SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549

                                   FORM 10-KSB

              (X) Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

      For the Fiscal Year Ended June 30, 1996 Commission File No. 0-26884



                       NETTER DIGITAL ENTERTAINMENT, INC.
              (Exact name of Small Business Issuer in its Charter)


                Delaware                                     95-3392054
      (State or other jurisdiction                        (I.R.S. Employer
           of incorporation)                             Identification No.)


                      5200 Lankershim Boulevard, Suite 280
                        North Hollywood, California 91601
                     (Address of principal executive office)

        Registrant's telephone number, including area code: 818-753-1990



         Securities registered under Section 12(b) of the Exchange Act:

Title of Each Class                                     Name of Each Exchange
                                                           Which Registered

Common Stock, $.01 Par Value                                    NASDAQ
Common Stock Purchase Warrants                                  NASDAQ

         Securities registered under Section 12(g) of the Exchange Act:

                                      None

Check whether the Registrant  (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
12 months (or for such shorter  period that the  Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.

                                  YES X NO ____

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10K-SB
or any amendment to this Form 10-KSB. [X]

The Registrant's revenues for the most recent fiscal year were $23,655,054.


<PAGE>





The  aggregate  market value of the voting stock held by  non-affiliates  of the
Company,  based  upon the  closing  price  of the  Common  Stock  on the  NASDAQ
Automated  Quotation  System on  September  27, 1996 was  $3,856,000.  Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed affiliates.

As  of  September  27,  1996,  there  were  2,795,000  shares  of  common  stock
outstanding.



                       Documents Incorporated By Reference


The following  documents  are  incorporated  by reference  into Part III of this
Annual Report on Form 10-KSB:


Registration Statement on Form SB-2 declared effective on November 20, 1995.

Registration Statement on Form 8-A dated November 20, 1995.

Form 10-QSB for the quarter ended December 31, 1995.

Form 10-QSB for the quarter ended March 31, 1996.





<PAGE>





                                     PART I.

ITEM 1.        BUSINESS

General

Netter Digital Entertainment,  Inc. (the "Company") is a digital film production
company  engaged in the  acquisition,  development  and production of television
series, made-for-television movies, documentaries and theatrical motion pictures
(collectively and individually referred to as the "Productions " or "Projects").
The Company  specializes in combining live action film  production with computer
graphics  and  other  digital  imaging  in  the  creation  of  science  fiction,
documentary,  family  and  children's  programming,  utilizing  state-of-the-art
entertainment production technology. Historically, the Company sells or licenses
its  Productions  on the basis that it produce the  Projects  under a production
services  contract  with a major  entertainment  studio  or  distributor  who is
responsible for the financial risk of the Project.

The  Company  intends to  increase  its  ongoing  revenue  participation  in its
Productions  through the  retention  of  ancillary  exploitation  rights such as
merchandising or by licensing the distribution rights for the individual markets
or software platforms. The Company has increased the number of properties it has
in development for sale or licensing to the major studios and distributors.  The
Company's high technology production capabilities are suitable to attract talent
and  state-of-the-art  creative  projects that can be produced  efficiently  and
digitally pre-purposed for multimedia software platforms.

In  addition  to  the  core  business  of  developing  and  producing   creative
programming,   the  Company  is  strategically  expanding  its  high  technology
capabilities  as  a  digital  studio  and  new  entertainment  technology  based
"Production  Services  Group"  focused on  servicing  the  expanding  production
markets beyond its in-house Productions.


The Company  completed  its initial  public  offering of  securities in November
1995. The Company's  Common Stock and Stock Purchase  Warrants are listed on the
National  Association of Securities  Dealers,  Inc.  Automated  Quotation System
("NASDAQ")  and are traded in the  NASDAQ's  Small Cap  Market  under the symbol
"NETT" and "NETTW," respectively.

History

The Company  commenced  operations  as a television  production  company in 1979
doing business as Rattlesnake Productions,  Inc. ("RPI"). In September 1995, the
Company was  reincorporated  under the laws of the State of Delaware and changed
its name to Netter Digital  Entertainment,  Inc. The Company's first  production
was the network  mini-series  "Louis  L'Amour's The  Sacketts".  The Company has
produced  eleven  Productions  and most  recently  the award  winning  primetime
television series "Babylon 5".

The Company has  demonstrated it can develop and deliver  Projects at production
costs  consistent  with the quality  required by the market.  The Company avoids
substantial  operating  overheads by  maintaining  a small  permanent  staff and
engaging  free-lance  production staff only as required for each production.  In
addition,  by expanding the in-house  capacities of the technology division with
broader  based  in-house  computer  graphics,   animation  and  post  production
capabilities,  combined  with the  implementation  of the  Company's  internally
developed production methodology and techniques, the production costs on several
of its recent Projects are particularly competitive.


<PAGE>





                                RELEASED PROJECTS

Title          Principal Cast Members        Programming             Air Date
--------------------------------------------------------------------------------

Babylon 5       Bruce Boxleitner,
                Claudia Christian             Television Series*        1993 -
                                                                         Present

Hypernauts      Glenn Herman, Heidi Lucas,    Children's Television
                Marc Daniel                   Series                     1996

The Gathering   Michael O'Hare, Mira Furlan   TV Movie/Pilot for
                                              "Babylon 5" series         1993

Siringo         Brad Johnsen, Chad Lowe,      Television Movie
                Crystal Bernard                                          1995

The Wild West   Jack Lemmon, James Coburn,    Documentary Series         1993
                Helen Hunt, Bruce Boxleitner

Captain Power   Tim Dunigan, Peter MacNeill,  Television Movie           1989
and the         Jessica Steen
Soldiers of
the Future;
The Legend
Begins

Captain Power   Tim Dunigan, Peter MacNeill,  Children's Series       1987-1998
and the         Jessica Steen
Soldiers
of the Future

Five Mile       Louise Caire Clark,           Cable Television Series 1983-1986
Creek           Rod Mullinar

Louis L'Amour's Cindy Pickett, Mary Larkin,   Network Pilot               1982
Cherokee Trail  Timothy Scott

Wild Times      Sam Elliot, Ben Johnson,      Television Mini-Series      1980
                Bruce Boxleitner

Roughnecks      Ana Alicia, Vera Miles,       Television Mini-Series      1980
                Cathy Lee Cosby, Steve
                Forrest, Harry Morgan

The Buffalo     Stan Shaw, Richard Lawson,     Network Pilot              1979
Soldiers        John Beck, Hilly Hicks

Louis L'Amour's Sam Elliot, Tom Selleck,       Network Mini-Series        1979
The Sacketts    Glenn Ford, Ben Johnson

* Three seasons of 22 one hour  episodes  were  produced in 1993,  1994 and 1995
respectively.  A  fourth  season  of 22  one  hour  episodes  are  currently  in
production for delivery over 1996 and 1997 years.


<PAGE>





Business Strategy

The Company's strategy has been to develop and produce high quality leading edge
programming  which is  financed  100% by the  major  entertainment  studios  and
television  distributors  and not to take  the  financial  risk of any  Project.
Because  the  Company  receives  the full  cost of the  production,  the  profit
potential is usually limited to production margins, producer fees and a share of
the distributors' net profits, if any.

The Company is increasing the number of Projects being developed and produced as
quickly as possible.  For certain  future  Projects  the  objective is to retain
greater ongoing equity  participation when the project is sold to a major studio
or  distributor.  The retention of these ancillary  exploitation  rights such as
merchandising,   and  the   licensing  of  individual   multimedia   markets  or
entertainment  platforms such as the Internet,  are areas of particular interest
to the Company. In the future, the Company may also sell the licensing rights to
Projects  on a market by market  basis and  finance a  Production  from  banking
institutions  on a non-  recourse  basis.  The  financing  approach  is industry
practice for low budget feature films.

In addition to the core  business of  developing  and  producing  Projects,  the
Company is  strategically  expanding its  capabilities  as a digital  studio and
technology  based  "Production   Services  Group"  focused  on  specific  niches
identified in the  multimedia and  entertainment  production  environments.  The
Company is well  advanced  in the  process of  expanding  its  in-house  digital
production  capabilities,  and intends to continue to grow through the strategic
acquisition of production  services and  technology  based entities that provide
additional  income and asset growth  opportunities  that are  independent of the
Company's own in-house Productions.


Current Production

"Babylon 5" is produced in association with its creator,  J. Michael Straczynski
for Warner Bros.  Prime Time  Entertainment  Network  ("PTEN").  This Production
includes  a two  hour  made-for-television  Babylon  5 movie  followed  by three
television  seasons  of 22 one  hour  episodes  making  a total  of 66 one  hour
episodes already produced.  The Company is currently producing the fourth season
of 22 one hour episodes which are scheduled for completion in July 1997. At that
time the Babylon 5 series will consist of 88 original one hour episodes.  Warner
Bros.  has also  licensed  the re-run  rights to " Babylon 5" to Turner  Network
Television  ("TNT")  for  syndication  on  cable  commencing  in  the  1997-1998
television season.

For the past 10 years, the Company has employed leading edge digital  production
techniques,  such as three  dimensional  computer  graphics,  digitally  created
virtual sets,  surround stereo audio mixing, and digital editing of both picture
and  sound.   The   Company's   production   methodology   creates   substantial
efficiencies,  allowing  projects to be  produced  utilizing  desk top  computer
platforms that are relatively inexpensive and easily upgradable.

