of fiscal 2001
were minimal. The cards retail at between $5.50 to $6.95 per card.

We are committed to acquiring more licensed video and DVD titles and
upgrading the quality of our packaging and pre-printed materials in order to
enhance our available products. Our videocassette program inventory currently
consists of approximately 739 titles, including approximately 464 public domain
programs and approximately 275 licensed programs. The titles comprise motion
pictures, cartoons, educational, sports highlights, computer-literacy and
exercise programs. Our DVD program inventory currently consists of approximately
22 titles, all of which are public domain programs. We are continually
identifying new titles to add to our program inventory and intend to expand our
selection of licensed programs which have historically shown a higher profit
margin than public domain programs.

In September 1998, we entered into an exclusive distribution agreement
with a licensing and distribution company which granted us exclusive
distribution rights for a new product line called CineChrome(TM), a trademarked
product line utilizing classic images of licensed properties from film, music,
sport, fine art and fine photography.

During the third quarter ended December 31, 1999, we contracted with a
customer to furnish video duplication services which were rendered through a
third party contractor. There is no assurance that we will receive additional
orders for such video duplication services in the foreseeable future.

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

On January 31, 2000, we moved our principal offices from Cerritos,
California to a smaller facility in Walnut, California. This move from our prior
facility of approximately 49,000 square feet to our new facility of
approximately 20,000 square feet was part of our effort to reduce our operating
overhead. In making this move, we expect a significant reduction in our
production costs in order to be more competitive in the pricing of the products
we distribute.

We completed our re-development of our web-site in early July 2000 as a
fully operational e-commerce web-site. Although there can be no assurances,
during fiscal 2001, we propose to implement an aggressive marketing and sales
campaign on our web-site to fully capitalize on this new marketing and sales
vehicle to increase our revenue and profit margins.

Diamond Entertainment was incorporated under the laws of the State of
New Jersey on April 3, 1986. In May 1999, we registered in the state of
California to do business under the name "e-DMEC, Inc."

Video and DVD Product Lines

Video Program Line

Our video program inventory consists of a total of nearly 739 titles
appealing to all age groups. The programs include cartoons, horror films,
science fiction, dramas, adventure stories, mysteries, musicals, comedies, fairy
tale adaptations, educational programs, sports highlights, instructional and
exercise programs. Public domain programs account for approximately 464 titles,
and licensed programs account for approximately 275 titles of our program
inventory.

Motion Pictures - Public Domain. We offer a total of 106 feature motion
picture titles including many film classics, such as "Life With Father," "Meet
John Doe," "Pygmalion" and "The Little Princess," which generally appeal to
adult audiences. We also market our own special collection of favorite
performers' "Festivals," including The Three Stooges, Shirley Temple, Bob Hope,
Jack Benny and Milton Berle. We have recently added titles such as "Call of The
Wild," "Love Affair," "Thief of Bagdad," "Return of Rin Tin Tin" and "Seven
Alone" and such horror titles such as "Slime People," "Horror Riser from the
Tomb," "Demon," and "Pieces." Classical biblical tales including "Constantine
and the Cross," "Herod the Great," "Esther and the King," and "David and
Goliath," were also recently added.

Animated Programs - Licensed. We have licensed during fiscal year 2000,
in either English or Spanish language, a very high quality, full-length
animation film, titled "Don Quixote." This film was released in video during the
second quarter of calendar 2000, in Spanish and will be followed by an English
version.

Children's Programs - Licensed and Public Domain. Most of our cartoons
are in the public domain, including 21 cartoon programs redubbed in Spanish.
These programs are generally 30 minutes in length and consist of a series of
cartoons selected by us. We also market approximately 18 children's holiday
features, and 49 titles in our Testaments and Children's Bible series.

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

Sports Programs - Licensed. We have licenses to market 16 sports
videos including five volumes of "Great Sports Memories" and "Basketball's
Fabulous 50 Stars."

Computer Software Learning Tutorial Programs - Licensed. We have
licensed approximately 45 titles of computer tutorial videos including titles
such as "Family Guide to the Computer," "Family Guide to the Internet,"
"Windows`98," "Word for Windows," "Mastering WordPerfect," "Mastering Excel for
Windows," and "Make Your Own Web Page."

TV Episodes - Public Domain. We have added TV episodes including
"Mr. Lucky," "Peter Gunn," and "Yancy Derringer."

DVD Program Line

Our DVD program inventory currently consist of 22 titles, all of which
are public domain feature films and television episodes.

Motion Pictures - Public Domain. We offer titles in DVD format such as
"Zulu," "Constantine and the Cross," "The Demon," "Creature," "Honor Thy
Father," "Great St. Louis Bank Robbery," and "The Holcroft Covenant" which
generally appeal to adult audiences.

Television Episodes - Public Domain. Television episodes in DVD include
programs such as "The Lucy Show," "The Beverly Hillbillies," "The Andy Griffith
Show," and the "The Red Skelton Show."

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

The costs associated with our film masters (used for duplicating) and
artwork (for packaging and advertising) include the purchase cost of masters,
initial fee for rights to duplicate, shooting costs and developing costs. During
the year ended March 31, 2000, we acquired approximately 65 new titles and
during the six months ended September 30, 2000, we acquired approximately 10 new
titles. As of March 31, 2000, the net book value of our film masters and artwork
was approximately $114,424. We believe that our film masters and artwork are
significant assets since we derive the majority of our revenue from their use.

Suppliers - Video and DVD Products

Our programs are duplicated, and in some cases packaged, by one DVD and
five videotape manufacturers/duplicators located in the United States.
Generally, we arrange with these firms to duplicate masters we supply, then
label, package, shrink-wrap and carton the videocassettes or DVDs. Labels and
packaging sleeves are supplied by us. We submit our orders and instructions by
purchase order with terms payable within 90 days of delivery. For the year ended
March 31, 2000, and the six months ended September 30, 2000, our video products
business had purchases from two suppliers that amounted to approximately 60% and
43.6%, respectively, of net purchases. During such period, the percentage of net
video product purchases made from such suppliers were 49% and 11%, respectively.
We believe that, if for any reason we cannot rely on or retain the services of
any of our current suppliers, duplicators or manufacturers, other suppliers
would be available in the marketplace.

Markets and Customers - Video and DVD Products

We market our program inventory to large retail chain outlets and
provide each retail chain operator with brochures, advertising materials and
literature describing and promoting our program inventory. We market our
program lines using our own in-house sales personnel and outside independent
sales representatives. Our products are sold through more than ten mass
merchandisers such as Sam's Club, Costco and Best Buy, primarily in the
Northeast, the South and the East Coast. These outlets sell our products to the
general public at retail prices ranging from approximately $1.99 to $9.99 per
videocassette. For the years ended March 31, 2000 and 1999, we derived revenue
from our program inventory of approximately $3,563,400 and $3,957,000,
respectively. For the year ended March 31, 2000, we had net sales to two
customers, individually of more than 10% of our revenues, or approximately
$1,003,000. For the year ended March 31, 1999, we had one customer responsible
for more than 10% of our revenue, or approximately $2,466,000. The loss of one
of these customers would have a material adverse effect on our financial
condition and results of operations.

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

We derive approximately 40% of our gross revenue from sales to mass
merchandisers and other retail outlets. Approximately 19% of gross revenue is
derived from sales through consignment arrangements with a catalog company under
which we deliver tapes to their facilities pending receipt of orders by
customers. We only book sales from consignment sales after the catalog company
delivers the actual funds from sales. Less than one percent of revenue are
derived from programs sold on a retail basis directly to consumers.

Seasonality - Video and DVD Products

We generally experience marginally higher sales of our programs from
September through January due to increased consumer spending around the year-end
holidays. During the year ended March 31, 2000, we derived approximately 48% of
our gross revenue from sales during those five months, with approximately 52% of
revenue generated in the other seven months of the year.

License Arrangements - Video and DVD Products

We enter into license agreements under which we acquire from licensors
the right to duplicate and distribute a licensed video program. Currently, none
of the DVD programs that we distribute are licensed programs. Licenses may be
exclusive or non-exclusive, but typically are non-exclusive. Generally, licenses
cover specific titles. In return for the grant of certain rights by the
licensor, we make certain advance payments or guarantees and also pay royalties.
Royalty payments under license agreements typically are credited against any
advances paid. Generally, our licenses are for a term of between three and seven
years. While our efforts to renegotiate and renew our license agreements have
generally been successful, there can be no assurance that such licenses will be
renegotiated or renewed in the future. The programs that we have acquired under
license contain limitations from the licensors regarding the geographic areas to
which we can distribute our products and are usually restricted to distribution
and sales in the United States and Canada.

The various licensing agreements that we have entered into with
licensors provide for advance payments ranging from $1,500 to $100,000 and
subsequent royalty payments based upon either a per video sold fee or a
percentage of wholesale price fee. During the year ended March 31, 2000, and the
six months ended September 30, 2000, we incurred royalty expenses of
approximately $103,000 and $10,500, respectively, under our licensing
agreements.

Competition - Video and DVD Products

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

Jewel Products International, Inc.

In May 1997, we acquired by way of merger, Beyond Design Corporation.
Subsequently, we renamed the company Jewel Products International, Inc. We
acquired Jewel in consideration of the issuance of an aggregate of 2,427,273
shares of our common stock and the assumption of certain obligations of Jewel.
The Jewel acquisition was an arms-length transaction. Jewel is in the business
of manufacturing and distributing one toy product, purchasing various other
children's toy products from U.S.-based importers or directly from Asia for
distribution, distributing toys to mass merchandisers in the United States and
purchasing and distributing certain furniture products. In the fiscal year ended
March 31, 2000, and six months ended September 30, 2000 revenue realized from
Jewel's business amounted to approximately $222,900 and $6,600, respectively.

Product Lines

At the time of its acquisition, Jewel's sole line of business was the
manufacture and sale of its patented Woblong(R) Double Wing Flier, a bi-wing
aerodynamic flying toy. The Woblong, subsequently renamed the Zoombie(R), is a
game of catch intended to compete directly with Frisbee(R), Aerobie(R) and
Whoosh(TM). During the year ended March 31, 2000, Jewel has introduced
approximately 20 new toy items to its product line. Popular products include
various plastic toy sets (for example, a Fire Rescue set, an Airport set, a City
Movers set and plastic toy figurines). Toy products also include a line of
plastic animal shaped squirt gun, and a radio controlled sports utility vehicle
(SUV). Jewel's toy products sell at retail prices ranging from approximately
$2.00 to $12.00 per item.

During fiscal 1999, we obtained the exclusive marketing rights to
purchase and distribute a line of padded folding chairs and a table set. The
furniture set sells at a retail price of approximately $109.00 to $129.00. The
furniture product line is purchased directly from Asia and is distributed to
mass merchandisers in the United States. We also offer the furniture on our
website.

Suppliers - Toy Products

For the year ended March 31, 2000, and the six months ended September
30, 2000, 39% and 100%, respectively, of our supplier purchases were from one
supplier. We are continuing to diversify our supplier base, and made purchases
from eight U.S. suppliers and three suppliers in China.

Markets and Customers - Toy Products

In fiscal year 1998, we marketed our toy products using outside sales
personnel and manufacturer representatives and utilized independent
manufacturer's representatives to reach our customers. During fiscal year 1999,
we began to pursue major chain retailers and drug store chains, such as Target,
K-Mart, Toys R Us and Rite Aid and chain store opportunities in Canada. During
fiscal 2000, we began shipping our Zoombie flying toy for sale by certain Target
stores and we have placed the Zoombie toy product for sale on our web-site.

Competition - Toy Products

We compete with other distributors of toy products including
distributors of other flying toys such as "Frisbies." We concentrate on the most
popular and new products available and offer these toy products for limited
sales period and, as demand for products change, we are able to immediately
switch to newer and more popular products. Most of the distributors with which
we compete are better established, have a broader product line and industry
recognition, and have financial resources substantially greater then ours.

Seasonality - Toy Products

Our toy revenues are very seasonal and are currently generated during
the period June through September.

Greeting Card Products

In September of 1998, we entered into an exclusive distribution
agreement which granted to us exclusive distribution rights obtained from a
licensing and distribution company for a new product line called CineChrome(TM),
which is a trademarked product line utilizing classic images of licensed
properties from film, music, sport, fine art and fine photography. These classic
images are being published on the front cover (in a greeting card format) using
the patented print technology, KromeFX(TM). KromeFX(TM) is a proprietary
printing process, which combines reflectivity, color vibrancy, depth of image
and dimension. We derived revenues of approximately $42,100 from the sale of
these products during fiscal 2000.

The CineChrome(TM) cover is laminated to a high quality paper and
printed on the inside cover, inside back and back all in four color process. The
inside contains editorial information about the property including full color
stills and the back cover serves as a letter of authenticity with branded and
copyright information. The CineChrome(TM) is completed with a custom designed
gallery standard envelope with the property's logo imprinted in two colors along
with a two color CineChrome(TM) logo. In order to protect the integrity of the
collectible there is an inserted stationery quality onion sheet note for
messages from the sender. The onion skin has watermarks of the property logo and
the branded logo, CineChrome(TM).

We plan to distribute the CineChrome(TM) product line worldwide and
expand the series of images to include a wide variety from other major studios
and licensors. The currently existing product in the CineChrome(TM) product line
is made up of 20 "Saturday Evening Post" Holiday and Special Occasion Gift
Cards. Two sets of ten cards have been made into gift sets and cards can also be
sold separately. There can be no assurance that we will be able to continue to
market and distribute successfully the CineChrome(TM) products on our website or
to our other customers.

Suppliers - Greeting Card Products

We have two sources for our CineChrome(TM) products. One supplier is in
Carlsbad, California who owns the patented print technology, KromeFX(TM) and
another supplier in West Bend, Wisconsin, who utilizes its own proprietary
technology which is similar to KromeFX(TM) process. During fiscal 2000, we
purchased approximately $47,000 in CineChrome(TM) products utilizing the
KromeFX(TM) process and approximately $14,000 from the West Bend supplier.

Competition - Greeting Card Products

The KromeFX(TM) process which is utilized by our CineChrome(TM)
products, is also available to our competitors who are in the business of
selling posters, trading cards, inserts and other similar products. Under our
exclusive distribution contract, we have the exclusive rights to use the
KromeFX(TM) process in the greeting card format as long as we maintain certain
performance criteria. As a result of our not meeting our minimum purchase
requirements for KromeFX(TM) products under our exclusive distribution contract

for the first year of the contract, the exclusive rights to use KromeFX(TM) has
been nullified. Most of the companies with which we compete, including Hallmark,
American Greeting Co. and Gibson are better established, have broader public and
industry recognition, have financial resources substantially greater than ours
and have manufacturing and distribution facilities better than those which now
or in the foreseeable future will become available to us. The greeting card
market requires substantial resources to obtain shelf space in retail outlets,
therefore, we cannot assume that it can or will be successful in this
marketplace or in the future.

American Top Real Estate

Upon sale or development of land, proceeds are used to repay all
related loans and other obligations, with the remaining balance distributed
among the shareholders of ATRE pro rata based on their interests. None of the
other investors in ATRE are otherwise associated or affiliated with us in our
real estate holdings. ATRE has interests in two real estate parcels.

During the year ended March 31, 1998, ATRE sold approximately 11 acres
of parcel 1. We received $588,733 during the year ended March 31, 1999 from the
proceeds of the sale of the parcel of 11 acres as repayment of advances made to
ATRE.

At November 30, 1998, we were advised by ATRE that it had no binding
sales contracts for the remaining parcels of real estate owned by ATRE as these
parcels of land continue to be developed for commercial use. Contracts that were
pending have not closed due to possible changes in interest rates or possible
overall market conditions. In addition, we were advised by ATRE that proceeds
realized by ATRE during fiscal 1998 were reinvested into other parcels to
improve the ability to sell the remaining parcels. In December 1998, we received
from a real estate development specialist an informal valuation reflecting an
aggregate approximate valuation of $5,200,000 for the remaining ATRE parcels.

Although we believed that final sales contracts would be able to be consummated,
at this time it was not possible to predict with any certainty when the closing
of such sales contracts of commercial real estate may occur or whether the
proceeds expected by us for our share in this real estate could be significantly
less than anticipated. Therefore, the ultimate realizable value of the
receivable for advances from ATRE could be substantially less than the
preadjusted carrying value of $1,600,000. We set up a valuation allowance in the
quarter ended March 31, 1998, of $1,117,788 and, accordingly, charged operations
for that amount so that the amount due from ATRE at March 31, 1998 was presented
at the amount of the 1998 subsequent receipts of approximately $500,000. Based
upon the above circumstances the likelihood is that $1,117,788 from future
proceeds from the sale of the ATRE parcels will not be realized by us with any
certainty.

In June 1998, we borrowed approximately $809,500 from ATRE to finance
certain purchases of toy products. During the quarter ended December 31, 1999,
we converted the amount borrowed of $809,500 into a one year 7% Convertible
Promissory Note due on September 30, 2000. The repayment date of the note has
been extended through September 1, 2001. During the year ended March 31, 2000,
we borrowed $559,900 from ATRE and paid back $81,000. We owed ATRE approximately
$478,900 in short term notes at March 31, 2000.

On June 2, 1999, ATRE entered into a real estate sale agreement for
approximately $600,000 and in September 1999, entered into a sales agreement for
another parcel of the remaining acres for approximately $550,000. During June
2000, the sales agreement for $600,000 entered into on June 2, 1999 was canceled
by the buyer who forfeited the $25,000 purchase deposit to ATRE. On September
19, 2000, ATRE closed the sale for one parcel of the remaining acres for
$550,000. The net proceeds of this sale was applied against ATRE'S outstanding
mortgage loan which was collateralized by the property sold. ATRE had previously
repaid to us all past loans it borrowed from us including all applicable
interest and at September 30, 2000, we owed ATRE $568,800 in accumulated loans
it received, consisting of proceeds from ATRE's mortgage loans and partial
proceeds from parcels previously sold. ATRE believes the remaining parcels will
be sold and continues to list the properties with its real estate agent. Future
sales are contingent on market conditions and there can be no assurance that
ATRE will sell the remaining parcels within the next one to three years.

