Form 10-QSB

                       SECURITIES AND EXCHANGE COMMISSION
                                 Washington D.C.


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

For the Quarterly Period Ended September 30, 1996   Commission File No. 0-26884


                       NETTER DIGITAL ENTERTAINMENT, INC.
               (exact name of registrant as specified in charter)

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


                        5200 Lankershim Blvd., Suite 280
                         No. Hollywood, California 91601
                     (Address of principal executive office)

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


Indicate by check mark 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 ____


As of November 11, 1996 the Registrant had 2,795,000 shares of its Common Stock,
$.01 par value, issued and outstanding.
<PAGE>
 
                         PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

     Incorporated herein is the following unaudited financial information:

     Consolidated  Balance  Sheets as of  September  30,  1996 and June 30, 1996

     Consolidated  Statement of  Operations  for the  three-month  periods ended
     September 30, 1996 and September 30, 1995

     Consolidated Statement of Stockholders' Equity as of June 30, 1996

     Consolidated  Statements  of Cash Flows for the  three-month  periods ended
     September 30, 1996 and September 30, 1995
<PAGE>

                                                                     
               NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                    
                                                 September 30,          June 30,
                                                    1996                  1996
                                                  (Unaudited)

                                     ASSETS
<S>                                             <C>                 <C>  

CURRENT ASSETS:
     Cash and cash equivalents                   $1,056,059         $2,181,223
     Accounts receivable                            535,965             93,817
     Notes receivable                               450,000            350,000
     Due from officer                               194,876            194,876
     Production costs, net                           72,854             65,209
     Other                                           12,062             54,407
         TOTAL CURRENT ASSETS                     2,321,816          2,939,532

EQUIPMENT, Net                                      937,719            568,993

DEFERRED ACQUISITION COSTS                          185,035            113,396

DEPOSITS AND OTHER ASSETS                           110,410             83,518

                                                 $3,554,980         $3,705,439

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable                          $    335,567       $    209,615
     Accrued expenses                                18,833             80,775
         TOTAL CURRENT LIABILITIES                  354,400            290,390

MINORITY INTEREST                                       500                500

STOCKHOLDERS' EQUITY:
     Preferred stock, $.001 par value, 
     2,000,000 shares authorized; no shares          
     issued and outstanding                           -                  -
     Common stock, $.01 par value, 6,000,000 
     shares authorized; 2,795,000                                 
     shares issued and outstanding                   27,950             27,950
     Additional paid-in capital                   3,533,331          3,533,331
     Accumulated deficit                          (361,201)          (146,732)
         TOTAL STOCKHOLDERS EQUITY                3,200,080          3,414,549

                                                 $3,554,980         $3,705,439
</TABLE>

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

                                        2
<PAGE>


                                                                        
               NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>

                                                 Three Months Ended Sept. 30,
                                                   1996                1995
                                               (Unaudited)         (Unaudited)
<S>                                          <C>                   <C> 

REVENUES:
     Production                                  $3,114,176         $4,992,290
     Licensing                                         -                  -
         TOTAL REVENUES                           3,114,176          4,992,290

EXPENSES:
     Production                                   2,843,716          4,519,072
     General and administrative                     512,031            426,689
         TOTAL EXPENSES                           3,355,747          4,945,761

OPERATING INCOME (LOSS)                           (241,571)             46,529

OTHER INCOME (EXPENSE):
     Interest income                                27,102              -
     Other income                                      -                -
     Interest expense                                  -               (1,624)
         TOTAL OTHER INCOME (EXPENSE)               27,102             (1,624)

INCOME/(LOSS) BEFORE PROVISION FOR INCOME         (214,469)             44,905
TAXES AND MINORITY INTEREST

PROVISION FOR INCOME TAXES                             -                14,000

MINORITY INTEREST                                      -                 -     

NET INCOME (LOSS)                                $(214,469)             30,905

NET INCOME (LOSS) PER COMMON SHARE               $   (0.08)               0.02

WEIGHTED AVERAGE NUMBER OF COMMON SHARES          2,795,000          1,860,000

</TABLE>

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

                                        3
<PAGE>


                                                                        
               NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                                   (Unaudited)