Development

The Company  either  acquires an option to purchase or creates or co-creates its
own concept,  outline,  treatment,  script, or literary rights (a "property") on
which it will base a television  series or movie.  These  properties are usually
acquired by options for a nominal fee against the purchase price;  typically for
a term of one year or longer.  These  options  enable the Company to develop and
secure a production commitment before actually acquiring the property.  Terms of
the  options  vary  significantly  and  are  dependent  upon,  inter  alia,  the
credibility of and prior success of the writer/owner of the property,  the level
of revenues the Company  estimates can be received from the  exploitation of the
property and the estimated  cost of further  development  and  production of the
property. Certain agreements may provide for additional payments to writers upon
the sale,  production,  or  distribution  of a project and may also  provide for
participation in revenues or profits from these projects.


<PAGE>





On a continuing  basis,  the Company has numerous  projects in various stages of
development.  The Company allocates a significant portion of the time and energy
of its staff to search for  potentially  viable material and for the development
of concepts,  treatments  and  screenplays.  As of June 30, 1996,  approximately
$65,000  had been  spent or  committed  by the  Company in  connection  with the
development of Projects that are currently active. Although a number of projects
which the Company develops are subsequently abandoned, the Company believes that
these  expenditures are necessary if the Company is to develop suitable Projects
which have a chance of achieving  commercial  success. It is not the practice of
the Company,  however, to expend substantial sums on a per project basis, unless
it believes that there is a strong likelihood of a financing,  production and/or
distribution commitment from third parties.

Financing

It has been the  Company's  practice to utilize third party sources of financing
to cover the  primary  cost of  production  for the  programming  developed  and
produced by the Company. For the foreseeable future the Company will continue to
have its productions  financed by major entertainment  studios and distributors.
For  certain  new  projects  it is the  Company's  strategy  to  retain  certain
ownership and ancillary distribution rights such as merchandising. This strategy
may  require  overhead  and  equity  investment  by the  Company  which  will be
considered by management on a case by case basis.

The principal  sources of funds for the Company have been (i) the sale of equity
in the Company and (ii) the Company's internally-generated funds, primarily from
the financing of projects/productions by third-party distributors.

Employees

At June 30, 1996, the Company employed approximately 38 persons full-time in its
North  Hollywood  office.  Of such persons,  five are officers.  The balance are
production,  clerical  and  administrative  personnel.  The Company  anticipates
increasing  its  technology,  computer  graphics  animation and post  production
facilities  as well as its staffing  requirements  in the upcoming  fiscal year.
Some of the Company's or subsidiary's  employees are represented by labor unions
and the Company believes that it has good relationships with its employees.  The
Company is  continuing  to review its  staffing  requirements  and  additions or
reductions in staff may be made if appropriate in the opinion of management.

When the  Company is in  production  as many as 100  people  are  engaged by the
Company at its  production  studio for  periods  of nine  months or longer.  The
Company has granted, and will grant, to actors,  directors,  screenwriters,  and
other important  creative and financial  elements,  rights to participate in the
net profits or gross revenues of particular projects.  Similar  participation is
required pursuant to the terms of certain collective bargaining agreements.

The Company or certain of its subsidiaries are signatories to various agreements
with unions and guilds that operate in the entertainment industry.  Although the
Company  considers its employee  relations to be  satisfactory  at present,  the
renewal of these union contracts does not depend on the Company's  activities or
decisions alone. If, prior to the expiration of an existing union contract,  the
representatives  of the  employers  were unable to negotiate a new contract with
the union, any resulting work stoppage could adversely affect the Company.


<PAGE>





Competition

The Company is subject to intense  competition in all phases of its  operations.
The Company's  competitors include major entertainment  studios,  television and
cable networks and numerous independent production companies, many of which have
greater  financial  resources  than  the  Company.  All  of  these  studios  and
production  companies  compete for available  literary  properties,  writers and
other creative  talent,  production  financing,  and  distribution  of completed
projects.  In recent  years,  an  increase in the  international  market and the
number of both production  companies and television and motion picture  products
has intensified this competition.

The entertainment business in general, and the television, multimedia and motion
picture business in particular,  are undergoing  significant changes,  primarily
due to  technological  developments.  These  developments  have  resulted in the
availability of alternative  forms of leisure time  entertainment,  expanded pay
television  services,  the Internet and more readily  available  multimedia home
entertainment  equipment.  The number of episodes of a television series and the
ability  to retain  ancillary  rights  remains a critical  factor in  generating
revenues  in other  media.  Given the nature of  technological  development  and
shifting consumer tastes, it is impossible to predict what effect  technological
and other changes will have on the potential overall revenue from television and
motion pictures.

ITEM 2.   REAL PROPERTY

The Company leases its principal executive offices on a month to month basis and
its studio  facilities  on an annual  basis.  Accordingly,  no  long-term  lease
commitments  exist.  Rent expense for the years ended June 30, 1996 and 1995 was
approximately  $404,000  and  $324,000,  respectively.  The lease for the studio
facilities  provides for annual option renewals  through May 1999 with an annual
minimum rental of $288,000.


ITEM 3.   LEGAL PROCEEDINGS

In  connection  with a sexual  harassment  claim for  unspecified  damages filed
against the Company and other third parties in the Los Angeles Superior Court on
June 27,  1995,  the matter has been  settled as of June 30,  1996 to the mutual
satisfaction  of all  parties.  All  settlement  costs have been paid by a third
party. Accordingly, no provisions by the Company were necessary.

In the  normal  course of  business,  the  Company is from time to time party to
various  actions  which in the  aggregate  are not believed by  management to be
material to its financial condition


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matter was submitted to a vote of security  holders during the fourth quarter
of the fiscal year covered by this report.


<PAGE>





                                     PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The  Company's  Common  Stock is traded in the NASDAQ Small Cap Market under the
symbol "NETT" since  November 20, 1995. In addition,  warrants to purchase up to
544,400 of the Company's  Common Stock are listed on the NASDAQ market under the
symbol  "NETTW."  The terms of the  warrants  provide  the  holder  the right to
purchase  any time prior to  November  21,  1998 one share of Common  Stock at a
price of $6.50. The warrants are redeemable at the Company's option upon 30 days
notice to the warrant holders at $0.01 per share if the closing bid price of the
Common Stock  averages in excess of 110% of the then current  exercise  price of
the warrants for a period of 20  consecutive  trading days ending within 15 days
of the date of the notice of redemption.

The  following  table  sets  forth  the high and low bid  price per share of the
Common Stock as reported by NASDAQ for each quarter within the last fiscal year.

Quarter Ended                 High bid              Low Bid

December 31, 1995             $5.00                 $4.375
March 31, 1996                $12.00                $4.250
June 30, 1996                 $8.375                $4.500



On  September  27, 1996,  the closing  prices of the Common Stock as reported by
NASDAQ  were  $4.00 bid and  $4.375  ask.  On such date there were 17 holders of
record  of the  Common  Stock.  The  number of  shareholders  does not take into
account  shareholders  for whom  shares are being held in the name of  brokerage
firms or clearing agencies.

The  Company  has never paid any  dividends  on the Common  Stock.  The  Company
intends  to  retain  earnings  and  capital  for  use in its  business.  No cash
dividends are expected to be paid on the Common Stock in the foreseeable future.
The  Company  intends  to sell  shares of  preferred  stock in a limited  public
offering to be  commenced  in October,  1996.  The  preferred  stock will have a
dividend preference such that dividends on preferred stock must be paid prior to
the payment of dividends on common stock.


ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS

General

The  Company's  operations  have  primarily  been as a  provider  of  production
services to distributors  such as The Walt Disney Company and Warner.  Bros. and
to networks such as the ABC and NBC Networks. It has been the Company's practice
to utilize external sources for 100% of its production  funding.  Employing this
strategy,  the Company  minimizes the risk of loss on  productions by generating
production fees to cover production expenses, while limiting its ongoing revenue
participation as the distributor or network retains a significant portion of the
rights to the main and ancillary  markets.  Revenues are recognized  when earned
which is  typically  upon  receipt.  Costs  associated  with these  revenues are
recognized  on the same basis.  These  revenues are  primarily  dependent on the
number of projects being produced by the Company and the agreements  relating to
such projects. Accordingly, year to year comparisons of production revenues from
these sources are not necessarily indicative of future revenues.


<PAGE>





To date,  the  Company's  principal  business  has been to develop  and  produce
projects  for the  major  studios  and  television  distributors,  for  which it
receives  production services revenues and producer fees. To increase production
margins the Company set up additional in-house post production capabilities that
were  effectively  used in the later part of the third season of "Babylon 5" and
the  production of  "Hypernauts."  The Company also  retained the  merchandising
rights for the Hypernauts Production of 13 episodes,  which were sold to the ABC
Network.  Pursuant  to the  Hypernauts  agreement,  the  Company  established  a
merchandising  licensing  division  which  concluded a master toy license with a
major toy manufacturer. The merchandising of "Hypernauts" was suspended when the
production  was not  renewed  for the 1996 Fall  television  season  period and,
subsequently, the merchandising division overhead was substantially reduced. The
production and merchandising of "Hypernauts" will only be reinstated if and when
the Company is successful in finding an  alternative  distributor to finance the
production.