Employees

As of September 30, 2000, we employed 25 full-time employees. During
the peak season, we engage additional part-time or temporary employees to help
with the surge for Christmas season orders. We reduce our manufacturing force
after the peak season to improve the profitability of the operations when sales
orders decline. Our employees are not unionized. Management believes that it has
good working relations with its employees.

We rely on a combination of common law trademark, copyright and trade
secret law to establish and protect our proprietary rights and promote our
reputation and the growth of our business. In addition, in the toy product line,
the Woblong(R), subsequently renamed as the Zoombie(R), is protected by patent
claims in the form of a utility patent registered with the U.S. Patent and
Trademark Office. The U.S. Patent number is 5,131,879. Further, a design patent
was issued on March 9, 1994 - D344,989.

We license approximately 275 videocassette titles from licensors for
duplication and distribution, generally on a non-exclusive basis. Such licensors
could become subject to third party infringement claims which could result in
their inability or unwillingness to license these titles to us and would impair
our ability to provide such titles to our customers.

Description of Property

We lease approximately 20,000 square feet at 800 Tucker Lane, Walnut,
California under a lease that commenced January 6, 2000 and expires on January
31, 2003, for use as executive offices and manufacturing and warehouse
facilities for a monthly rent of $10,500.00. We closed our 1,200 square feet
facility in Freehold, New Jersey in April 2000, which we used for our sales
office. In addition, we lease approximately 22,080 square feet in Cerritos,
California for $9,274 per month which space was formerly used by us for
executive offices and warehousing. We sublet the Cerritos property on January 1,
1999 for a term that expires on March 31, 2001. The sublease requires the
subtenant to pay us $9,494 per month through February 2000, and $9,936 per month
through the remaining term of the sublease. All of our lease and sublease
agreements are with unaffiliated parties. We believe that we have sufficient
space for operations for the next twelve months.

Legal Proceedings

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

We have in the past been named as defendant and co-defendant in various
legal actions filed against us in the normal course of business. All past
litigation has been resolved without material adverse impact on us. For the year
ended March 31, 1999, there are three civil actions against us. One action is
for alleged copyright infringement. We entered into a settlement agreement in
February of 1998 to pay $208,000 over twenty-four months, and we have made all
the required payments under the settlement agreement. The second action is for
breach of service whereby we settled for two payments of $4,750 each that were
paid July and August 15, 1999. In the third action, we received a letter from a
production company on April 17, 1998, claiming that the sale of certain video
tapes constituted copyright infringement. We investigated the claims in depth
and challenged the claims for copyright infringement. The production company did
not respond to our requests for information and explanations, dated May 8, 1998,
and June 2, 1998, respectively. We received another letter on June 8, 1999,
which again claimed that we were infringing on the production company's rights.
The production company has responded to our requests for information and
explanations and as of the date of this prospectus, we have not received a
response to our challenge to the claims.

On February 15, 2000, one of our suppliers brought legal action against
us to collect approximately $35,200 comprising unpaid invoices, interest, court
costs and attorneys fees owed to the supplier. We recorded the liability upon
receipt of the goods and have acknowledged that this amount is owed to the
supplier. During September 2000, we negotiated a weekly payment schedule and, as
of the date of this prospectus, the balance owed is $22,668.

During March 2000, the lessor of our Cerritos property brought action
against us to recover delinquent rental payments and penalties arising from the
termination of our building lease in Cerritos, California. The action against us
resulted in a stipulated judgment whereby we agreed to pay $72,000.00 at 10%
interest by paying $6,600.00 per month for twelve consecutive months beginning
April 1, 2000 through March 1, 2001. There is a penalty clause for a failure to
pay in a timely manner which increases the total amount to $119,000 with
immediate acceleration in the event of a default under the stipulated judgment.
The required payments through November 2000 have been made in a timely manner
and there have been no defaults.

MANAGEMENT

Our directors and officers are as follows:

Name Age Title
- -------------------------- --- -----------------------------------------

James K.T. Lu............. 53 Chairman of the Board, President, Chief
Executive Officer, Secretary and Director

Jeffrey I. Schillen....... 54 Executive Vice President, Sales and
Marketing and Director

Murray T. Scott........... 78 Director

Fred U. Odaka............. 63 Chief Financial Officer

Background of Executive Officers and Directors

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

James K.T. Lu (Class 2 Director). Mr. Lu has been a director since
February 1989, Chairman of the Board, Chief Executive Officer and Secretary
since March 1, 1990, and President since July 1991. Mr. Lu received his B.S.I.E.
degree from Chung Yuen University Taiwan in 1969, his M.S.I.E. degree from the
Illinois Institute of Technology in 1972 and a Master of Business Administration
(MBA) from California State University in 1981.

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

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

Fred U. Odaka. Mr. Odaka has been our Chief Financial Officer since
September 2000. From December 1998 to September 2000 Mr. Odaka was a consultant
to Diamond Entertainment and was our "acting" Chief Financial Officer. From July
1996 to July of 1998, Mr. Odaka served as chief financial officer for Front Row
Collectibles, Inc., a manufacturer and distributor of super event collectibles.
From January 1993 to June 1996, Mr. Odaka was a financial consultant and analyst
for Kibel, Green Inc., a West Coast business advisory and financial services

firm specializing in corporate re-structuring and crisis intervention. From July
1986 to December 1992, Mr. Odaka was a partner and principal of two investment
banking firms concentrating in mergers and acquisitions. From November 1984 to
June 1986, Mr. Odaka was vice president and chief financial officer for Ibex
Computer Corporation, a manufacturer of computer tape drives. Mr. Odaka was a
founder of Rexon, Inc., a publicly traded manufacturer of computers and computer
peripheral equipment and, from May 1978 to October 1984, held the positions of
vice president and chief financial officer and was instrumental in taking the
company public. From January 1970 to April of 1978, Mr. Odaka was controller of
the computer division of Perkin-Elmer Corporation, a publicly traded company
that manufactures life sciences systems and analytical instruments. Mr. Odaka
received his Bachelor of Science degree in finance from Fresno State College,
Fresno, California.

Under our certificate of incorporation, our board of directors is
divided into three (3) classes, with each class to be elected by the
shareholders every three years. All directors hold office for terms of three (3)
years and until the next annual meeting of stockholders scheduled to vote on
such class of directors and the election and qualification of their respective
successors. Our board presently consists of three directors and our directors
were elected at the 2000 annual meeting of stockholders for concurrent three
year terms. None of our directors have resigned or declined to stand for
re-election due to a disagreement on any matter relating to our operations,
policies or practices.

Officers are elected annually by our board of directors and, subject to
existing employment agreements, serve at the discretion of our board.

Committees of the Board of Directors

We have no standing audit, nominating or compensation committee, or any
committee performing similar functions.

Indemnification of Directors and Officers

Section 14A:3-5 of the New Jersey Business Corporation Act provides
that: "Any corporation organized for any purpose under any general or special
law of this State shall have the power to indemnify a corporate agent against
his expenses and liabilities in connection with any proceeding involving the
corporate agent by reason of his being or having been such a corporate agent,
other than a proceeding by or in the right of the corporation, if (a) such
corporate agent acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation; and (b) with respect
to any criminal proceeding, such corporate agent had no reasonable cause to
believe his conduct was unlawful. The termination of any proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not of itself create a presumption that such corporate agent
did not meet the applicable standards of conduct set forth elsewhere in
paragraphs 14A: 3-5 (2)(a) and 14A: 3-5(2)(b)."

Our By-Laws provide that, to the extent permitted under the New Jersey
Business Corporation Act, we may indemnify any director, officer, employee or
agent against his expenses and liabilities incurred in connection with any
proceeding involving such persons by reason of the fact that he was serving in
such capacity.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.

EXECUTIVE COMPENSATION

Summary Compensation Table

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

Summary Compensation Table

Annual Compensation Long Term Compensation
----------------------- -----------------------------------------
Awards Payouts
------------ ----------------------------
Securities All Other
Underlying LTIP Payouts Compensation
Name and Principal Position Year Salary ($) Bonus ($) Options (#) ($) ($)
- -------------------------------- ------- ----------- ----------- ------------ ------------- -------------

James K.T. Lu (1) 2000 37,500 0 0 0 27,606
President, Chief Executive 1999 120,000 0 0 0 89,983
Officer and Secretary 1998 78,350 0 0 0 31,572

Jeffrey I. Schillen (2) 2000 50,000 0 0 0 15,618
Executive Vice President of 1999 100,000 0 0 0 13,036
Sales and Marketing 1998 51,500 0 0 0 20,792

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

(1) Mr. Lu's annual salary was $150,000 during the fiscal year ended March
31, 2000. He elected to defer $112,500 of his salary for this period.
During March 2000, Mr. Lu waived all of his deferred salary owed as of
March 31, 1999 and as of the date of this prospectus, Mr. Lu continues to
defer a substantial portion of his salary.
(2) Mr. Schillen's annual salary was $120,000 during the fiscal year ended
March 31, 2000. He elected to defer $70,000 of his salary for this
period. During March 2000, Mr. Schillen waived all of his deferred salary
owed as of March 31, 1999, and as of the date of this prospectus, Mr.
Schillen continues to defer until August 2000, a substantial portion of
his salary.

Option/SAR Grants in Last Fiscal Year

The following table sets forth certain information with respect to the
options granted during the year ended March 31, 2000, for the persons named in
the Summary Compensation Table (the "Named Executive Officers"):

Number of Percent of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date
- ------------------------ ------------ ------------------ ---------------- ---------------

James K.T. Lu 2,500,000 56% 0.05 5/24/04
James K.T. Lu 1,000,000 22% 0.10 5/24/04
Jeffrey I Schillen 500,000 11% 0.05 5/24/04
Jeffrey I. Schillen 500,000 11% 0.10 5/24/04

Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values

The following table sets forth certain information with respect to
options exercised during the fiscal year ended March 31, 2000 by the Named
Executive Officers and with respect to unexercised options held by such persons
at March 31, 2000.

Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired On Value Options/SARs In-the-Money Options/SARs
Name Exercise (#) Realized ($) At FY-End (#) at FY-End ($)
- ----------------------- -------------- ------------ --------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------- ------------- ------------ -------------

James K.T. Lu 0 0 6,000,000 0 0 0
Jeffrey I. Schillen 0 0 2,150,000 0 0 0

Employment Agreements

In 1991, we entered into employment agreement with each of Messrs. Lu
and Schillen for annual compensation of $150,000 and $90,000, respectively; both
provide for annual adjustments in accordance with the consumer price index.
However, effective 1996, Mr. Schillen's annual compensation was increased to
$120,000. Consequently, contracted salary levels are at $150,000 for Mr. Lu and
$120,000 for Mr. Schillen. Both employment agreements were extended in July 2000
for a period of five years terminating on December 31, 2005. In March 2000, Mr.
Lu and Mr. Schillen both waived all of their deferred salaries owed as of March
31, 1999. See "Summary Compensation Table" above, and the notes thereto.

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

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

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

On September 1, 1997 we entered into employment agreements with nine
other employees holding important positions. The agreements provided for the
issuance of an aggregate of 550,000 shares of common stock with a fair value of
$11,000, as payment for services, warrants for 550,000 shares with an exercise
price of $.10 per share and the semi-monthly compensation of approximately
$14,000 in the aggregate. On September 1, 1999, the warrants to exercise the
550,000 shares of common stock expired. On August 27, 1999, we granted warrants
to purchase 300,000 shares of common stock, which expire on September 1, 2002,
at an exercise price of $.10 per share to the five remaining employees with
employment agreements.

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

2000 Stock Compensation Plan

On June 9, 2000, we adopted our 2000 Stock Compensation Plan for the
purpose of providing a means of compensating selected key employees including
officers, directors and consultants of Diamond Entertainment and our
subsidiaries for their services rendered in connection with our development
through the issuance of shares of common stock. We are authorized to sell or
award up to 13,000,000 shares and/or options to purchase our common stock. The
plan is administered by our board of directors which has the discretion to
determine the grantees, the number of shares, the date of each grant, the
consideration for the shares and such other terms and conditions as the board
may determine. The plan terminates on May 31, 2001.

Remuneration of Directors

To date, directors who are not also our employees have received no
compensation for attending meetings of our board of directors. All directors are
entitled to reimbursement of reasonable travel and lodging expenses related to
attending meetings of our directors. There are no standard arrangements or
agreements to provide compensation to directors for attending meetings of our
board of directors.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In May 1995, James Lu, our Chairman, Chief Executive Officer and
President, personally assumed our obligations to three services providers in the
aggregate amount of approximately $1,131,000. The obligations are secured by all
shares of our common stock owned or to be owned by Mr. Lu. In June 1995, Mr. Lu
converted such obligations into 8,212,785 shares of common stock. In August 1995
Jeffrey I. Schillen and Murray T. Scott, agreed to assume $413,400 and $110,240,
respectively, of the obligations assumed by Mr. Lu. In consideration for the
reassignment of such obligations, Mr. Lu agreed to assign 3,000,000 and 800,000
of shares of common stock, respectively, to Messrs. Schillen and Scott.

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

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

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

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

In June of 1998, we borrowed approximately $2,700,000 in short term
loans from two companies and the borrowings were used primarily to reduce our
accounts payable balance. On October 1, 1999, the balance of these loans totaled
approximately $1,880,725 and during the quarter ended December 31, 1999, our
board of directors authorized the conversion of these short term loans into one
year 7% Convertible Promissory Notes of $1,071,225 and $809,500 each, both due
on September 30, 2000. The repayment date of the notes has been extended through
September 1, 2001. We intend to utilize future debt or equity financing or debt
to equity conversions to help satisfy past due obligations and to pay down our
debt obligations and at September 30, 2000, the balances of these notes were
approximately $1,123,536 and $866,165, respectively.

In July 1998, Mr. Lu was granted additional options to purchase
6,000,000 shares of our common stock for $0.10 per share in consideration of his
(i) personal guaranty of our bank line of credit and (ii) loans made to us. Such
options expire July 9, 2003.

On July 30, 1998, we and Mr. Lu, our President, on the one hand, and
The EMCO/Hanover Group, Inc. and three individual consultants, on the other
hand, entered into a settlement agreement. The parties were in dispute arising
out of our August 1997 engagement letter with the consultants and the
agreed-upon payments to consultants thereunder of cash fees and a right to
receive a five percent non-dilutive equity interest. In September 1997, an
accounting firm issued a valuation letter stating that the right entitled the
consultants to purchase 1,499,523 shares of our common stock for $0.01 per
share. On October 6, 1997, pursuant to an assignment agreement, 1,499,523 shares
of common stock owned of record by Mr. Lu were assigned and transferred to the
consultants and the consultants agreed to remit all of the assigned shares to
Mr. Lu and to exercise the right no later than October 15, 1997, whereupon Mr.
Lu would tender the assigned shares back to the consultants. The consultants
never remitted the assigned shares to Mr. Lu nor did they exercise their right.

Under the settlement agreement the parties terminated the engagement letter and
the right, and the consultants agreed they would have no further right or claim
to receive any shares of common stock pursuant either to the right or the
engagement letter, or to receive any further fee or compensation under the
engagement letter. Further, we agreed to issue to Mr. Lu 1,499,523 shares of
common stock, for no consideration, in order to reimburse him for his assignment
and transfer of the assigned shares to the consultants. The settlement agreement
contained releases by the consultants and Mr. Lu.

On November 2, 1998, 10% convertible debentures with a balance of
$848,861 were reinvested into a new note for $921,851 for a new two year term
expiring October 31, 2000 with interest of 10% and an extension bonus of
$175,000, which caries interest of 1.5% per annum payable $50,000 per month
after payment of all prior interest and the restructured note. The repayment
term was a weekly amount of $6,250 and $12,500 in the years 1999 and 2000.

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

In February of 1999, we converted $640,000 of the 10% convertible
debentures into 8,000,000 shares of common stock. On February 10, 1999, we
converted the remaining balance of $172,661 and unpaid interest of $90,415 into
3,018,254 shares of common stock. It was also agreed that the $175,000 extension
bonus, which was recorded as a deferred financing cost in February of 1999,
could be converted into shares of common stock at an agreed exercise price
subject to market conditions. During the year ended March 31, 2000, the $175,000
extension bonus and accrued interest of $13,125 were converted into 3,500,000
shares of our common stock.

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

In March and June 1999, we issued callable convertible notes for
$50,000 and $100,000 to James Lu and Jeffrey I. Schillen, respectively. The
notes bear interest at 10% per year with principal and interest due on the first
anniversary of the date of issuance. Each note has been extended for an
additional year. The notes also call for any amount of the outstanding principal
to be converted into restricted shares of our common stock at the option of the
lenders at a conversion rate of $0.05 per share. The notes contain certain
demand and piggyback registration rights. As of the date hereof, neither of the
notes had been converted.

In March of 1999, we received a total of $150,000 from three investors
and issued promissory notes due in one year with principal and interest paid
bimonthly at an interest rate of 10% per annum. The notes could be used to
exercise options held by the investors. During the year ended March 31, 2000,
the note holders used the $150,000 and accrued interest of $2,500 as funds to
exercise their common stock options and received an aggregate of 3,000,000
shares of our common stock.

In March and April of 1999, we entered into two convertible debentures
for $100,000 and $50,000, respectively. The debentures bear interest at 10% with
principal and interest due on the first anniversary of the date of issuance. The
debentures also call for any amount of the outstanding principal to be converted
into restricted shares of our common stock at the option of the lender at a
conversion rate of $0.05 per share. As of March 2000, one investor converted the
$50,000 debenture into 1,000,000 shares of our common stock. As of March 31,
2000, the outstanding balance of convertible debentures was $100,000, and the
lender has extended the due date to March 2001.