<TABLE>
<CAPTION>
                                      Preferred Stock                  Common Stock
                                   Number                                                  Additional   Retained       Net
                                     of                        Number of                    Paid-in     Earnings    Stockholders'
                                   Shares        Amount          Shares          Amount     Capital    (Deficit)      Equity
<S>                                 <C>          <C>           <C>               <C>       <C>         <C>

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

Issuance of common stock              -            -               -                -            -          -            -
in public offering

Exercise of warrants                                               -                -            -          -            -

Net Income - (Unaudited)               -           -               -                -      (214,469)    (214,469)

Balance - Sept. 30, 1996              -            -          2,795,000          $27,950  $3,533,331   $(361,201)   $3,200,080
</TABLE>

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

                                        4
<PAGE>

                                                          
               NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                   Three Months Ended Sept. 30,
                                                        1996          1995
                                                    (Unaudited)     (Unaudited)
<S>                                                <C>             <C> 

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income/(loss)                                 $ (214,469)    $    30,905


   Adjustments to reconcile net income 
   (loss) to net cash provided by
   operating activities:
         Depreciation                                     40,307            250

Changes in operating assets and liabilities:
 (Increase)/decrease in accounts receivable            (442,148)        379,732
 (Increase)/decrease in production costs                 (7,645)            -
 (Increase)/decrease in other current assets              42,345            932
 (Increase)/decrease in deposits and other assets       (26,892)       (19,313)
 (Increase)/decrease in accounts payable                 125,952       (58,111)
 (Increase)/decrease in accrued expenses                (61,942)       (42,671)
 (Increase)/decrease in deferred revenue                   -          (153,553)
                                                       (370,330)        107,016

NET CASH PROVIDED BY (USED IN) OPERATING 
ACTIVITIES                                             (544,492)        138,171

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                              (409,033)        (1,759)

NET CASH USED IN INVESTING ACTIVITIES                  (409,033)        (1,759)

CASH FLOWS FROM FINANCING ACTIVITIES:
 (Increase) decrease in deferred acquisition costs      (71,639)            -
 (Increase) in notes receivable                        (100,000)            -
 (Increase) decrease in due from officer                   -            (5,037)
 (Increase) decrease in deferred registration costs                    (47,738)
 Proceeds from bridge financing                                         250,125

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   (171, 639)        197,350

NET INCREASE (DECREASE) IN CASH                      (1,125,164)        333,762

Cash, beginning of period                              2,181,223        338,231

Cash, end of period                                   $1,056,059    $   671,993

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid for interest                           $    -        $     1,624
     Cash paid for income taxes                       $    -        $    -
</TABLE>

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

                                        5
<PAGE>


              NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


BASIS OF PREPARATION

The accompanying  unaudited consolidated financial statements have been prepared
in  accordance  with  generally  accepted  accounting   principles  for  interim
financial  statements and with the instructions to Form 10-QSB and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
disclosures required for annual financial statements. These financial statements
should be read in conjunction  with the  consolidated  financial  statements and
related  footnotes  for the year ended June 30, 1996 included in the Form 10K-SB
for the year then ended.

In the opinion of the  Company's  management,  all  adjustments  (consisting  of
normal recurring  accruals)  necessary to present fairly the Company's financial
position as of September 30, 1996,  and the results of operations and cash flows
for the  three  month  periods  ended  September  30,  1996,  and 1995 have been
included.

The results of operations  for the three month period ended  September 30, 1996,
are not necessarily indicative of the results to be expected for the full fiscal
year. For further  information,  refer to the consolidated  financial statements
and footnotes  thereto  included in the Company's  Form 10K-SB as filed with the
Securities and Exchange Commission for the year ended June 30, 1996.

Earnings per share has been calculated based upon the weighted average number of
common  shares  outstanding.  Stock  options have been  excluded as common stock
equivalents  because  they  are  either  antidilutive,  or their  effect  is not
material.


DUE FROM OFFICER/RECEIVABLE FROM RELATED PARTY

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

MERGER AGREEMENT WITH VIDESSENCE, INC.