In April 1996,  pursuant to the Company's  strategy of expanding its  technology
and production  services operations the Company entered into a definitive merger
agreement with Videssence,  Inc.  ("Videssence"),  a designer,  manufacturer and
distributor  of patented  media  lighting  technology  for the  illumination  of
studios,  stages,  and  other  production  environments  in the  television  and
production  markets.  The Videssence merger is expected to close in October 1996
subject to certain closing conditions including the raising of $2 million of new
equity capital by the Company.

Results of Operations

Net Revenues.  Net Revenues increased to $23.7 million for the fiscal year ended
June 30, 1996, an increase of 25% when compared to $18.9 million in net revenues
for the fiscal year ended June 30, 1995. The growth in net revenues has resulted
primarily  from  increased  revenues  from  "Babylon 5" of $19.5  million in the
fiscal  year ended June 30, 1996  compared  to $18.5  million in the fiscal year
ended June 30, 1995, and from the addition of the "Hypernauts"  Production which
added $4.2 million to total  revenues in the fiscal year ended June 30, 1996. Of
the $4.2 million from "Hypernauts", $3.9 million was for production revenues and
$300,000 was for licensing fees for merchandising activities.

Gross Margin. The Company's gross margin for the fiscal year ended June 30, 1996
was $1,165,446, or 4.9% of net revenues,  compared with $791,290 or 4.2% for the
fiscal year ended June 30, 1995.  The  increase in the gross margin  percent was
achieved  primarily  due to the addition of the  merchandising  activity for the
"Hypernauts"  project.  Associated expenses for the merchandising  activity were
recorded in general and administrative expenses as explained below.

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased  to  $1,524,864  in the fiscal year ended June 30,  1996;  compared to
$646,668  for the fiscal year ended June 30,  1995,  an  increase  of 136%.  The
increase was primarily attributable to the start up costs and operating expenses
of  the  "Hypernauts"  merchandising  division,  the  creation  of  the  project
development group, the expansion of the Company's technology  operations and the
staffing costs, legal,  regulatory,  accounting and other expenses that resulted
from being a publicly  traded  company as of November  1995.  The  Company  also
launched the "Official  Babylon 5 Fan Club" ("Fan Club") in April 1996.  The Fan
Club incurred  marketing and operational  costs relating to its startup prior to
the Company receiving any associated  revenues.  The Fan Club as of September 6,
1996 had approximately 5000 members worldwide.  Subsequent to June 30, 1996, and
as a result of ABC placing  "Hypernauts"  on an indefinite  hiatus,  the Company
suspended  its  merchandising  division,  resulting in  curtailment  of overhead
expenses.  In fiscal 1996,  consistent  with the  activities  of the new project
development group, the Company capitalized  approximately  $65,000 as production
costs for projects  currently in development.  No such costs were capitalized in
the fiscal year ended June 30, 1995.

Other Income and Expenses.  Interest income  increased to $98,262 for the fiscal
year ended June 30,  1996  compared to $1,368 for the fiscal year ended June 30,
1995.  The increase was due  primarily to interest  earned on proceeds  from the
Company's initial public offering which was completed in November 1995.

Liquidity and Capital Resources

The Company has funded its operations to date primarily  through cash flows from
operations,  the initial public offering of Common Stock and Warrants  completed
in November 1995,  which generated net proceeds of  approximately  $3.2 million,
and from the proceeds received from exercises of stock warrants, which generated
approximately $.3 million.


<PAGE>





Cash used in operating activities was approximately $590,000 for the fiscal year
ended  June 30,  1996.  Approximately  $257,000  was used to fund the net  loss,
approximately $65,000 was used to fund projects in development, accounts payable
decreased by  approximately  $168,000 and a decrease in accounts  receivable  of
approximately  $333,000 was largely offset by a decrease in deferred  revenue of
approximately  $394,000 to comprise  the  majority of the cash used in operating
activities.

Cash used for capital equipment  investment was  approximately  $593,000 for the
fiscal year ended June 30, 1996.  The use of cash was primarily for additions of
computer and post production equipment for the expansion of the technology group

On April 26, 1996, the Company entered into a definitive  merger  agreement with
Videssence,  Inc., a company that designs,  manufactures  and distributes  media
lighting  products which  incorporate  the patented and  trademarked  SRGB light
technology  for  the  illumination  of  studios,  stages  and  other  production
environments  in  the  sound  stage,  media  picture,  theater  and  theme  park
industries.  On August 5, 1996,  the  stockholders  of the Company  approved the
proposed  purchase  of  Videssence.  Upon the  satisfaction  of certain  closing
conditions, which includes $2 million to be provided to Videssence for operating
capital.  Videssence will become a wholly owned subsidiary of the Company. Under
the terms of the  agreement,  the Company  will  acquire all of the  outstanding
common stock of  Videssence  in exchange for a minimum of 522,000  shares of the
Company's Common Stock,  valued at $9.00 per share. The Videssence  shareholders
can earn up to an additional  maximum of 788,000 shares of the Company's  Common
Stock upon Videssence  achieving  certain  performance  based criteria.  For the
fiscal year ended June 30,  1996,  the Company  used  approximately  $113,000 in
deferred acquisitions costs in support of the Videssence  transaction.  On April
26, 1996,  the Company and  Videssence  entered  into a  promissory  note in the
amount of  $250,000  bearing  interest  of 9% per annum in  connection  with the
merger.  Any unpaid  principal (all of which is outstanding as of June 30, 1996)
and  accrued  interest  is payable on the  closing  date  pursuant to the merger
agreement or October 31,  1996,  whichever  is earlier.  On June 10,  1996,  the
Company and Videssence  entered into a second  promissory  note in the amount of
$275,000 bearing interest at 9% per annum in connection with the  aforementioned
transaction. Any unpaid principal and accrued interest is payable on the closing
date pursuant to the merger agreement or October 31, 1996, whichever is earlier.
As of June 30, 1996, $100,000 had been advanced under this agreement.

Pursuant to the terms of the merger transaction,  and as a condition to closing,
the  Company  intends to raise a minimum  of $2  million  which will be used for
expansion and operating  capital  purposes at Videssence.  On September 5, 1996,
the Company and an investment banking firm, acting as placement agent, agreed to
undertake a "Limited  Public  Offering,"  to be marketed  over the  Internet and
IPONet,  for the  issuance  by the  Company  of Class A  Cumulative  Convertible
Preferred Stock. The Class A Preferred Stock will bear a Class A Preferred Stock
dividend  of 10% per annum and is  expected  to be offered at a price  $7.00 per
share.  The holders of Class A Preferred  Stock may  convert  their  shares into
common stock at a conversion ratio yet to be determined  between the Company and
the placement agent. The offering has been structured on a basis of a minimum of
$2  million  and a maximum  of $5  million.  In the event  the  offering  is not
completed,  the Company may not recover the amounts  loaned to Videssence  under
the terms of the promissory notes signed.

Management  believes that its present cash position and overall  liquidity  will
enable the Company to meet its operating commitments for the next twelve months.
As of June 30, 1996, the Company's  sources of liquidity  included cash and cash
equivalents  totaling  approximately  $2.2  million.  The  Company  had no  debt
outstanding as of June 30, 1996.


<PAGE>





The Company's  sources of working capital are principally  derived from contract
production receipts from distributors  including a major studio and a subsidiary
of a major television  network.  These monies are received by the Company during
the  production  stage of a Project.  The  Company  has in the past been able to
secure  production  financing from a major studio or distributor  for all of its
Projects.  While the Company believes that similar financing arrangements can be
made for future  productions,  there can be no  assurance  the  Company  will be
successful in obtaining such production  financing.  In that event,  its working
capital  will be reduced  accordingly.  Moreover,  as the Company  continues  to
develop new forms of high technology  production activities and projects for new
entertainment ancillary markets, it may elect to make additional commitments for
these new  projects and to cover the  resulting  increased  overhead  with these
endeavors. These financial commitments create additional risk for the Company as
to whether they will recover the costs of investment and generate a profit.

Future  Commitments

The  Company  will  continue  to  expand  its  post  production  and  technology
facilities  through the purchase of more post  production and computer  graphics
equipment and increasing its staff of animators and technical support personnel.
Management  believes  this  will  facilitate  greater  creative  control  of its
projects while reducing production costs. In addition,  new revenue sources will
result from the Company's own production  budgets,  plus third party productions
using the Company's facilities and services.

On August 15, 1996 the Company launched its Website for the "Babylon 5" Fan Club
Website on the Internet's  World Wide Web in response to the strong  interest in
the  television  series and the Company's  successful  formation of the Official
Babylon Fan Club ("Fan  Club") in April 1996.  The Website  will provide 24 hour
access to the fans of the  television  series and in the future it will  provide
marketing  of  licensed  merchandise.   The  Website  will  also  be  linked  to
approximately  260 "Babylon 5" Internet sites that have been established by fans
to discuss the series.  Management  believes  this profit  center will produce a
solid merchandising outlet,  strengthened by the Fan Club's promotional efforts,
and that  additional  revenue streams may originate  through  advertising on the
"Babylon  5"  Website.   This  unique  Website  has  been  designed  to  provide
demographic   information  of   visitors/users   of  the  Website  to  potential
advertisers.  There can be no assurances,  however, that the Company will derive
any significant revenues from sales of merchandise over its Website.

