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The following is an excerpt from a 10KSB SEC Filing, filed by BRILLIANT DIGITAL ENTERTA ... on 3/30/2000.

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ITEM 1. DESCRIPTION OF BUSINESS

CORPORATE OVERVIEW

Brilliant Digital Entertainment is a pioneering entertainment content provider and 3D animation technology developer for the converging Internet and television markets. We have expanded our business to include the broadcast and webcast over the Internet and television, of live auctions through our subsidiary, The Auctionchannel, Inc.

We use our proprietary software tools to develop and distribute digitally-animated interactive content for the Internet, including our Multipath(TM) Movies. We also develop technology and software tools for sale to others to be used by them in the development of content for the Internet. Our subsidiary, The Auction Channel, enables viewers to watch auction events on television or the Internet and use the Internet or their telephone to bid in real time against bidders present at an auction.

We are a Delaware corporation that was incorporated in July 1996. We were formed through the combination of two businesses: Brilliant Interactive Ideas, Pty. Ltd., an entertainment software developer and producer, and Sega Australia New Developments, a research and development operation for leading edge software tools. We acquired Trojan Television Limited in July 1999, and are in the process of transferring Trojan to our subsidiary, The Auctionchannel, Inc. Our executive offices are located at 6355 Topanga Canyon Boulevard, Suite 120, Woodland Hills, California 91367, and our telephone number is (818) 615-1500. Information on our websites, www.multipathmovies.com and www.theauctionchannel.com, does not constitute part of this Form 10-KSB.

OUR DIGITAL ANIMATION BUSINESS

THE DIGITAL ENTERTAINMENT MARKET

Digital entertainment is created, stored and distributed electronically. Examples of current digital entertainment products include computer games, music, virtual reality attractions, computer-animated Internet and television programs and feature films. Traditionally, digital entertainment has been distributed on CD-ROM and game console cartridges. Leading edge digital entertainment products are now also being released online to capitalize on the current interest in the Internet and the World Wide Web. In addition, digital entertainment products have recently been released as broadcast television and cable programming, home videos, and even full-length feature movies, although on a limited basis.

OUR MULTIPATH MOVIES

We produce Multipath Movies that are three-dimensional digitally animated stories each with multiple plot alternatives, or paths, leading to multiple distinct conclusions that are influenced by the user. The action of a Multipath Movie does not stop while a user makes decisions. A user's decisions are implemented seamlessly because our proprietary Digital Projector has the technical ability to form and manipulate streams of complex three-dimensional animated images in real time, sequentially, for the duration of the movie. Users interact with Multipath Movies by responding with a mouse or keyboard to decision points which affect the plot of a Multipath Movie. The Multipath Movie allows the user to jump forward or back up to previously viewed scenes and, if desired and permitted by the director, to select a different decision path.

MULTIPATH MOVIE PRODUCTION

We develop a broad range of titles designed to appeal to viewers of varying ages and tastes. Our strategy is to continue to develop and produce a library of Multipath Movie Webisodes for the Internet.

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Webisodes are 3 to 7 minute movies that we typically syndicate to other well-trafficked websites and offer on our own website for viewing on a weekly basis. Users are reminded by way of a weekly email to view the next in the series of Webisodes. We have developed titles in the following series:

KISS IMMORTALS SERIES. We collaborated with the rock group KISS to create, develop and produce a unique new interactive digital entertainment and music product based on and featuring KISS. The initial title, KISS IMMORTALS features the voices, likenesses, trademarks and master recordings of the performances of this legendary group.

SUPERMAN SERIES. Our agreement with D.C. Comics provides us with rights to use the comic strip character SUPERMAN in Multipath Movies, which can be distributed on CD-ROM and DVD and via the Internet. We recently licensed the SUPERMAN titles to Time Warner's, Entertaindom website on an exclusive basis. To date, we have confirmed orders from Entertaindom for 45 Webisodes.

XENA; WARRIOR PRINCESS SERIES. Our agreement with Universal Studios provides us with rights to use certain story scripts from the live action television series XENA: WARRIOR PRINCESS and animated character designs from the direct-to-video motion picture HERCULES & XENA: THE ANIMATED MOVIE for use in the production of Multipath Movies. The Multipath Movie titles based on the original plots have been developed for CD-ROM and DVD, and will be distributed via the Internet. In this series we have completed production of GIRLS JUST WANNA HAVE FUN and DEATH IN CHAINS, and continue to produce Webisodes in this series expected for release in the first half of 2000.

ACE VENTURA SERIES. The Ace Ventura series was developed through an agreement with Morgan Creek, a major developer and distributor of feature films. We have developed two titles in the series, THE DON IS DEAD and THE CASE OF THE SERIAL SHAVER.

