SECURITIES AND EXCHANGE COMMISSION
                          Washington D.C.  20549

                              FORM 10-KSB/A

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

For the Fiscal Year Ended June 30, 1998			      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 Identification No.)
        of incorporation)



                        5125 Lankershim Boulevard
                   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 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 $ 32,312,551.


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 23, 1998 was $2,711,000.  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 23, 1998, there were 3,334,405 shares of common stock 
outstanding.



                        DOCUMENTS INCORPORATED BY REFERENCE

Pursuant to General Instruction E(3) to this form, the information required by 
Items 9, 10, 11, 12 and 13 of Part III hereof is incorporated by reference from 
the registrant's definitive Proxy Statement for its Annual Meeting of 
Stockholders scheduled to be held on November 16, 1998.


Transitional Small Business Disclosure Format:
Yes________________ No     X  	





                                    PART I.

ITEM 1.	   	BUSINESS

Introduction

Netter Digital Entertainment, Inc. (the "Company") is engaged in three primary 
business activities: 

- Entertainment Production. The Company is engaged in the acquisition, 
development and production of television series, made-for-television movies, 
documentaries, theatrical motion pictures, theme park attractions and multimedia
products (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 dramatic 
series, documentaries, and children's programming, utilizing state-of-the-art 
entertainment production technology.  With its recent work on the children's 
series, "Voltron:The Third Dimension" ("Voltron"), the Company is at the 
forefront of the fully animated or animation intensive production market for 
television.  The Company's general practice has been to sell or license its 
Productions under a production contract with a major entertainment studio or 
distributor who is responsible for the production costs of the Production.  
Since its November 1995 initial public offering, the Company has increased the 
number of Projects it has in development for sale to the major studios and 
distributors.  The Company's unique, vertically integrated digital production 
process which closely links live-action film production with computer graphics 
production and digital post-production, is well suited to attract state-of-the-
art creative projects that can be produced efficiently while being digitally 
pre-purposed for various multimedia software platforms.

- Computer Animation and Visual Effects Production Services.  As an outgrowth of
its traditional core business of developing and producing media Productions, the
Company has entered the business of providing digital media production services 
to outside clients.  In support of its own Productions, the Company has 
developed significant expertise in computer graphics production, digital 
post-production and various other digital imaging techniques.  The quality and 
popularity of the Company's productions has created industry-wide recognition of
its creative and technical skills in these areas. The Company believes that 
an active market exists for projects requiring creative, high quality, cost 
effective digital graphics and effects.  In order to more fully exploit its 
strengths in these areas, the Company formed the Netter Digital Technologies 
division in the fourth quarter of fiscal 1997 to market computer graphics and 
digital post-production services to outside clients.

- Videssence(tm) Lighting Products.  The Company's Videssence subsidiary 
manufactures and distributes media lighting products which incorporate its 
patented SRGB(tm) lighting technology.  These products are used for the 
illumination of studios, stages and other production environments in the 
television, motion picture, theater and theme park industries as well as in the
video conferencing, distant learning, and pre-press digital photography markets.
The Company's high-tech fluorescent lights consume significantly less 
electricity than traditional incandescent production lighting products.  
Additionally, they generate light without the higher level of heat that 
traditional incandescent production lighting products generate.  As a result, 
they are much more comfortable for the talent working under them.  The Company 
markets its lighting products in the USA and internationally through a network 
of manufacturer's representatives, distributors, dealers, and direct sales 
staff.

                                  1

Background

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 thirteen productions, most recently, the award winning 
primetime television series "Babylon 5" and an all new computer animated 
children's series, "Voltron."  Throughout this period, 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
employs standard desktop computer platforms that are relatively inexpensive and 
easily upgradable.  This creates substantial efficiencies, allowing projects to 
be produced at lower costs.

The Company has demonstrated it can develop and deliver Projects at production 
costs and quality levels consistent with market requirements.  Historically, it 
has contained operating overhead by supplementing its permanent staff with 
freelance production staff as required for each Production. Further, over the 
past year, the Company has expanded its in-house capacities with broader based 
in-house computer graphics, animation and post production capabilities.  These 
expanded in-house facilities, combined with the Company's internally developed 
production methodology and techniques, has yielded particularly competitive 
production costs in its recent Projects.

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 Small Cap Market under the symbol 
"NETT" and "NETTW," respectively.

In January 1997, the Company branched into manufacturing with its acquisition of
Videssence, Inc. ("Videssence"), a designer, manufacturer, and distributor of 
lighting products which incorporate its patented SRGB(tm) light technology for 
the illumination of studios, stages and other production environments in the 
television, motion picture, theater and theme park industries.  Videssence was 
founded in 1989 and initially marketed products to the television studio market.
These products proved to be a viable alternative to traditional incandescent 
lights which generate an abundance of "heat" for the relatively low amount of 
usable light which they produce.  Today, Videssence's lighting fixtures are 
installed in over 500 studios throughout the world, covering forty countries, 
including CNN, CBS, NBC ABC, and the BBC.

                                  2


                            RELEASED PROJECTS

Title              Principal Cast Members        Programming           Air Date
                   or Voices
-----              ----------------------        -----------           --------
Voltron:The Third  Tim Curry, Billy West         Children's            1998
        Dimension                                Television Series

Babylon 5          Bruce Boxleitner, Tracy       Television Series *   1993 -
                   Scoggins**                                          Present

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

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

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

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

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

Captain Power      Tim Dunigan, Peter MacNeill,   Children's Series    1987-1988
and the Soldiers   Jessica Steen
of the Future

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

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

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

Roughnecks         Ana Alicia, Vera Miles,        Television           1980
                   Cathy Lee Crosby, Steve        Mini-Series
                   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              1979
The Sacketts       Glenn Ford, Ben Johnson        Mini-Series

*	Five seasons of 22 one hour episodes were produced, one season per year, in 
1993 through 1997.  A spin-off of this series, called "Crusade," consisting of 
22 one hour episodes is currently in production for delivery in the 1998-1999 
television season.  In addition, the Company has produced two made for
television movies which aired in 1998 and is currently producing two additional 
movies for Turner Network Television which will air in 1999.
**	Tracy Scoggins replaced Claudia Christian in the fifth season. 

                                  3

Business Strategy

Historically, the Company's strategy has been to develop and produce high 
quality leading edge programming which is financed 100% by the major 
entertainment studios, networks and television distributors, with the Company 
avoiding the financial risk of funding its Projects.  Because the Company 
receives the full cost of the production, its profit potential is usually 
limited to production margins, producer fees and a share of the distributors' 
net profits, if any.  The key elements of the Company's strategic growth plan 
are:

-Entertainment Production.  The Company's increased in-house post production and
graphics/animation capacity has helped to streamline its production times and 
increase its ability to handle more projects. This division's strategic plan is 
to achieve a capacity to concurrently produce three major television or feature 
film projects.  These would be either joint venture productions in conjunction 
with a major studio or distributor, or will be the Company's own Productions.  
Discussions along these lines are on-going and will come to fruition if and when
projects that meet the Company's criteria for profitability and success are 
successfully developed and placed.  The Company has also established an 
objective to retain greater equity participation in the projects it produces.  
The retention of 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.

- Computer Animation and Visual Effects Production Services.  From experience 
gained in producing its own projects, especially "Babylon 5," the Company has 
developed significant expertise in computer graphics, digital post-production 
and various other digital imaging techniques and has gained growing recognition 
throughout the entertainment industry for producing highly creative visual 
effects while maintaining tight budgetary control.  In order to more fully 
exploit these strengths, the Company formed the Netter Digital Technologies 
division in the fourth quarter of fiscal 1997 to market computer graphics and 
digital post-production services to outside clients.  The Company has provided 
visual effects and post-production work in the feature film, television 
production, television promotion, industrial/corporate video and television 
commercial segments.  In the fourth quarter, the Division finalized deals which 
started production on a 3-D animated children's series, "Voltron," and the 
graphics for a new electronic video game, bringing it into two new segments.  
The Company is increasing its efforts in this area and will continue to bid on 
numerous outside projects on a larger scale, including feature films, television
mini-series and commercials.  

- Videssence Lighting Products. Videssence's strategic growth plan is to use its
SRGB(tm) technology and its association with the Company to create new products 
for entry into new market segments that it feels will provide significant growth
potential.  In the middle of the year, the Company introduced new products 
which were developed for the film production markets which utilize film rather 
than video cameras, as well as, a line of portable and kit oriented products 
that are being marketed to the location and portable studio markets for both 
film and video camera production applications.  In regards to general lighting,
film and video media are formulated differently and require specific lighting 
calibrations.  The Company believes that a large market exists in film lighting 
applications and that the same product advantages that prompted a wide 
acceptance in video camera production applications will also be successful in 
film production applications.  The Company hopes that it will be able to 
steadily increase its market share in the film lighting arena in the coming 
year.  In the latter part of fiscal 1998, Videssence also introduced the Zones, 
a line of low price point lighting instruments aimed at non-studio applications 
such as corporate video production, teleconferencing, schools 
(distant learning), government council chambers, and many other areas.  The 
Company believes that this will also be a growing market for its lighting 
products.