On April 26, 1996, the Company entered into a definitive  merger  agreement with
Videssence,  Inc., a company that designs,  manufactures  and distributes  media
lighting  products which  incorporate  the patented and  trademarked  SRGB light
technology  for  the  illumination  of  studios,  stages  and  other  production
environments  in  the  sound  stage,  media  picture,  theater  and  theme  park
industries.  On August 5, 1996,  the  stockholders  of the Company  approved the
proposed  purchase  of  Videssence.  Upon the  satisfaction  of certain  closing
conditions, which includes $2 million to be provided to Videssence for operating
capital, Videssence will become a wholly- owned subsidiary of the Company. Under
the terms of the  agreement,  the Company  will  acquire all of the  outstanding
common stock of  Videssence  in exchange for a minimum of 522,000  shares of the
Company's Common Stock,  valued at $9.00 per share. The Videssence  shareholders
can earn up to an additional  maximum of 788,000 shares of the Company's  Common
Stock upon Videssence achieving certain performance based criteria.

On April 26, 1996, the Company and Videssence  entered into a promissory note in
the amount of $250,000  bearing  interest at 9% per annum in connection with the
merger.  Any unpaid  principal  (all of which is outstanding as of September 30,
1996) and accrued interest is payable on the closing date pursuant to the merger
agreement  or December 20, 1996,  whichever  is earlier.  On June 10, 1996,  the
Company and Videssence entered into a secondary promissory note in the amount of
$275,000 bearing interest at 9% per annum in connection with the  aforementioned
transaction. Any unpaid principal and accrued interest is payable on the closing
date  pursuant  to the merger  agreement  or December  20,  1996,  whichever  is
earlier.  As of  September  30,  1996,  $450,000  had been  advanced  under this
agreement. $100,000 was advanced during the quarter.

Pursuant to the terms of the merger transaction,  and as a condition to closing,
the  company  intends to raise a minimum  of $2  million  which will be used for
expansion and operating  capital  purposes at Videssence.  On September 5, 1996,
the Company and an investment banking firm, acting as placement agent, agreed to
undertake a "Limited  Public  Offering,"  to be marketed  over the  Internet and
IPONet,  for the  issuance  by the  Company  of Class A  Cumulative  Convertible
Preferred Stock. The Class A Preferred Stock will bear a Class A Preferred Stock
dividend  of 10% per annum and is expected to be offered at a price of $9.00 per
share.  The holders of Class A Preferred  Stock may  convert  their  shares into
common stock at a conversion ratio of 3:1. The offering has been structured on a
basis of a minimum of $2 million and a maximum of $5  million.  In the event the
offering is not  completed,  it is possible that the Company may not recover the
amounts loaned to Videssence under the terms of the promissory notes signed.

<PAGE>


ITEM 2.  Management's  Discussion  and Analysis of Financial  Condition and
         Results of Operations


General

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

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

In April 1996,  pursuant to the Company's  strategy of expanding its  technology
and production  services operations the Company entered into a definitive merger
agreement with Videssence,  Inc.  ("Videssence"),  a designer,  manufacturer and
distributor  of patented  media  lighting  technology  for the  illumination  of
studios,  stages,  and  other  production  environments  in the  television  and
production markets. At a special meeting of stockholders held on August 5, 1996,
the stockholders of the Company approved the Videssence  merger.  The Videssence
merger is expected to close in  November  or  December  1996  subject to certain
closing conditions  including the raising of $2 million of new equity capital by
the Company.

<PAGE>

Results of Operations

Net Revenues.  Net Revenues decreased 38% to $3.11 million for the quarter ended
September  30, 1996 as compared to $4.99 million in net revenues for the quarter
ended  September 30, 1995. The decrease in net revenues for the first quarter of
$1.88  million  resulted  primarily  from the  production  of the new  season of
"Babylon 5"  starting on August 26, 1996  compared to July 31, 1995 in the first
quarter of last year.  The  decrease  in revenue  from  "Babylon 5" in the first
quarter will be recouped  over the  remainder of the current  fiscal year as the
number of episodes to be produced is the same in both years.