The Company continues to focus on prospective acquisitions in the technology and
production services segment of the media and entertainment industry.

ITEM 7    FINANCIAL STATEMENTS


                     NETTER DIGITAL ENTERTAINMENT, INC. AND
                                  SUBSIDIARIES

                         INDEX TO CONSOLIDATED FINANCIAL
                                   STATEMENTS


                                                                      Page

INDEPENDENT AUDITORS' REPORT                                           F-2

CONSOLIDATED BALANCE SHEET - June 30, 1996                             F-3

CONSOLIDATED STATEMENTS OF OPERATIONS -
for the years ended June 30, 1996 and 1995                             F-4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
for the years ended June 30, 1996 and 1995                             F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS -
for the years ended June 30, 1996 and 1995                             F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         F-7 to F-14














                                       F-1




<PAGE>
                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors of
Netter Digital Entertainment, Inc.
and Subsidiaries

     We have  audited  the  accompanying  consolidated  balance  sheet of Netter
Digital  Entertainment,  Inc.  and  Subsidiaries  as of June 30,  1996,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for the years ended June 30, 1996 and 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

     We conducted  our audit in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 audit provides a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in  all  material   respects,   the   financial   position  of  Netter   Digital
Entertainment,  Inc. and Subsidiaries as of June 30, 1996 and the results of its
operations  and its cash  flows for the years  ended  June 30,  1996 and 1995 in
conformity with generally accepted accounting principles.


                                             /s/ Feldman Radin & Co., P.C.
                                             __________________________________
                                                       FELDMAN RADIN & CO., P.C.
                                                    Certified Public Accountants



New York, New York
September 13, 1996


<PAGE>

               NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                                  JUNE 30, 1996

<TABLE>
                                     ASSETS

CURRENT ASSETS:                                         
<S>                                                    <C>          
     Cash and cash equivalents                         $2,181,223    
     Accounts receivable                                   93,817    
     Notes receivable                                     350,000    
     Due from officer                                     194,876    
     Production costs                                      65,209    
     Other                                                 54,407    
          TOTAL CURRENT ASSETS                          2,939,532    

EQUIPMENT, net                                            568,993    

DEFERRED ACQUISITION COSTS                                113,396    

DEPOSITS AND OTHER ASSETS                                  83,518    
                                                       $3,705,439   


                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable                                  $  209,615     
     Accrued expenses                                      80,775     
          TOTAL CURRENT LIABILITIES                       290,390     

MINORITY INTEREST                                             500     

STOCKHOLDERS' EQUITY:
     Preferred stock, $.001 par value,
     2,000,000 shares authorized; no
     shares issued and outstanding
     Common stock, $.01 par value,
     6,000,000 shares authorized;
     2,795,000 shares issued and
     outstanding                                          27,950               
     Additional paid in capital                        3,533,331     
     Accumulated deficit                                (146,732)    
          TOTAL STOCKHOLDERS' EQUITY                   3,414,549     

                                                      $3,705,439     



    The accompanying notes are an integral part of the financial statements.

</TABLE>
                                       F-3

<TABLE>
               NETTER DIGITAL ENTERTAINMENT, INC. AND
                            SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF OPERATIONS

                                                       Years ended June 30,
                                                       1996          1995
<S>                                                   <C>           <C>
REVENUES:
      Production                                      $23,305,054  $18,878,661
      Licensing                                           350,000      --
           TOTAL REVENUES                              23,655,054   18,878,661

EXPENSES:
      Production                                       22,489,608   18,087,371
      General and administrative                        1,524,864      646,668
           TOTAL EXPENSES                              24,014,472   18,734,039

OPERATING INCOME (LOSS)                                  (359,418)     144,622

OTHER INCOME (EXPENSE):
      Interest income                                      98,262        1,368
      Other income                                         15,098
      Interest expense                                    (10,786)      (4,245)
TOTAL OTHER INCOME (EXPENSE)                              102,574       (2,877)

INCOME (LOSS) BEFORE PROVISION FOR
  INCOME TAXES AND MINORITY INTEREST                     (256,844)     141,745

PROVISION FOR INCOME TAXES                                   --        (44,350)

MINORITY INTEREST                                            --           --

NET INCOME (LOSS)                                     $  (256,844) $    97,395

NET INCOME (LOSS) PER COMMON SHARE                    $     (0.11) $      0.05

WEIGHTED AVERAGE NUMBER OF COMMON SHARES                2,404,356    1,860,000


      

    The accompanying notes are an integral part of the financial statements.



                                          F-4
</TABLE>


      NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>


                                    Preferred           Common                           Retained
                                      Stock              Stock         Additional    Earnings      Total
                                Number of          Number of            Paid in    (Accumulated Stockholders'
                                  Shares   Amount   Shares    Amount    Capital     Deficit)      Equity
<S>                            <C>         <C>      <C>       <C>      <C>          <C>         <C>

Balance, June 30, 1994              --    $ --    1,860,000  $18,600  $ (17,080)  $ 12,717     $ 14,237

      Grant of stock options        --      --        --        --       20,000       --         20,000
      Net income                    --      --        --        --         --       97,395       97,395

Balance, June 30, 1995              --      --    1,860,000   18,600       2,920    110,112      131,632

      Sale of common stock
       in public offering           --      --      860,000    8,600   3,231,161     --        3,239,761
      Exercise of warrants          --      --       75,000      750     299,250     --          300,000
      Net loss                      --      --                                    (256,844)    (256,844)

Balance, June 30, 1996              --   $  --    2,795,000  $27,950  $3,533,331  $(146,732)  $3,414,549  



    The accompanying notes are an integral part of the financial statements.




                                       F-5


</TABLE>

<PAGE>

               NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>


                                    Preferred           Common                           Retained
                                      Stock              Stock         Additional    Earnings      Total
                                Number of          Number of            Paid in    (Accumulated Stockholders'
                                  Shares   Amount   Shares    Amount    Capital     Deficit)      Equity
<S>                            <C>         <C>      <C>       <C>      <C>          <C>         <C>

Balance, June 30, 1994              --    $ --    1,860,000  $18,600  $ (17,080)  $ 12,717     $ 14,237

      Grant of stock options        --      --        --        --       20,000       --         20,000
      Net income                    --      --        --        --         --       97,395       97,395

Balance, June 30, 1995              --      --    1,860,000   18,600       2,920    110,112      131,632

      Sale of common stock
       in public offering           --      --      860,000    8,600   3,231,161     --        3,239,761
      Exercise of warrants          --      --       75,000      750     299,250     --          300,000
      Net loss                      --      --                                    (256,844)    (256,844)

Balance, June 30, 1996              --   $  --    2,795,000  $27,950  $3,533,331  $(146,732)  $3,414,549  



    The accompanying notes are an integral part of the financial statements.




                                       F-5


</TABLE>

<PAGE>



     NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       YEARS ENDED JUNE 30, 1996 AND 1995


1.   ORGANIZATION:

     Rattlesnake Productions,  Inc. was incorporated in June 1979 under the laws
     of the State of California.  Babylonian Productions, Inc., a majority owned
     subsidiary (51%), was incorporated in June 1993 under the laws of the State
     of California. In September 1995, Rattlesnake Productions, Inc. merged into
     a Delaware  corporation,  Netter  Digital  Entertainment,  Inc.  Hereafter,
     Netter Digital  Entertainment,  Inc. and Babylonian  Productions,  Inc. are
     collectively  referred to as the  "Company".  The Company is engaged in the
     development, acquisition and production of prime time television series and
     movies,  children's  series and  theatrical  movies.  The Company is in the
     process of expanding  its  production  technologies  division and expanding
     into technology  related production  services.  In August 1996, the Company
     agreed  to  purchase  all  the  outstanding  shares  of  Videssence,   Inc.
     ("Videssence"),  a company that designs, manufactures and distributes media
     lighting  products which incorporate the patented SRGB light technology for
     the illumination of studios,  stages and other  production  environments in
     the sound stage, media picture, theater and other theme park industries.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     A.   Financial  statements - The financial  statements include the accounts
          of the  Company and its  subsidiaries.  All  significant  intercompany
          balances  and  transactions  have been  eliminated  in  consolidation.
          Certain  reclassifications  have been made to the 1995 presentation to
          conform  to  the  1996  presentation.   These  1995  reclassifications
          resulted in a net decrease to revenues and general and  administrative
          expenses in the amounts of $380,423 and $765,671,  respectively, and a
          net increase to production expenses in the amount of $385,248.

     B.   Cash and cash  equivalents  - The Company  considers all highly liquid
          temporary cash investments  with an original  maturity of three months
          or less when purchased, to be cash equivalents.

 

                                       F-7

<PAGE>




     C.   Revenue  recognition:   Production  revenues  -  The  Company  derives
          revenues  primarily from  providing  contract  production  services to
          distributors including  producers-profit  participation.  Revenues are
          recognized as earned.  Amounts advanced under production contracts are
          deferred and not recognized as revenues until  obligations  under such
          contracts are performed. Conversely, amounts expended under production
          contracts not yet reimbursed are recorded as a receivable.  Management
          has  determined   that  as  of  June  30,  1996  all  receivables  are
          collectible.  Accordingly, no allowance for doubtful accounts has been
          recorded.  To  date,  the  Company  has not  recognized  any  material
          revenues from producers-profit participation.