GRAVITY ANGELS SERIES. We have created an original series called GRAVITY ANGELS, which currently consists of 4 episodes, totaling 16 Webisodes. We are in the process of developing these titles into Webisodes and have created a version of this series for distribution on television.

CHOOSE YOUR OWN NIGHTMARE SERIES. We have developed several titles in the CHOOSE YOUR OWN NIGHTMARE series targeting children eight to twelve years of age. Titles in the series include NIGHT OF THE WEREWOLF, HALLOWEEN PARTY, HOW I BECAME A FREAK, THE EVIL PENPAL, THE CURSE OF THE MUMMY and THE BITE OF THE VAMPIRE. All of these titles are based upon Bantam Doubleday Dell's popular children's series, CHOOSE YOUR OWN NIGHTMARE.

POPEYE SERIES. The POPEYE series is targeted at children three to twelve years of age. These titles are specifically designed to appeal to this age group by including more comic-like characters and engaging music and sound effects. Titles developed include QUEST FOR THE WOOLLY MAMMOTH, THE SUNKEN TREASURE and THE RESCUE, all featuring POPEYE.

SALES AND MARKETING OF OUR MULTIPATH MOVIES

Our sales and marketing program is designed to achieve revenue growth, capture new customers and promote the ongoing growth of the Multipath Movie genre through various distribution methods and promotional initiatives. To facilitate the broad acceptance of Multipath Movies, we are pursuing a broad distribution strategy.

INTERNET AND ONLINE SERVICES. Given the importance of Internet and online delivery in the overall success of the Multipath Movie and other movies using our B3D technology, we believe that it is critical to make Multipath Movies available to as many Internet and online service users as possible. Consequently, we follow a syndication strategy to distribute content as broadly as possible across the Internet. We will continue to focus more and more of our efforts toward Internet distribution through third party websites. Much progress has been made in this area during late 1999 and in the first quarter of 2000.

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The development of compression technologies continues to be a significant component of our business strategy and a primary focus of our research and development efforts. We believe that reductions in the time to download and stream Multipath Movie and B3D content over the Internet will lead to an increase in online acceptance and distribution of our products.

CD-ROM/DVD RETAIL CHANNELS AND DIRECT-TO-RETAIL. We are continuing to establish a retail distribution program in which Multipath Movies are marketed through traditional software publishers and distributors nationwide. We are making progress in the retail channel through our relationship with GT Interactive, who is representing selected titles on CD-ROM through their mass-market outlets. There are, however, numerous obstacles and uncertainties involved in developing a retail distribution channel. Further, we intend to release Multipath Movie titles to the DVD market for distribution commencing in 2000. We believe that distributing our titles on DVD will increase the awareness of Multipath Movies in the retail market.

TELEVISION BROADCAST/CABLE PROGRAMMING AND HOME VIDEO. We have begun to market our Multipath Movies as television programming and home video features. Due to the episodic and serial nature of our Multipath Movies, our titles are easily adaptable to the episodic television market. In addition, by grouping multiple episodes together, we also can produce titles for the cable and direct to video markets. In January 1999, we entered into an agreement with Kaleidoscope Media Group for the distribution of GRAVITY ANGELS, a two-hour 3D animated science fiction thriller, to the television broadcast/cable and home video markets. We believe the convergence of television programming and Internet content can create opportunities for more content to be produced using our technology.

INTERNATIONAL SALES AND MARKETING OF OUR MULTIPATH MOVIES

Our international sales and marketing strategy is managed from the United States and executed through a combination of domestic and offshore efforts. Our strategy for international distribution is to utilize exclusive arrangements for specific countries or dedicated territories with distributors that, in management's opinion, are well suited to direct the commercial launch and ongoing marketing support of products in that country or territory. We believe we will continue to capitalize on management's extensive network of international relationships and background in the international distribution of CD-ROM and video game products. In 1997 we retained a managing director for Europe, based in the United Kingdom. We are actively exploring distribution, joint venture and strategic relationship opportunities in Europe. We believe that product distribution in Europe will require implementation of localized distribution strategies and methods through established regional distributors. In addition, we believe that greater emphasis on traditional retail distribution methods will be required in Europe initially because of lower Internet usage in this region.

We recently concluded an agreement with e-New Media, a Hong Kong-based publicly traded company for the distribution of new and existing content and the development of newly created content for the Asian market. The agreement included an equity investment in Brilliant. In addition, we have an existing agreement in place for the Latin American market with a Panamanian company for the localization and distribution of selected titles in parts of Latin America.

Given the global nature of the World Wide Web, we believe that international markets represent a significant incremental opportunity for our Multipath Movies delivered over the Internet. Utilizing our proprietary TalkTrack technology, we can deliver Multipath Movies in foreign languages without significant logistical or cost issues.