On April 12, 1999, we engaged three consultants for a period of one
year each to provide managerial and strategic planning for financial matters and
expansion. The consultants received options to purchase an aggregate of
6,000,000 shares of our common stock exercisable at $0.05 per share in exchange
for services to be rendered and the options were to expire on April 11, 2000.
The options had an aggregate fair value at date of grant of approximately
$292,000. These options were exercised in April 1999, by the forgiveness of
$150,000 of notes payable, executed in March 1999 and cash proceeds of $150,000.

On May 25, 1999, we issued to Mr. Lu, as a bonus, options to purchase
2,500,000 shares of our common stock at $0.05 and options to purchase 1,000,000
shares of our common stock at $0.10 per share. The options expire on May 24,
2004.

On May 25, 1999, we issued to Mr. Schillen, as a bonus, options to
purchase 500,000 shares of common stock at $0.05 and options to purchase 500,000
shares of our common stock at $0.10 per share. The options expire on May 24,
2004.

During the quarter ended December 31, 1999, we converted approximately
$1,880,725 in related party payables into one year 7% Convertible Promissory
Notes of $1,071,225 and $809,500 each, both due on September 30, 2000. The terms
of the convertible notes, allow us to make partial principal and interest
payments from time to time and the holders of the convertible notes have the
option to request such payments of the indebtedness evidenced by the notes
either in the lawful money of the United States or into our common stock, the
number of shares, determined by dividing the payment amount by the average
twenty day bid price for our common stock during the twenty trading days prior
to the date of such payment date. The provisions of each of the notes prohibit
the holder from receiving shares of our common stock as payment of principal or
interest if as a result of the payment the holder would own in excess of 4.9% of
our common stock after payment. Also, during the quarter ended December 31,
1999, all of the common stock of the related party to which $1,071,225 in
related parties payable was owed by us, was sold to an unrelated party. At March
31, 2000, the balance of the Convertible Promissory Note to the unrelated party
was $1,050,775 as a result of payments toward the note in March 2000, and by
offsetting $20,450 in money owed to us by the unrelated party. The notes were
subsequently extended through September 1, 2001.

On June 9, 2000, we entered into three consulting agreements that will
terminate on May 31, 2001, whereby the consultants will provide consulting
service for us concerning management, marketing, consulting, strategic planning,
corporate organization and financial matters in connection with the operation of
our businesses, expansion of services, acquisitions and business opportunities.
The consultants received options to purchase a total of 7,300,000 of our common
stock exercisable at $.035 per share in exchange for services to be rendered and
the options expire on May 31, 2001. In June and July of 2000, we received
$215,500 in cash for the issuance of the 6,157,143 shares upon the exercise of
these options and the remaining 1,142,857 options were exercised for consulting
services incurred and owed by us to one of the consultants totaling $30,000 and
from the cancellation of an obligation of $10,000 in principal and interest owed
to the same consultant.

PRINCIPAL STOCKHOLDERS

The following table sets forth information as of November 22, 2000,
with respect to the beneficial ownership of the outstanding shares of our common
stock and preferred stock by (i) each person known by us to be the beneficial
owner of more than 5% of our common stock, (ii) each director, (iii) each Named
Executive Officer; and (iv) all directors and executive officers as a group.
Unless otherwise indicated below, such individuals have the sole power to
control the vote and dispose of such shares of capital stock.

Percentage of
Common Stock
Assuming
Common Stock Percentage of Preferred Conversion of
Name (1) Owned Common Stock Stock Owned (2) Preferred Stock (3)
-------- ------------ ------------- --------------- -------------------

James K. T. Lu (4) 16,444,960 20.63% 209,287 21.03%
Diamond Entertainment Corporation
800 Tucker Lane
Walnut, CA 91789

Jeffrey I. Schillen (5) 7,005,750 9.49% 36,282 9.58%
Diamond Entertainment Corporation
48 St. Lawrence Way
Marlboro, NJ 07746

Murray T. Scott (6) 1,300,000 1.86% 75,796 2.07%
Diamond Entertainment Corporation
800 Tucker Lane
Walnut, CA 91789

All directors and officers as a 24,750,710 29.42% 321,365 29.94%
group (3 persons) (7)

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

(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, and is generally determined by voting
and/or investment power with respect to securities. Unless otherwise noted,
all shares of common stock listed above are owned of record by each
individual named as beneficial owner and such individual has sole voting
and dispositive power with respect to the shares of common stock owned by
each of them. Such person or entity's percentage of ownership is determined
by assuming that any options or convertible securities held by such person
or entity which are exercisable within 60 days from the date thereof
exercised or converted as the case any be.

(2) The preferred stock entitles the holder to 1.95 votes for each share owned
and each share may be converted into 1.95 shares of common stock.

(3) Assumes conversion of shares of preferred stock beneficially owned.

(4) Mr. Lu is President, Chief Executive Officer, Secretary and a director.
Includes 10,100,000 shares of common stock issuable upon exercise of
warrants, options and convertible notes.

(5) Mr. Schillen is the Executive Vice President and a director. Includes
4,150,000 shares of common stock issuable upon exercise of warrants,
options and convertible notes.

(6) Mr. Scott is a director. Includes 250,000 shares of common stock issuable
upon exercise of warrants.

(7) Represents 10,250,710 shares of common stock outstanding and 14,500,000
shares of common stock issuable upon exercise of warrants, options or
convertible notes.

There are no agreements or other arrangements or understandings known
to us concerning the voting of our common stock or otherwise concerning control
of us which are not disclosed herein. There are no pre-emptive rights applicable
to our securities.

SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of our common stock by the selling stockholders as of November 22,
2000. The number of shares of common stock listed as beneficially owned by each
selling stockholder and potentially offered by this prospectus represents the
number of shares of common stock issuable to such stockholder upon conversion of
outstanding shares of Series A Convertible Preferred Stock and upon exercise of
the warrants as of November 22, 2000. The provisions of the certificate of
incorporation governing the Series A Convertible Preferred Stock and the terms
of the warrants prohibit any holder thereof from converting the Series A
Convertible Preferred Stock or exercising the warrants to the extent such
conversion would result in such holder owning in excess of 4.9% of our common
stock after the conversion. The cover page of this prospectus indicates the
selling stockholders may sell up to 13,400,000 shares of common stock. This
number includes up to 11,875,000 shares that may be issued upon conversion of
the Series A Convertible Preferred Stock, an amount to cover the 6% per annum
premium payable in common stock upon the Series A Convertible Preferred Stock at
the time of conversion and the 1,525,000 shares of our common stock issuable
upon exercise of the warrants. Upon completion of the offering and assuming the
sale by the selling stockholders of all of the shares of common stock available
for resale under this prospectus, the selling stockholders will not own more
than 1% of the outstanding shares of our common stock.

Shares Owned
After Offering
Shares Owned Shares Being -----------------
Name Before Offering Offered Number(1) Percent(1)
----------------------- ---------------- ------------ --------- --------
Jeffrey Hrutkey 1,187,500 (2) 1,187,500 -0- -0-
Charles and Ann Adkins 1,187,500 (2) 1,187,500 -0- -0-
Gordon D. Mogerley 7,125,000 (2) 7,125,000 -0- -0-
Michelle Levite 475,000 (2) 475,000 -0- -0-
Ralph Lowry 712,500 (2) 712,500 -0- -0-
Anthony E. Rakos 237,500 (2) 237,500 -0- -0-
Gerald Holland 475,000 (2) 475,000 -0- -0-
John Bollinger 475,000 (2) 475,000 -0- -0-
The May Davis Group, Inc. 200,000 (3) 200,000 -0- -0-
Hunter Singer 162,500 (3) 162,500 -0- -0-
C. Max Rockwell 162,500 (3) 162,500 -0- -0-
Joseph Donahue 162,500 (3) 162,500 -0- -0-
Mark A. Angelo 662,500 (3) 662,500 -0- -0-
Kenneth G. Merkel, II 20,000 (3) 20,000 -0- -0-
Blair Spruill 72,000 (3) 72,000 -0- -0-
Michael Jacobs 25,000 (3) 25,000 -0- -0-
Wayne Coy 25,000 (3) 25,000 -0- -0-
Victor Knight 4,000 (3) 4,000 -0- -0-
James Gonzalez 4,000 (3) 4,000 -0- -0-
Butler Gonzalez, L.L.P. 25,000 (3) 25,000 -0- -0-
================ ============ ======== =========
Total: 13,400,000 13,400,000 -0- -0-
================ ============ ======== =========

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

(1) Assumes that all shares acquired upon conversion of our Series A
Convertible Preferred Stock or exercise of the warrants are sold pursuant
to this prospectus.

(2) Represents shares of our common stock issuable upon conversion of
outstanding shares of Series A Convertible Preferred Stock. The maximum
number of shares of common stock that we are obligated to issue upon
conversion of all outstanding shares of Series A Convertible Preferred
Stock is 11,875,000. These amounts assume that such maximum number of
shares of common stock are issued pro rata among all holders of outstanding
Series A Convertible Preferred Stock upon conversion thereof.

(3) Represents shares of our common stock issuable upon exercise of outstanding
warrants.

The selling stockholders have not had a material relationship with us
or any of our affiliates within the past three years other than as a result of
the ownership of our Series A Convertible Preferred Stock or warrants to
purchase our common stock as a result of the negotiation and execution of the
securities purchase agreement and, in the case if The May Davis Group, Inc., a
placement agreement related to the placement of our Series A Convertible
Preferred Stock.

The shares offered hereby by the selling stockholders are to be
acquired upon conversion of our shares of our Series A Convertible Preferred
Stock or upon exercise of certain warrants. Under a registration rights
agreements with holders of our Series A Convertible Preferred Stock, we agreed
to register these shares for resale by the selling stockholders to permit the
resale from time to time in the market or in privately negotiated transactions.
We will prepare and file with the SEC amendments and supplements to the
registration statement as may be necessary in accordance with the rules and
regulations of the Securities Act to keep it effective until all of such shares
have been resold.

We have agreed to bear the expenses of registration of the shares,
excluding broker discounts, commissions and transfer taxes.

DESCRIPTION OF SECURITIES

Common Stock

We are authorized to issue 600,000,000 shares of common stock, no par
value per share, of which 69,634,029 shares are issued and outstanding as of
November 22, 2000. Each outstanding share of common stock entitles the holder
thereof to one vote on all matters that may be voted upon by the owners thereof
at meetings of the stockholders. The holders of our common stock (i) have equal
ratable rights to dividends from funds legally available therefrom when declared
by our board of directors; (ii) subject to the rights of our preferred
stockholders, they are entitled to share ratably in all of our assets available
for distribution to holders of common stock upon our liquidation, dissolution or
the winding up of our affairs; and (iii) do not have, except as described below,
preemptive, subscription or conversion rights, or redemption or sinking fund
provisions applicable thereto. In addition, holders of our common stock do not
have rights to cumulate their votes on matters on which stockholders may vote at
meetings of stockholders. However, under Section 2115 of the California
Corporations Code, specific provisions of the California General Corporation
Law, including mandatory cumulative voting rights of stockholders, are made
applicable to "Pseudo-California" corporations incorporated under the laws of

other states which meet certain tests. The tests are: (i) that the average of
specified property, payroll and sales factors (generally related to the extent
of activities in California) exceed 50% on a consolidated basis during the
corporation's latest full income year and (ii) that more than one-half of the
corporation's outstanding voting securities are held of record by persons having
addresses in California. We do no believe we meet such tests. If we were
required to implement cumulative voting for the election of directors, the
existence of a classified board of directors may have the effect of delaying or
preventing changes in control or in management because a greater number of
shares would be required to elect any one director.

Preferred Stock

We are authorized to issue up to 5,000,000 shares of preferred stock,
no par value per share, of which 1,000,000 shares have been designated Preferred
Stock and 483,251 of which are issued and outstanding as of the date of this
prospectus and 50 shares have been designated Series A Convertible Preferred
Stock and all of such shares are issued and outstanding as of the date of this
prospectus. Our board of directors is authorized to determine the rights,
preferences, privileges and restrictions, including the dividend rights,
conversion rights, voting rights, terms of redemption (including sinking fund
provisions, if any) and liquidation preferences, of any new series of preferred
stock and to fix the number of shares of any such series without any further
vote or action by stockholders.

Preferred Stock

We have designated 1,000,000 authorized shares of preferred stock as
Preferred Stock of which 483,251 are issued and outstanding as of the date of
this prospectus. The Preferred Stock entitles the holder of a share to 1.95
votes and each share may be immediately converted into 1.95 shares of common
stock. The Preferred Stock and common stock vote together on all matters.

The Preferred Stock has no (i) dividend rights; (ii) sinking fund
provisions; (iii) rights of redemption; (iv) classification provisions for
voting; (v) pre-emptive rights; (vi) liability to further calls or to
assessments by us, or (vii) any provision discriminating against any existing or
prospective holder. Holders of shares of preferred stock are not entitled to any
dividend preference. In the event of liquidation, holders of shares of preferred
stock shall be entitled to a preference of $.01 per share, and any other
remaining proceeds of liquidation shall be distributed share and share alike to
holders of all capital stock.

Series A Convertible Preferred Stock

We have designated 50 shares of our preferred stock as Series A
Convertible Preferred Stock and all of such shares are issued and outstanding as
of the date of this prospectus. The Series A Convertible Preferred Stock ranks
senior to our common stock for distributions upon our liquidation, dissolution
or winding up. The Series A Convertible Preferred Stock provides for a premium
of 6% per annum of the stated value of $10,000 per share payable in our common
stock at the time of conversion of the Series A Convertible Preferred Stock into
common stock. Commencing August 9, 2000, each outstanding share of Series A

Convertible Preferred Stock is convertible into our common stock and shall be
automatically converted into our common stock on April 14, 2002. The conversion
price of the Series A Convertible Preferred Stock is the lower of $.08 per share
or 78% of the average of the closing bid prices of our common stock on any five
trading days in the ten trading days preceding the date of conversion. The
conversion price of the Series A Convertible Preferred Stock is also adjusted in
the event of stock dividends, stock splits, recapitalizations, reorganizations,
consolidations, mergers or sales of assets. To the extent the holders of Series
A Preferred Stock convert and then sell shares of common stock, the price of our
common stock may decrease even further due to additional shares in the market,
allowing the holders to convert additional shares of Series A Convertible
Preferred Stock into greater amounts of common stock.

The Series A Convertible Preferred Stock does not provide any voting
rights, except as may be required by law. However, we may not take certain
actions that would adversely affect the rights of the holders of Series A
Convertible Preferred Stock without the approval of two-thirds of the
outstanding shares of Series A Convertible Preferred Stock.

Commencing September 8, 2000, we have the right to redeem shares of
Series A Convertible Preferred Stock having a stated value of up to $100,000 at
a redemption price of 120% of such stated value. Also, holders of our Series A
Convertible Preferred Stock have the right to require us to redeem their shares
in the event we consummate a merger, reorganization, restructuring,
consolidation or similar transaction except where we are the survivor, a
majority merger or where holders receive the greater of 125% of the liquidation
value of a share of Series A Convertible Preferred Stock or the price calculated
on the basis of a discount to the market price of our common stock including a
premium at the rate of 6% per annum. Holders of our Series A Convertible
Preferred Stock also have a redemption right if any of the shares of our common
stock issuable upon conversion of the Series A Convertible Preferred Stock
cannot be sold under this prospectus, or if we fail to perform or comply with
any of our obligations under the securities purchase agreement, any
representation in such agreements are false or misleading and under certain
other circumstances.

In the event of the liquidation, winding up or dissolution of Diamond
Entertainment, holders of Series A Convertible Preferred Stock will receive a
liquidation preference of $10,000 plus a premium of 6% per annum of $10,000.

Warrants

In connection with the sale of our Series A Convertible Preferred
Stock, we issued an aggregate of 1,500,000 warrants to purchase our common stock
to The May Davis Group, Inc., or its designees. May Davis acted as placement
agent for the offering of the Series A Convertible Preferred Stock. We also
issued an aggregate of 25,000 warrants to Butler Gonzalez, LLP, counsel to May
Davis. The warrants are exercisable for five years from the date of issuance,
and contain certain antidilution and cashless exercise provisions. The warrants
are exercisable at a price of $.01 per share for a period of five years.

Anti-Takeover Provisions

The provisions in our certificate of incorporation relating to a
staggered board of directors and issuance of our preferred stock may have the
effect not only of discouraging tender offers or other stock acquisitions but
also of impeding management changes sought by existing shareholders. A
classified board, while promoting stability in board membership and management,
also moderates the pace of any change in control of our board of directors by
extending the time required to elect a majority, effectively requiring action at
a minimum of two consecutive annual meetings. All directors may be removed from
office, with cause, upon the vote of holders of a majority of shares entitled to
vote in the election of directors.

These provisions enhance the possibility that a potential bidder for
control of us will be required to act through arm's-length negotiation with
respect to a major transaction, such as a merger, consolidation or purchase of
substantially all of our assets. Such provisions may also have the effect of
discouraging tender offers or other stock acquisitions, giving our management
power to reject certain transactions which might be desired by the owners of a
majority of our voting securities. These provisions could also be deemed to
benefit incumbent management to the extent they deter such offers by persons who
would wish to make changes in management or exercise control over management.
Our board of directors does not presently know of a third party that plans to
make an offer to acquire us through a tender offer, merger or purchase of all or
substantially all of our assets.

Registration Rights

Under Registration Rights Agreements we entered into with purchasers of
our Series A Convertible Preferred Stock, we are required to file and keep
current a registration statement with regard to the common stock issuable upon
conversion of such Series A Convertible Preferred Stock.