                                  4

Entertainment Production

Current Production.  Since 1993, the Company, through its 51%-owned subsidiary, 
Babylonian Productions, Inc., has produced the award winning television series, 
"Babylon 5," in association with its creator, J. Michael Straczynski, for Warner
Bros. Prime Time Entertainment Network ("PTEN"). By the end of fiscal 1998, the 
"Babylon 5" series consisted of 110 original one-hour episodes.  While 
traditionally seen in syndication, the fifth season of "Babylon 5" premiered on
Turner Network Television ("TNT") in January 1998.  At the end of fiscal 1998, 
the Company began production on an all new, "spin-off" series to this popular 
franchise entitled "Crusade," which will air on TNT in January 1999.  The 
Company is scheduled to produce 22 episodes throughout fiscal 1999. In addition,
work has commenced on two all new "Babylon 5" made for television movies, one of
which will serve as a transition from "Babylon 5" to "Crusade." TNT began airing
the fifth season of "Babylon 5" and re-runs of the first four seasons in January
1998, making TNT the exclusive "home" of the "Babylon 5" franchise in the United
States.  Warner Bros. continues to directly market the series overseas.  With 
the new production of the series "Voltron" underway through its Netter Digital 
Technologies division, the Company is now positioned to undertake additional 
children's and prime-time series utilizing 100% computer animation.
 
Development.  The development of new material or properties for television, film
and new multimedia productions is essential to the Company's future growth.  It 
is the Company's intention to begin to take greater equity ownership of certain 
future Projects, thus creating the potential for greater ancillary 
rights and profit participation.  Typically, 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.  When acquiring existing Properties by option, the
Company will usually pay a nominal fee for a six-month or longer option against 
a more substantial price if the Company exercises the option and purchases the 
Property.  Such 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 the credibility of and prior success of the
writer/owner of the Property, the revenues the Company estimates can be received
from exploitation of the Property and the estimated cost of further development 
and production.  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.

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, 1998, approximately 
$250,000 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. Traditionally, the Company's practice has been to fund production 
costs for particular Projects through production contracts with studios, 
networks and distributors who cover 100% of the production funding.  The Company
has been able to secure such production financing to date, and intends to 
continue this general practice for financing its projects in the foreseeable 
future.  However, as discussed above, for certain future Projects, the Company's
strategic intent is to retain equity participation including, for example, 

                                 5

the retention of ancillary exploitation rights such as merchandising.  While 
this strategy may require additional overhead and equity investment by the 
Company, as well as corresponding additional financial risk, it is expected to
provide a greater upside on successful projects through equity participation.
These projects will be considered by management on a case by case basis.

Competition.  The Company's entertainment production activities are subject to 
intense competition.  The Company's competitors include major entertainment 
studios, television and cable networks and numerous independent production 
companies, many of which have significantly greater experience and 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.  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 businesses 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.

Computer Animation and Visual Effects Production Services

Current Outside Client Productions.  The Company, under its Netter Digital 
Technologies division, began to solicit work for its digital media production 
services business in the fourth quarter of fiscal 1997.  As the process for 
orchestrating the integration of outside service work with the Company's own 
current in-house productions was new, the Company started with a small number of
jobs in different segments of the market.  Since then, the Company has provided 
visual effects and post-production work in the feature film, television 
production, television promotion, industrial/corporate video and television 
commercial segments.  In the fourth quarter of fiscal 1998, the Division 
finalized deals and started production on a 3-D animated children's series 
entitled "Voltron:The Third Dimension" and the graphics for a new electronic 
video game with a major entertainment company, bringing it into two new 
segments.  "Voltron" is the biggest undertaking to date of the division and 
represents the first time a U.S. company has created a television series 
entirely in 3-D animation.  This children's series consists of 22 episodes and
will begin airing in September 1998.  The Company is continuously bidding on 
numerous outside projects on a larger scale, including feature films, 
television mini-series and commercials.  

Growth Strategy.  Through its work on "Babylon 5," the Company has pioneered 
many aspects of visual effects creation utilizing desktop computers.  The 
Company's strategy is to combine its technical expertise with the cost 
efficiencies resulting from its production methodology, to penetrate what the 
Company believes is an active market for projects requiring creative, high 
quality digital graphics and effects produced in a cost effective manner.  
Further, the Company is one of the few companies which offer the ability to 
perform visual effects and post-production work under the same roof.

In July 1997, the Company moved into a new state-of-the-art facility in North 
Hollywood, a center of the entertainment and communications media industry.  
Within this facility, the Company designed an infrastructure that would allow 
the animation, compositing and post-production division to be on the cutting 

                               6

edge of network and rendering technology.  As the entertainment industry 
continues to advance through technology, the Company hopes to be at the 
forefront of the service providers.

The Company now offers a multitude of services such as: digital visual effects, 
3D modeling and animation, compositing, matte painting, roto, online editing, 
offline editing, art direction, and on-set supervision.  The Company also has a 
state-of-the-art motion capture facility which enables it to efficiently 
animate 3-D character movements.  All of these services run on multiple hardware
platforms and utilize many different software programs such as: Alias, Discreet 
Logic, SoftImage, Lightwave 3D, Illusion, After Effects, Electric Image, and 
Matador Paint.  The Company employs these platforms on numerous hardware 
platforms including SGI, Windows NT, and Macintosh computers.  All of these 
different platforms give the Company the luxury of flexibility that most other 
facilities do not enjoy.

Competition.  The Production Services business faces significant competition 
from numerous independent visual effects and post-production houses.  The 
entertainment industry, especially in Southern California, is filled with 
companies, large and small, which offer these services.  With the advancements 
of technology, the costs of the computer systems used to create special effects,
along with the associated software, have fallen dramatically opening up the 
market to many start-up companies.  As the Company expands in this market, it 
will face competition from larger entities with greater experience and financial
resources such as Industrial Light and Magic, Digital Domain and Digital Magic.

Videssence Lighting Products

Current Products. Videssence has successfully manufactured and marketed a broad 
line of lighting products utilizing its patented SRGB(tm) lighting technology 
since 1989. This patented technology has stabilized the fluorescent light source
by eliminating the "flicker" or "strobe effect" thus rendering it effective for 
media production lighting.  SRGB(tm) lighting fixtures utilize tri-color content
(red, blue and green color values) lamps enclosed in proper reflectors and 
fixtures. Since 1989, Videssence has successfully developed the first energy 
efficient, technically color correct alternative to the incandescent lighting 
used in television, motion picture production and photography.  Videssence's 
high-tech fluorescent lights consume far less energy and generate light with a 
lower level of heat than incandescent lights.  Historically, Videssence's 
products have been marketed to customers who operate video production facilities
or television news studios, both of which utilize video cameras in production. 
The end-users in these markets have accepted Videssence's Studio 2000 product 
line which has generated the majority of the company's sales to date. These 
products are now installed in over 500 news studios around the world including 
CNN, ABC World News Tonight With Peter Jennings, CBS and affiliates, NBC and 
affiliates, the BBC, China Central Television (CCTV) and numerous other 
prominent news broadcasters.  Videssence's products have also been introduced 
into the video conference/distant learning market and the digital photography 
market.

Since July 1995, Videssence has been adapting technology from the Studio 2000 
product line and has been developing new product components to work in 
conjunction with film (vs. video) applications and productions.  The new 
Vid-Strip power distribution and Vista dimming control products have been tested
and proven on the Company's "Babylon 5" sound stage and have been well received.
With the development of the custom phosphor SRGB(tm) Cinelamps and the custom 
remote ballast, the ET-250 SRGB(tm) E-Drive which are compatible with the 
existing Studio 2000 products, Videssence has prepared itself for entry into all
production markets, whether in operations using film or video technology.

In the beginning of calendar year 1998, Videssence completed a new line of 
products to be marketed to the location and portable studio markets for all 
media production lighting applications.  Its Koolite and Koolhead line are a 

                                7

range of lightweight metal fixtures and folding plastic fixtures, respectively, 
suitable for sale to the rental or production lighting industries.  The new 
Koolkits represent prepackaged Koolite products for media production 
professionals needing studio quality lighting when they are in the field.