DISTRIBUTION OF OUR MULTIPATH MOVIES

We have developed and continue to develop a large distribution network for our Multipath Movies. Some of our distribution partners include:

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TIME WARNER'S ENTERTAINDOM. A new site sponsored by Warner Bros. Online, Entertaindom features a broad array of entertainment, information and services including animation-, video-, music- and games-based entertainment. Our SUPERMAN Multipath Movie webisodes are prominently displayed in a Multipath Movie channel on the Entertaindom website with other selected Multipath Movie content, including KISS IMMORTALS. The website will also feature links to our website to access other Multipath Movie content.

Excite@HOME. We entered into a content and distribution agreement with @Home Network, the leading provider of high-speed Internet services via cable infrastructure, in December 1998. Under the agreement our Multipath Movie titles are offered to @Home subscribers, enabling them to access our interactive digital Webisodes via our website at www.multipathmovies.com. @Home's high-speed network allows subscribers to download our content at faster speeds than users connected to the Internet via standard modems can.

VH1. We entered into a revenue share distribution agreement with VH1 whereby the KISS series is featured on their website. VH1 has committed to promote the series for a period not to exceed two years. Other programming initiatives are in discussions.

ROAD RUNNER. We entered into a non-exclusive agreement with Road Runner, the high-speed online service, whereby digitally animated, 3-D interactive content, which we developed, including content optimized for broadband distribution, is distributed and promoted to Road Runner subscribers. We also participate in Road Runner's off-line marketing and promotions campaign, and our content is promoted within the Road Runner Service. Road Runner's high-speed network allows its subscribers to download and view our content much faster and more readily than through a standard Internet connection.

SLINGSHOT. We entered into an agreement with Slingshot, a special purpose DVD publisher and distributor, in March 1999. We granted to Slingshot exclusive worldwide rights to distribute 20 of our Multipath Movies in DVD format. Under the agreement Slingshot has made an up-front, non-refundable cash advance and provided a minimum guarantee in exchange for its exclusive retail DVD distribution rights. Initial DVD titles are expected to be available in retail outlets in the second quarter of 2000.

GT INTERACTIVE SOFTWARE. We continue to distribute select Multipath Movies on CD-ROM for the retail channel through GT Interactive.

OUR OTHER DIGITAL ANIMATION PRODUCTS

In addition to our Multipath Movies, we are in the process of developing other digital animation products, including:

B3D SHORTS. We produce short movie segments up to5 minutes in length using our B3D technology. These B3D Shorts cover a variety of genres, including adventure, drama and abstract. We develop these B3D Shorts to demonstrate the versatility of our proprietary software tools for use in creating engaging and diverse animated content.

SPORTS TUTORIALS. We have produced a three dimensional, animated golf tutorial using our B3D technology. We are actively involved in attempting to secure sports personalities for use in these tutorials for a variety of sports, including golf and tennis.

EDUCATION PRODUCTS. We are using our B3D technology to produce three dimensional, animated content for use in the educational market in a number of areas, including math, science and English.

E-COMMERCE PRODUCTS. We have produced a demonstration showcasing the use of our B3D technology to create a three dimensional, animated shopping experience on the Internet. We believe that the three dimensional shopping environment created with B3D is superior to the more prevalent two dimensional shopping environments currently found on most websites.

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COMPETITION FOR OUR DIGITAL ANIMATION CONTENT

The markets for our digital entertainment products are intensely competitive, subject to rapid change and characterized by both the constant demand for new product features at reduced prices and the pressure to accelerate the release of new products and product enhancements. Our Multipath Movies and webisodes compete with traditional feature films and television programming produced by major movie studios, including Disney, Warner Bros and MCA Universal as well as numerous other independent motion picture and television production companies. Several movie studios already have developed their own internal computer animation capability and have developed and released animated feature films or created computer animation for special effects in animated films. We expect additional competition in the animated feature film market from these and other movie studios. We also compete with movie studios and Internet companies for the acquisition of literary properties, production financing, the services of performing artists, and the services of other creative and technical personnel, particularly in the fields of animation and technical direction. Internet entertainment companies include Atom Films, Pop.com, Protozoa.com, Shockwave.com and others that produce animated or video content for distribution on the Internet. We expect additional competition in the area of animated and video content for Internet distribution.

OUR SOFTWARE TOOLS BUSINESS

Over the past four years, we have developed a suite of proprietary authoring and broadcasting software tools that allow for the delivery of full-screen, full-motion 3D animation over the Internet. The B3D tool suite has proven critical in the current adoption of our proprietary Multipath Movie format.

CONTENT PRODUCTION TOOLS

The Company has developed several integrated proprietary software tools that enable it to produce Internet-ready, high-quality animated content.