The holder of a convertible note in the principal amount of $100,000
has demand registration rights with respect to our common stock that may be
issued upon conversion of the note. Messrs. Lu and Schillen have the same demand
registration rights with respect to the common stock that may be issued upon
conversion of convertible notes we issued to them in the principal amount of
$50,000 and $100,000, respectively.

Transfer and Warrant Agent

Continental Stock Transfer & Trust Company, New York, New York is our
transfer agent.

PLAN OF DISTRIBUTION

We have been advised by the selling stockholders that the selling
stockholders may sell their shares from time to time in transactions on the
NASD's OTC Bulletin Board, in negotiated transactions, or otherwise, or by a
combination of these methods, at fixed prices which may be changed, at market
prices at the time of sale, at prices related to market prices or at negotiated
prices. The selling stockholders may effect these transactions by selling the
shares to or through broker-dealers, who may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders or the
purchasers of the shares for whom the broker-dealers may act as an agent or to
whom they may sell the shares as principal, or both. The compensation to a
particular broker may be in excess of customary commissions.

The selling stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with the sale of the shares offered
hereby. Broker-dealers who act in connection with the sale of the shares may
also be deemed to be underwriters. Profits on any resale of the shares as a
principal by such broker-dealers and any commissions received by such
broker-dealers may be deemed to be underwriting discounts and commissions under
the Securities Act.

Any broker-dealer participating in such transactions as agent may
receive commissions from the selling stockholder (and, if they act as agent for
the purchaser of such shares, from such purchaser). Broker-dealers may agree
with the selling stockholder to sell a specified number of shares at a
stipulated price per share, and, to the extent such broker-dealer is unable to
do so acting as agent for the selling stockholder, to purchase as principal any
unsold shares at the price required to fulfill the broker dealer commitment to
the selling stockholder. Broker-dealers who acquire shares as principal may
thereafter resell such shares from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or otherwise
at market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
shares commissions computed as described above. To the extent required under the
Securities Act, a supplemental prospectus will be filed, disclosing (a) the name
of any such broker-dealers; (b) the number of shares involved; (c) the price at
which such shares are to be sold; (d) the commissions paid or discounts or
concessions allowed to such broker-dealers, where applicable; (e) that such
broker-dealers did not conduct any investigation to verify the information set
out in this prospectus, as supplemented; and (f) other facts material to the
transaction.

The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.

Under applicable rules and regulations under the Securities Exchange
Act, any person engaged in a distribution of the shares may not simultaneously
engage in market making activities with respect to such securities for a period
beginning when such person becomes a distribution participant and ending upon
such person's completion of participation in a distribution, including
stabilization activities in the common stock to effect covering transactions, to
impose penalty bids or to effect passive market making bids. In addition and
without limiting the foregoing, in connection with transactions in shares, we

and the selling stockholders will be subject to applicable provisions of the
Securities Exchange Act and the rules and regulations thereunder, including,
without limitation, Rule 10b-5 and, insofar as we and the selling stockholders
are distribution participants, Regulation M and Rules 100, 101, 102, 103, 104
and 105 thereof.
All of the foregoing may affect the marketability of the shares.

The selling stockholders will pay all commissions and certain other
expenses associated with the sale of the shares. The shares offered hereby are
being registered pursuant to our contractual obligations and we have also agreed
to indemnify the selling stockholders with respect to the shares offered hereby
against certain liabilities under the Securities Act, or if such indemnity is
unavailable, to contribute toward amounts required to be paid in respect of such
liabilities.

LEGAL MATTERS

Certain legal matters in connection with the registration of the
securities offered hereby will be passed upon for us by Williams, Mullen, Clark
& Dobbins, Washington, D.C.

EXPERTS

The consolidated financial statements included in this prospectus and
elsewhere in this registration statement and for the periods included in their
report have been audited by Merdinger, Fruchter, Rosen & Corso, P.C.,
independent auditors, and are included herein in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

On January 14, 2000, our independent public accountants, Moore
Stephens, P.C., terminated its client-auditor relationship with us. On January
18, 2000, our board of directors approved the engagement of Merdinger, Fruchter,
Rosen & Corso, P.C. to serve as our independent public accountants and to be the
principal accountants to conduct the audit of our financial statements for the
fiscal year ending March 31, 2000, replacing the firm of Moore Stephens, P.C.
who had been engaged to audit our financial statements for the fiscal years
ended March 31, 1996, 1997, 1998 and 1999. Subsequently, we engaged Merdinger,
Fruchter, Rosen & Corso, P.C., to re-audit our financial statements for the year
ended March 31, 1999. Moore Stephens, P.C.'s report on our statements during the
fiscal years ended March 31, 1998 and 1999 contained no adverse or disclaimer of
opinion, however it did contain a going concern explanatory paragraph. Our
management 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 Moore Stephens, P.C., would have caused it to make a reference
to the subject matter of the disagreement in connection with its reports.

INDEX TO FINANCIAL STATEMENTS

PAGE

AUDITED FINANCIAL STATEMENTS

INDEPENDENT AUDITORS' REPORT..............................................F-2

CONSOLIDATED BALANCE SHEET (RESTATED)...............................F-3 - F-4

CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)..........................F-5

CONSOLIDATED STATEMENT OF STOCKHOLDERS'
DEFICIENCY (RESTATED)................................................... F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED....................F-7 - F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................F-11 - F-37

UNAUDITED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET........................................F-38 - F-39

CONSOLIDATED STATEMENT OF OPERATIONS.....................................F-40

CONSOLIDATED STATEMENT OF CASH FLOWS..............................F-41 - F-42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................F-43 - F-45

F-1

INDEPENDENT AUDITORS' REPORT

TO THE STOCKHOLDERS' AND BOARD OF DIRECTORS OF
DIAMOND ENTERTAINMENT CORPORATION

We have audited the accompanying consolidated balance sheet of Diamond
Entertainment Corporation and Subsidiaries as of March 31, 2000 and the related
consolidated statements of operation, stockholders' deficiency and cash flows
for the two-year period ended March 31, 2000. These financial statements are the
responsibility of our management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Diamond
Entertainment Corporation and Subsidiaries as of March 31, 2000, and the
consolidated results of their operations and their cash flows for the two year
period ended March 31, 2000, in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, our has incurred recurring losses and a
negative cash flow from operations, as well as a working capital deficit which
raises substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also discussed in Note 1. These
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants

Los Angeles, California
July 13, 2000

F-2

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Restated)
MARCH 31, 2000

ASSETS
CURRENT ASSETS
Accounts receivable, net of allowance for
doubtful accounts of $137,750 $ 421,196
Inventories 1,094,878
Prepaid expenses and other current assets 116,456
-----------
Total current assets 1,632,530

PROPERTY AND EQUIPMENT, net 266,570
FILM MASTERS AND ARTWORK, less
accumulated amortization of $3,813,596 114,424
OTHER ASSETS
Investment in equity subsidiary 50,000
Other assets 60,982
-----------
TOTAL ASSETS $ 2,124,506
===========

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

F-3

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Restated) (Continued)
MARCH 31, 2000

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ 19,428
Accounts payable and accrued expenses 1,486,142
Financing agreement payable 909,131
Notes payable - current portion 125,762
Related parties - notes and advances payable
-current portion 1,543,841
Convertible debentures - current portion 1,050,775
Capital lease obligations - current portion 28,742
-----------
Total current liabilities 5,163,821

LONG-TERM LIABILITIES
Notes payable, less current portion 63,872
Related parties - notes and advances payable,
less current portion 100,000
Convertible debentures, less current portion 100,000
Capital lease obligations, less current portion 17,912
-----------
TOTAL LIABILITIES 5,445,605
-----------
COMMITMENTS AND CONTINGENCIES (Note 12) -

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
Common stock, no par value; 100,000,000 shares
Authorized; 62,334,029 issued and outstanding 14,001,535
Accumulated deficit (17,650,424)
Treasury stock ( 48,803)
------------
TOTAL STOCKHOLDERS' DEFICIENCY ( 3,321,099)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,124,506
============

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

F-4

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Restated)

For the Year Ended
March 31,
---------------------------------
2000 1999
------------- -------------
(Restated) (Restated)
------------- -------------

SALES - net $ 3,828,261 $ 4,373,303

COST OF GOODS SOLD 3,348,102 2,934,057
------------- -------------
GROSS PROFIT 480,159 1,439,246

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,055,809 3,887,479
------------- -------------
LOSS FROM OPERATIONS ( 3,575,650) ( 2,448,233)
------------- -------------
OTHER INCOME (EXPENSE)
Interest expense ( 418,524) ( 463,905)
Other income 14,316 50,674
Income (loss) from equity investment 42,500 ( 7,500)
Valuation adjustment for investment - 88,773
------------- -------------
Total other income (expense) ( 361,708) ( 331,958)
-------------- -------------
LOSS BEFORE INCOME TAXES ( 3,937,358) ( 2,780,191)

INCOME TAXES - -
------------- -------------
LOSS FROM CONTINUING OPERATIONS ( 3,937,358) ( 2,780,191)

EXTRAORDINARY INCOME - Forgiveness of debt,
net of tax effect of $0 - 65,968
------------- -------------

NET LOSS $( 3,937,358) $( 2,714,223)
============= ============
LOSS PER SHARE, basic and diluted
CONTINUING OPERATIONS $( 0.07) $( 0.08)
EXTRAORDINARY INCOME - -
------------- -------------
NET LOSS $( 0.07) $( 0.08)
============== =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 59,375,234 34,392,178
============= ============

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

F-5

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (Restated)
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999

Convertible Total
Preferred Stock Common Stock Accumulated Treasury Stockholders'
Shares Amount Shares Amount Deficit Stock Deficiency
------- -------- ---------- ----------- ------------- --------- ------------

Balance at March 31, 1998 483,251 $376,593 28,753,250 $ 9,207,416 $(10,634,843) $(48,803) $(1,099,637)
Adjust for interest on convertible
debentures - - - 364,000 ( 364,000) - -
------- -------- ---------- ----------- ------------- --------- ------------
Balance at March 31, 1998 (Restated) 483,251 376,593 28,753,250 9,571,416 (10,998,843) (48,803) (1,099,637)
Shares issued for:
Conversion of interest - - 3,445,011 303,946 - - 303,946
Conversion of principal - - 10,396,245 848,867 - - 848,867
Settlement agreement - - 1,499,523 47,985 - - 47,985
Services rendered - - 25,000 1,920 - - 1,920
Exercise of options and warrants - - 6,500,000 355,000 - - 355,000
Issuance of stock options for
services rendered - - - 430,426 - - 430,426
Issuance of stock options to
employees below market - - - 160,000 - - 160,000
Interest for convertible debentures - - - 216,200 - - 216,200
Net loss - - - - ( 2,714,223) - (2,714,223)
------- -------- ---------- ----------- ------------- --------- ------------
Balance at March 31, 1999 (Restated) 483,251 376,593 50,619,029 11,935,760 (13,713,066) (48,803) (1,449,516)
Exercise of common stock options:
Cash - - 4,000,000 200,000 - - 200,000
Settlement of debt and interest - - 7,225,000 376,875 - - 376,875
Settlement of accounts payable - - 490,000 24,500 - - 24,500
Options issued for consulting
services - - - 660,000 - - 660,000
Options issued for officers
compensation - - - 620,000 - - 620,000
Interest for convertible debentures - - - 184,400 - - 184,400
Net loss (Restated) - - - - ( 3,937,358) - (3,937,358)
------- -------- ---------- ----------- ------------- --------- ------------
Balance at March 31, 2000 (Restated) 483,251 $376,593 62,334,029 $14,001,535 $(17,650,424) $(48,803) $(3,321,099)
======= ======== ========== =========== ============ ========== =============

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

F-6

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated)

For the Year Ended
March 31,
---------------------------------
2000 1999
------------- -------------
(Restated) (Restated)
------------- -------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $( 3,937,358) $( 2,714,223)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 279,038 337,905
Provision for doubtful accounts ( 51,205) 307,013
Inventory reserve 176,386 500,000
Issuance of note payable for settlement 72,000 -
Gain on extinguishment of debt - ( 65,970)
Issuance of equity instruments as
compensation and other fees 1,464,400 1,014,524
Valuation adjustment of investment - ( 88,733)
(Income) loss from equity investment ( 42,500) ( 7,500)
Changes in assets and liabilities
(Increase) decrease
Accounts receivable 189,240 315,264
Inventories 977,527 1,034,881
Prepaid expenses and other current assets ( 30,096) 36,455
Other assets 230,020 168,492
Increase (decrease)
Accounts payable and accrued expenses 244,141 ( 3,725,148)
Accrued interest 29,997 -
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES ( 398,410) ( 2,887,040)
------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES
Repayments by ATRE - 588,733
Purchase of property and equipment ( 18,506) ( 109,560)
Purchase of film masters and artwork ( 66,420) ( 71,293)
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ( 84,926) 407,880
------------- -------------

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

F-7

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated) (Continued)

For the Year Ended
March 31,
---------------------------------
2000 1999
------------- -------------
(Restated) (Restated)
------------- -------------

CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdraft ( 85,475) 104,903
Net repayments of financing agreement ( 267,796) 132,716
Proceeds from notes payable 194,146 367,487
Payments of notes payable ( 350,270) ( 554,339)
Proceeds from notes payable (related party) 784,341 1,977,925
Payments of notes payable (related party) - -
Proceeds from convertible debentures 50,000 100,000
Payment of convertible debentures ( 16,370) -
Payments on capital leases ( 25,240) ( 10,062)
Proceeds from the exercise of options 200,000 355,000
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 483,336 2,473,630
------------- -------------

NET CHANGE IN CASH AND CASH EQUIVALENTS - ( 5,530)

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR - 5,530
------------- -------------

CASH AND CASH EQUIVALENTS - END OF YEAR $ - $ -
============= =============

SUPPLEMENTAL INFORMATION:
Interest paid $ 237,000 $ 300,000
============= =============
Income taxes paid $ - $ -
============= =============

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

F-8

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated) (Continued)

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

For the year ended March 31, 1999, the Company issued the following equity and
security instruments:

Authorized to extend the exercise period for an additional two years for
4,000,000 options to purchase common shares issued in prior years to employees.
The Company cancelled the original options and issued new options with the same
terms including the two-year extension. Since the option price was below the
market price on the date of grant, the Company has recognized compensation
expense for the difference, which aggregates to $160,000.

Granted options to consultants to purchase 5,950,000 shares of the
Company's common stock. The Company has recognized consulting expense of
$392,670.

Authorized the reduction in the exercise price to $0.05 per share for
1,200,000 options, issued in previous years to consultants, to purchase the
Company's common stock. The Company cancelled the original options and
issued new options with the same terms, except, at an exercise price of
$0.05. The Company has recognized consulting expense of $37,756.

Issued 1,499,523 and 25,000 shares of its common stock to pay for a legal
settlement and services rendered, respectively. The Company recorded an
expenditure associated with issuance at the current market price of the
Company's common stock for an aggregate of $49,905.

Issued 3,445,011 shares of its common stock for the payment of interest
expense. The Company recorded additional interest expense of $157,987 for
the difference between the fair market value of the shares issued and the
accrued interest at the time of the issuance.

Issued 10,396,245 shares of its common stock for the conversion of $848,867
of principal balance of convertible promissory notes.

Issued convertible promissory notes in the aggregate of $325,000 with a
conversion price below the market value on the date of issuance. The
Company has recognized additional interest expense of $216,200 for the
difference between the current market value and the conversion price. Also,
of the convertible promissory note totaling $175,000 was for an extension
bonus on the convertible debentures converted during the year. The Company
has amortized $155,000 and $20,000 as financing expense for the years ended
March 31, 2000 and 1999.

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

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

F-9

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated) (Continued)

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
(Continued):

For the year ended March 31, 2000, the Company issued the following equity and
security instruments:

Granted options to consultants to purchase 14,465,000 shares of its common
stock, in connection with consulting agreements and officer compensation.
The Company has recognized consulting expense of $1,535,000.

Issued 7,225,000 and 490,000, respectively, shares of its common stock for
the conversion of $376,875 of principal balance and accrued interest and
$24,500 of accounts payable, respectively.

Converted $1,860,275 of accounts payable to related parties into two
separate convertible debentures for i) $1,050,775 issued to an unrelated
third party, and ii) $809,500 issued to a related party.

Issued a $72,000 promissory note in settlement for the 2000 termination of
an operating lease.

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

F-10

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business
------------------
The Company is in the business of distributing and selling
videocassettes, general merchandise, patented toys, furniture, and
Cine-Chrome gift cards, through normal distribution channels throughout
the United States and through a web site. At March 31, 2000 and 1999,
our 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, video products
and general merchandise, described as follows:

Video Programs and Other Licensed Products
The Company distributes and sells videocassette titles, including
certain public domain programs and certain licensed programs. The
Company markets its video programs to national and regional mass
merchandisers, department stores, drug stores, supermarkets and other
similar retail outlets. Also, in September of 1998, the Company entered
into a distribution agreement for a new product called Cine-Chrome,
utilizing classic images of licensed properties.

General Merchandise
The Company, through its wholly owned subsidiary, Jewel Products
International, Inc. ("JPI"), purchases and distributes toy products to
mass merchandisers in the U.S., which commenced in fiscal 1999. The
Company offers the toy products for limited sales periods and as demand
for products change, the Company switches to newer and more popular
products.

Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.

Basis of Presentation
---------------------
As reflected in the accompanying consolidated financial statements, the
Company has had recurring losses from operations, negative cash flow
from operations, a negative working capital 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.