Product Development.  At the end of fiscal 1998, Videssence completed 
development on the Zones product line which represent a nine fixture family of 
SRGB(tm) lighting capable of replacing 500 to 5000 watt incandescent fixtures.  
Each fixture is sold with accessories that convert a fixture's pattern from very
large to small zones of lighting.  The concept of this line was to be a simple, 
low-cost "solution" to any lighting professional who desired an inexpensive, 
easy to adopt and use lighting system.  The Company will market the Zones 
products for non-studio applications such as corporate video production, 
teleconferencing, schools (distant learning), government council chambers, and 
many other areas. 

Manufacturing and Supplies.  The principal materials used by Videssence in the 
manufacture of its products are metal work, electronic components and 
fluorescent lamps, most of which (other than as described below) are readily 
available from alternative suppliers. Videssence purchases specific electronic 
components and tri-chrome fluorescent lamps from the largest lighting companies,
including General Electric, Philips and Siemens. Videssence produces certain 
electronic components for use in its products (including high speed ballasts) 
and requires advanced integrated circuit components to produce such electronic 
components. These items are available but sometimes require long lead times for 
delivery. While in the past Videssence has been able to obtain an adequate 
supply of such circuit components on a timely basis, there can be no assurance 
that the company will not experience delays or problems in the future in 
procuring needed materials.

Marketing. Videssence markets its products in the USA and internationally 
through a network of manufacturer's representatives, dealers, distributors and 
direct sales staff. The company utilizes direct marketing with trade promotions,
advertising, attendance at recognized industry trade shows and a detailed 
internet web site to reach its customer base and support its sales/distribution 
network.  With its new product offerings and new target markets, Videssence 
restructured and expanded its sales and distribution network in fiscal 1998 
signing on a significantly increased number of professional selling 
organizations compared to a year ago.  Furthermore, with the advent of its new 
Zones line, Videssence has entered an agreement with a major New York based 
international mass marketer to feature the Zones in their upcoming direct mail 
catalog.

Competition. The media production lighting business is highly competitive. 
Videssence competes with manufacturers of traditional incandescent lighting 
products as well as other manufactures of fluorescent lighting products. To the 
extent the end user selects high speed fluorescence as the lighting method, the 
company has four primary competitors: Strand, Kinoflo, Balcar and LightTech. 
Strand, Balcar and LightTech are  manufacturing product (or will) using 
technology licensed from Videssence, although these companies have not generated
significant revenues for Videssence.  The company will meet new competitors as 
it releases its new film and portable/kit products. Some of these competitors 
are significantly larger than the company and have significantly greater capital
and management resources. As such, there can be no assurance that Videssence 
will be successful in marketing its new products.

Employees

At June 30, 1998, the Company employed 69 persons full-time in its principal 
executive offices and post-production/animation facilities.  Of such persons, 
four are officers.  The balance are production, clerical and administrative 
personnel.  The Company is currently staffed to handle its current workload and 
a specific amount of incoming outside production services business.  The Company

                                  8

anticipates increasing its technology, computer graphics animation and post 
production facilities as well as its staffing requirements in the upcoming 
fiscal year as new projects are undertaken. 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 120 additional people may be 
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.

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 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.

At June 30, 1998, Videssence employed 22 persons full-time at its principal 
executive offices, manufacturing/distribution facility, and satellite sales 
offices in Pennsylvania and Illinois.  Of such persons, one is an officer, 6 are
engaged in sales and sales support, 6 were engaged in manufacturing and the 
remainder were engaged in management, marketing, engineering or administration.
Videssence believes its relations with its employees are satisfactory.

ITEM 2.	   	REAL PROPERTY

The Company leases its principal executive offices and post-production and 
animation facilities in a new, state-of-the-art building with 22,000 square feet
located at 5125 Lankershim Blvd., North Hollywood, California 91601.  The lease,
which started in July 1997, is for seven years with annual minimum rent of 
$277,000.  The Company has an option to extend the lease for two additional five
year terms.  The Company leases approximately 80,000 square feet of studio 
facilities located at 8615 Tamarack Avenue, Sun Valley, California 91352 on an 
annual basis under two leases which expire in June 1999.  The aggregate annual 
minimum rent for these facilities is $385,000, and one of the two leases for the
studio facilities, representing approximately 20,000 square feet, has three 
options to renew for one year each.  The Company also leases two spaces for 
Videssence's manufacturing facilities, warehousing, and administrative offices 
which are located at 341 and 360 Beach Rd., Burlingame, California 94010.  The 
lease for the former facility is for 4,500 square feet and expires in December 
1998 while the second is for 8,000 square feet and expires in November 2000
with an annual minimum rent of $77,000.  The Company is currently evaluating its
overall space requirements for its Videssence subsidiary.  Rent expense for the 
year ended June 30, 1998 was approximately $790,000.

ITEM 3.   		LEGAL PROCEEDINGS

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 fiscal 1998.

                                9

                              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 
494,500 of the Company's Common Stock are listed on the NASDAQ Small Cap 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 Company's Common Stock is also traded on the Pacific 
Exchange.


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

           Quarter Ended          High sales        Low sales
           -------------          ----------        ---------
           September 30, 1996         $5.75            $3.50
           December 31, 1996          $4.38            $1.75
           March 31, 1997             $4.69            $2.50
           June 30, 1997              $4.44            $3.50
           September 30, 1997         $3.88            $2.13
           December 31, 1997          $3.25            $1.75
           March 31, 1998             $2.75            $1.50
           June 30, 1998              $6.00            $1.63

On September 23, 1998, the closing prices of the Common Stock as reported by 
NASDAQ were $1.63 bid and $1.94 ask.  On such date there were 34 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, and no cash 
dividends are expected to be paid on the Common Stock in the foreseeable future.

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


EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS 
ADDRESSED IN THIS ITEM 6 CONSTITUTE "FORWARD LOOKING STATEMENTS" 
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS 
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS 
AMENDED, SUCH FORWARD LOOKING STATEMENTS ARE SUBJECT TO A VARIETY 
OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED UNDER THE 
HEADING "RISK FACTORS" IN THE COMPANY'S REGISTRATION STATEMENT ON 
FORM S-3 (Registration No.333-56963) FILED WITH THE SECURITIES AND EXCHANGE 
COMMISSION ON JUNE 16, 1998, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER 
MATERIALLY FROM THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT.

                                 10

General

Historically, the Company's primary operations have been to develop and produce 
media entertainment Projects under agreements with studios, networks and 
distributors who fund 100% of production costs of the Project.  Employing this 
strategy, the Company avoids the financial risk of funding such production 
costs, but limits its ongoing revenue participation since the studio, network 
or distributor retains a significant portion of the rights to the main and 
ancillary markets for the Projects.  Under these arrangements, revenues are 
recognized when earned (typically upon receipt) and associated costs are 
recognized when incurred.

These revenues are primarily dependent on the number of Projects being produced
by the Company and the agreement relating to such Projects.  Accordingly, year 
to year comparisons of production revenues from these sources are not 
necessarily indicative of future revenues.  During fiscal 1998 and fiscal 1997, 
the Company derived approximately 93% and 99%, respectively, of its 
entertainment production revenues from Warner Bros. for the "Babylon 5" 
television series.  In fiscal year 1999, the Company is contracted to produce a 
spin-off to its popular "Babylon 5" entitled "Crusade" which will be in 
production through May 1999.  As discussed above in "PART I. ITEM 1. BUSINESS," 
the Company's business strategy is to expand its entertainment production 
business as well as to broaden its business base through Videssence's 
manufacture and sale of lighting products and through the Company's marketing of
its computer animation and visual effects production services to outside 
clients.  Of course, there can be no assurance that this strategy will be 
successful, and, if the "Crusade" series is not renewed after the first season 
or replaced by a series generating comparable revenues, the Company's 
financial condition and operations could be materially adversely affected.

Results of Operations

Net Revenues. Net revenues increased to approximately $32.3 million for the 
fiscal year ended June 30, 1998, an increase of 25.7%, as compared to 
approximately $25.7 million for the fiscal year ended June 30, 1997.  This 
increase resulted from several factors.  First, revenues from entertainment 
production increased $3.2 million as the production on two new television movies
provided $4.5 million of additional revenues to offset a $1.3 million decrease 
in the "Babylon 5" Season 5 revenue compared to Season 4.  The latter difference
stemmed from production timing.  Second, the first full year of Netter Digital 
Technologies generated $1.4 million of new revenue.  Third, as Videssence was 
acquired in January 1997, fiscal 1998 benefited from a full year of revenue 
compared to only six months in fiscal 1997 which contributed additional revenues
of $1.5 million to the Company.  Other areas of the Company, from the 
"Babylon 5" Fan Club with its expanding merchandise sales and fan base to 
computer graphics work on promotional activities to other production contracts, 
also contributed an increase of $500,000 of revenues.