          Licensing  revenues  -  Licensing  revenues  representing   guaranteed
          royalties  are  recognized  as  income  when  the  Company  meets  all
          commitments and obligations related to the royalty agreement.

     D.   Equipment - Equipment is recorded at cost.  Depreciation is calculated
          using the straight line method based on the estimated  useful lives of
          the related assets, which range from three to seven years.

     E.   Net  income  (loss) per  common  share - Net income  (loss) per common
          share is  computed  using  the  weighted  average  number of shares of
          common stock and dilutive common stock equivalents  outstanding during
          the respective periods.

     F.   Income taxes - Effective July 1, 1993, the Company  adopted  Statement
          of  Financial  Accounting  Standards  No.109,  "Accounting  for Income
          Taxes" ("SFAS No.109").  SFAS No.109 requires the Company to recognize
          deferred tax assets and  liabilities  based on the difference  between
          the financial  statements  carrying amount and the tax basis of assets
          and  liabilities,  using the effective tax rates in the years in which
          the differences are expected to reverse. A valuation allowance related
          to deferred tax assets is also  recorded when it is probable that some
          or all of the deferred tax asset will not be realized.

     G.   Concentration of credit risk - Financial  instruments that potentially
          subject  the  Company to  significant  concentrations  of credit  risk
          consisting of cash and trade receivables. At times the cash in any one
          bank may exceed the FDIC $100,000  limit.  The Company places its cash
          with high credit quality financial  institutions.  In regards to trade
          receivables, the risk is relatively limited due to the customers being
          national and foreign distributors.

     H.   Minority  interest  -  Minority   interest   represents  the  minority
          shareholders' proportionate share of the equity

                                       F-8

<PAGE>



          of the Company's subsidiary,  which was 49% at June 30, 1996 and 1995.
          The  minority  interest is adjusted  for the  minority's  share of the
          earnings or loss of the Company's subsidiary.

     I.   Stock based compensation - The Company accounts for stock transactions
          in accordance with APB Opinion No.25,  "Accounting for Stock Issued to
          Employees."  In  accordance  with  Statement of  Financial  Accounting
          Standards  No.123,  "Accounting  for Stock  based  Compensation,"  the
          Company  intends  to adopt the pro forma  disclosure  requirements  of
          Statement No.123 in fiscal 1997.

     J.   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  reporting  amounts of
          revenues and expenses during the reported period. Actual results could
          differ from those estimates.

3.   NOTES RECEIVABLE:

     On April 26,  1996,  the Company and  Videssence  entered into a promissory
     note  in the  amount  of  $250,000  bearing  interest  at 9% per  annum  in
     connection  with the  acquisition.  Any unpaid  principal  (all of which is
     outstanding  as of June 30,  1996) and  accrued  interest is payable on the
     closing  date  pursuant  to the  merger  agreement  or  October  31,  1996,
     whichever is earlier.  On June 10, 1996, the Company and Videssence entered
     into a promissory note in the amount of $275,000 bearing interest at 9% per
     annum  in  connection  with  the  aforementioned  transaction.  Any  unpaid
     principal  and accrued  interest is payable on the closing date pursuant to
     the merger agreement or October 31, 1996,  whichever is earlier. As of June
     30, 1996, $100,000 had been advanced under this agreement.

4.   DUE FROM OFFICER:

     On November 20, 1995, the Company's Chief Executive  Officer entered into a
     promissory  note  with the  Company  in the  amount  of  $194,876,  bearing
     interest at 7.25% per annum.  The entire unpaid  principal  balance and all
     accrued interest is due on May 20, 1997.

5.   RELATED PARTY TRANSACTION:

     During the years ended June 30, 1996 and 1995, the Company  contracted with
     a computer graphics company to produce certain


                                       F-9

<PAGE>



     visual effects for two of its productions for approximately  $1,834,000 and
     $1,000,000,  respectively.  Until  February  1996,  the  computer  graphics
     company was 10% owned by the spouse of an officer of the Company.

     During the years ended June 30, 1996 and 1995, the Company rented trailers,
     in connection with one of its productions,  for approximately  $118,000 per
     annum,  from a company  which is 50% owned by an officer of the Company and
     his spouse.

     During fiscal years ended June 30, 1996 and 1995,  the Company  leased some
     of its recording  equipment for  approximately  $55,000.  The supplier is a
     company owned by an officer of the Company's  son and  administered  by the
     officer's wife.

     In March 1996,  the Company  entered into a six month  business  consulting
     agreement  with one member of its Board of Directors  ("Consultant")  for a
     monthly fee of $5,000. Under the terms of the agreement,  the Consultant is
     to locate suitable  acquisitions or joint ventures or assist the Company in
     consummating  similar  transactions.  In the event he is successful,  he is
     entitled  to  a  performance   fee   calculated  as  a  percentage  of  the
     consideration paid by the Company for the acquiree.

     In a separate  consulting  agreement  entered into by the same board member
     with the Company in June, 1996, the Company agreed to pay $10,000 per month
     for two months to assist with completion of the Videssence merger.

6.   PRODUCTION COSTS:

     Production costs consist of the following at June 30, 1996:


     Story rights and scenarios:                             $65,209

     Production  costs are deferred and will be amortized  under the "Individual
     Film  Forecast  Method" as required by Statement  of  Financial  Accounting
     Standards  No.53,  "Financial  Reporting by Producers and  Distributors  of
     Motion Picture  Films."  Production  costs will be amortized in relation to
     the revenue  recognized  from each  production,  and  amortization  will be
     calculated based on management's  latest estimate of the production's gross
     profit margin over its remaining  life,  which  requires the Company to use
     estimates of the future revenue  generating  potential of each  production.
     Such  estimates are subject to a variety of cost factors.  These  estimates
     will be re-evaluated  periodically  and, when necessary,  production  costs
     will be written down to net realizable value.


                                      F-10

<PAGE>



7.   EQUIPMENT:

     Equipment consists of the following at June 30, 1996:


Post-production equipment                                 $    568,720
Office furniture and equipment                                  33,370
                                                         -------------
                                                               602,090         

Less: accumulated depreciation                                  33,097

                                                         $     568,993
                                                         =============

8.   DEFERRED ACQUISITION COSTS:

     Deferred  acquisition  costs,  which relate to the Videssence  acquisition,
     will  be  capitalized  as  part  of  the  purchase  price  upon  successful
     completion of the Company's proposed merger and private  placement.  In the
     event the merger is not completed, the costs will be charged to expense.

9.   COMMITMENT AND CONTINGENCIES:

     The  Company  leases its  principal  executive  offices on a month to month
     basis  and its  studio  facilities  on an  annual  basis.  Accordingly,  no
     long-term lease  commitments  exist.  Rent expense for the years ended June
     30, 1996 and 1995 was  approximately  $404,000 and $324,000,  respectively.
     The lease for the studio  facilities  provides for annual  option  renewals
     through May 1999 with an annual minimum rental of $288,000.

10.  STOCKHOLDERS' EQUITY:

     In September  1995,  the Company  issued an aggregate of 125,000 three year
     warrants in connection with a bridge financing. Each warrant is exercisable
     for one share of common stock at a price of $4.00 per share. As of June 30,
     1996, 75,000 of these warrants were exercised for proceeds of $300,000.

     In  November  1995,  the  Company   completed  a  public  offering  of  its
     securities, selling 860,000 shares of common stock and 430,000 warrants for
     net proceeds of approximately  $3,200,000.  The warrants are exercisable to
     purchase  one share of  common  stock at a price of $6.50  per  share.  The
     warrants are  exercisable at any time after issuance and expire in November
     1997. The warrants are redeemable at the Company's option

     
                                      F-11

<PAGE>



     commencing  February 18, 1996 upon 30 days notice to the  warrantholders at
     $.01 per warrant if the closing bid price of the common  stock  averages in
     excess of 110% of the then  current  exercise  price of the  warrants for a
     period of 20  consecutive  trading days ending within 15 days of the notice
     of redemption.  The underwriters of the public offering  received a warrant
     to purchase up to 129,000 shares or warrants,  or any combination  thereof.
     The  warrant  will be  exercisable  for a period of four  years  commencing
     November  20,  1996 at an  exercise  price of $6.00 per share and $.012 per
     warrant.

     Preferred Stock

     The Company is authorized  to issue  2,000,000  shares of preferred  stock,
     $.001  par  value,  the  terms of  which  (including,  without  limitation,
     dividend rate,  conversion  rates,  voting rights,  terms of redemption and
     liquidation  preferences)  may be fixed by the Board of  Directors at their
     sole discretion.

     Stock Options and Warrants

     The Company  adopted a Stock Option Plan  ("Plan") in September  1995.  The
     Plan is administered by a committee of two  ("Committee")  appointed by the
     Board of Directors and provides  that the Committee has sole  discretion to
     select  options  and to  establish  terms and  conditions  of each  option,
     subject to provisions of the Plan. If options granted are "incentive  stock
     options",  the  exercise  price of the options may not be less than 100% of
     the fair market  value of the  Company's  common stock on the date of grant
     (110% of the fair market value if the grant is to an employee who owns more
     than 10% of the  outstanding  common  stock).  Nonstatutory  options may be
     granted  under the Plan at an  exercise  price of not less than 85% of fair
     market  value of the common stock at the date of grant.  The maximum  grant
     term is 10 years. The Plan is designed for officers,  directors,  and other
     key employees and is authorized to grant up to 500,000 options.  As of June
     30,  1996,  402,000  options  have been  granted  and no options  have been
     exercised.