F-11

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of Presentation (Continued)
---------------------------------
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
our 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:

o The Company is seeking to secure a line of credit. The Company
will require $500,000 to expand our product line (DVD products)
and in turn increase sales; any funds received over $500,000 will
be used to pay down related parties-notes and advances.

o Extended the maturity date for a $100,000 convertible debenture
and $150,000 of related parties - convertible debentures in order
to reduce our cash requirements.

o Convert to common stock $1,051,000 of convertible debentures and
$810,000 of related parties - convertible debentures, in order to
reduce our cash requirements.

o Convert approximately 50% of our video products to DVD format in
order to keep current with existing demand and technology. The
new products are estimated to increase overall sales by
approximately 18%, which will add to the overall gross profit
margin approximately 13%.

o Reduce operating expenses to the lowest level possible, as the
Company has relocated its office and warehouse facilities in
order to reduce annual rent expense by approximately $250,000.

o Evaluate the lowest level of employee requirements to operate the
Company effectively, as the Company has reduced its annual
payroll and payroll related expenses by approximately $350,000.

F-12

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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.

Cash and Cash Equivalents
-------------------------
Cash equivalents are comprised of certain highly liquid investments,
with maturities of three months or less when purchased. The Company has
no 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 March 31, 2000, with financial
institutions subject to a credit risk beyond the insured amount.

Inventories
-----------
Inventories are stated at the lower of FIFO (first-in, first-out) cost
or market, and consist of videocassettes, general merchandise, patented
toys, furniture, and Cine-Chrome gift cards.

F-13

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property and Equipment
----------------------
Property and equipment are presented at historical cost less
accumulated depreciation. Depreciation is computed by 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 videocassettes that are sold to customers.

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.

Revenue Recognition
-------------------
The Company records sales when products are shipped to customers and
are shown net of estimated returns and allowances.

Advertising Costs
-----------------
Advertising costs are expensed as incurred. Advertising costs were
approximately $44,500 and $54,700 for the years ended March 31, 2000,
and 1999, respectively.

F-14

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation
------------------------
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees". Under APB 25, the Company does not
recognize compensation expense related to options issued under its
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.

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
--------------------
SFAS No. 130, "Reporting Comprehensive Income" establishes standards
for the reporting of comprehensive income and its components in the
financial statements. As of March 31, 2000 and 1999, the Company has no
items that represent comprehensive income and, therefore, has not
included a schedule of comprehensive income in the accompanying
consolidated financial statements.

F-15

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Net Loss Per Share
------------------
The Company uses SFAS No. 128, "Earnings Per Share" for calculating the
basic and diluted loss per share. Basic loss per share is computed by
dividing net loss attributable to common stockholders by the weighted
average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. At March 31, 2000
and 1999, the weighted average common shares outstanding would have
been increased 19,004,000 and 11,004,000 shares if the issued and
exercisable stock options would have been dilutive.

NOTE 2 - RESTATEMENT AND CORRECTION OF ERRORS

The March 31, 2000 consolidated financial statements were previously
presented in our Form 10KSB filing, filed with the Securities and
Exchange Commission on August 21, 2000. The Company has restated its
March 31, 2000 consolidated financial statements to expense $255,000 of
capitalized deferred costs, which was incurred due to the issuance of
stock options to consultants. Since the consultants were 100% vested in
the options on the date of grant, the Company has determined that the
associated cost of the option has no future value to the Company. The
effect of the restatement is a $255,000 increase in selling, general
and administrative expense. Also, the March 31, 2000 consolidated
financial statements have been effected to reflect accumulative
adjustments of $308,209 for 1999 restatements, which have increased our
1999 net loss.

The Company has restated its March 31, 1999 financial statements as a
result of the following:

1) In 1999, the Company issued convertible debentures for $175,000
and $100,000 to an unrelated third party and a $50,000
convertible debenture to its president. Since the debentures are
convertible into restricted shares of the Company's common stock
at a rate below market price of our common stock on the date of
issuance of the debentures, the first 20% of the below market
price was attributed to the lack of tradability of the shares,
due to restriction on sale and the remainder of the below market
price was attributed to financing costs. The additional amount of
financing cost was calculated to be $105,000, $73,600 and
$37,600, respectively. The Company did not record the effect of
this matter in its financial statements. The effect on the
financial statements was a $216,200 increase in common stock and
a corresponding increase in selling, general and administrative
expense.

F-16

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 2 - RESTATEMENT AND CORRECTION OF ERRORS (Continued)

2) In 1999, the Company converted $145,959 of accrued interest into
3,445,011 shares of its common stock at a conversion rate below
the market price of its common stock. The Company recorded
additional interest expense of $157,987 for the difference
between the conversion price and the market price of its common
stock. The effect on the financial statements was a $157,987
increase in common stock and a corresponding increase in selling,
general and administrative expense.

3) The Company's equity investment was recorded at a value of
$50,000 when the book value was approximately $7,500. The effect
on the financial statements was a $42,500 decrease in the
investment and a corresponding decrease in the valuation
adjustment for the investment.

4) The Company had $175,000 of deferred costs associated with a loan
fee, which was being amortized over the life of the loan. The
amortization expense for 1999 was understated by $16,468. The
effect on the financial statements was a $16,468 decrease in
total assets and a corresponding increase in selling, general and
administrative expense.

5) In 1999, the Company had approximately $176,000 of consignment
sales recorded as accounts receivable. The effect on the
financial statements was a $176,000 decrease in sales and $86,000
decrease in cost of goods sold for a $90,000 decrease in the
gross profit.

6) In 1999, the Company issued 1,524,523 shares of common stock for
services rendered. The shares were valued at $34,500. However,
the market value of the common stock on the date of issuance was
$49,905. The effect on the financial statements was a $15,405
increase in common stock and a corresponding increase in selling,
general and administrative expense.

7) In 1999, the Company granted an option to purchase 7,150,000
shares of its common stock to consultants. The options were
valued at $39,000. However, the estimated market value of the
options was $430,426. The effect on the financial statements was
a $391,426 increase in common stock and a corresponding increase
in selling, general and administrative expense.

F-17

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 2 - RESTATEMENT AND CORRECTION OF ERRORS (Continued)

8) In 1999, the Company granted an option to purchase 4,000,000
shares of its common stock to employees. The Company has elected
to account for employee stock options under APB 25 and recorded
an intrinsic expense of $15,000 for these options since the
option price was below the market price of its common stock on
the date of grant. However, the actual expense had been
calculated to be $160,000. The effect on the financial statements
is a $145,000 increase in common stock and a corresponding
increase in selling, general and administrative expense.

9) As of March 31, 1999, the Company had $48,180 of deferred costs,
which was incurred due to the issuance of stock options to
consultants. Since the consultants were 100% vested in the
options, the Company has determined that the associated cost of
the options to have no future value to the Company. The effect on
the financial statements was a $48,180 decrease in total assets
and a corresponding increase in selling, general and
administrative expense.

NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable at March 31, 2000 net of allowance for doubtful
accounts were approximately $420,000. Substantially all of the accounts
receivable at March 31, 2000 have been pledged as collateral for our
financing agreement (see Note 8).

NOTE 4 - INVENTORIES

Inventories consisted of the following as of March 31, 2000:

Raw materials $ 525,209
Finished goods 1,246,055
-----------
1,771,264
Less: valuation allowance 676,386
-----------
Inventories, net $ 1,094,878
===========

Allowance
-------------
An allowance has been established for the inventories of approximately
$676,000. This reserve is primarily for the anticipated reductions in
selling prices (which are lower than the carrying value) for inventory
which has been (a) restricted to specified distribution territories as
a result of legal settlements and (b) inventory, which has passed its
peak selling season.

F-18

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of March 31, 2000:

Furniture and equipment $ 1,079,941
Automobile 24,487
Leasehold improvements 40,174
--------------
1,144,602
Less: accumulated depreciation and amortization 878,032
---------------
Furniture and equipment, net $ 266,570
==============

Depreciation expense for the years ended March 31, 2000 and 1999 was
approximately $89,000 and $107,000, respectively.

NOTE 6 - RELATED PARTIES RECEIVABLES

The Company was owed approximately $69,000 from the President of the
Company for advances and loans. Simple interest was accrued monthly at
an annual rate of 10% on the outstanding balance. The loan was due in
December 2001. In 1999, the unpaid balance of approximately $69,000 was
forgiven by the Company and treated as compensation costs on the
statement of operations in consideration for the President's personal
guarantees for two leases and promissory notes.

NOTE 7 - INVESTMENT IN AMERICAN TOP REAL ESTATE ("ATRE")

The Company paid $50,000 for 50% of the issued and outstanding common
stock of ATRE. Since the Company does not have greater than a 50%
investment, this investment is accounted for using the equity method.
The operations of ATRE are not considered to be significant to the
Company's operations; therefore the Company has not included a summary
of ATRE's assets and liabilities.

As of March 31, 1998, the Company estimated net realizable value for
the investment was established to be $500,000. In 1999, the Company
received payments from ATRE of $588,733 and recorded equity income of
$7,500. Since, the net book value was $500,000, the Company recorded a
valuation adjustment of $88,733 and income from investment of $7,500
for the year ended March 31, 1999.

Also, March 31, 2000 and 1999 investment amounts of $50,000 and $7,500
approximate the Company's 50% interest in the net assets of ATRE.

F-19

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 8 - FINANCING AGREEMENT PAYABLE

The Company has a financing agreement for a maximum borrowing of up to
$2,500,000. Substantially all assets of the Company have been pledged
as collateral for the borrowings. The agreement calls for a factoring
of its accounts receivable, and an asset-based note related to its
inventories. The cost of funds for the accounts receivable portion of
the borrowings is a 1.5% discount from the stated pledged amount of
each invoice for every 30 days the invoice is outstanding. The
asset-based portion of the borrowings is determined by the lesser of i)
$800,000, ii) 25% of the clients finished toy inventory or iii) 55% of
the clients finished videotape inventory. The cost of funds for the
inventory portion of the borrowings is at 2.0% per month on the highest
outstanding balance each month. The agreement stipulates an $8,000 per
week payment against the asset-based note payable, with final payment
in November 2000. The Company paid interest of $110,000 and $340,000
for the years ended March 31, 2000 and 1999, respectively. The
financing agreement consisted of the following as of March 31, 2000:

Factor payable $ 551,020
Note payable - inventory 358,111
----------
$ 909,131
==========
NOTE 9 - NOTES PAYABLE

The Company has a vehicle financing agreement with monthly payments of
$562 for principal and interest at 9.75% per annum, due in March 2001.
The balance as of March 31, 2000 was $12,214.

Note payable at 16% annual interest with twelve monthly installments of
principal of $2,292. This note is guaranteed by the President of the
Company and is subordinated to the financing agreement payable. Since,
the Company did not pay-off the note on the scheduled maturity date,
the lender has extended the maturity date and assessed an additional
interest charge of 20% per annum as a penalty on the unpaid balance
each month. At March 31, 2000, the balance of $27,500 is due and
payable May 2001.

In March 2000, the Company entered into a legal settlement with its
prior landlords for unpaid rent. The Company agreed to a note payable
for $72,000 at 10% interest payable in twelve monthly installments of
principal and interest of $6,600. At March 31, 2000, the balance of
$72,000 is due and payable March 2001.

As of March 31, 2000, the Company had various payables aggregating
$77,920, due on demand.

F-20

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 9 - NOTES PAYABLE (Continued)

Scheduled annual maturities of these obligations at March 31, 2000 are
as follows:

Year
----
2001 $125,762
2002 63,872
--------
$189,634
========

NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE

Convertible Debentures - Related Parties
----------------------------------------
In March and June 1999, the Company entered into two convertible
debentures for $50,000 and $100,000, respectively. The debentures bear
interest at 10% per year with principal and interest due on the first
anniversary of the date of issuance. Each note has been extended for an
additional year. The notes also call for any amount of the outstanding
principal to be converted into restricted shares of our common stock at
the option of the lender's at a conversion rate of $0.05 per share. As
of March 31, 2000, neither of the debentures were converted. Since the
debentures are convertible into restricted shares of our common stock
at a rate below market, the first 20% of the below market amount was
attributed to the lack of tradability of the shares due to restriction
on sale and the remainder was attributed to additional interest. The
additional amount of financing costs for the years ended March 31, 2000
and 1999 were calculated to be $184,400 and $37,600, respectively, of
which each amount was expensed.

Also, at March 31, 1999, the Company had $809,500 due to a related
party for payment of trade payables. In October 1999, the outstanding
balance was converted into a convertible debenture at 7% per annum due
and payable on or before September 30, 2000. At the option of the
lender all or part of the balance can be paid with shares of the
Company's common stock. The number of shares is determined by dividing
the principal being converted by the average twenty-day bid price,
prior to the date of such payment request, for our common stock. As of
March 31, 2000, the outstanding balance was $809,500.

F-21

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 10 - RELATED PARTIES - NOTES AND ADVANCES PAYABLE (Continued)

Note Payable - Related Parties
------------------------------
As of March 31, 2000, the Company has a $90,000 note payable, due to an
officer, at 10% due on demand.

Advances Payable - Related Parties
----------------------------------
At March 31, 2000, the Company has the following liabilities, which are
non-interest bearing and due on demand: $478,900 due to ATRE and
$115,441 due to an officer.

NOTE 11 - CONVERTIBLE DEBENTURES

In February and March 1999, the Company entered into convertible
debentures for $175,000 and $100,000, respectively. The debentures bear
interest at 10% with principal and interest due on the first
anniversary of the date of issuance. The notes also call for any amount
of the outstanding principal to be converted into restricted shares of
the Company's common stock at the option of the lender at a conversion
rate of $0.05 per share. As of March 2000, one investor converted the
$175,000 note into 3,500,000 shares of our common stock. As of March
31, 2000, the outstanding balance of convertible debentures was
$100,000, for which the lender extended the due date to March 2001.
Since the debentures are convertible into restricted shares of the
Company's common stock at a rate below market, the first 20% of the
below market amount was attributed to the lack of tradability of the
shares due to restriction on sale and the remainder was attributed to
additional interest. The additional amount of financing expense for the
year ended March 31, 1999 was calculated at $178,600.

At March 31, 1999, the Company had $1,118,425 due to a related party
for payment of trade payables. In October 1999, the Company ceased to
have a relationship with the party, so the outstanding balance of
$1,050,775 was converted into a convertible debenture. The debenture
bears interest at 10% with principal and interest due on the first
anniversary of the date of issuance. At the option of the holder, all
or part of the balance can be paid with shares of the Company's common
stock. The number of shares is determined by dividing the principal
being converted by the average twenty-day bid price, prior to the date
of such payment request, for the Company's common stock. As of March
31, 2000, the outstanding balance was $1,050,775.

F-22

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 12 - 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 years ended March 31, 2000 and
1999, royalty expense was $103,841 and $73,356, 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.

Employment Agreements
---------------------
In 1991, two employment agreements were executed for two officers for
annual compensation totaling $240,000. These agreements terminate in
the year 2001 and are adjusted annually in accordance with the Consumer
Price Index. The Board of Directors agreed on April 23, 1996 to reserve
1,000,000 shares of common stock for distribution to two officers of
the Company. The officers at current market prices in installment
payments with a five-year promissory note with interest can purchase
the common stock at 6% per annum. As of March 31, 2000, the officers
did not purchase these shares.

Lease Commitments
-----------------
The Company leases office and storage facilities under operating
leases, which expire in 2003. Also, the Company leases equipment under
capital leases, which expire through 2002.

F-23

The Company's future minimum annual aggregate rental payments for
capital and operating leases that have initial or remaining term in
excess of one year are as follows:

Capital Operating
Leases Leases
---------- ----------
Year Ending March 31,:
2001 $ 34,960 $ 135,000
2002 20,179 131,000
2003 - 105,000
--------- ----------
Total minimum lease payments 55,139 $ 371,000
=========
Less: amount representing interest 8,485
---------
Present value of minimum lease payments 46,654
Less: current portion 28,742
----------
Long-term portion $ 17,912
=========

F-24

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)

Rent expense for the years ended March 31, 2000 and 1999 was
approximately $154,000 and $302,000, respectively.

The following is a summary of property held under the capital leases as
of March 31, 2000:

Furniture and equipment $ 87,081
Less: accumulated depreciation 28,000
----------
Total $ 59,081
=========

Litigation
-------------
The Company has in the past been named as defendant and co-defendant in
various legal actions filed against the Company in the normal course of
business. All past litigation has been resolved without material
adverse impact on the Company.

NOTE 13 - EQUITY

Authorized Shares
-----------------
The Board of directors has authorized a total number of shares in the
amount of 105,000,000 of which 5,000,000 has been dedicated to
preferred stock and 100,000,000 shares for common stock.

Convertible Preferred Stock
---------------------------
The preferred stock has i) voting rights upon all matters upon which
common stockholders have at a 1.95 vote for each share of preferred
stock, ii) conversion rights at 1.95 shares of common stock for each
share of preferred, iii) no rights of redemption and iv) no dividend
preferences, but entitled to a preference of $0.01 per share in the
event of liquidation.

During the year ended March 31, 1999, the Company had the following
significant equity transactions:

o Issued 10,396,245 for the conversion $848,867 of debt principal
for convertible debentures.

o Issued 3,445,011 shares for the conversion of $145,945 of accrued
interest at $0.42 per share. Since the conversion price was below
the market value for our common stock on date of conversion, the
Company has recorded $158,001 of additional interest expense in
1999 for the difference between market and the conversion price.

F-25

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 13 - EQUITY (Continued)

o The Company recorded $216,000 of additional financing costs
related to convertible debentures, convertible into its common
stock at a rate below market, the first 20% of the below market
amount was attributed to the lack of tradability of the shares,
due to restriction on sale and the remainder was attributed to
additional financing. The additional amount of financing expense
for the year ended March 31, 1999 was calculated to be $216,200.

o Issued 1,499,523 shares to the Company's president pursuant to
replace shares he forfeited in a personal legal settlement. The
shares were valued at $47,985, the market value for the Company's
common stock at the date of issuance.

o Issued 6,500,000 shares for the exercise of stock options for
$355,000.