Gross  Margin.  The Company's  gross margin for the quarter ended  September 30,
1996 was $270,460, or 8.7 % of net revenues,  compared with $473,218 or 9.5% for
the quarter ended  September 30, 1995.  The decrease in gross margin dollars and
percent was caused  primarily by the lower revenue level  experienced due to the
later start date of production of "Babylon 5" in the current season.

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased 20% to $512,031 for the quarter  ended  September 30, 1996 as compared
to $426,689 for the quarter ended September 30, 1995. The increase was caused by
the creation of the project  development  group,  the expansion of the Company's
technology operations and the staffing, legal, regulatory,  accounting and other
expenses that resulted from being a publicly traded company as of November 1995.
Additionally,   the  Company  incurred   non-recurring   operating  expenses  in
connection  with  the  curtailment  of  the  merchandising  activities  for  the
"Hypernauts" project totaling approximately $70,000.

Other Income and Expenses.  Interest income increased to $27,102 for the quarter
ended  September 30, 1996  compared to no interest  income for the quarter ended
September  30,  1995.  The  increase  was due  primarily  to interest  earned on
proceeds  from the  Company's  initial  public  offering  which was completed in
November 1995.

Liquidity and Capital Resources

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

Cash used in operating  activities  was  approximately  $544,492 for the quarter
ended  September 30, 1996.  The primary uses of cash were to fund an increase of
$442,148  in  accounts  receivable  and to fund  the  $214,469  net loss for the
quarter.  These uses of cash were  partially  offset by an  increase in accounts
payable.
<PAGE>

Investments in capital equipment totaled approximately  $409,033 for the quarter
ended  September  30,  1996.  The use of cash was  primarily  for  additions  of
computer and post  production  equipment  for the  expansion  of the  technology
group, primarily for post production and animation activities.

On April 26, 1996, the Company entered into a definitive  merger  agreement with
Videssence,  Inc., a company that designs,  manufactures  and distributes  media
lighting  products which  incorporate  the patented and  trademarked  SRGB light
technology  for  the  illumination  of  studios,  stages  and  other  production
environments  in  the  sound  stage,  media  picture,  theater  and  theme  park
industries.  On August 5, 1996,  the  stockholders  of the Company  approved the
proposed  purchase  of  Videssence.  Upon the  satisfaction  of certain  closing
conditions, which includes $2 million to be provided to Videssence for operating
capital,  Videssence will become a wholly owned subsidiary of the Company. Under
the terms of the  agreement,  the Company  will  acquire all of the  outstanding
common stock of  Videssence  in exchange for a minimum of 522,000  shares of the
Company's Common Stock,  valued at $9.00 per share. The Videssence  shareholders
can earn up to an additional  maximum of 788,000 shares of the Company's  Common
Stock upon Videssence  achieving  certain  performance  based criteria.  For the
quarter ended  September  30, 1996,  the Company used  approximately  $71,369 in
deferred  acquisition costs in support of the Videssence  transaction.  On April
26, 1996,  the Company and  Videssence  entered  into a  promissory  note in the
amount of  $250,000  bearing  interest  of 9% per annum in  connection  with the
merger.  Any unpaid  principal  (all of which is outstanding as of September 30,
1996) and accrued interest is payable on the closing date pursuant to the merger
agreement  or December 20, 1996,  whichever  is earlier.  On June 10, 1996,  the
Company and Videssence  entered into a second  promissory  note in the amount of
$275,000 bearing interest at 9% per annum in connection with the  aforementioned
transaction. Any unpaid principal and accrued interest is payable on the closing
date  pursuant  to the merger  agreement  or December  20,  1996,  whichever  is
earlier.  As of  September  30,  1996,  $ 450,000 had been  advanced  under this
agreement. $100,000 was advanced during the quarter.