Gross Margin.  The Company's gross profit for fiscal 1998 was approximately 
$5.0 million, or 15.4% of revenues, as compared to approximately $3.3 million, 
or 12.8% of revenues, for fiscal 1997. The Company's entertainment production 
business generated approximately $3.1 million (approximately 11.0% of revenues 
from entertainment production activities) in fiscal 1998, up from approximately 
$2.0 million (approximately 8.8% of revenues from entertainment production) in 
fiscal 1997, because the Company has continued to improve its operating 
methodologies and the business generated from Netter Digital Technologies has 
been able to generate higher margins than the traditional core entertainment 
production business.  Videssence generated approximately $1.88 million of gross 
profit (approximately 47.9% of net revenues) in fiscal 1998 as compared to $1.25
million of gross profit (approximately 52.0% of net revenues) in the second half
of fiscal 1997 (Videssence was acquired in January 1997.)  This decrease 
resulted from the expansion of the dealer network during the sales restructuring
and a change in the product mix of sales to incorporate the new products which 
have somewhat lower gross margins in the second half of fiscal 1998.

                                     11

General and Administrative Expenses.  General and administrative expenses 
increased to approximately $4.5 million, or approximately 13.9% of the Company's
net revenues, as compared to approximately $3.1 million, or approximately 12% of
revenues, in fiscal 1997.  The increase was primarily attributable to the 
addition of Videssence's operations which added an additional $1.1 million to 
expenses during its first full year within the Company.  To a lesser degree, 
rent and other facility expenses increased as the Company moved to its new, 
larger building.  Also, travel and consulting costs increased as management 
worked to restructure Videssence and increase communication with the investment 
community.

Operating Income (Loss).  The Company achieved operating incomes of 
approximately $376,000 and $157,000 for the years ended June 30, 1998 and 
June 30, 1997, respectively.  In fiscal 1998, operating income of approximately 
$776,000 from its entertainment production and production services activities 
(as compared to $48,000 in fiscal 1997) offset an operating loss of 
approximately $400,000 from its Videssence operations (as compared to operating 
income of approximately $109,000 in fiscal 1997.)  The increase in operating 
income from the entertainment production and production services activities was
primarily due to revenues from the additional made-for-television movies for TNT
and the additional series, "Voltron."  The operating loss of Videssence can be 
attributed to lower than expected sales, especially from the international 
markets during the fourth quarter of fiscal 1998.

Other Income and Expenses.  Interest income decreased to approximately 
$22,000 for fiscal 1998, as compared to approximately $83,000 for fiscal 1997, 
as proceeds from the Company's November 1995 initial public offering were fully 
drawn from short term investments and used for expansion of its in-house 
post-production and graphics/animation facilities and working capital for 
Videssence.  Interest expense increased to approximately $206,000 in fiscal 
1998, from approximately $59,000 in fiscal 1997, due to the acquisition of 
Videssence which had more long term debt and credit facilities and the use in 
fiscal 1998 of lease lines to finance capital expansion in its 
graphics/animation facilities.

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, a February 1997 preferred stock placement which raised $424,000 in gross 
proceeds.  With respect to production costs for particular entertainment 
Projects, production contracts are entered into with studios, networks and 
distributors which cover 100% of the production funding.  Such production funds 
are received by the Company during the production stage of a Project.  To date, 
the Company has been able to secure production financing from a major studio, 
network or distributor for all its Projects.  While the Company believes that 
similar financing arrangements can be made for future productions, there can be
no assurance that the Company will be successful in obtaining such production 
financing.  In that event, the Company would have to secure alternative sources 
for financing Projects.  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 overhead and equity 
commitments for these new projects.These potential, new financial commitments, 
if pursued, could create additional risk for the Company as to whether it will 
recover the costs of its investment and generate a profit.

During fiscal 1998 and fiscal 1997, the Company derived approximately 93% and 
99%, respectively, of its entertainment production revenues from its agreements 
with Warner Bros. relating to the production of the "Babylon 5" series and the 
associated made for television movies.  During fiscal 1998, the Company was 
contracted to produce a spin-off of "Babylon 5" entitled "Crusade" which will 
be in production from July 1998 through approximately May 1999.  The Company has

                                    12

also begun production on two new made for television movies.  If the "Crusade" 
series is not renewed through an additional agreement extension after the first 
season and the Company is unable to replace the series with one generating 
comparable revenues, the Company's financial condition and operations could 
be materially adversely affected.

Cash used in operating activities was approximately $878,000 for the fiscal year
ended June 30, 1998.  The biggest uses of cash were a build-up of inventory at 
Videssence due to the development of a new line of lighting products for the 
film industry, and an increase in accounts receivable both at Videssence and 
Netter Digital Entertainment.  The accounts receivable increases resulted from 
the termination of a factoring agreement at Videssence and an increase in sales 
from both companies.  Partially offsetting these uses was an increase in 
deferred revenue as the Company began to start its new production season for 
"Crusade."

Cash used for capital equipment investment was approximately $139,000 for fiscal
1998.  The use of cash was primarily for additions of computer and post 
production equipment to expand its post-production and graphics/animation 
facilities as well as additional office equipment at Videssence.

Since January 1, 1997, the Company has advanced approximately $2 million of 
additional working capital to its Videssence subsidiary.

Effective July 1997, the Company's subsidiary Videssence obtained a $750,000 
line of credit with a bank, guaranteed by the Company, which required monthly 
payments of interest on outstanding principal amounts at 2% above the bank's 
reference rate.  The loan documents also require the Company to comply with 
certain restrictive covenants, including maintaining a minimum working capital 
and specific financial ratios.  As of September 20, 1998, the Company owes an 
outstanding principal amount of $607,000 on such line, which was borrowed to 
repay monies advanced by the Company's factor in conjunction with terminating 
the Company's factoring agreement.

Management believes that its present cash position and overall liquidity will 
enable the Company to meet its operating commitments for the next twelve months.

Year  2000


The Year 2000 issue results from the development of computer programs and 
computer chips using two digits rather than four digits to define the applicable
year.  Computer programs and/or equipment with time-sensitive software or
computer chips may recognize the date using "00" as the year 1900 rather than 
the year 2000.  This could result in system failure or miscalculations and 
cause disruptions to business operations.

The Company's entertainment production and computer animation and visual effects
production operations rely heavily on computers in the development and 
production of projects and in the provision of digital media production 
services, but do not rely heavily on computers for operating activities such as
the processing of payroll.  In contrast, the Company's Videssence subsidiary 
relies heavily on computers for the processing of payroll, accounts receivable
and accounts payable, but does not rely heavily on computers in manufacturing
and distributing its products.  The Company also makes use of computers for
efficient communications with employees and customers, including extensive use
of e-mail systems and the Internet.  Finally, embedded technology such as
microcontrollers are commonly found in computers used throughout the Company's
operations.  The complete failure of these systems could have a material 
negative impact on the operations of the Company.  In addition, most of the
Company's major suppliers and customers rely heavily on computer systems and
failures in such systems could disrupt their operations.

The Company has substantially completed the process of identifying and 
addressing potential Year 2000 difficulties in its technological operations,
including information technology ("IT") applications, IT technology and support,
desktop hardware and software, non-IT systems and important third party
operations.  Based on its assessment of these efforts, the Company believes that
Year 2000 issues will not have a material adverse effect on the Company's
business, operations or financial condition.  Further, management expects that
costs which have been or will be incurred to assure Year 2000 capability will
not have a material adverse effect on the Company's financial position or
results of operations.  The Company has undertaken continuing efforts to update,
modify or replace, and test systems in the ordinary course of business.  Based
on such efforts, the Company does not believe that it will be required to 
otherwise modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter.

The Company estimates its cost to assess and achieve Year 2000 compliance will
be less than $10,000, of which less than $5,000 has been incurred through
June 30, 1998.  These amounts do not include costs incurred in the Company's 
replacement or upgrading of existing computer systems in the ordinary course
of business.  These estimates are subject to revisions based on future
assessments and responses from vendors and customers.  The Company expects to
continue to fund its Year 2000 costs through its cash flows from operations and
to expense modification costs as incurred.

Management believes the primary Year 2000 risks to the Company's business are
external to the Company and relate to the Year 2000 readiness of the Company's
third party suppliers and customers.  Consequently, the Company's Year 2000 
effort also includes communication with significant suppliers of products and
services to determine that the suppliers operations and the products and 
services they provide are Year 2000 capable.  Based on responses it has 
received to date, the Company does not believe that the impact of Year 2000 
issues on such suppliers will be material to the Company's business, operations
or financial condition.  However, there can be no assurance that another
company's failure to ensure Year 2000 capability will not have an adverse
effect on the Company.