During the year ended March 31, 2000, the Company had the following
significant issuances of its common stock:

o 7,225,000 shares for the exercise of options with the option
price settled by the holders' conversions of $376,875 of notes
payable and accrued interest.

o 4,000,000 shares for the exercise of options for cash proceeds of
$200,000

o The Company recorded $184,400 of additional financing costs
related to convertible debentures, convertible into its common
stock at a rate below market, the first 20% of the below market
amount was attributed to the lack of tradability of the shares
due to restriction on sale and the remainder was attributed to
additional financing. The additional amount of financing expense
for the year ended March 31, 2000 was calculated to be $184,400.

F-26

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 14 - COMMON STOCK OPTIONS

For the fiscal year ended March 31, 1999, the Company had the following
common stock option transactions:

The per unit weighted-average fair value of unit options granted for
the year ended March 31, 1999 was $0.06 at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: weighted-average risk-free interest rates of 4.6%;
dividend yields of 0%; weighted-average volatility factors of the
expected market price of our common stock of 178%; and expected lives
of the options ranging from .05 to 1 years. The Company issued the
following stock options:

o Authorized to extend the exercise period for an additional two
years for 4,000,000 stock options issued to employees. The
Company cancelled the original options and issued new options
with the same terms including the two-year extension. The Company
has elected to account for these options under APB 25 and record
an expense for the intrinsic value of the options. Since the
option price was below the market price on the date of grant, the
Company has recognized compensation expense for the difference
between the market and exercise price, which aggregates to
$160,000.

o Authorized to reduce the exercise price for two consultants, who
each had 600,000 options, from $0.10 per share to $0.05 per
share. The Company valued the options and recorded consulting
expense of $37,756. The consultants exercised these options in
February 1999 for cash proceeds of $60,000.

o Granted an option to an employee to purchase 2,000,000 shares for
a period of five years at $0.10 per share. The Company has
elected to account for these options under APB 25 and record an
expense for the intrinsic value of the options. Since the option
price was equal to the market price on the date of grant, the
Company has not recognized any compensation expense.

o The Company engaged three consultants for a period of one year to
provide advice to undertake for and consult with the Company
concerning management, marketing, consulting, strategic planning,
corporate organization and structure, financial matters in
connection with the operation of the businesses of the Company,
expansion of services, acquisitions and business opportunities.
The consultants received options to purchase a total of 4,700,000
of the Company's common stock exercisable at $.05 per share in
exchange for services to be rendered and the options shall expire
on December 31, 2000. The Company valued the options at and
recorded consulting expense of $336,685. These options were
exercised in February of 1999 for proceeds to the Company of
$275,000.

F-27

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 14 -COMMON STOCK OPTIONS (Continued)

o The Company engaged a consultant for a period of one year to
provide advice to undertake for and consult with the Company
concerning management, marketing, consulting, strategic planning,
corporate organization and structure, financial matters in
connection with the operation of the businesses of the Company,
expansion of services, acquisitions and business opportunities.
The consultant received an option to purchase a total of
1,000,000 shares of the Company's common stock, exercisable at
$.10 per share in exchange for services to be rendered and the
options shall expire in July 2001. The Company valued the options
at and recorded consulting expense of $31,463.

o The Company engaged a consulting firm to provide internet media
consulting and public relations services for a period of one
year. The fee for the services to be rendered included a monthly
cash fee of $3,000. The consulting firm also received options to
purchase a total of 250,000 shares of our common stock with an
exercise price of $0.05 per share in exchange for services to be
rendered and the options shall expire on February 11, 2001. The
Company valued the options at and recorded consulting expense of
$24,522. These options were not exercised as of March 31, 1999.

For the fiscal year ended March 31, 2000, the Company had the following
common stock option transactions:

The per unit weighted-average fair value of unit options granted for
the year ended March 31, 2000 was $0.11 at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: weighted-average risk-free interest rates of 5.5%;
dividend yields of 0%; weighted-average volatility factors of the
expected market price of the Company's common stock of 178%; and
expected lives of the options ranging from 1 to 3 years. The Company
issued the following stock options:

o The Company engaged a consultant for a period of one year to
provide managerial and strategical planning for financial matters
and expansion of the Company. The consultant received an option
to purchase 1,000,000 shares of its common stock exercisable at
$0.10 per share in exchange for services to be rendered and the
option shall expire on July 8, 2001. The option had an aggregate
fair value at date of grant of approximately $40,000.

F-28

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 14 - COMMON STOCK OPTIONS (Continued)

o The Company engaged three consultants for a period of one year
each to provide managerial and strategical planning for financial
matters and expansion of the Company. The consultants received
options to purchase an aggregate of 6,000,000 shares of the
Company's common stock exercisable at $0.05 per share in exchange
for services to be rendered and the options shall expire on April
11, 2000. The options had an aggregate fair value at date of
grant of approximately $291,000. These options were exercised in
April 1999, by the forgiveness of $150,000 of notes payable,
executed in March 1999, and cash proceeds of $150,000.

o Our board of directors approved and the Company issued to its
President, as a bonus, options to purchase 2,500,000 and
1,000,000 shares of our common stock at $0.05 and $0.10 per
share, respectively. The options expire on May 24, 2004. Since
the options are accounted for under APB 25 and the exercise price
is below market, the Company has expensed the aggregate intrinsic
value at date of grant of approximately $486,400.

o Our board of directors approved and the Company issued to its
V.P. of Sales and Marketing, as a bonus, options to purchase
500,000 and 500,000 shares of its common stock at $0.05 and $0.10
per share, respectively. The options expire on May 24, 2004.
Since the options are accounted for under APB 25 and the exercise
price is below market, the Company has expensed the aggregate
intrinsic value at date of grant of approximately $133,600.

o The Company engaged a consultant for a period of one year to
provide advice to, and consult with, the Company concerning
managerial and strategical planning for financial matters and
expansion of the Company. The consultant received an option to
purchase 1,000,000 shares of the Company's common stock,
exercisable at $0.10 per share in exchange for services to be
rendered and the option shall expire on July 12, 2002. The option
had an aggregate fair value at date of grant of approximately
$127,000.

F-29

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 14 - COMMON STOCK OPTIONS (Continued)

o The Company engaged two consultants for a period of one year each
to provide advice to, and consult with, the Company concerning
managerial and strategical planning for financial matters and
expansion of the Company. The consultants received options to
purchase in the aggregate 1,965,000 shares of the Company's
common stock exercisable at $0.05 per share in exchange for
services to be rendered and the options shall expire on August 1,
2000. The options had an aggregate fair value at date of grant of
approximately $202,000. The options were exercised during the
year ended March 31, 2000 by the forgiveness of $36,250 of
principal and interest of debt outstanding for 725,000 shares and
$50,000 cash and the forgiveness of $12,000 of accounts payable
for 1,240,000 shares.

The following summarizes the common stock options issued for consulting
services for the years ended March 31, 2000 and 1999:

Weighted
Average
Exercise
Employees Consultants Price
---------- ----------- ---------
Options outstanding, March 31, 1998 5,000,000 4,004,000 $ 0.14
Granted 6,000,000 7,150,000 $ 0.08
Exercised - (6,500,000) $ 0.05
Expired/cancelled (4,000,000) (1,200,000) $ 0.05
---------- ----------

Options outstanding, March 31, 1999 7,000,000 3,454,000 $ 0.10
Granted 4,500,000 9,965,000 $ 0.06
Exercised - (8,215,000) $ 0.05
Expired/cancelled - (1,000,000) $ 0.25
---------- -----------

Options outstanding, March 31, 2000 11,500,000 4,204,000 $ 0.10
========== ===========
Options exercisable, March 31, 2000 11,500,000 4,204,000 $ 0.10
========== ===========

The Company applies SFAS No. 123, and related interpretations, for
stock options issued to officers and consultants in accounting for its
stock options. Compensation expense has been recognized for the
Company's stock-based compensation for consulting services in the
amount of $1,280,000 and $590,426 for the years ended March 31, 2000
and 1999, respectively. The exercise price for all stock options issued
to these individuals during fiscal years 2000 and 1999 were below the
market price of the Company's stock at the date of grant.

F-30

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 14 - COMMON STOCK OPTIONS (Continued)

STOCK OPTION PLAN

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

The following summarizes our stock option transactions under the stock
option plan:

Weighted
Average
Stock Options Exercise
Outstanding Price
------------- --------
Options Outstanding, March 31, 1998 550,000 $ 0.10
Granted - -
----------- ----------

Options Outstanding, March 31, 1999 550,000 $ 0.10
Granted 300,000 $ 0.10
Expired ( 550,000) $ 0.10
---------- -------
Options, Exercisable and Outstanding,
March 31, 2000 300,000 $ 0.10
========== =======

The weighted average remaining contract lives of stock options
outstanding are 2.42 years.

F-31

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 14 - COMMON STOCK OPTIONS (Continued)

The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB 25 and related interpretations in accounting for its
plan and does not recognize compensation expense for its stock-based
compensation plan other than for stock and options issued under
compensatory plans and to outside third parties. If the Company had
elected to recognize compensation expense based upon the fair value at
the grant date for awards under the plan consistent with the
methodology prescribed by SFAS 123, the Company's net loss would be
increased by $279,504 and $306,760 for the years ended March 31, 2000
and 1999, respectively, to the pro forma amounts indicated below.

2000 1999
----------- -----------
Net Loss:
As Reported $(3,937,358) $(2,714,223)
=========== ===========
Pro forma $(4,216,862) $(3,020,983)
=========== ===========

The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for years ended March 31, 2000 and 1999:
weighted- average risk-free interest rates of 5.7% and 6.0%; dividend
yields of 0% and 0%; weighted-average volatility factors of the
expected market price of the Company's common stock of 178% and 144%;
and a weighted average expected life of the option of 2.5 and 2.5
years.

NOTE 15 - MAJOR CUSTOMERS

For the year ended March 31, 1999, the Company had net sales to five
customers that amounted to approximately $2,466,000 or 54%.

For the year ended March 31, 2000, the Company had net sales to two
customers that accounted for approximately 17.1% and 10.8%,
respectively.

F-32

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 16 - INCOME TAXES

The components of the provision for income taxes are as follows:

For The Years Ended
March 31,
--------------------------------
2000 1999
------------- --------------
Current Tax Expense
U.S. federal $ - $ -
State and local - -
-------------- --------------
Total Current - -
-------------- --------------

Deferred Tax Expense
U.S. federal - -
State and local - -
-------------- --------------
Total deferred - -
--------------- --------------
Total tax provision from
continuing operations $ - $ -
============== =============

The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows for the years ended March 31, 2000 and
1999:

Federal income tax rate ( 34.0)%
Effect of valuation allowance 34.0%
-----------
Effective income tax rate 0.0%
============

At March 31, 2000 and 1999, the Company had net carryforward losses of
approximately $11,045,000 and $8,387,000, respectively. Because of the
current uncertainty of realizing the benefit of the tax carryforwards,
a valuation allowance equal to the tax benefit for deferred taxes has
been established. The full realization of the tax benefit associated
with the carryforwards depends predominantly upon the Company's ability
to generate taxable income during the carryforward period. The net
change in the valuation allowance for the years ended March 31, 2000
and 1999, increased by approximately $491,000 and $653,000,
respectively.

F-33

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 16 - INCOME TAXES (Continued)

Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's deferred
tax assets and liabilities are as follows:
March 31,
-----------------------------
2000 1999
----------- -----------
Deferred Tax Assets
Loss carryforwards $ 3,755,000 $ 3,355,000
Less: valuation allowance 3,755,000 3,355,000
----------- -----------
Net Deferred Tax Assets $ - $ -
=========== ===========

Net operating loss carryforwards expire starting in 2007 through 2018.
Per year availability is subject to change of ownership limitations
under Internal Revenue Code Section 382.

NOTE 17 - 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 2000 and 1999, the Company operated in two
principal industries;

a) Video programs and other licensed products
b) General merchandise

Year Ended March 31,
---------------------------
2000 1999
----------- -----------
Revenues:
Video programs and other licensed products $ 3,605,343 $ 3,956,290
Merchandise 222,918 417,013
----------- -----------
$ 3,828,261 $ 4,373,303
=========== ===========
Loss before taxes:
Video programs and other licensed products $(3,414,811) $(2,046,250)
Merchandise ( 522,547) ( 667,973)
----------- -----------
$(3,937,358) $(2,714,233)
============ ===========

F-34

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 17 - SEGMENT INFORMATION (Continued)

Year Ended March 31,
--------------------------
2000 1999
---------- -----------
Depreciation and amortization:
Video programs and other licensed products $ 242,976 $ 301,843
Merchandise 36,062 36,062
----------- -----------
$ 279,038 $ 337,905
=========== ===========
Segment assets:
Video programs and other licensed products $ 1,813,567 $ 3,141,302
Merchandise 310,939 887,840
----------- -----------
$ 2,124,506 $ 4,029,142
=========== ===========
Expenditure for segment assets:
Video programs and other licensed products $ 84,926 $ 180,583
Merchandise - -
----------- -----------
$ 84,926 $ 180,583
=========== ===========

NOTE 18 - SUBSEQUENT EVENTS

Authorized Shares
-----------------
In July 2000, the Company amended its Articles of Incorporation to
increase the number of authorized common stock from 100,000,000 shares
to 600,000,000 shares.

Stock Option Plan
-----------------
On June 9, 2000, the Board of Directors of the Company approved its
2000 Stock Compensation Plan ("Plan") for the purpose of providing the
Company with a means of compensating selected key employees (including
officers), directors and consultants to the Company and its
subsidiaries, for their services rendered in connection with the
development of Diamond Entertainment Corporation with shares of Common
Stock of the Company. The Plan authorizes the Board of Directors of the
Company to sell or award up to 13,000,000 shares and/or options of its
Common Stock, no par value.

F-35

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 18 - SUBSEQUENT EVENTS (Continued)

Consulting Agreements
---------------------
On June 1, 2000, the Company entered into three consulting agreements
that will terminate on May 31, 2001, whereby the consultants will
provide consulting service for the Company, concerning management,
marketing, consulting, strategic planning, corporate organization and
financial matters in connection with the operation of the businesses of
the Company, expansion of services, acquisitions and business
opportunities. The consultants received options to purchase a total of
7,300,000 of the Company's common stock exercisable at $.035 per share
in exchange for services to be rendered and the options shall expire on
May 31, 2001.

The per unit weighted-average fair value of unit options granted on
June 1, 2000 was $0.029 at the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions:
weighted-average risk-free interest rates of 5.86; dividend yields of
0%; weighted-average volatility factors of the expected market price
of the Company's common stock of 178%; and a weighted average expected
life of the option was 2 months. In June and July of 2000, the Company
received $215,500 in cash for the issuance of the 6,157,143 shares
upon the exercise of these options and the remaining options of
1,142,857 were exercised for consulting services incurred and owed by
the Company to one of the consultants totaling $30,000 and from the
cancellation of an obligation of $10,000 in principal and interest,
owed to the same consultant.

Series A Convertible Preferred Stock
------------------------------------
On May 11, 2000, the Company entered into a Securities Purchase
Agreement ("Securities Purchase Agreement") with eight investors.
Pursuant to the Securities Purchase Agreement, the Company issued and
sold 50 shares of Series A Convertible Preferred Stock ("Series A
Preferred Stock") for total consideration of $500,000, or $10,000 per
share. The May Davis Group, Inc. ("May Davis"), acted as placement
agent for the offering. May Davis received a placement fee of $40,000
and the Company issued warrants to purchase 1,500,000 shares of Common
Stock to May Davis and certain designees of May Davis and warrants to
purchase 25,000 shares of Common Stock to Butler Gonzalez, LLP, counsel
to May Davis. Such warrants are exercisable at a price of $.08 per
share.

F-36

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

NOTE 18 - SUBSEQUENT EVENTS (Continued)

Series A Convertible Preferred Stock (Continued)
------------------------------------------------
Commencing August 9, 2000, the Series A Preferred Stock is convertible,
at the investor's option, into shares of the Company's Common Stock and
automatically converts into Common Stock on April 12, 2002. The
conversion price of the Series A Preferred Stock is the lower of $.08
per share or 80% of the average of the closing bid prices of the
Company's Common Stock on any five trading days in the ten trading day
period preceding the date of conversion. The conversion price of the
Series A Preferred Stock is also adjusted in the event of stock
dividends, stock splits, recapitalizations, reorganizations,
consolidations, mergers or sales of assets. The Series A Preferred
stock also provides for a dividend upon conversion of the Series A
Preferred Stock at the rate of 6% per annum payable in additional
shares of the Company's Common Stock. In no event can the Series A
Preferred Stock be converted into more than 11,575,000 shares of Common
Stock.

Additional features of the Series A Preferred Stock include, among
other things, i) a redemption feature at the option of the Company
commencing September 8, 2000, of shares of Series A Preferred Stock
having a stated value of up to $100,000, ii) a mandatory redemption
feature upon the occurrence of certain events such as a merger,
reorganization, restructuring, consolidation or similar event, and a
liquidation preference over the Common Stock in the event of a
liquidation, winding up or dissolution of the Company. The Series A
Preferred Stock does not provide any voting rights, except as may be
required by law.

Under Registration Rights Agreements the Company entered into with the
purchasers of the Series A Preferred Stock, the Company is required to
file a registration statement to register the Common Stock issuable
upon conversion of the Series A Preferred Stock under the Securities
Act to provide for the resale of such Common Stock. The Company is
required to keep such a registration statement effective until all of
such shares have been resold.