11.  EMPLOYMENT AGREEMENTS:

     The Company  entered  into  agreements  for the  services of certain of its
     officers  and others.  These  agreements  expire  through June 30, 2001 and
     provide for aggregate  compensation of approximately  $706,000 for the year
     ended  June 30,  1996,  and  approximately  $910,000  annually  thereafter.
     Certain of these agreements  provide for additional  compensation  based on
     future financing and certain revenue or other operating result

                                      F-12

<PAGE>



     targets.  Some of these agreements also provide for payments by the Company
     in the event of death, disability, or termination.

12.  INCOME TAXES:

     The provision for income taxes consists of the following:

                                                    June 30,
                                        ----------------------------------
                                              1996                1995
                                        --------------      --------------
Current federal and state income taxes  $     -             $       48,193
           
Deferred federal and state                    -                     (3,843)

Provision for income taxes              $     -             $       44,350   
                                        ==============      ==============

     The provision for income taxes differs from the amount computed by applying
     the statutory federal income tax rate to income (loss) before provision for
     income taxes and minority interest as follows:


                                                    June 30,
                                       ------------------------------------
                                            1996                 1995
                                       ---------------      ---------------
Income tax provision (benefit)
computed at the statutory rate         $     (90,000)       $        48,193

Income tax benefit of disqualifying 
dispositions                                                          9,000
                                                            
Income tax benefit not recognized              90,000              -

Provision for state income taxes                -                     8,183

Miscellaneous                                   -                    (3,026)
                                                                          
Income tax provision                   $        -           $        44,350
                                       ===============      ===============

     The Company has a net operating loss carryforward for tax purposes totaling
     approximately $256,000 at June 30, 1996 that expires in the year 2011.



                                      F-13

<PAGE>


     The  following  table  illustrates  the sources and status of the Company's
     major deferred tax assets and (liability) items at June 30, 1996:


Tax benefit of net operating                                $          102,000
loss carryforward
                                                               ---------------
Net deferred tax asset                                                 102,000
Valuation allowance                                                   (102,000)
Net deferred tax asset recorded                             $           -
                                                               ===============

13.  SIGNIFICANT CONCENTRATIONS:

     During the year ended June 30, 1996, the Company derived  approximately 83%
     of its revenue from one distributor and approximately 17% from another.  In
     June 1996,  the former  distributor  exercised  their  option to extend the
     contract for a fourth season of  production  through  approximately  August
     1997.  If the option with this  distributor  is not renewed  after a fourth
     season, the Company's financial condition and operations could be adversely
     affected.

14.  SUBSEQUENT EVENTS:

     On August 5, 1996, the Company held a special  meeting of the  stockholders
     to vote on the proposal to adopt an "Agreement  and Plan of  Reorganization
     and Merger"  providing  for the merger of  Videssence  into a wholly  owned
     subsidiary  of the Company.  All of the  outstanding  shares of  Videssence
     common stock will be converted into the right to receive  522,000 shares of
     the Company's  common stock at a price of $9.00 per share.  Upon  achieving
     certain performance  criteria,  the shareholders of Videssence will also be
     entitled to earn up to an additional 788,000 shares of the Company's common
     stock also at a price of $9.00 per share.  The matter was  approved  and is
     subject to certain  closing  conditions  and terms,  including  the Company
     obtaining  financing.  The  possible  acquisition  will follow the purchase
     method of accounting.

     On September 5, 1996, the Company and an investment  banking firm agreed to
     undertake an offering for the issuance by the Company of Class A Cumulative
     Convertible  Preferred  Stock in a  limited  public  offering.  The Class A
     Preferred  Stock will bear a preferred  stock dividend of 10% per annum and
     will be  offered  at a price  $7.00  per  share.  The  holders  of  Class A
     Preferred  Stock may convert  their shares into Common Stock on a share for
     share basis plus an amount  equal to unpaid  dividends.  The pricing of the
     offering  and  conversion  ratio of the  Series A  Preferred  Stock  may be
     subject to alteration by the Company and the placement  agent if prevailing
     market conditions require.

                                      F-14
<PAGE>

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE

None


                                    PART III

ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The  following  table sets forth  information  with respect to the directors and
executive and other officers of the Company. Directors are elected at the annual
meeting  of  stockholders  to  serve  for a term of one  year  and  until  their
successors  are elected and  qualified.  Officers serve at the discretion of the
Board of  Directors of the  Company.  Except as noted below,  there are no other
family relationships between any of the executive officers and directors.

     Name                     Age            Position with Company

Douglas Netter                75        Chairman of the Board, Chief Executive
                                        Officer, and President

John Copeland                 45        Executive Vice President, Secretary
                                        and Director

Thomas Jorgenson              41        Chief Operating Officer

George Johnsen                42        Senior Vice President - Post
                                        Production and Technology

Geoffrey Talbot               48        Acting Chief Financial Officer,
                                        Director

Kate Netter Forte             40        Director

Rowland Perkins               61        Director

Leonard Silverman             58        Director


Officers and Directors

Douglas Netter, Chairman of the Board of Directors, Chief Executive Officer, and
President has been an officer and director of the Company since its inception in
1979.  Mr.  Netter  has  spent  his  entire  career in the  motion  picture  and
television  industry.  From  1969 to  1975,  he was a  member  of the  Board  of
Directors and Chief Operating Officer of the MGM group of companies which during
his tenure  produced over 75 feature  films and an extensive  list of television
shows.  Prior to 1969, Mr. Netter was involved in the production of David Lean's
"Lawrence of Arabia," the "Matt Helm" films for Columbia,  Jack Lemmon's "How to
Murder Your Wife" and "April Fools," and Samuel  Goldwyn's "Porgy and Bess." Mr.
Netter was also General  Manager of Todd AO during the production of "Oklahoma,"
"South Pacific" and "Around the World in Eighty Days."

John  Copeland  has been with the  Company  since  its  inception  serving  as a
producer on many of the Company's  television movies,  series and documentaries.
He has been the  Executive  Vice  President  and  Secretary of the Company since
September  1995. He is currently  producer of the Company's  two-time Emmy Award
winning prime time television  series "Babylon 5." In the past several years, he
also  produced  the  Emmy-nominated  documentary  series "The Wild West" and the
television movie, "Siringo." Mr. Copeland's functions include administration and
management of productions  and assisting in the business and financial  planning
for the Company. In addition,  he is involved in the development and acquisition
of properties for additional projects to be produced by the Company. He received
a Bachelor  of Arts  degree from  Chapman  College  with majors in both Film and
Theater.


<PAGE>




Thomas Jorgenson  joined the Company as Chief Operating  Officer in August 1996.
His  functions   include   administration   and   management  of  the  Company's
non-production activities as well as the business and financial planning for the
Company  as a whole.  Mr.  Jorgenson  is also  responsible  for  performing  due
diligence  on,  and  as  necessary,   operationally   integrating  and  managing
acquisition and merger  candidates that the Company may pursue in fulfillment of
its business plan. Mr.  Jorgenson has over fifteen years  experience as a senior
executive    in    finance,     administration,     business     planning    and
operations/manufacturing  management.  From  1994 to  1995,  Mr.  Jorgenson  was
Co-chairman of the Board, Chief Operating Officer and Chief Financial Officer of
Spectral,  Inc., a manufacturer  of digital audio editing  hardware and software
products for the multimedia,  post production and music production markets. From
1984 to 1994,  Mr.  Jorgenson  held  various  financial,  business  planning and
operations  management  positions  in  the  operating  business  units  and  the
corporate  office at  Harman  International  Industries,  Inc.,  a  Fortune  500
manufacturer  of audio equipment for the consumer,  professional  and automotive
OEM markets. Mr. Jorgenson holds a Bachelor of Science degree in Accounting from
San Diego State  University and an Masters of Business  Administration  from the
University of Southern California.

George  Johnsen  joined  the  Company  as the  Senior  Vice  President  of  Post
Production and Technology and as an Associate Producer in 1993. Prior to joining
the Company,  Mr.  Johnsen  founded and operated a digital  studio  facility for
twelve  years  servicing  companies  in  film,   television  and  special  venue
production.   In  this  capacity,   he  acquired   experience  in  working  with
animatronics,  3-D images,  large format  projected  images,  HDTV and simulator
motion base interfaces.  Mr. Johnsen's functions are to establish and manage the
Technology and Production Services Division including:  managing post production
of  Company  produced  projects;  generating  income  from the  acquisition  and
application of new technologies;  and marketing  production  services to outside
producers.