SCRIPNAV. ScripNav was developed specifically for the writing of complex Multipath Movie scripts. It is used to compose, edit and finalize a script using a commercially available word processing package. It provides for the insertion of various subplots into scenes in order to adapt the script to the Multipath Movie format.

TALKTRACK. TalkTrack automatically synchronizes a character's lip movements with corresponding dialogue tracks. Talk Track does this by examining wave files and generating output files that contain references to the appropriate mouth shapes. TalkTrack allows for low cost modification of the Multipath content to any language without the awkward appearance of dubbed movies.

B3D STUDIO. B3D Studio is the centerpiece of the content development and production process. B3D Studio is an object-oriented environment that collects and integrates source files from ScripNav and TalkTrack with graphics, sound and animation and makes them available for layup, editing and final output. B3D Studio provides a multi-window editing environment in which the developer can preview, analyze and edit the final product. B3D Studio includes a Shot Based Editing System that enables movie "clips" to be incorporated into a scene. It also allows cuts and edits to take place, as in a traditional film environment. For example, the specific scene data (sets and props) can be loaded into memory and viewed from different camera positions.

B3D Studio, through its Data Compression Wizard, builds, integrates and compresses the data files to create a B3D file to be played on our Digital Projector. The Data Compression Wizard arranges, assembles and, using licensed technology, compresses thousands of audio and bitmap files that are created during the development of a Multipath Movie in a manner that optimizes the playing of the title. The Data Compression Wizard compresses files allowing up to five hours of branching content to be captured in less than 60 megabytes of disk space, as compared with conventional technologies which presently would require at least one gigabyte of storage.

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DIGITAL PROJECTOR. Digital Projector contains all the necessary components to load and play Multipath Movies or any animation files that have been designed using our B3D technology. The Digital Projector is the software engine that the system uses to play a Multipath Movie, and is generally the only software tool that we must continually modify to permit the Multipath Movie to be adapted to new platforms. We have developed the Digital Projector for PCs, and will develop a Digital Projector for other platforms.

In addition to our proprietary software tools and engines, we use certain commercially available sound and graphics tools in the Multipath Movie production process.

CONTENT TOOLS APPLICATIONS

The B3D tools suite allows for the creation of three-dimensional objects that function within a three-dimensional environment and that can be updated in real time. Examples of the applications for the tool suite include:

o Entertainment content delivered over the Internet and television and on CD-ROM and DVD

o Internet advertisements

o Virtual storefronts with database enabled e-commerce

o Educational programming

o Sports instruction

o Personal online persona

o Virtual Reality content applications and environment management

Entertainment content created with the B3D tools suite has premiered in broadband on Excite@Home and RoadRunner, and premiered in narrowband on Time Warner's Entertaindom portal. In addition, we have or will post our three-dimensional animation content on VH-1, Nettaxi, Lycos, British Telecom, Telekom-Germany and other sites during the first quarter of 2000.

We intend to offer three distinctive versions of our B3D tools suite targeting different types of customers in the graphics and e-commerce markets. These versions include B3D STUDIO, a fully-functional release aimed at major studios and animation production facilities, B3D PROFESSIONAL, a release aimed at professional web and content developers, and B3D MAX, a limited-feature release aimed at individual artists.

THE ADVANTAGES OF OUR SOFTWARE TOOLS

We believe our B3D technology is the only known method for creating high-quality linear and interactive programming for the Internet, traditional television broadcasting, DVD and CD-ROM using a single production process. Our current B3D technology offers the following significant advantages over competing rich media or 3D real time animation technologies:

SMALLER DATA TRANSMISSION REQUIREMENTS. While certain media requires the compression and transmission of each frame in a video image (there are 25 frames per second of video image), our B3D technology requires only the transmission of animation instructions, which consist of commands such as "move the left arm upwards by 12 degrees." As a result, B3D files require much less data to be transmitted, which allows B3D files to be streamed more easily over the Internet.

SMALL FILES AND FAST RENDERING. B3D files are highly compressed binary images with simple command sets, requiring small files and resulting in fast rendering.

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INTERACTIVITY. B3D files offer interactivity. We have developed a unique pre-load system to enable story or interactive branching to take place seamlessly and without interruption to the story or visual representations.

STREAMING DURING PLAYBACK. B3D files allow a movie to begin playing after only a portion of the program has been downloaded, with sound and animation continuing to stream over the Internet while the movie plays. Competing formats generally require that the entire program be downloaded before the user can begin to play the content.

SCALABLE SCREEN SIZE. B3D files can scale from small thumbnails to full-screen movies without degradation. Competing formats generally either pixelate as users enlarge the screen, or are restricted to a partial screen.

SCALES WITH INTERNET BANDWIDTH. Our Digital Projector automatically detects Internet bandwidth and selects the best-quality soundtrack and textures that can be streamed within this bandwidth. This is superior to those competing products which offer bandwidth scalability, but generally require the user to manually select their bandwidth requirements.