F-37

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000
[UNAUDITED]

ASSETS
CURRENT ASSETS
Accounts Receivable, net of allowance for
Doubtful accounts of $138,914 $ 556,871
Deferred consulting costs 139,333
Inventory 1,083,075
Prepaid expenses and other current assets 95,739
-----------
Total Current Assets 1,875,018

FURNITURE AND EQUIPMENT, net 301,465
FILM MASTERS AND ARTWORK, less
Accumulated amortization of $3,890,506 81,250

OTHER ASSETS
Investment in ATRE 50,000
Other assets 60,982
-----------
TOTAL ASSETS $ 2,368,715
===========

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

F-38

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000
[UNAUDITED]

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Book overdraft $ 7,711
Accounts Payable and accrued expenses 1,515,492
Financing payable 853,663
Notes payable - current portion 82,079
Notes payable related party - current portion 1,530,241
Convertible debentures - current portion 1,049,275
Capital lease obligations - current portion 28,742
-----------
Total Current Liabilities 5,067,203

LONG TERM LIABILITIES
Notes payable, less current portion 52,112
Notes payable related party, less current portion 100,000
Convertible debentures, less current portion 100,000
Capital lease obligations, less current portion 5,788
-----------
Total Liabilities 5,325,103
-----------

COMMITMENTS AND CONTINGENCIES -

STOCKHOLDERS' DEFICIENCY
Convertible Preferred Stock - No Par Value,
5,000,000 Shares Authorized, 483,301 Issued
[of which 172,923 are held in Treasury] 809,593
Common Stock - No Par Value, 600,000,000 Shares
Authorized; 69,634,029 Shares Issued and Outstanding 14,466,035
Accumulated Deficit (18,183,213)
Treasury Stock ( 48,803)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY ( 2,956,388)
-----------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,368,715)
===========

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

F-39

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS [UNAUDITED]

Three months ended Six months ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
----------- ----------- ---------- -----------

SALES - net $ 878,022 $ 974,026 $1,473,567 $ 1,673,111

COST OF GOODS SOLD 527,093 695,649 920,792 1,160,414
---------- ----------- ---------- -----------

GROSS PROFIT 350,929 278,377 552,775 512,697

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 546,654 715,824 913,853 1,562,037
---------- ----------- ---------- -----------
LOSS FROM OPERATIONS (195,725) (437,447) (361,078) (1,049,340)
---------- ----------- ---------- -----------
OTHER INCOME (EXPENSES)
Interest Expense (129,207) (142,583) (160,644) ( 306,899)
Other income 124 7,416 183 7,592
---------- ----------- ---------- -----------
LOSS BEFORE INCOME TAXES (324,808) (572,614) (521,539) (1,348,647)
---------- ---------- ---------- -----------

INCOME TAXES - - - -
---------- ---------- ---------- -----------

NET LOSS (324,808) (572,614) (521,539) (1,348,647)
---------- ---------- ---------- -----------

PREFERRED DIVIDEND ( 7,500) - ( 11,250) -
---------- ---------- ---------- -----------

NET LOSS ATTRIBUTABLE TO COMMON SHARES $( 332,308) $ (572,614) $ (532,789) $(1,348,647)
========== =========== ========== ===========
LOSS PER SHARE, basic and diluted
NET LOSS $ - $ ( .01) $ ( .01) $ ( .02)
PREFERRED DIVIDEND - - - -
---------- ----------- ---------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES $ - $ ( .01) $ ( .01) $ ( .02)
========== =========== ========== ===========

WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 68,967,362 57,461,529 66,650,696 55,061,112
========== ========== ========== ===========

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

F-40

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS [UNAUDITED]

Six months ended
September 30,
2000 1999
---------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (532,789) $(1,348,647)
Adjustments to reconcile net loss to net cash
(used in) operating activities
Depreciation and amortization 116,695 171,041
Bad debt expense 91,001 65,816
Non-cash consulting and compensation expense 69,667 285,591
Non-cash interest expense - 116,250
Increase (decrease)in accounts receivable (171,675) (154,646)
Increase (decrease)in inventory 11,803 240,155
Increase (decrease)in prepaid expense 20,717 (47,836)
Increase (decrease)in Other Assets - 80,035
Decrease (decrease)in deferred Cost (139,333) ( 18,346)
Increase (decrease)in accounts payable and
accrued expenses 29,350 274,994
Decrease (decrease)in obligation Payable 64,932 14,734
Decrease in accrued expenses -
---------- -----------
Net cash used in operating activities (439,632) (320,859)
---------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES
Repayments by ATRE 59,900 97,900
Purchase of property and equipment ( 73,573) ( 16,189)
Purchases of masters and artwork ( 44,843) ( 24,480)
Loans receivable - -
---------- -----------
Net cash provided by (used in) investing activities $ ( 58,516) $ 57,231
---------- -----------

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

F-41

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS [UNAUDITED](continued)

Six months ended
September 30,
2000 1999
---------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in book overdraft ( 11,717) (120,639)
Net repayments of financing agreement ( 55,468) ( 74,903)
Proceeds from notes payable - -
Payment of notes payable ( 55,443) (120,000)
Proceeds from notes payable related parties - 190,000
Payments of notes payable related party ( 13,600) (211,500)
Proceeds from convertible debentures - 150,000
Payments of convertible debentures ( 1,500) ( 13,544)
Payments on capital leases ( 12,124) ( 14,186)
Proceeds from sale of preferred convertible stocks 433,000
Proceeds from the exercise of options 215,000 478,400
---------- -----------
Net cash provided by financing activities 498,148 263,628
---------- -----------

NET CHANGE IN CASH AND CASH EQUIVALENTS 0 ( 48,074)

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 0 48,074
---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 0 $ 0
=========== ============
SUPPLEMENTAL INFORMATION Interest paid $ 64,725 $ 190,760
========== ===========
Income taxes paid $ - $ -
========== ===========

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

F-42

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The unaudited Condensed Consolidated Financial Statements have been
prepared by Diamond Entertainment Corporation (the "Company"), pursuant to the
rules and regulations of the Securities and Exchange Commission. The information
furnished herein reflects all adjustments (consisting of normal recurring
accruals and adjustments) which are, in the opinion of management, necessary to
fairly present the operating results for the respective periods. Certain
information and footnote disclosures normally present in annual consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. The results
of the six months ended September 30, 2000 are not necessarily indicative of the
results to be expected for the full year ending March 31, 2001.

NOTE 2 - STOCK OPTION PLAN

On June 9, 2000, the Board of Directors of the Company approved the
Company's 2000 Stock Compensation Plan ("Plan") for the purpose of providing the
Company with a means of compensating selected key employees (including
officers), directors and consultants to the Company and its subsidiaries for
their services rendered in connection with the development of Diamond
Entertainment Corporation with shares of Common Stock of the Company. The plan
authorizes the Board of Directors of the Company to sell or award up to
13,000,000 shares and/or options of the Company's Common Stock, no par value.

NOTE 3 - CONSULTING AGREEMENTS

The per unit weighted-average fair value of unit options granted on
June 1, 2000 was $0.029 at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions: weighted-average
risk-free interest rates of 5.86; dividend yields of 0%; weighted-average
volatility factors of the expected market price of the Company's common stock of
178%; and a weighted average expected life of the option was 2 months. In June
and July of 2000, the Company received $215,500 in cash for the issuance of the
6,157,143 shares upon the exercise of these options and the remaining options of
1,142,857 were exercised for consulting services incurred and owed by the
Company to one of the consultants totaling $30,000 and from the cancellation of
a obligation of $10,000 in principal and interest owed to the same consultant.
The options had an aggregate fair value at date of grant of approximately
$209,000.

F-43

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

On July 24, 2000, the Company engaged a consulting firm for a period of
one year to provide advice to undertake for and consult with the company
concerning management, marketing, consulting, strategic planning, corporate
organization and structure, financial matters in connection with the operation
of the businesses of the Company, expansion of services, acquisitions and
business opportunities, and shall review and advise the Company regarding its
overall progress, needs and conditions. The consulting firm was granted options
to purchase 600,000 shares of the Company's Common Stock with an exercise price
at $0.05 per share and option shall expire on July 24, 2003. These options were
not exercised as of September 30, 2000.

NOTE 4 - SERIES A CONVERTIBLE PREFERRED STOCK

On May 11, 2000, the Company entered into a Securities Purchase
Agreement ("Securities Purchase Agreement") with eight investors. Pursuant to
the Securities Purchase Agreement, the Company issued and sold 50 shares of
Series A Convertible Preferred Stock ("Series A Preferred Stock") for total
consideration of $500,000, or $10,000 per share. The May Davis Group, Inc. ("May
Davis"), acted as placement agent for the offering. May Davis received a
placement fee of $40,000 and the Company issued warrants to purchase 1,500,000
shares of Common Stock to May Davis and certain designees of May Davis and
warrants to purchase 25,000 shares of Common Stock to Butler Gonzalez, LLP,
counsel to May Davis. Such warrants are exercisable at a price of $.08 per
share.

Commencing August 9, 2000, the Series A Preferred Stock is convertible,
at the investors' option, into shares of the Company's common Stock and
automatically converts into Common Stock on April 12, 2002. The conversion price
of the Series A Preferred Stock is the lower of $.08 per share or 80% of the
average of the closing bid prices of the Company's Common Stock on any five
trading days in the ten trading day period preceding the date of conversion. The
conversion price of the Series A Preferred Stock is also adjusted in the event
of stock dividends, stock splits, recapitalizations, reorganizations,
consolidations, mergers or sales of assets. The Series A Preferred stock also
provides for a dividend upon conversion of the Series A Preferred Stock at the
rate of 6% per annum payable in additional shares of the Company's Common Stock.
An accrual was recorded as a dividend expense for approximately $11,250 during
six month period ended September 30, 2000. In no event can the Series A
Preferred Stock be converted into more than 11,575,000 shares of Common Stock.

Additional features of the Series A Preferred Stock include, among
other things, i) a redemption feature at the option of the Company commencing
September 8, 2000, of shares of Series A Preferred Stock having a stated value
of up to $100,000, ii) a mandatory redemption feature upon the occurrence of
certain events such as a merger, reorganization, restructuring, consolidation or
similar event, and a liquidation preference over the Common Stock in the event
of a liquidation, winding up or dissolution of the Company. The Series A
Preferred Stock does not provide any voting rights, except as may be required by
law.

F-44

DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 4 - SERIES A CONVERTIBLE PREFERRED STOCK (continued)

Under Registration Rights Agreements the Company entered into with the
purchasers of the Series A Preferred Stock, the Company is required to file a
registration statement to register the Common Stock issuable upon conversion of
the Series A Preferred Stock under the Securities Act to provide for the resale
of such Common Stock. The Company is required to keep such registration
statement effective until all of such shares have been resold.

NOTE 5 - AUTHORIZED SHARES

In July 2000, the Company amended its Articles of Incorporation to
increase the number of authorized common stock from 100,000,000 shares to
600,000,000 shares.

F-45

[Prospectus Back Cover]

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

You may rely only on the information contained
in this prospectus. We have not authorized
anyone to provide information different from
that contained in this prospectus. Neither the
delivery of this prospectus nor the sale of
common stock means that information contained
in this prospectus is correct after the date of this
prospectus. This prospectus is not an offer to
buy these shares of common stock in any
circumstances under which the offer or
solicitation would be unlawful.

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

[Prospectus front cover]
======================

DIAMOND ENTERTAINMENT
CORPORATION

Up to 13,400,000 shares of common stock

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

PROSPECTUS

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

December __, 2000

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

Section 14A:3-5 of the New Jersey Business Corporation Act (the
"Statute") provides that: "Any corporation organized for any purpose under any
general or special law of this State shall have the power to indemnify a
corporate agent against his expenses and liabilities in connection with any
proceeding involving the corporate agent by reason of his being or having been
such a corporate agent, other than a proceeding by or in the right of the
corporation, if (a) such corporate agent acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation; and (b) with respect to any criminal proceeding, such corporate
agent had no reasonable cause to believe his conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent, shall not of itself create a
presumption that such corporate agent did not meet the applicable standards of
conduct set forth elsewhere in paragraphs 14A: 3-5 (2)(a) and 14A: 3-5(2)(b)."

Our By-Laws provide that, to the extent remitted under the Statute,
Diamond Entertainment Corporation (the "Company") may indemnify any director,
officer, employee or agent against his expenses and liabilities incurred in
connection with any proceeding involving such persons by reason of the fact that
he was serving in such capacity.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company,
the Company has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.

Item 25. Other Expenses of Issuance and Distribution.

The estimated expenses to be incurred by the Company in connection with
the registration of the securities subject of this registration statement, other
than underwriting discounts and commissions, are estimated as follows:

SEC Registration Fee $ 81.48
Printing and Engraving Expenses 1,000.00
Registrant's Counsel Fees and Expenses 15,000.00
Accountant's Fees and Expenses 2,500.00
Miscellaneous Expenses 1,500.00
-----------
Estimated Total $20,081.48

II-1

Item 26. Recent Sales of Unregistered Securities.

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

As of March 31, 1997, the 10% Debentures of $290,000 were converted
into 1,450,000 shares of our common stock by several off shore companies under
Regulation S and $967,988 of convertible promissory notes payable were
outstanding and in default by the Company. Interest expense of $97,000 and
$24,702 was recorded for the years ended March 31, 1998 and 1997. Subsequent to
September 30, 1997, the Company negotiated a one year extension agreement and
agreed to add 15% to the note as a deferred financing cost of $110,721.

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

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

On August 25, 1997, as compensation pursuant to four consulting
agreements, the Company issued 250,000 shares of Common Stock, and warrants to
purchase an aggregate of 2,050,000 shares of Common Stock, exercisable at $0.10
per share, such warrants to expire on August 24, 1999. Murray T. Scott, a
director of the Company, received the 250,000 shares of Common Stock and 250,000
of such warrants. In July 1998, two individuals who received warrants under the
consulting agreements each exercised warrants to purchase 100,000 shares of
Common Stock for aggregate consideration of $20,000 and in 1999, the Company
authorized the reduction in the exercise price for 1,200,000 of these options to
purchase our common stock by canceling such options and issuing new option with
the same terms except at an exercise price of $0.05 and recorded a non-cash
additional consulting expense of $37,756 in 1999. The Company received $60,000
in January of 1999 from the exercise of 1,200,000 of these options at $0.05 per
share. In February 1999, the Company received $40,000 from one consultant who
exercised 400,000 of these options at an exercise price of $0.10. In March 1999,
the warrants for 250,000 shares issued to Mr. Scott were canceled and reissued
extending the exercise period for an additional two years for such options.

The Company executed nine employment agreements effective September 1,
1997, pursuant to which an aggregate of 550,000 shares of Common Stock were
issued, with a deemed value of $11,000, as payment for past services, and also
issued warrants to purchase 550,000 shares with an exercise price of $.10 per
share. Such shares were subsequently registered pursuant to our Registration
Statement on Form S-8 filed in September 1997. On September 1, 1999, the
warrants to exercise the 550,000 shares of Common Stock expired.

II-2

On August 27, 1999, the Company granted warrants to purchase 300,000
shares of Common Stock, which expire on September 1, 2002, at an exercise price
of $.10 per share to the five remaining employees with employment agreements.

On September 1, 1997 each of Messrs. Lu and Schillen were issued shares
of Common Stock and granted warrants as consideration for agreeing to defer
payment of their salaries. Mr. Lu was issued 3,000,000 shares of Common Stock
and granted warrants to purchase an additional 3,000,000 shares of Common Stock
at $0.10 per share through August 24, 2002. Mr. Schillen was issued 750,000
shares of Common Stock and granted warrants to purchase an additional 750,000
shares of Common Stock at $0.10 per share through August 24, 2002.

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

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

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

On July 9, 1998 the Company entered into a consulting agreement that
will terminate on July 8, 2001 whereby a consultant received an option to
purchase 1,000,000 shares of common stock which expire on July 8, 2001. The
options are exercisable at a price of $.10 per share. The agreement and options
were canceled in September 1998 as the consultant failed to fulfill his
obligations under the consulting agreement. On July 13, 1999, the options for
1,000,000 shares of our common stock were re-issued to the consultant in
accordance with the terms of the original consulting agreement entered into on
July 9, 1998 which was also reinstated. The agreement can be terminated or
extended as agreed to between the parties. This option had not been exercised as
of March 31, 2000.

In July and August of 1998, Mr. Lu was granted additional options to
purchase 2,000,000 shares of Common Stock for $0.10 per share in consideration
of his (i) personal guaranty of our bank line of credit and (ii) loans made to
the Company. Such option expire in March 2003.

On July 15, 1998, the Company incorporated Galaxynet International,
Inc. ("GalaxyNet") in the State of Delaware, as a majority-owned subsidiary of
the Company. GalaxyNet intended to develop and sell internet gaming software and
intended to offer its software to internet gaming companies and provide internet
gaming web sites to solicit gambling wagers from primarily, Asian players. The
Company also issued 4,000,000 options exercisable at $.10 per share to an
investor and 2,000,000 options to the Chief Executive Officer exercisable at
$.10 in connection with this project. On July 17, 1998, the Company, along with
GalaxyNet, entered into a memorandum of understanding regarding the raising of
capital in a private offering to raise gross proceeds in the aggregate of
between $3,000,000 and $10,000,000 with an enterprise who would be paid the sum
of 15% of the aggregate proceeds and receive options for up to 3,750,000 shares
II-3

of common stock at exercise prices of between $.10 and $.20 per share. The
private offering period ended September 30, 1998, and was extended until October
31, 1998. The private offering resulted in raising funding proceeds of only
$250,000. The Company subsequently canceled the project and refunded the
$250,000 to the investor and canceled all the project related options in
November 1998. The company incurred expenses on behalf of GalaxyNet for fiscal
1999 of approximately $30,000.

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

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

On January 10, 1999, the Company engaged three consultants for a period
of one year to provide advice to undertake for and consult with the Company
concerning management, marketing, consulting, strategic planning, corporate
organization and structure, financial matters in connection with the operation
of the businesses of the Company, expansion of services, acquisitions and
business opportunities. The consultants received options to purchase a total of
4,700,000 of our common stock exercisable at $.05 per share in exchange for
services to be rendered and the options shall expire on December 31, 2000. The
Company valued the options at and recorded consulting expenses of $336,685 for
the year ended March 31, 1999. These options were exercised in February of 1999
for proceeds to the Company of $275,000.