Overall, the Company believes that it will complete its Year 2000 effort and 
that there will not be a significant disruption to its business caused by the
failure of its own computer systems.  In addition, the Company believes that, 
to the extent that its entertainment production and computer animation and
visual effects production operations rely on suppliers for specialty services,
there are a variety of alternative suppliers available in the event the 
Company's existing suppliers of parts for its lighting products.  Although there
are alternative sources for these items, the Videssence subsidiary may 
experience a disruption in its receipt of these parts if it is forced to replace
existing suppliers who experience Year 2000 problems.  Consequently, the
Company's Videssence subsidiary could experience disruptions in its operations 
as a result of failures in the computer systems of its major vendors. 
Accordingly, the Company will develop contingency plans to help mitigate the 
effects of such failures, if any.

Forward-Looking Statements

The foregoing discussion contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended.  There are risks and 
uncertainties that could cause future events and results to differ materially
from those anticipated by management in the forward-looking statements included
in this report.  Among these risks and uncertainties are the effect of the Year
2000 computer problem on the Company's internal systems and the effect on the
Company's business of any failures in the computer systems of the Company's
major vendors or customers.



                                  13


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, 1998						             F-3

CONSOLIDATED STATEMENTS OF OPERATIONS-
for the years ended June 30, 1998 and 1997							            F-4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
for years ended June 30, 1998 and 1997								               F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS - 
for years ended June 30, 1998 and 1997								               F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS				       F-7 to F-17 







                     INDEPENDENT AUDITORS' REPORT



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

We have audited the accompanying consolidated balance sheets of Netter Digital 
Entertainment, Inc. and Subsidiaries as of June 30, 1998, and the related 
consolidated statements of operations, stockholders' equity and cash flows for 
the years ended June 30, 1998 and 1997. 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 audits.

We conducted our audits 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 audits provide 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, 1998 and the results of its operations and 
its cash flows for the years ended June 30, 1998 and 1997 in conformity with 
generally accepted accounting principles.





                                          /s/ Feldman Sherb Ehrlich & Co., P.C.	
                                          -------------------------------------
                                          Feldman Sherb Ehrlich & Co., P.C.
                                          Certified Public Accountants
                                          (Formerly Feldman Radin & Co., P.C.)

New York, New York
August 22, 1998







                                  F-2


               NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEET
                              JUNE 30, 1998


                                   ASSETS
                                   ------
CURRENT ASSETS:
  Cash and cash equivalents                                      $    1,634,809
  Accounts receivable, net of allowances of $46,000                   2,285,011 
  Inventories                                                         1,631,025
  Due from officer                                                      155,897 
  Production costs                                                      251,632 
  Other                                                                 134,537 
                                                                  --------------
      TOTAL CURRENT ASSETS                                            6,092,911 

EQUIPMENT,  net                                                       3,157,394

GOODWILL, net                                                         1,938,434

DEPOSITS AND OTHER ASSETS                                               333,760
                                                                  --------------
                                                                 $   11,522,499 
                                                                  ==============

                       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable and production fee advances                   $    2,304,092
  Accrued expenses                                                      265,582 
  Deferred revenue                                                    1,106,957
  Due to stockholder                                                     36,497
  Credit facilities                                                     525,717
  Current portion of capital lease obligations                          734,329 
                                                                  --------------
        TOTAL CURRENT LIABILITIES                                     4,973,174 
                                                                  --------------
CAPITAL LEASE OBLIGATIONS                                             1,337,186 

MINORITY INTEREST                                                           500 
                                                                  --------------

STOCKHOLDERS' EQUITY :
  Preferred stock, $.001 par value, 2,000,000 shares
    authorized; 51,859 shares issued and outstanding                    304,366
  Common stock, $.01 par value, 20,000,000 shares
    authorized; 3,334,405 shares issued and outstanding                  33,344
  Additional paid-in capital                                          4,726,171 
  Retained Earnings                                                     147,758 
                                                                  --------------
          TOTAL STOCKHOLDERS EQUITY                                   5,211,639 
                                                                  --------------
                                                                 $   11,522,499 
                                                                  =============

                       See notes to financial statements.

                                     F-3

              NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS


                                              Years Ended June 30,
                                          ---------------------------     
                                              1998          1997            
                                          ---------------------------     

REVENUES:
   Production                             $ 28,396,765   $ 23,300,891
   Sales                                     3,915,786      2,410,987
                                           ------------   ------------   
      TOTAL REVENUES                        32,312,551     25,711,878      
                                           ------------   ------------    
EXPENSES:
   Production                               25,288,142     21,258,498
   Cost of goods sold                        2,039,390      1,155,937         
   General and administrative                4,504,742      3,097,249       
   Amortization of goodwill                    104,311         43,463        
                                           ------------   ------------    
        TOTAL EXPENSES                      31,936,585     25,555,147   
                                           ------------   ------------  
OPERATING INCOME                               375,966        156,731
                                           ------------   ------------
OTHER INCOME (EXPENSE):
   Interest income                              21,785         83,414
   Interest (expense)                         (206,090)       (59,054)
   Other income                                 10,337         33,285
                                           ------------   ------------
     TOTAL OTHER INCOME (EXPENSE)             (173,968)        57,645
                                           ------------   ------------

INCOME BEFORE PROVISION FOR
  INCOME TAXES                                 201,998        214,376

PROVISION FOR INCOME TAXES                      41,000         24,000
                                           ------------   ------------   

NET INCOME (LOSS)                         $    160,998   $    190,376
                                           ============   ============  

Cumulative preferred stock dividend             42,530         14,354
                                           ------------   ------------

Net Income to common shareholders         $    118,468   $    176,022
                                           ============   ============   

Net Income per common share,
   basic and assuming dilution            $       0.04   $       0.06    
                                           ============   ============   

Weighted average common shares outstanding   3,334,552      3,056,944
                                           ============   ============   


                     See notes to financial statements.

                                 F-4

                NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
     
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                       Retained      
                                   Preferred Stock      Common 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, July 1, 1996                -     $   -     2,795,000  $ 27,950  $ 3,533,331  $ (146,732) $ 3,414,549 

Stock issued in connection 
with acquisition                     -         -       522,221     5,222    1,107,109      -	        1,112,331

Stock issued in connection 
with settlement                      -         -        10,000       100       35,803      -            35,903 

Sale of preferred stock           47,145     261,939      -           -        -           -           261,939 

Stock dividend                     1,595      14,354      -           -        -          (14,354)       -

Net income                           -         -          -           -        -          190,376	     190,376
                                ---------  --------  ----------  ---------  --------  -----------  ------------
Balance, June 30, 1997            48,740  $  276,293  3,327,221  $ 33,272  $4,676,243  $	  29,290   $	5,015,098 

Stock issued in connection 
with settlement                      -         -	        11,729 	     117      49,883       -   	        50,000 

Retirement of common stock           -         -         (4,545)      (45)         45       -            -

Stock dividend                     3,119      28,073      -            -         -        (28,073)       -

Accrual of stock dividend 
payable                              -         -          -            -         -        (14,457)      (14,457)

Net income                           -         -          -            -         -     	  160,998 	     160,998 
                                 ---------  --------- ---------- ---------  ---------  -----------  -----------
Balance, June 30, 1998            51,859   $ 304,366   3,334,405 $ 33,344  $4,726,171  $	 147,758 	   5,211,639 
                                 =========  ========= ========== =========  =========  ===========  ============
<FN>
<FN1>
                          See notes to financial statements
</FN>
</TABLE>

                                        F-5

                  NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES 
                        CONSOLIDATED STATEMENTS OF CASH FLOWS 
<TABLE>
<CAPTION>

                                                                  Years Ended June 30,
                                                            ------------------------------
                                                                 1998             1997
                                                            -------------     -------------
<S>                                                        <C>               <C>
                                                            
CASH FLOWS FROM OPERATING ACTIVITIES: 
 Net income                                                $     160,998    $     190,376

 Adjustments to reconcile net income to net cash 
      (used in) provided by operating activities: 
            Depreciation                                         520,307          238,087
            Amortization                                         104,311           43,463
            Gain on disposal of equipment                        (10,621)           -
  