LOW SERVER IMPACT. The continuous stream of video data served on demand to viewers worldwide continues to present a significant challenge. In contrast much of the data required to view B3D files resides on the user's computer. Consequently less data is required to be streamed to the user while the movie plays. In addition, B3D files compress to under 10% of video.

USER FRIENDLY. To achieve acceptance with the broadest possible audience, we strive to make our products more user-friendly than those of our competitors, as follows:

o VERSATILE PLAYABILITY. B3D files play with just a double-click of the mouse and in a number of different formats, such as on a web page, inside an e-mail, in a word processor document, spreadsheet or PowerPoint presentation. With self-contained B3D files, everything needed to view the animated content is contained in a single B3D file, eliminating the need for program installation.

o WEBSITE OPERATORS. B3D files do not require special server software with attendant license fees. B3D files can be placed on any HTTP web server without any special server requirements. Their ease of use and low bandwidth requirement appeal to website operators.

o ANIMATORS. Using our B3D Max plug-in, animators using the popular 3D Studio Max tools can quickly and easily output their work as a small .b3d file and play it on a web page in a full screen window with high clarity.

o ADVERTISERS. The current standard advertising mechanism features silent, 5-frame animated Graphics Interchange Format files. Our technology allows for the use of real-time, 3D-based banner advertisements with animated graphics and streaming sound. More significantly, B3D advertisements themselves will be interactive. We believe that interactive advertisements will improve the likelihood that viewers will be interested in the ads and more likely to click on the ads because they will not be transported out of the website in which the ad appears. We believe our B3D ads will be desirable to websites operators, who will encourage their use, because the website will lose fewer viewers to linked advertiser sites.

o E-COMMERCE. B3D designers may program the files so that consumers can only play the movie from within a specific website or only on one occasion, even though the viewer has already downloaded the data to their personal computer. Because B3D content is interactive, e-commerce can be integrated into the content to produce sales opportunities online. Furthermore, the capacity to control images on the viewers' personal computer enables product placement and responsive content to be created.

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THE INSTALLER

We have developed sophisticated installation technology that enables our Digital Projector and content to be installed without taking the user out of their Internet browser. The installer works in conjunction with encrypted installation scripts and a backend database to manage objects on the user's PC and to synchronize assets on the user's PC with those on the server. This will enable the future integration of e-commerce components into content and enable content to be updated on a regular basis. For instance, in a virtual shopping application, with each visit to the virtual supermarket, the Installer will detect objects and automatically update the user's PC with the necessary items required to display items in the order pre-determined by the vendor.

PENDING PATENTS

The technology involved in creating and maintaining a state-of-the-art tools suite represents a significant barrier to entry for new and less technologically advanced competitors. We have applied for various patents with respect to our tools suite, which, if issued, will apply to the following subject areas:

o Streaming Internet Data

o Automated Lip Sync

o Controlling 3D Object Gestures

o Preloading, Caching and Look Ahead of Internet Streamed Data

o Real Time Scalability of Real Time 3D Graphics

o 3D Data Compression

SALES, MARKETING AND DISTRIBUTION OF OUR SOFTWARE TOOLS

We are pursuing a strategy designed to encourage active use of our tools and technology by a broad market of animators who are currently using 3D Studio Max, an animation and three-dimensional design software package developed and marketed by Discreet, a division of Autodesk. Our B3D Max tool is a plug-in to 3D Studio Max. It enables animators to output their animation to be played back in real time on the Internet using our Digital Projector playback system. B3D Max is distributed by Digimation Inc., an authorized distributor of 3D Studio Max plug-ins, and by us directly to the market. The marketing program is designed to encourage content creation and distribution on the Internet of B3D Max to further encourage use of the Digital Projector, and through this, to establish broader demand for our other tools and technology that we intend to continue to release to the market. The tool is not limited to the production of entertainment content. It can be applied to the production of artistic renderings, education, architecture, engineering, e-commerce and other solutions that require animation.

RESEARCH AND DEVELOPMENT

Our research and development efforts are principally focused on the following tasks:

o Enhancing the B3D Max tool, documentation and Digital Projector;

o Implementing our relationships with new affiliates and other technology partners;

o Completing our B3D Studio advanced animation production environment;

o Developing enhanced Internet delivery capabilities of our Multipath Movies, including reduction of content file sizes though new compression technology and streaming of animation data;

o Creating and implementing a progressive dowload system for shorter movie download times;

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o Developing our tools for use on Macintosh computers and other platforms;

o Increasing the efficiency of our object-oriented data libraries and production process;

o Enhancing our software tools to continually add features identified by, and of value to, the creative and production entertainment communities;

o Improving our proprietary database to enhance facial expressions and mouth movements of Multipath Movie characters; and

o Integrating our tools with third party databases for real time control over B3D web objects for use in e-commerce and content applications.