In February of 1999, the holders converted $640,000 of the 10%
Debentures into 8,000,000 shares of common stock. On February 10, 1999, the
Company converted the remaining the 10% Debentures balance of $172,661 and
unpaid interest of $90,415 into 3,018,254 shares of common stock. It was also
agreed that the $175,000 extension bonus, which was recorded as a deferred
financing cost in February of 1999, could be converted into shares of common
stock at an agreed exercise price subject to market conditions. The Company
amortized $20,000 and $155,000 of the extension bonus as a financing expense for
the year ended March 31, 1999 and March 31, 2000, respectively. During the year
ended March 31, 2000, $175,000 extension bonus and accrued interest of $13,125
was converted into 3,500,000 shares of our common stock.

In February 1999, the Company engaged a consulting firm to provide
internet media consulting and public relations services for a period of one
year. The fee for the services to be rendered included a monthly cash fee of
$3,000. The consulting firm also received options to purchase a total of 250,000
shares of our common stock with an exercise price of $.05 per share in exchange
for services to rendered and the options shall expire on February 11, 2001.
During the year ended March 31, 2000, all of the options were exercised for
services rendered by the consulting firm and cost incurred totaling $12,500.

II-4

In March and June 1999, the Company issued callable convertible notes
for $50,000 and $100,000 to James Lu and Jeffrey I. Schillen, respectively. The
notes bear interest at 10% per year with principal and interest due on the first
anniversary of the date of issuance. Each note has been extended for an
additional year. The notes also call for any amount of the outstanding principal
to be converted into restricted shares of our common stock at the option of the
lenders at a conversion rate of $0.05 per share. As of March 31, 2000, neither
of the debentures were converted. Since the debentures are convertible into
restricted shares of our common stock at a rate below market, the first 20% of
the below market amount was attributed to the lack of tradability of the shares
due to restriction on sale and the remainder was attributed to additional
interest. The additional amount of interest for the years ended March 31, 2000
and 1999 were calculated to be $167,200 and $37,600, respectively, of which each
amount was expensed in its appropriate fiscal year.

In March of 1999, the Company received a total of $150,000 from three
investors and issued promissory notes due in one year with principal and
interest paid bimonthly at an interest rate of 10%. The notes could be used as
proceeds for the exercised options held by the investors. During the year ended
March 31, 2000, the note holders used the $150,000 and accrued interest of
$2,500 as funds to exercise their common stock options for a total aggregate of
3,000,000 shares of our common stock.

In March and April of 1999, the Company issued two convertible notes
for $100,000 and $50,000, respectively. The notes bear interest at 10% with
principal and interest due on the first anniversary of the date of issuance. The
notes also call for any amount of the outstanding principal to be converted into
restricted shares of our common stock at the option of the lender at a
conversion rate of $0.05 per share. As of March 2000, one investor converted the
$50,000 note into 1,000,000 shares of our common stock. As of March 31, 2000,
the outstanding balance of convertible notes was $100,000, which the lender
extended the due date to March 2001. On June 2, 1999, the Company was advised by
the convertible note holder of the $100,000 note to waive receipt of bimonthly
principal payments and to continue to receive the bimonthly interest only
payments. Since the debentures are convertible into restricted shares of our
common stock at a rate below market, the first 20% of the below market amount
was attributed to the lack of tradability of the shares due to restriction on
sale and the remainder was attributed to additional interest. The additional
amount of interest expense for the year ended March 31, 1999 was calculated to
be $91,100.

On April 12, 1999, the Company engaged three consultants for a period
of one year each to provide managerial and strategic planning for financial
matters and expansion of the Company. The consultants received options to
purchase and aggregate of 6,000,000 shares of our common stock exercisable at
$0.05 per share in exchange for services to be rendered and the options expire
on April 11, 2000. The options had an aggregate fair value at date of grant of
approximately $291,000. These options were exercised in April 1999, by the
forgiveness of $150,000 of notes payable, executed in March 1999 and cash
proceeds of $150,000.

On May 25, 1999, the Company's board of directors approved and the
Company issued to the Company's President, as a bonus, options to purchase
2,500,000 and 1,000,000 shares of our common stock at $0.05 and $0.10 per share,
respectively. The options expire on May 24, 2004. The options had an aggregate
fair market value at date of grant of approximately $681,000.

II-5

On May 25, 1999, the Company's board of directors approved and the
Company issued to the Company's V.P. of Sales and Marketing, as a bonus, options
to purchase 500,000 and 500,000 shares of our common stock at $0.05 and $0.10
per share, respectively. The options expire on May 24, 2004. The options had an
aggregate fair market value at date of grant of approximately $194,000.

In July 1999, the Company engaged a consultant for a period of one year
to provide managerial and strategic planning for financial matters and expansion
of the Company. The consultant received an option to purchase 1,000,000 shares
of our common stock exercisable at $0.10 per share in exchange for services to
be rendered and option shall expire on July 8, 2001. The option had an aggregate
fair value at date of grant of approximately 40,000.

On July 13, 1999, the Company engaged a consultant for a period of one
year to provide advice to undertake for and consult with Company concerning
managerial and strategic planning for financial matters and expansion of the
Company. The consultant received an option to purchase 1,000,000 shares of our
common stock exercisable at $0.10 per share in exchange for services to be
rendered and the option shall expire on July 12, 2002. The option had an
aggregate fair value at date of grant of approximately $127,000. These options
had not been exercised as of March 31, 2000.

On August 2, 1999, the Company engaged two consultants for a period of
one year to provide advice to undertake for and consult with the Company
concerning management, marketing, consulting, strategic planning, corporate
organization and structure, financial matters in connection with the operation
of the businesses of the Company, expansion of services, acquisitions and
business opportunities. The consultants received options to purchase a total of
1,965,000 of the Company's common stock exercisable at $.05 per share in
exchange for services to be rendered and the options shall expire on August 2,
2000. The options had an aggregate fair value at date of grant of approximately
$202,000. The options were exercised during the year ended March 31, 2000 by the
forgiveness of $36,250 of principal and interest of debt outstanding for 725,000
shares and $50,000 cash and the forgiveness of $12,000 of accounts payable for
1,240,000 shares.

During the quarter ended December 31, 1999, Board of Directors of the
Company authorized the conversion of approximately $1,880,725 in related parties
payables into one year 7% Convertible Promissory Notes of $1,071,225 and
$809,500 each, both due on September 30, 2000. The terms of the new convertible
notes allow the Company to make partial principal and interest payments from
time to time and the holders of the convertible notes have the option to request
such payments of the indebtedness evidenced by the notes either in the lawful
money of the United States or in an equivalent value consisting of our common
stock, the number of shares, to be determined by dividing the payment amount by
the average twenty day bid price for our common stock during the twenty trading
days prior to the date of such payment. Also, during the quarter ended December
31, 1999, the related party to which $1,071,225 in related parties payable was
owed by the Company, transacted a change in ownership of its common stock in
which 100% of its outstanding shares of common stock was sold to a non-related
party and at March 31, 2000, the balance of the Convertible Promissory note to
the non-related party was $1,050,775 as a result of the Company recording
payments toward the note in March 2000, by offsetting $20,450 in money owed to
the Company by the non-related party.

II-6

On May 11, 2000, the Company sold 50 shares of Series A Convertible
Preferred Stock ("Series A Preferred Stock") for total consideration of
$500,000, or $10,000 per share. The May Davis Group, Inc. ("May Davis"), acted
as placement agent for the offering. May Davis received a placement fee of
$40,000 and the Company issued warrants to purchase 1,500,000 shares of Common
Stock to May Davis and certain designees of May Davis and warrants to purchase
25,000 shares of Common Stock to Butler Gonzalez, LLP, counsel to May Davis.
Such warrants are exercisable at a price of $.08 per share.

On June 1, 2000, the Company entered into three consulting agreements
that will terminate on May 31, 2001, whereby the consultants will provide
consulting service for the Company concerning management, marketing, consulting,
strategic planning, corporate organization and financial matters in connection
with the operation of the businesses of the Company, expansion of services,
acquisitions and business opportunities. The consultants received options to
purchase a total of 7,300,000 of our common stock exercisable at $.035 per share
in exchange for services to be rendered and the options shall expire on May 31,
2001. In June and July of 2000, the Company received $215,500 in cash for the
issuance of the 6,157,143 shares upon the exercise of these options and the
remaining options of 1,142,857 were exercised for consulting services incurred
and owed by the Company to one of the consultants totaling $30,000 and from the
cancellation of a obligation of $10,000 in principal and interest owed to the
same consultant.

On July 24, 2000, the Company engaged a consulting firm for a period of
one year to provide advice to undertake for and consult with the Company
concerning management, marketing, consulting, strategic planning, corporate
organization and structure, financial matters in connection with the operation
of the businesses of the Company, expansion of services, acquisitions and
business opportunities and shall review and advise the Company regarding its
overall progress, needs and conditions. The consulting firm was granted options
to purchase 600,000 shares of the Company's Common Stock with an exercise price
at $0.05 per share and option shall expire on July 24, 2003. These options were
not exercised as of September 30, 2000.

The Company believes that the transactions set forth above were exempt
from registration with the Commission pursuant to either Section 4(2) of the
Securities Act or Rule 506 of Regulation D promulgated thereunder, as
transactions by an issuer not involving any public offering, Section 3(a)(9) of
the Securities Act as a transaction involving an exchange by an issuer with
existing security holders, or Regulation S under the Securities Act as a
transaction that occurred outside the United States. Except as set forth above,
no broker-dealer or underwriter was involved in the foregoing transactions. All
certificates representing such securities have been or will be appropriately
legended.

II-7

Item 27. Exhibits.

The following exhibits are filed as part of this Registration
Statement:

Exhibit
Number Title of Exhibit
------- ----------------
3.1 (4) Certificate of Incorporation, as amended
3.1.2 (8) Certificate of Amendment to Certificate of Incorporation of
Diamond Entertainment Corporation filed with the State of
New Jersey State Treasurer on May 11, 2000
3.1.3 (8) Certificate of Amendment to Certificate of Incorporation of
Diamond Entertainment Corporation filed with the State of
New Jersey State Treasurer on July 6, 2000.
3.2 (4) By-laws, as amended.
4.1 (4) Certificate for shares of Common Stock.
5.1 (9) Opinion of Williams, Mullen, Clark & Dobbins
10.1 (2)(3) Employment Agreement effective as of January 1, 1991 between
the Company and James K.T. Lu, and Amendment No. 1 to
Employment Agreement, dated September 1, 1997
10.2 (2)(3) Employment Agreement effective as of August 16, 1991
between the Company and Jeffrey I. Schillen, and Amendment
No.1 to Employment Agreement, dated September 1, 1997.
10.3 (5) Agreement of Merger dated May 13, 1997, between BDC
Acquisition Corp. and Beyond Design Corporation
10.4 (6) Agreement of Merger dated May 13, 1997, between BDC
Acquisition Corp. and Beyond Design Corporation.
10.5 (6) Consulting Agreement dated August 25, 1997 between the
Company and George Furla.
10.6 (6) Consulting Agreement dated August 25, 1997 between the
Company and Al Davis.
10.7 (2)(6) Consulting Agreement dated August 25, 1997 between the
Company and Murray T. Scott.
10.8 (6) Consulting Agreement dated August 25, 1997 among the Company
and Bruce W. Barren and the EMCO/Hanover Group.
10.9 (6) Employment Agreements dated as of September 1, 1997, between
the Company and various employees.
10.10 (3) Standard Sublease Agreement, dated as of July 30, 1998,
between the Company and Shinho Electronics & Communication,
Inc., for executive offices on Carmenita Road, Cerritos,
California.
10.11 (3) Standard Industrial/Commercial Multi-Tenant Lease Agreement,
dated as of November 1, 1995, between the Company and
Marquardt Associates, for offices on Marquardt Avenue,
Cerritos, California
10.12 (3) Office Lease Agreement dated October 31, 1997, between
the Company and Freehold-Craig Road Partnership, for offices
in Freehold, New Jersey
10.13 (3) Form of Sublease Agreement between the Company as sublessor
and Vigor Sports, Inc. as subtenant, for offices on
Marquardt Avenue, Cerritos, California.
10.14 (7) 10% Callable Convertible Note, dated March 22, 1999, in
the principal amount of $50,000 issued to Mr. Lu.

II-8

Exhibit
Number Title of Exhibit
------- ----------------
10.15 (7) 10% Callable Convertible Note, dated June 3, 1999, in
the principal amount of $100,000 issued to Mr. Schillen.
10.16 (8) 10% Callable Convertible Note, dated June 3, 1999, in
the principal amount of $100,000 issued to Mr. Schillen.
10.17 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Anthony E. Rakos concerning the issuance and
sale of shares of our Series A Convertible Preferred Stock.
10.18 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Gerald Holland concerning the issuance and sale
of shares our Series A Convertible Preferred Stock
10.19 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Jeffrey Hrutkay, MD concerning the issuance and
sale of shares of our Series A Convertible Preferred Stock.
10.20 (8) Registration Rights Agreement, dated May 11, 2000 between
the Company and Charles and Jane Adkins concerning the
issuance and sale of shares of our Series A Convertible
Preferred Stock.
10.21 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Gordon D. Mogerley concerning the issuance and
sale of shares of our Series A Convertible Preferred Stock.
10.22 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Michelle Levite concerning the issuance and
sale of shares of our Series A Convertible Preferred Stock.
10.23 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and Ralph Lowry concerning the issuance and sale
of shares of our Series A Convertible Preferred Stock.
10.24 (8) Registration Rights Agreement, dated May 11, 2000 between the
Company and John Bolliger concerning the issuance and sale
of shares of our Series A Convertible Preferred Stock.
10.25 (8) Consulting Agreement dated June 1, 2000 between the Company
and Peter Benz.
10.26 (8) Consulting Agreement dated June 1, 2000 between the Company
and S. Michael Rudolph.
10.27 (8) Consulting Agreement dated June 1, 2000 between the Company
and Owen Naccarato.
10.28 (8) 2000 Stock Option Plan dated June 9, 2000.
21.1 (8) Subsidiaries of the Registrant.
23.1 (1) Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
23.2 (9) Consent of Williams, Mullen, Clark & Dobbins
24.1 Power of Attorney (included on signature page of this
Registration Statement)
27.1 Financial Data Schedule for Year Ended March 31, 1999
(Restated)
27.2 Financial Data Schedule for Year Ended March 31, 2000
(Restated)

II-9

- -----------------------
(1) Filed herewith.

(2) Indicated a management contract or compensatory plan or arrangement
required to be filed.

(3) Incorporated by reference to Registrant's exhibits to the Annual Report on
Form 10-KSB for the year ended March 31, 1998, filed December 24, 1998,
(File Number 0-17953).

(4) Incorporated by reference to Registrant's Registration Statement on Form
S-18 (File No. 33-33997).

(5) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed May 16, 1997, (File No. 0-17953).

(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, filed September 15, 1997 (File No. 333-35623).

(7) Incorporated by reference to Registrant's exhibits to the Annual Report on
Form 10-KSB for the year ended March 31, 1999, filed July 14, 1999, (File
Number 0-17953) and Annual Report on Form 10-KSB/A for the year March 31,
1999, filed August 23, 1999 (File Number 0-17953).

(8) Incorporation by reference to Registrant's exhibits to the Annual Report on
Form 10-KSB/A for the year ended March 31, 2000, filed October 26, 2000
(File No. 0-17953)

(9) Incorporated by reference to Registrant's exhibits to the registration
statement on Form SB-2, filed December 15, 2000 (File No. 333-51996).

Item 28. Undertakings

(a) Rule 415 Offering. The undersigned Registrant will:

(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:

(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;

(ii) Reflect in the prospectus any facts or events which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the registration statement; and

(iii) Include any additional or changed material information on the plan of
distribution.

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.

(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.

II-10

(b) Indemnification.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.

(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act of 1933 as part of this Registration Statement as of the time
it was declared effective.

(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and that offering of such securities at that time shall be deemed to be as the
initial bona fide offering of those securities.

II-11

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and authorized this
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Walnut, State of California, on December 22, 2000.

DIAMOND ENTERTAINMENT CORPORATION

By: /s/ James K. T. Lu
-------------------------------
James K.T. Lu, President, Chief
Executive Officer and Director

POWER OF ATTORNEY

We, the undersigned directors and officers of Diamond Entertainment
Corporation, do hereby constitute and appoint James K.T. Lu and Fred U. Odaka,
or either of them, our true and lawful attorneys-in-fact and agents, each with
full power to sign for us or any of us in our names and in any and all
capacities, any and all amendments (including post-effective amendments) to this
Registration Statement, or any related registration statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto and other documents
required in connection therewith, and each of them with full power to do any and
all acts and things in our names and in any and all capacities, which such
attorneys-in-fact and agents, or either of them, may deem necessary or advisable
to enable Diamond Entertainment Corporation to comply with the Securities Act of
1933, as amended, and any rules and regulations, and requirements of the
Securities and Exchange Commission, in connection with this Registration
Statement; and we hereby do ratify and confirm all that such attorneys-in-fact
and agents, or either of them, shall do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.

Signature Title Date

/s/ James K. T. Lu President, Chief Executive December 22, 2000
- -----------------------
James K.T. Lu Officer, Secretary and Director
[Principal Executive Officer]

* Executive Vice President December 22, 2000
- ----------------------- and Director
Jeffrey I. Schillen

* Director December 22, 2000
- -----------------------
Murray T. Scott

/s/ Fred U. Odaka Chief Financial Officer December 22, 2000
- ----------------------- [Principal Financial and
Fred U. Odaka Accounting Officer]

*By: /s/ James K. T. Lu
-------------------
James K. T. Lu
Attorney-in-fact

II-12

EXHIBIT INDEX
-------------

Exhibit No.
- ----------
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.

II-13