Geoffrey P.  Talbot has been a  consultant  to the  Company  since July 1994 and
joined the Board of Directors in September  1995.  Mr.  Talbot is presently  the
Acting  Chief  Financial  Officer  of the  Company.  Mr.  Talbot has 26 years of
international  business  experience  primarily in the corporate finance,  media,
entertainment  and  transportation  industries where he has held numerous senior
executive positions. Mr. Talbot founded and is presently the President of Trital
Acquisition Inc., a corporate advisory and merchant banking firm specializing in
media and  entertainment  investments.  In September 1992, Mr. Talbot co-founded
Classics  International  Entertainment,  Inc. ("CIE") and later became its Chief
Executive  Officer,  President and director in which  capacities he served until
June  1994.  Between  1989 and 1992,  Mr.  Talbot  provided  financial  advisory
services  to  companies  in the  media,  environmental,  consumer  products  and
equipment leasing industries.

Kate Netter Forte joined the Board of Directors in September  1995. From 1991 to
the  present,  Ms.  Netter  Forte  has  been the  Executive  Vice  President  of
Production and Development of Oprah Winfrey's Harpo Productions, Inc., where she
is  responsible  for  the  development  and  production  of  feature  films  and
made-for-television  movies.  She also  serves  as  producer  for  Harpo  Films.
Previously,  from 1981 to 1991, she worked at Marion Rees & Associates,  Inc., a
developer of television programming, serving as its Director of Development. Ms.
Netter Forte is the daughter of Douglas Netter.

Rowland  Perkins  joined the Board of Directors in September  1995.  Mr. Perkins
founded  and is  presently  President  of The  Rowland  Perkins  Company,  Inc.,
established to develop and produce feature  network and cable films,  television
series and special  Broadway shows and other  entertainment  products.  Prior to
that and from 1975 to 1994,  Mr.  Perkins  co-founded  and became  President  of
Creative  Artists  Agency,  Inc.,  a  theatrical  agency,  which  also  provides
diversified services encompassing advertising, investment banking and consulting
for  communications  and technology  companies  pursuing the  information  super
highway.  From  1959 to  1975,  he  worked  for the  William  Morris  Agency,  a
theatrical  agency,  serving as its Director of TV Talent Department and as Vice
President of Creative Services.



<PAGE>





Leonard  Silverman  joined the Board of  Directors in June 1996.  Dr.  Silverman
spent  most of his  professional  career at USC and  since  1977 has been a Full
Professor of Electrical  Engineering.  His  administrative  career began in 1982
when he was elected Chairman of the Electrical  Engineering-Systems  Department.
He was appointed as the fifth Dean of Engineering at USC in 1984. Dr.  Silverman
is  internationally  known for his pioneering work in the theory and application
of  multi-variable  control systems and signal  processing and has more than 100
publications to his credit.

The Company does not  currently  pay or intend to pay cash  compensation  to its
directors for their  services in that capacity;  however,  directors who are not
employees are reimbursed for out-of-pocket  expenses incurred in connection with
their  attendance  at Board of  Directors  meetings or committee  meetings.  The
Company has  granted its  non-employee  directors a  non-discretionary  grant of
50,000 options each under its Option Plan as compensation for their services.

Compliance with Section 16(a) of the Exchange Act

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
directors  and executive  officers and persons  owning more than 10 percent of a
registered class of the Company's equity securities, to file with the securities
and Exchange  Commission  initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company.  Officers,
directors  and  greater  than  ten  percent  shareholders  are  required  by SEC
regulations to furnish the Company with copies of Section 16(a) forms they file.

To the  Company's  knowledge,  during the fiscal year ended June 30,  1996,  all
Section 16(a) filing  requirements  applicable to its officers,  directors,  and
greater than ten percent beneficial owners were satisfied.


ITEM 10.  EXECUTIVE COMPENSATION

Summary Compensation Table

The  following  table sets forth the  compensation  of the  Company's  executive
officers  receiving  salary and bonus in excess of  $100,000  in any of the last
three fiscal years.

                                                         Long Term
                                                        Compensation
Name and Principal Position   Year   Salary($)  Bonus($)  Options     All Other
Douglas Netter                1996   $234,753   $55,417(1)  N/A       $7,750(2)
CEO/President/Chairman of     1995   $156,000   $42,000(1)  N/A           N/A
of the Board                  1994   $ 39,000   $39,000(1)  N/A           N/A

John Copeland                 1996   $195,156   $29,167(1) 50,000     $3,500(2)
Executive Vice President      1995   $171,600      N/A      N/A           N/A
                              1994   $165,000      N/A      N/A           N/A

George Johnsen                1996   $127,778   $21,667(1) 50,000         N/A
Senior Vice President         1995   $ 86,228      N/A      N/A           N/A
                              1994   $ 83,029      N/A      N/A           N/A


         (1)  Participation in producer fees of projects produced.
         (2)  Automobile Allowance


<PAGE>





Employment Agreements

In September  1995, the Company  entered into a five year  employment  agreement
with Douglas  Netter.  Under this agreement his base salary is $175,000 plus 25%
of the executive  producer fees earned by the Company for his services  rendered
in that capacity for each production  ("Executive Producer Fees" ). Mr. Netter's
total base salary plus  Executive  Producer  Fees are capped at $270,000 for the
first year of service.  The Compensation  Committee may adjust Mr. Netter's base
salary and base salary cap in its  reasonable  discretion  in any year after the
first year. Under the agreement,  Mr. Netter is also entitled to an annual bonus
of 8% of the Company's net income before taxes. If the Company attains projected
net income for the first  year,  Mr.  Netter will  receive  warrants to purchase
10,000  shares of Common  Stock at an  exercise  price of $6.50  per  share.  In
subsequent  years,  Mr.  Netter is entitled  to 10,000  warrants in any year the
Company attains a net income level determined by the Compensation Committee. Mr.
Netter will be granted  "piggyback"  registration rights in conjunction with any
such  warrant  grant.  He  also  receives  customary  executive  benefits  and a
$2,000,000 life insurance policy for his designated beneficiary's benefit.

In  September  1995,  the  Company  also  entered  into a five  year  employment
agreement with John  Copeland.  Under this agreement his base salary is $140,000
plus 25% of the  executive  producer fees earned by the Company for his services
rendered in that capacity for each production  ("Producer Fees"). Mr. Copeland's
total base salary plus  Producer  Fees are capped at $190,000 for the first year
of service. The Compensation Committee may adjust Mr. Copeland's base salary and
base salary cap in its  reasonable  discretion in any year after the first year.
Under the agreement,  Mr.  Copeland is also entitled to an annual bonus of 2% of
the  Company's net income before  taxes.  If the Company  attains  projected net
income for the first year, Mr. Copeland also receives warrants to purchase 2,500
shares of Common Stock at an exercise  price of $6.50 per share.  In  subsequent
years,  Mr.  Copeland  is  entitled  to 2,500  warrants  in any year the Company
attains  a net  income  level  determined  by the  Compensation  Committee.  Mr.
Copeland will be granted "piggyback" registration rights in conjunction with any
such  warrant  grant.  He  also  receives  customary  executive  benefits  and a
$1,000,000 life insurance policy for his designated beneficiary's benefit.

George  Johnsen also entered into an  employment  agreement  with the Company in
December  1995 for an  unspecified  term.  Under  this  agreement,  Mr.  Johnsen
receives a base salary of $2,500 per week plus 20% of his  producer  fees earned
by the Company for his services rendered in that capacity for each production he
oversees.  After one year the  Compensation  Committee may adjust Mr.  Johnsen's
base salary and additional compensation in its sole discretion. He also receives
customary benefits.

1995 Stock Option Plan

The Company  adopted the 1995 Stock Option Plan ("Option Plan") on September 13,
1995.  The Plan is  administered  by a  committee  of two  outside,  independent
directors  ("Committee")  appointed by the Board of Directors  and provides that
the Committee has sole  discretion to select options and to establish  terms and
conditions of each option,  subject to provisions of the Option Plan. If options
granted are "incentive stock options", the exercise price of the options may not
be less than 100% of the fair market value of the Company's  Common Stock on the
date of grant (110% of the fair market  value if the grant is to an employee who
owns more than 10% of the  outstanding  Common  Stock).  The  exercise  price of
nonstatutory  options may be granted under the Option Plan at an exercise prices
of not less than 85% of fair  market  value of the  Common  Stock at the date of
grant. The Option Plan provides for the grant of options to qualified employees,
including  officers,  directors,  and  other  key  persons  associated  with the
Company,  to purchase an aggregate  of 500,000  shares of common  stock.  Unless
otherwise specified, no stock options may be exercised more than ten years after
grant.  As of June 30,  1996,  402,000  options have been granted and no options
have been exercised.


<PAGE>





Option Grants, Exercises and Year-End Values

Shown below is information  with respect to the unexercised  options held by the
Named Executive Officers, for the year ended June 30, 1996.

                              % of Total                Value of
                               Options                 Unexercised
                 Number of    Granted to              In-the-Money
                 Securities   Employees                 Options
                  Options     in Fiscal   Exercise     At June 30     Expiration
Name              Granted       1996        Price         1996           Date

George Johnsen    10,000         2.5%       $5.00       $----(1)(2)      2006


(1) Based upon the difference between the closing price of the stock on June 28,
1996 of $5.00 and the option exercise price.  (2) Mr. Johnsen was granted 50,000
options under the 1995 Stock Option Plan, of which 10,000  options are presently
exercisable.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

Principal Stockholders

The  following  table sets forth certain  information,  as of September 6, 1996,
concerning  ownership  of shares of Common  Stock by each person who is known by
the  Company to own  beneficially  more than 5% of the  issued  and  outstanding
Common Stock of the Company:

                                         Amount and Nature
Name and Address of Beneficial Owner  of Beneficial Ownership  Percent of Class

Douglas Netter
5200 Lankershim Boulevard                   1,731,000(1)             61.93%
North Hollywood, CA  91601

John Copeland
5200 Lankershim Boulevard                    150,000(1)              5.37%
North Hollywood, CA  91601


1) In December  1989,  Mr.  Netter  granted  Mr.  Copeland an option to purchase
100,000  shares  owned by Mr.  Netter,  exercisable  at $0.01 per share,  and in
September  1995,  Mr. Netter granted Mr.  Copeland an option to purchase  50,000
shares  owned by Mr.  Netter,  exercisable  at $4.00 per share.  Mr.  Copeland's
options remain unexercised.