We may determine to alter the course and scope of our research and development effort and to abandon any one or more of these projects. As is the case with most research and development efforts, there can be no assurance that our research will prove to be successful or result in commercially viable developments.

COMPETITION FOR OUR SOFTWARE TOOLS

The markets for our software tools are competitive and subject to rapid change characterized by both the constant demand for new product features at reduced prices and the pressure to accelerate the release of new features and tool enhancements. Companies competing in this market include established companies like Macromedia as well as Pulse and Metacreations. Certain competitive companies are focused on two dimensional technologies as can be seen in the Macromedia Flash toolset, while others with less established technologies have centered on three dimensional animation. B3D enjoys many competitive advantages specific to its core area of expertise. We expect competitors to keep coming into the market as the demand for Internet-ready content increases.

OUR AUCTION BUSINESS

We have recently expanded our business to offer Internet and television based auction services through our subsidiary, Trojan Television Limited, which we acquired in July 1999. Trojan is a London-based company doing business as The Auction Channel. We are in the process of transferring Trojan to our subsidiary, The Auctionchannel, Inc., which operates from offices located in New York.

Founded in 1996, The Auction Channel integrates live satellite, cable TV and Web broadcasts of auction events conducted by auction houses, allowing for participants to watch events on television and use the Internet or their telephone to bid simultaneously with people actually present at the auction house. The Auction Channel has been the first to:

o Provide individuals and businesses the ability to bid live on auctions being conducted at auction houses around the world via the Internet and the telephone; and

o Simulcast live auctions on both television and the Internet.

The Auction Channel's computer software and hardware systems currently are used to host two types of auctions:

o REAL-TIME LIVE AUCTION EVENTS, which are broadcast on television or webcast from an auction floor using The Auction Channel's technology and which allow for interactive bidding either over the Internet or with a touchtone telephone; and

o DELAYED ONLINE AUCTION EVENTS, which enable buyers to bid over a defined period of time, such as 5 days, for a particular item.

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The Auction Channel intends to expand its business to make its website, www.theauctionchannel.com, a principal destination on the Internet for collectors by offering live televised auctions, live webcast auctions, online auctions, fixed-priced dealer e-commerce and business-to-business dealer e-commerce, as well as by providing news, information, services and community both to collectors and dealers. Additionally, The Auction Channel intends to create the world's first 24 hour, 7 days a week global digital interactive television channel devoted exclusively to collecting and auctions.

THE AUCTION MARKETS

There are three primary online auction markets, which include:

o BUSINESS TO BUSINESS: The business-to-business market focuses primarily on products such as computers, industrial and biotech equipment, coal and other commodities and any other industrial item that is subject to liquidation or season-end excess inventory. This category also includes dealers, such as fine art dealers, selling through auction houses to other dealers.

o PERSON TO PERSON: This person-to-person market is exemplified by Internet-based companies such as eBay, which act as a facilitator between buyers and sellers regardless of their geographical location. This market is characterized by a "buyer beware" policy since the facilitator normally does not take responsibility for the authentication of the goods being offered for sale.

o BUSINESS TO PERSON: The business to person market has been the slowest of the auction markets to develop. We believe that this market will become a useful means for large retail companies to discount and close out unwanted inventory. This category also includes dealers selling through auction houses to private individuals.

Within the auction market, we believe the following are the primary types of online auction companies:

o AUCTION HOUSE WITH DEDICATED ONLINE TRADING AREA - includes companies that have developed their own online trading environment for their own auction activities.

o AUCTION HOUSE WITH DEDICATED ONLINE TRADING AREA AND DEALER NETWORK - includes companies that have developed their own online trading environment for their own auction activities and the auction activities of members of a dealer network. Sotheby's is an example of this type of online auction company.

o TRADING AREA - includes companies such as eBay which have developed trading areas where individuals post items for auction which are acquired by other individuals.

o TRADING AREA WITH `TIED' AUCTION HOUSE - includes companies with a trading area that establish a relationship with an auction house in order to benefit from increased volume and authentication services. The relationship between Sotheby's and Amazon.com is an example of these types of online auction companies.

o AUCTION HOUSE-TRADING CONDUIT OR CHANNEL - includes companies like The Auction Channel that provide distribution and marketing services to all auction houses.

One of the many benefits to auction houses of the technology used by The Auction Channel is its low entry cost and low systems support and development expenditure in relation to its high market penetration. This enables auction houses to access and service new and fast growing markets with minimum development costs. The Auction Channel has developed a real-time auction environment specifically to add-value to existing auction house services, while at the same time differentiating its services from existing online auction companies.