 Changes in operating assets and liabilities: 
    (Increase) in accounts receivable                         (1,418,930)        (371,372)
    (Increase) in inventories                                   (640,970)         (62,973) 
    Decrease (increase) in production costs                       43,087         (229,510)
    (Increase) decrease in other current assets                  (16,424)          13,945   
    (Increase) decrease in deposits and other assets             (38,912)        (211,330)
    (Decrease) increase in accounts payable                     (107,550)       1,426,240
    (Decrease) in accrued expenses                               (50,493)        (117,201)
    Increase in deferred revenue                                 576,755          530,202
                                                          ---------------   ---------------
                                                              (1,653,437)         978,001
                                                          ---------------   ---------------

    NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES         (878,442)       1,449,927
                                                          ---------------   ---------------

CASH FLOWS FROM INVESTING ACTIVITIES: 
    Capital expenditures                                        (138,770)        (647,120)
    Proceeds from sale of equipment                               22,866            -
    Advances to subsidiary prior to acquisition                    -             (275,000)
                                                          ---------------   ---------------
    NET CASH (USED IN) INVESTING ACTIVITIES                     (115,904)        (922,120)
                                                          ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES: 
    Acquistion costs net of cash required                          -             (342,989)
    Issuance of preferred stock                                    -              261,939
    Decrease in due from officer                                   -               38,979
    Proceed from line of credit                                  458,606            -    
    Notes payable principal payments                            (127,820)         (75,675)
    Principal payments of capital lease obligations             (276,153)         (16,762)
                                                          ---------------   -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES               54,633         (134,508)
                                                          ---------------   -------------

NET (DECREASE) IN CASH                                          (939,713)         393,299

Cash, beginning of year                                        2,574,522        2,181,223
                                                          ---------------   -------------

Cash, end of year                                           $  1,634,809     $  2,574,522
                                                          ===============   ===============   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 
 Cash paid during the year for:
      Interest                                               $    206,090     $     78,918 
      Income taxes                                           $     10,791     $      1,630
 Noncash activity:
   Issuance of common stock in connection with 
      acquisition of Videssence                              $       -        $  1,112,330
   Stock issued for legal fee settlement                     $     50,000     $     35,903
   Stock dividend                                            $     28,073     $     14,354    -
   Purchase of equipment through leases payable              $  2,119,407     $    202,589 

<FN>
<FN1>
                        See notes to financial statements. 
</FN>
</TABLE>

                                    F-6

              NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      YEARS ENDED JUNE 30, 1998 AND 1997


1. 	ORGANIZATION:

Netter Digital Entertainment, Inc. was incorporated in September 1995 under the
laws of the State of Delaware.  Babylonian Productions, Inc., a majority owned 
subsidiary (51%), was incorporated in June 1993 under the laws of the State of 
California. Netter Digital Entertainment, Inc. and Babylonian Productions, Inc. 
are collectively referred to as "NDEI".  NDEI is engaged in the development, 
acquisition and production of television series, made for television movies, 
documentaries, theatrical motion pictures and multimedia products.

On January 10, 1997, NDEI purchased all the outstanding shares of Videssence, 
Inc. ("Videssence") in exchange for 522,221 shares of NDEI's Common Stock.  This
transaction was completed pursuant to an Agreement and Plan of Merger (the 
"Plan") dated April 26, 1996 between Videssence and NDEI.  Under the Plan the 
Videssence shareholders can earn up to an additional maximum of 788,000 shares 
of NDEI's common stock upon Videssence achieving certain performance based 
criteria over the next five years.  Acquisition costs amounted to $495,998. This
merger was accounted for as a purchase.  Videssence designs, manufactures and 
distributes media lighting products which incorporate the patented SRGB(tm) 
light technology for the illumination of studios, stages and other production 
environments in the sound stage, media picture, theater and other theme park 
industries.  Hereafter, NDEI and Videssence are collectively referred to as 
(the "Company").

The following unaudited pro-forma information reflects the results of operations
of the Company as though the merger had been consummated as of July 1, 1996:


                                                        Year ended June 
                                                            30, 1997
                                                       -----------------

              Revenue                                  $     28,096,332 
                                                       =================
              Net loss                                 $       (111,589)
                                                       =================
              Net loss to common shareholders          $       (125,943)
                                                       =================
              Net loss per share                       $          (0.04)
                                                       =================

                                   F-7

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

A.	Principles of consolidation - The consolidated financial statements include 
the accounts of the Company and its subsidiaries.  The accounts of Videssence 
have been included for the year ended June 30, 1998 and the six months ended 
June 30, 1997  All material intercompany transactions have been eliminated. 

B.	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.

C.	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.

D.	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. To 
date, the Company has not recognized any material revenues from 
producers-profit participation.

E.	Inventories - Inventories are recorded at the lower of cost or market. Cost 
is determined using the average cost method.

F.	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.  When assets are retired or 
otherwise disposed of, the costs and related accumulated depreciation or 
amortization are removed from the accounts and any gain or loss on disposal is 
recognized currently.

Repairs and maintenance are expensed as incurred.  Expenditures which 
significantly increase values, change capacities, or extend useful lives are 
capitalized.

G.	Product warranty - The Company accrues for an estimate of expenses relating 
to the one-year warranty covering all parts and labor relating to the sale of 
its products.

H.	Net income per common share - The Company has adopted Statement of Financial 
Accounting Standard No. 128, "Earnings per Share;" specifying the computation, 
presentation, and disclosure requirements of earnings per share information.  
Basic earnings per share has been calculated based upon the weighted average 
number of common shares outstanding.  Stock options and convertible preferred 
stock have been excluded as common stock equivalents in the diluted earnings per

                                 F-8

share because they are either antidilutive, or their effect is not material.  
There is no effect on earnings per share information for the year ended June 30,
1997 related to the adoption of this Standard.

I.	Income taxes - The Company recognizes 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.

J.	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.

K.	Minority interest - Minority interest represents the minority shareholders'
proportionate share of the equity of the Company's subsidiary, Babylonian 
Productions, Inc. which was 49% at June 30, 1998 and 1997. The minority interest
is adjusted for the minority's share of the earnings or loss of Babylonian 
Productions, Inc.

L.	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," and has adopted the pro forma 
disclosure requirements of Statement No.123.

M.	Fair value of financial instruments - The carrying amounts reported in the 
balance sheet for cash, receivables, accounts payable, and accrued expenses 
approximate fair value based on the short-term maturity of these instruments.

N.	Goodwill - Goodwill resulting from the acquisition of Videssence represents 
the remaining unamortized value of the excess of the purchase price over the 
fair value of the net assets of  Videssence.  Goodwill is amortized on a 
straight line basis over a period of 20 years.

O.	Impairment of long - lived assets - The Company reviews long-lived assets for
impairment whenever circumstances and situations change such that there is an 
indication that the carrying amounts may not be recovered.  At June 30, 1998, 
the Company believes that there has been no impairment of its long-lived assets.

                                 F-9

3.	BUSINESS SEGMENTS

The Company has adopted the disclosure requirements of SFAS No. 131, 
"Disclosures about Segments of an Enterprise and Related Information."  In 1997 
the Company, with the acquisition of Videssence, operates in two business 
segments, entertainment and manufacturing.

Summarized financial information of the business segments are as follows:

<TABLE>
For the year ended June 30, 1998     Entertainment    Manufacturing        Total
                                    ---------------  ---------------  ---------------
<S>                                <C>              <C>              <C>  
Revenue                             $   28,396,765   $    3,915,786   $   32,312,551
                                    ===============  ===============  ===============
Operating profit (loss)             $      775,748   $     (399,782)  $      375,966
                                    ===============  ===============  ===============
Net income (loss)                   $      694,328   $     (533,330)  $      160,998
                                    ===============  ===============  ===============
Identifiable assets                 $    6,222,688   $    5,299,811   $   11,522,499
                                    ===============  ===============  ===============
Depreciation and amortization       $      432,075   $      192,543   $      624,618
                                    ===============  ===============  ===============
Capital expenditures                $    2,217,115   $       41,062   $    2,258,177
                                    ===============  ===============  ===============


For the year ended June 30, 1997     Entertainment    Manufacturing        Total
                                    ---------------  ---------------  ---------------
Revenue                             $   23,300,891   $    2,410,987   $   25,711,878
                                    ===============  ===============  ===============
Operating profit                    $       48,036   $      108,695   $      156,731
                                    ===============  ===============  ===============
Net income                          $      145,115   $       45,261   $      190,376
                                    ===============  ===============  ===============
Identifiable assets                 $    4,753,204   $    4,030,037   $    8,783,241
                                    ===============  ===============  ===============
Depreciation and amortization       $      198,487   $       83,063   $      281,550
                                    ===============  ===============  ===============
Capital expenditures                $      817,055   $       32,654   $      849,709
                                    ===============  ===============  ===============
</TABLE>

4.	INVENTORIES:

Inventories consist of the following:


           Raw Material          $    943,472

           Work in Process            183,657

           Finished Goods             503,896
                                 -------------
                                 $  1,631,025
                                 =============

                                  F-10

5.	DUE FROM OFFICER:

Represents a promissory note due from the Company's Chief Executive Officer, 
bearing interest at 7.25% per annum. The unpaid principal balance and accrued 
interest was due on May 20, 1998 and extended to May 20, 1999 with the approval 
of the Company's Board of Directors.  All unpaid accrued interest through June 
30, 1998 was paid subsequent to that date.  The Board has agreed to allow the 
note to be repaid in shares of the Company's stock.  The stock repayment 
required is 110% of the outstanding loan amount which will be priced at the fair
market value on the date of repayment.