<PAGE>





Security Ownership of Management

The  following  table sets forth certain  information,  as of September 6, 1996,
concerning  ownership  of  shares of Common  Stock by (i) each  director  of the
Company,  (ii)  the  CEO of the  Company  and the two  most  highly  compensated
executive  officers whose compensation and bonus exceeds $100,000 per annum, and
(iii) all of the officers and directors and key employees as a group:

                                           Amount            Percent of
Name and Address of Beneficial Owner     and Nature      Beneficial Ownership

Douglas Netter                          1,731,000(1)(2)         61.9%
John Copeland                             150,000(1)             5.4%
Geoffrey Talbot                           125,000(2)             4.5%
Rowland Perkins                            30,000(3)             1.1%
Kate Forte                                 30,000(3)             1.1%
Leonard Silverman                          30,000(3)             1.1%
George Johnsen                             10,000(4)                *

All Directors and Officers
as a group
(7 persons)                             1,831,000(5)            63.3%


---------------------
The address for all persons listed is 5200 Lankershim Blvd., North Hollywood, CA
91601.

*   Less than 1%

     (1)  In  December  1989,  Mr.  Netter  granted  Mr.  Copeland  an option to
          purchase 100,000 shares owned by Mr. Netter,  exercisable at $0.01 per
          share,  and in September  1995,  Mr.  Netter  granted Mr.  Copeland an
          option to purchase  50,000 shares owned by Mr. Netter,  exercisable at
          $4.00 per share. Mr. Copeland's options remain unexercised.

     (2)  In July 1994,  Mr.  Netter  granted  Mr.  Talbot an option to purchase
          200,000 shares owned by Mr. Netter,  exercisable at $.01 per share. In
          September  1995, Mr. Talbot and Mr. Netter  mutually  agreed to cancel
          50,000 of the previously  granted  options.  Mr. Talbot  presently has
          options to purchase  125,000 of Mr.  Netter's  shares of Common Stock,
          all of which are presently exercisable.

     (3)  Under the 1995 Stock Option Plan,  Mr.  Perkins,  Ms.  Forte,  and Mr.
          Silverman  were each  granted  options to  purchase  from the  Company
          50,000 shares of Company  Common Stock,  of which 30,000 are currently
          exercisable  at  $5.00  per  share.  To date,  no  options  have  been
          exercised.

     (4)  Under the 1995 Stock  Option  Plan,  Mr.  Johnsen was  granted  50,000
          options, of which 10,000 are currently exercisable at $5.00 per share.
          To date, no options have been exercised.

     (5)  Of the shares  included as  beneficially  owned by all  directors  and
          officers  as a group,  100,000  shares may be  acquired by exercise of
          options,  not including the 275,000  options  granted by Mr. Netter to
          Mr. Copeland and Mr. Talbot.


<PAGE>





ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On November 20, 1995,  the  Company's  Chief  Executive  Officer  entered into a
promissory note with the Company in the amount of $194,876,  bearing interest at
7.25% per annum. The entire unpaid principal balance and all accrued interest is
due on May 20, 1997.

During the years ended June 30, 1996 and 1995,  the  Company  contracted  with a
computer  graphics  company to produce  certain  visual  effects  for two of its
productions   in  the  amounts  of   approximately   $1,834,000  and  $1,000,000
respectively.  Until February 1996, the computer  graphics company was 10% owned
by the spouse of an officer of the Company.

During the years ended June 30, 1996 and 1995, the Company rented  trailers,  in
connection with one of its productions,  for  approximately  $118,000 per annum,
from a company which is 50% owned by an officer of the Company and his spouse.

During fiscal years ended June 30, 1996 and 1995, the Company leased some of its
recording equipment for approximately  $55,000.  The supplier is a company owned
by an officer of the  Company's  son and  administered  by his wife.  Management
believes the terms of the rental  agreement is no less  favorable  than it could
obtain from an unaffiliated third party.

In  March  1996,  the  Company  entered  into a six  month  business  consulting
agreement with one member of its board of directors ("Consultant") for a monthly
fee of $5000.  Under the terms of the  agreement,  the  Consultant  is to locate
suitable  acquisitions  or joint ventures or, assist the Company in consummating
similar  transactions.  In  the  event  he is  successful  he is  entitled  to a
performance  fee  calculated  as a percentage of the  consideration  paid by the
Company.

In a separate consulting agreement entered into by the same board member and the
Company in June 1996, the Company agreed to pay $10,000 per month for two months
to assist with the completion of the Videssence  merger and to advise Videssence
in regard to its current operations.



<PAGE>





                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits (numbered in accordance with Item 601 of regulation S-K).

  Exhibit Number    Description

      2.1           Agreement and Plan of Merger and Reorganization,
                    as amended.(5)
      2.2           Amendment No. 2 to the Agreement of Merger and
                    Reorganization(6)
      3.1           Certificate of Incorporation(1)
      3.2           Bylaws(1)
     10.1           Mr. Netter's Employment Agreement(1)
     10.2           Mr. Copeland's Employment Agreement(1)
     10.3           "Babylon 5" Production Agreement(1)
     10.4           1995 Stock Option Plan(1)
     10.5           Talbot  Consulting/Completion  Fee  Agreement(6)
     


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

     (1)  Incorporated by reference to the Company's  Registration  Statement on
          Form SB-2 declared effective November 20, 1995. Registration Number is
          33-97402-LA.

     (2)  Incorporated by reference to the Company's  Registration  Statement on
          Form 8-A dated November 20, 1995.

     (3)  Incorporated by reference to the Company's Form 10-QSB for the quarter
          ended December 31, 1995.

     (4)  Incorporated by reference to the Company's Form 10-QSB for the quarter
          ended March 31, 1996

     (5)  Incorporated by reference to the Company's Proxy Statement, dated June
          26, 1996 for the  approval/disapproval  of the proposed merger between
          the Company and Videssence.

     (6)  Filed herewith.

(b)      Reports on Form 8-K

There were no Reports  on Form 8-K filed  during the last  quarter of the period
covered by this report.


<PAGE>




                                    SIGNATURE



Pursuant to the  requirements  of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned  thereunto
duly authorized.



NETTER DIGITAL ENTERTAINMENT, INC.



Dated: September 28, 1996                 By:  /s/Geoffrey Talbot
                                               Geoffrey Talbot, Acting Chief
                                               Financial Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

SIGNATURE                     TITLE                               DATE

/s/Douglas Netter        Chairman of the Board of           September 28, 1996
Douglas Netter           Directors, Chief Executive
                         Officer and President

/s/John Copeland         Executive Vice President           September 28, 1996
John Copeland            and Secretary

/s/Thomas L. Jorgenson   Chief Operating Officer            September 28, 1996
Thomas L. Jorgenson

/s/George Johnsen        Senior Vice President,             September 28, 1996
George Johnsen           Production and Technology

/s/Geoffrey Talbot       Acting Chief Financial Officer     September 28, 1996
Geoffrey Talbot          and Director

/s/Rowland Perkins       Director                           September 28, 1996
Rowland Perkins

/s/Kate Netter Forte     Director                           September 28, 1996
Kate Netter Forte

/s/Leonard Silverman     Director                           September 28, 1996
Leonard Silverman

<PAGE>
   
                             Exhibit Index

 Exhibit Number    Description

      2.1           Agreement and Plan of Merger and Reorganization,
                    as amended.(5)
      2.2           Amendment No. 2 to the Agreement of Merger and
                    Reorganization(6)
      3.1           Certificate of Incorporation(1)
      3.2           Bylaws(1)
     10.1           Mr. Netter's Employment Agreement(1)
     10.2           Mr. Copeland's Employment Agreement(1)
     10.3           "Babylon 5" Production Agreement(1)
     10.4           1995 Stock Option Plan(1)
     10.5           Talbot  Consulting/Completion  Fee  Agreement(6)
     


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

     (1)  Incorporated by reference to the Company's  Registration  Statement on
          Form SB-2 declared effective November 20, 1995. Registration Number is
          33-97402-LA.

     (2)  Incorporated by reference to the Company's  Registration  Statement on
          Form 8-A dated November 20, 1995.

     (3)  Incorporated by reference to the Company's Form 10-QSB for the quarter
          ended December 31, 1995.

     (4)  Incorporated by reference to the Company's Form 10-QSB for the quarter
          ended March 31, 1996

     (5)  Incorporated by reference to the Company's Proxy Statement, dated June
          26, 1996 for the  approval/disapproval  of the proposed merger between
          the Company and Videssence.

     (6)  Filed herewith.
<PAGE>