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THE AUCTION CHANNEL'S PRINCIPAL PRODUCTS AND SERVICES

The Auction Channel's principal products and services consist of the following:

INTERACTIVE BIDDING SYSTEM(TM) (IBS). IBS is a television-based service that permits an audience to view a live auction event on television and participate by placing bids over the telephone. The television signal is output on a cable or broadcast television channel and/or for local viewing in the auction room. To avoid confusion from poor synchronization of the television output and the telephone relay, the telephone is used solely to bid and cannot be used to listen in on auction events. The acceptance of a bid is communicated to the participant on the telephone and displayed to all viewers on the television screen. When the auctioneers hammer comes down stopping all further bids, the winner's "paddle" details are displayed. IBS is currently being developed to allow participants to bid using their television's remote control.

NETBIDLIVE(TM). NetBidLive is an Internet-based service that permits an audience to view a live auction event on the Internet and participate by placing bids over the Internet using their personal computer. Participants initially access the Internet bidding Web site via The Auction Channel's Web site at www.theauctionchannel.com. Prior to bidding, the participant must provide a client number and personal identification number. The Web page shows a bid button that shows the next bid increment, an image of the item currently being bid upon and other details about the item. When the bid button is selected, the bid is transmitted in real time and feedback as to the status of the bid is sent to the participant. NetBidLive currently is being updated to include streaming of video and audio data.

GRANDSTAND. GrandStand also is an Internet-based service that permits an audience to view a live auction event on the Internet, but the audience cannot participate in the auction by placing a bid. If users of GrandStand are interested in placing bids during an auction, they can push a button on their computer screen to access the registration screen of NetBidLive.

AUDIODIRECT. AudioDirect is a telephone-based service that only permits bidding by telephone without the ability to view the item up for auction. The participant is provided with a catalogue of items up for auction in advance of the auction event. At the time of the auction, the participant follows the auction by listening over the telephone for item numbers and price information. AudioDirect has additional features, including the ability to leave commission bids, browse an electronic catalogue and select items that are up for auction, request more information about the condition of an item, receive an alarm call about a specific item, pay bills, obtain shipping price quotes and make shipping arrangements. This system currently is installed and operational in Christie's South Kensington, London sale room.

SALE VISION. SaleVision is a television-based service that displays auction-related information on television screens throughout an auction house during an auction event. The display includes information about currencies, item descriptions and value estimates, as well as live footage of the auctioneer and of the item currently being bid upon. The SaleVision system also is used to output a television signal from the auction room to the broadcast satellite or cable service from which the TV signal is distributed to homes in the television broadcaster's territory.

CURRENCYVISION. CurrencyVision is a very basic television-based service that includes only a current bid in different currencies for display on television screens throughout an auction house during an auction event. CurrencyVision is an entry-level product.

OTHER SERVICES. The Auction Channel also provides website design and management assistance, marketing support, online catalogue design, customer registration and general online support services.

The IBS, NetBidLive and AudioDirect products are designed to be used simultaneously at a single auction. Bids placed using any of these systems are consolidated and delivered to the auctioneer on a single screen or computer monitor, making it possible for the auctioneer to receive in one location remote bids from the IBS, NetBidLive and AudioDirect systems.

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MARKETING OF THE AUCTION CHANNEL'S PRODUCTS AND SERVICES

The Auction Channel was founded and had its principal offices in the United Kingdom. Due to its geographic location and the abundance of auction houses located in the United Kingdom, The Auction Channel has first tested and marketed its products and services primarily in the United Kingdom. We plan to further expand The Auction Channel's business in the United Kingdom, and to commence operations outside of the United Kingdom, including in North America, Asia and the remaining countries of Europe. The Auction Channel has established relationships with well known auction houses such as CHRISTIES, PHILLIPS, BROOKS, BONHAMS, ALLSOPS and ANTIQUORUM to deliver products and services, increase participation in auction events and help build auction house brand awareness. The Auction Channel's existing relationships with auction houses include exclusive and non-exclusive fixed term arrangements and arrangements relating to individual auction events.

The Auction Channel markets its services to auction houses and television and cable networks through direct sales efforts by its senior management team. The Auction Channel markets and develops consumer awareness of its Web site and services by featuring its World Wide Web address, www.theauctionchannel.com, on all of its television programs, through Internet banner advertisements and links, newsletter subscriptions and media releases.

STRATEGIC RELATIONSHIPS

The Auction Channel has entered into strategic relationships with auction and television companies to facilitate the growth of its auction business.