6.	RELATED PARTY TRANSACTION:

During the years ended June 30, 1998 and 1997, the Company rented trailers, in 
connection with one of its productions, for approximately $119,000 per annum, 
from a company which is 50% owned by an officer of the Company and his spouse.

During fiscal year ended June 30, 1997, 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 consulting agreement which expired in 
February 1997, with an individual who through March 1997 was also a member of 
the Company's Board of Directors.  In March 1997, the Company entered into a new
six month consulting agreement with the same individual for monthly fee of 
$3,000.

In March 1998, the Company entered into a one year consulting agreement, with a 
former member of the Company's Board of Directors.  The agreement has a minimum 
annual guarantee of $50,000 and incentives based on additional projects 
initiated by the consultant.


7.	PRODUCTION COSTS:

Production costs consist of the following:


     Story rights and scenarios        $  251,632
                                        ==========
Production costs are deferred and will be amortized under the Individual Film 
Forecast Method.  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-11


8.	EQUIPMENT:

Equipment consists of the following at June 30, 1998:


    Machinery and equipment               $   114,711

    Leasehold improvement                     108,916

    Furniture and office equipment            243,235

    Computer equipment                        370,524

    Post-production, animation and 
    compositing equipment                   3,032,181

    Rental lights and grips                    72,007
                                          ------------
                                            3,941,574

    Less: accumulated depreciation            784,180
                                          ------------
                                         $  3,157,394
                                          ============

At June 30, 1998 the Company has $2,378,071 in equipment under capital leases 
as follows:


    Furniture and office equipment       $    212,830

    Computer equipment                        150,148

    Post-production, animation and 
    compositing equipment                   2,015,093
                                          ------------
                                         $  2,378,071
                                          ============

9.	GOODWILL:

Goodwill, which relates to the acquisition of Videssence consists of the 
following:


Purchase price, including acquisition costs    $  1,608,329

Net fair value of liabilities assumed               477,880
                                                ------------
Cost in excess of net book value of assets                 
acquired                                          2,086,209
            
Less: accumulated amortization                      147,775
                                                ------------
                                               $  1,938,434
                                                ============

                                 F-12

10. DEBT:


Debt consists of the following:

Line of credit from bank for up to $750,000, 
monthly payments of interest at 2% above the          $   458,606
banks reference rate(10.50% at June 30, 1998)

Note payable to bank, payable in monthly principal 
payments of $6,667, plus interest at the bank's            67,111
reference rate plus 2.50%(11.00% at June 30, 1998) 
The note matures on June 30, 1999.

Notes payable on demand to stockholder, bearing 
interest at 10% per annum. Notes are subordinate to        36,497
the bank borrowings.                                   -----------
     
                                                      $   562,214
                                                       ===========
The estimated fair value of the Company's debt approximates its carrying amount.


11.	CAPITAL LEASE OBLIGATIONS

                                    Current      Long-term         
                                    portion       portion        Total
                                  -----------   -----------   ----------- 
Total minimum lease payments     $   893,995   $ 1,456,266   $ 2,350,261

Less: amounts representing           159,666      119,080       278,746
interest
                                  -----------   -----------   -----------
Amounts representing principal   $   734,329   $ 1,337,186   $ 2,071,515
                                  ===========   ===========   ===========

12.	COMMITMENT AND CONTINGENCIES:

The Company leased its principal executive television production offices on a 
month to month basis through June 1997.  In July 1997 the Company entered into a
new seven year lease agreement for its principal offices expiring in June 2004 
at an annual rental of $277,000 with the option to extend the lease for two 
additional five years terms.  The leases for the two studio facilities with 
an annual minimum rental of $307,000, and $78,000 both expire in June 1999.  The
Company also leases space for its manufacturing facilities under a 
noncancellable three year operating lease requiring annual rent of $77,000 
expiring November 2000.  Rent expense under all operating leases for the years 
ended June 30, 1998 and 1997 including its manufacturing facilities were 
approximately $785,000 and $509,000, respectively.


                                 F-13

The future minimum rental payments as of June 30, 1998 are as follows:

               Year ended June 30,

                     1999                 $  758,949

                     2000                 $  359,034

                     2001                 $  311,770

                     2002                 $  276,200

                     2003                 $  276,200


13.	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. Through June 30, 1998, 
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 1998. The underwriters of the public 
offering received a warrant to purchase up to 129,000 shares or warrants, or any
combination thereof. The warrant is 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.
During the year ended June 30, 1997 the Company sold 47,145 shares of Series A 
Cumulative, Convertible Preferred Stock ("Series A Preferred Stock") at a price 
of $9.00 per share.  Dividends will be paid in nonassessable shares of Series A 
Preferred Stock in an amount per share equal to 10% per annum.  Each share of 
Series A Preferred Stock is convertible at any time at the option of the holder 
into three shares of common stock.  The Series A Preferred Stock is redeemable, 
in whole or in part, at the option of the Company, for cash at a redemption 
price of $9.00 per share.

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  

                                   F-14

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, 1998, 422,000 options have been granted at price 
ranging from $1.81 to $10.25 per share and no options have been exercised. 

In December 1997 the Company adopted the 1997 Incentive Stock Option Plan 
("1997 Plan").  The 1997 Plan is administered by the Board of Directors (the 
"Board") and provides that the Board has sole discretion to grant 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). The 
maximum grant term is 10 years.  The Plan is designed for officers, employee 
directors, and other key employees and is authorized to grant up to 600,000 
options.  As of June 30, 1998, 100,000 options have been granted at prices of 
$2.25 - $2.48 per share and no options have been exercised.

Additionally in December 1997 the Company adopted the 1997 Directors' Stock 
Option Plan ("1997 Directors' Plan") The 1997 Directors' Plan is administered by
a committee of the Board of Directors and provides that the committee shall 
adopt all rules and regulations and make other determinations that are 
desirable for the administration of the 1997 Directors' Plan.  Each Non-
Employee Director shall be automatically granted 30,000 options to purchase 
shares of common stock upon initial election to the Board and will be granted 
10,000 additional options upon each subsequent reelection to the Board.  The 
purchase price of these options shall be the fair market value on the date of 
the grant.  The 1997 Directors' Plan is designed for Non-Employee Directors 
and is authorized to grant up to 350,000 options.  As of June 30, 1998,  50,000 
options have been granted at a price of $2.88 per share and no options have been
exercised.

For disclosure purposes the fair value of each stock option grant is estimated 
on the date of grant using the Black-Scholes option-pricing model with the 
following weighted-average assumptions used for stock options granted during the
years ended June 30, 1998 and 1997, respectively: annual dividends of $0.00 for 
both years, expected volatility of 50%, risk-free interest rate of 6.0%  and 
expected life from two to five years for all grants.  The weighted- average fair
values of the stock options granted during the years ended June 30, 1998 and 
1997 were $1.32 and $1.89.

If the Company recognized compensation cost for the employee stock option plan 
in accordance with SFAS No. 123, the Company's pro forma net loss and loss per 
share would have been $(221,000) and $(0.07) in 1998 and $(382,000) and $(0.13) 
in 1997. 

                                F-15

The following table summarizes the changes in options and warrants outstanding 
and the related price ranges for shares of the Company's common stock:
<TABLE>

                              Options                                   Warrants
                -------------------------------------   -------------------------------------
                   Number      Price       Number of      Number        Price      Number of 
                 of Shares   Per Share      Shares       of Shares    Per Share     Shares
                               Range      Exercisable                   Range     Exercisable
                ----------  ------------  -----------   ----------  ------------  -----------
<S>            <C>         <C>           <C>           <C>         <C>           <C> 
Outstanding at 
June 30, 1996     402,000   $5.00-$10.25    120,400       683,500    $4.00-$6.50      50,000
                                          ===========                             ===========
Granted           220,000   $3.00-$4.38        -            -             -

Exercised           -           -              -          (10,000)        -

Canceled         (100,000)      -              -            -             -
                -----------                             -----------
Outstanding at 
June 30, 1997     522,000   $3.00-$10.25    206,800       673,500    $4.00-$6.50     673,500
                                          ===========                             ===========       
Granted           539,500   $1.81-$7.50        -           64,145    $3.50-$7.50

Exercised           -           -              -             -            -

Canceled         (139,300)      -              -             -            -
                -----------                             -----------
Outstanding at 
June 30, 1998     922,200   $1.81-$10.25    556,750       737,645    $3.50-$7.50     737,645
                ===========               ===========   ===========               ===========


14.	EMPLOYMENT AGREEMENTS: 

The Company has agreements for the services of certain of its officers.  Such 
agreements expire in September 2000 and provide for a base compensation of 
approximately $700,000. These agreements also provide for additional 
compensation based on certain revenue or other operating results and for 
payments by the Company in the event of death, disability, or termination.