The Auction Channel has provided its NetBidLive technology and Interactive Bidding System to a number of major international auction houses, including CHRISTIES, PHILLIPS, BROOKS, BONHAMS, ALLSOPS and ANTIQUORUM. The Auction Channel is developing an audio-only version of its IBS system for use at CHRISTIE'S SOUTH KENSINGTON, and has been providing its Internet and television auction services for CHRISTIE'S auctions broadcast by Sky Sports. For ALLSOP, The Auction Channel has agreement to webcast ALLSOP'S London-based auctions over the Internet. The Auction Channel has provided its Internet and/or television auction services to PHILLIPS, BROOKS, BONHAMS and ANTIQUORUM and expects to continue to provide similar services to these auction houses in 2000.

The Auction Channel also has entered into strategic relationships with broadcast, cable and satellite television companies. In the United Kingdom, The Auction Channel is working with Sky Sports, the largest provider in the United Kingdom of sports programming for satellite and cable television. During 1998 and 1999, The Auction Channel produced approximately 12 sporting memorabilia auctions in various sports categories for distribution by Sky Sports. The Auction Channel has extended its agreement with Sky Sports to continue to provide additional auction programs in 2000.

In 1999, The Auction Channel entered into an agreement with CanWest Global Communications, an international media company, to produce two auction events. Under the agreement, The Auction Channel produced a golf memorabilia auction in London, England that was transmitted to viewers in Canada, and expects to produce the remaining auction event in 2000.

The Auction Channel also has entered into a memorandum of understanding with Viasat, a division of Modern Times Group, a Swedish media company, to form a joint venture for the production, distribution and exploitation of auction programming and Internet operations in certain markets served by Viasat. The Auction Channel and Viasat currently are negotiating the terms of the joint venture.

COMPETITION IN THE ONLINE AUCTION MARKET

Competition in the on-line auction market is intense. Many competitors of The Auction Channel are substantially larger and have significantly greater resources and revenues. Principal competitors include eBay,

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QXL, LiveBid, Onsale and Amazon.com. We estimate that eBay will have over 6 million registered users by the end of 1999 trading in tens of millions of items. Recently, eBay acquired Butterfield & Butterfield auctioneers, a traditional auction house. QXL, which uses the eBay delayed auction model and has announced that it is Europe's equivalent of eBay, has recently started an auction affiliate network. Onsale, Inc. is an electronic retailer that sells merchandise through an interactive online auction service. Amazon.com, Inc., is an online book, CD and video retailer which acquired LiveBid.com. LiveBid.com provides live bidding on online auctions. Additionally, Amazon.com has formed Amazon.Sotheby.com, a strategic partnership with Sotheby's, a traditional auction house. In addition to the above companies, most of the major portal Web sites, such as Yahoo and America Online, have instituted their own auction services.

PRINCIPAL SUPPLIERS

Many of the underlying computer software and hardware technologies used by The Auction Channel, including the Interactive Bidding System and associated products, are licensed from Articulate UK Limited. The Auction Channel has, with respect to these technologies, a worldwide, irrevocable license, with rights to exploit and improve, to any and all software, patents, technology, object code, documentation and know how developed or owned or licensable by Articulate UK. The license granted to The Auction Channel currently is exclusive, but will become nonexclusive if The Auction Channel and its affiliates collectively do not spend with the Articulate UK and its affiliates at least 150,000 British Pounds in the first 12 months of the license term and 200,000 British Pounds in each year thereafter. The Auction Channel has the right to sublicense this technology to third party licensees including auctioneers but excluding parties in the business of providing auction related services to auctioneers. Articulate UK's right to license its technology is similarly restricted. Articulate UK retains the right to use the licensed technologies for its own internal business purposes, including its operation of an auction service in direct competition with The Auction Channel.

REGULATORY APPROVALS

The United Kingdom Independent Television Commission requires that any person broadcasting television transmissions into or out of the United Kingdom must hold an ITC broadcast license. The Auction channel currently holds an ITC broadcast license.

RESEARCH AND DEVELOPMENT

The Auction Channel has been developing the software to enable the Interactive Bidding System to successfully integrate with existing auction house technologies since the fourth quarter of 1998. The Auction Channel has spent approximately $287,000 on research and development during the fifteen months ended December 31, 1999.

OUR EMPLOYEES

At December 31, 1999, we had 93 full-time employees, of which 18 were engaged in research and development, 48 in production, 16 in general administration and finance and 11 in sales, marketing and business development. None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good. We currently utilize the services of four independent software developers and four consultants in administrative and business development roles pursuant to contractual relationships. Twelve of our employees, including the Chairman and CEO, the President, the CFO and the Director of Licensing, are based in Los Angeles, California. Two employees are located in The Auction Channel's offices in New York, New York and twelve are based in The Auction Channel's offices in London, England. Sixty-seven employees operate out of facilities located in Bondi Junction, a suburb of Sydney, Australia. Finally, our managing director for Europe is based in London, England. We expect to hire additional staff in 2000 in our Bondi Junction facility and in The Auction Channel's New York office.

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