The aggregate amounts paid pursuant to such agreements was $709,000 and $673,000
for the years ended June 30, 1998 and June 30, 1997, respectively.


15.	INCOME TAXES:

The provision for income taxes consists of the following:

                                                          June 30,
                                                ---------------------------
                                                  1998               1997
                                                -----------     -----------
Current federal and state income taxes         $    41,000     $    24,000
                                                ===========     ===========

                                    F-16

The provision for income taxes differs from the amount computed by applying the 
statutory federal income tax rate to income before provision for income taxes is
as follows:

                                                   June 30,
                                         ---------------------------
                                            1998             1997
                                         -----------     -----------
Income tax provision (benefit) 
  computed at the statutory rate        $    69,000     $    73,000 

Income tax benefit recognized               (72,020)        (41,000)

Tax rate differences                          -             (14,000)

Provision for state income taxes             44,020           6,000
                                         -----------     -----------
Income tax provision                    $    41,000     $    24,000
                                         ===========     ===========

The Company has a net operating loss carryforward for tax purposes totaling 
approximately $360,000 at June 30, 1998 expiring in the years 2010 to 2013.


Listed below are the tax effects of the items related to the net Company's tax 
asset:


Tax benefit of net operating loss carryforward                $   146,000

Tax credits carryforward                                           16,000

Section 263A inventory capitalization                             112,000

Expenses not currently deductible for income tax purposes        (204,000)
                                                               -----------
Total                                                              70,000

Valuation allowance                                               (38,000)
                                                               -----------
Net deferred tax asset recorded                               $    32,000
                                                               ===========

16.	SIGNIFICANT CONCENTRATIONS:   

During the year ended June 30, 1998 and 1997, the Company derived approximately 
93% and 99%, respectively, of its entertainment revenue from one distributor. In
July 1998, the distributor granted a new contract for a spin-off of the 
Company's previous production through approximately May 1999.  The distributor 
has options for an additional two years of this production with the Company.  If
the distributor's options are not renewed the Company's financial condition and 
operations could be adversely affected.  Included in cash and cash equivalents 
is approximately $600,000 of advances from such distributor. 

                                  F-17

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 information required by this item is incorporated by reference from the 
Company's definitive proxy statement for its Annual Meeting of Stockholders 
scheduled to be held on November 16, 1998.

ITEM 10.   	EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the 
Company's definitive proxy statement for its Annual Meeting of Stockholders 
scheduled to be held on November 16, 1998.

ITEM 11.   	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the 
Company's definitive proxy statement for its Annual Meeting of Stockholders 
scheduled to be held on November 16, 1998.

ITEM 12.   	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the 
Company's definitive proxy statement for its Annual Meeting of Stockholders 
scheduled to be held on November 16, 1998.

                                   14

                                 PART IV

ITEM 13.   	EXHIBITS AND REPORTS ON FORM 8-K

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

Exhibit   Description
Number
-------   ------------
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)
2.3       Amendment No. 3 to the Agreement of Merger and Reorganization. (7)
2.4       Amendment No. 4 to the Agreement of Merger and Reorganization. (7)
2.5       Amendment No. 5 to the Agreement of Merger and Reorganization. (7)
3.1       Certificate of Incorporation. (1)
3.2       Bylaws. (1)
4.1       Certificate of Designation. (8)
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)
10.6      Warrant, dated September 4, 1997, issued to W.J. Gallagher & Company. 
          (9)
10.7      Letter Agreement, dated September 1, 1997, between the Company and 
          H.D. Brous & Co., Inc. (9)
10.8      Stock Option Agreement, dated September 1, 1997, between the Company 
          and H.D. Brous & Co., Inc. (9)
10.9      Lease for premises at 5125 Lankershim Blvd., North Hollywood, CA. (9)
10.10     Equipment and furniture lease with Lyon Credit Corporation. (9)
10.11     Equipment lease with Terminal Marketing Company. (9)
10.12     Installment note and Loan and Security Agreement with Comerica Bank. 
          (9)
10.13     Mr. Costa's Employment Agreement. (9)
10.14     Mr. Francis's Employment Agreement. (9)
10.15     Mr. Cercone's Employment Agreement. (9)
10.16     Letter agreement, dated October 20, 1997, between the Company and 
          Martin E. Janis & Company, Inc. (10)
10.17     Consulting Agreement, dated October 1, 1997, by and between Netter
          Digital Entertainment, Inc and Geoffrey Talbot. (11)
10.18     Stock Option Agreement, dated October 1, 1997, by and between Netter
          Digital Entertainment, Inc. and Geoffrey Talbot. (11)
10.19     Equipment lease with Comerica Leasing Corporation. (12)
10.20     Equipment lease with Digital Financial Services. (12)
10.21     Amendment to Employment Agreement, Douglas Netter. (13)
10.22     Amendment to Employment Agreement, John Copeland. (13)
10.23     Equipment lease with Comerica Leasing, Schedules No. 2 and 3.(14)(15)
10.24     GE Capital Corporation Master lease, Schedules No. 1 and 2.
          (14)(15)
21			     List of Subsidiaries. (9)
27		     	Financial Data Schedule. (13)

                                     15
 
---------------------------

(1) Incorporated by reference to the Company's Registration Statement on 
    Form SB-2 (Registration Number is 33-97402-LA) declared effective November 
    20, 1995.
(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, Inc.
(6) Incorporated by reference to the Company's Form 10-KSB for the year ended 
    June 30, 1996.
(7) Incorporated by reference to the Company's Form 8-K dated January 10, 1997.
(8) Incorporated by reference to the Company's Form 10-QSB for the quarter ended
    September 30, 1996.
(9) Incorporated by refernce to the Company's Form 10-KSB for the year ended
    June 30, 1997.
(10)Incorporated by reference to the Company's Form 10-QSB for the quarter ended
    September 30, 1997.
(11)Incorporated by reference to the Company's Form 10-QSB for the quarter ended
    December 31, 1997.
(12)Incorporated by reference to the Company's Form 10-QSB for the quarter ended
    March 31, 1998.
(13)Incorporated by reference to the Company's Form 10-KSB for the year ended
    June 30, 1998, filed on September 25, 1998.
(14)Certain portions of this exhibit have been redacted and are subject to a 
    request for confidential treatment.  The entirety of this exhibit has been
    filed separately with the Commission.
(15)Filed herewith.

                                   16





SIGNATURE


In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant 
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



NETTER DIGITAL ENTERTAINMENT, INC.



Dated: January 20, 1999			        By: /s/Chad Kalebic
                                    -------------------
                             							Chad Kalebic, Chief Financial Officer


In accordance with the Exchange Act, 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        January 20, 1999
Douglas Netter            Directors, Chief Executive
                          Officer, and President

/s/John Copeland          Executive Vice President and    January 20, 1999
John Copeland             Secretary/Director

/s/Thomas L. Jorgenson    Executive Vice President and    January 20, 1999
Thomas L. Jorgenson       Chief Operating Officer

/s/Chad Kalebic           Chief Financial Officer         January 20, 1999
Chad Kalebic              (Chief Accounting Officer)

/s/Paul Costa             President, Videssence and       January 20, 1999
Paul Costa                Director

/s/Dr. Leonard Silverman  Director                        January 20, 1999
Dr. Leonard Silverman

/s/Kate Netter Forte      Director                        January 20, 1999
Kate Netter Forte

/s/Lennart Ringquist      Director                        January 20, 1999
Lennart Ringquist

                                   17  

                EXHIBIT INDEX
Exhibit         Description 
Number

10.23           Equipment lease with Comerica Leasing, Schedules No. 2 and 3.*
10.24           GE Capital Corporation Master lease, Schedules No. 1 and 
                2.*

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

*  Certain portions of this exhibit have been redacted and are subject to a     
   request for  confidential treatment.  The entirety of this exhibit has been
   filed separately with the Commission.








</TABLE>