Pursuant to the terms of the merger transaction,  and as a condition to closing,
the  Company  intends to raise a minimum  of $2  million  which will be used for
expansion and operating  capital  purposes at Videssence.  On September 5, 1996,
the Company and an investment banking firm, acting as placement agent, agreed to
undertake a "Limited  Public  Offering,"  to be marketed  over the  Internet and
IPONet,  for the  issuance  by the  Company  of Class A  Cumulative  Convertible
Preferred Stock. The Class A Preferred Stock will bear a Class A Preferred Stock
dividend  of 10% per annum and is  expected  to be offered at a price  $9.00 per
share.  The holders of Class A Preferred  Stock may  convert  their  shares into
common stock at a conversion ratio of 3:1. The offering has been structured on a
basis of a minimum of $2 million and a maximum of $5  million.  In the event the
offering is not  completed,  it is possible that the Company may not recover the
amounts loaned to Videssence under the terms of the promissory notes signed.

Management  believes that its present cash position and overall  liquidity  will
enable the Company to meet its operating commitments for the next twelve months.
As of September 30, 1996, the Company's  sources of liquidity  included cash and
cash equivalents  totaling  approximately $1.1 million.  The Company had no debt
outstanding as of September 30, 1996.
<PAGE>

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

Future Commitments

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

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

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


<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.   Legal Proceedings

      None

ITEM 2.   Changes in Securities

     On  September  30,  1996,  the Board of  Directors  approved a new class of
capital  stock,  Series A  Convertible  Preferred  Stock.  The  total  number of
authorized shares of the Series A Convertible Convertible Preferred Stock is One
Million Two Hundred Thousand. The Series A Convertible Preferred Stock cumulates
dividends  which are payable  semi-annually  in shares of  Series A  Convertible
Preferred Stock, commencing on the date of issue in an amount per share equal to
10% per annum.  No dividends on Common Stock may be paid until the  dividends on
the  Series  A  Convertible  Preferred  Stock  are paid in  full.  The  Series A
Convertible Preferred Stock also participates in any dividend declared on Common
Stock  such  that for every  share of Common  Stock to which a share of Series A
Convertible  Preferred Stock is convertible,  the Series A Convertible Preferred
Stock will receive an amount equal to 50% of the dividend  payable on a share of
Common Stock. The Series A Convertible Preferred Stock is convertible,  in whole
or in part, at the option of the holder at any time, unless previously redeemed,
into shares of Common  Stock,  at a  conversion  ratio of three shares of Common
Stock  for one  share of  Series  A  Convertible  Preferred  Stock,  subject  to
adjustment in certain  circumstances.  The Series A Convertible  Preferred Stock
has a liquidation preference of 9.00 per share prior to any liquidation payments
to holders of Common  Stock.  In  addition,  after the shares of Common of Stock
have received a liquidation payment of $9.00 per share, any liquidation proceeds
remaining, if any, shall be shared ratably between the Common Stock and Series A
Convertible  Preferred Stock, as converted.  The Series A Convertible  Preferred
Stock is redeemable by the Company at any time after proper notice is given,  in
whole or in part, at the option of the Company,  for cash at a redemption  price
of $9.00  per  share.  Other  than as  required  by law and as set  forth in the
Certificate of Designation,  the Series A Convertible  Preferred Stock and the
Common  Stock  shall vote  together,  as one class,  on all matters on which the
holders of shares of Common Stock are entitled to vote. In such cases, shares of
Series A Convertible  Preferred  Stock shall be entitled to such number of votes
as the number of shares of Common  Stock  into  which the  Series A  Convertible
Preferred  Stock is then  entitled  to  convert.  If  dividends  on the Series A
Convertible  Preferred  Stock  are in  arrears  for  four  semi-annual  dividend
<PAGE>

periods, holders of the Series A Convertible Preferred Stock (voting as a single
class)  will have the right to elect two  additional  directors  to serve on the
Company's Board of Directors until such dividend arrearage is eliminated.

ITEM 4.   Submission of Matters to a Vote of Security Holders.

     On August 5, 1996, the Company held a special meeting of the  stockholders.
At the meeting the stockholders approved the merger of a wholly-owned subsidiary
of the Company with  Videssence,  Inc. such that, upon completion of the merger,
Videssence,  Inc. will become the  wholly-owned  subsidiary of the Company.  The
results of the vote are as follows:  2,352,500  shares were voted for the Merger
and 800 shares voted against the Merger.

ITEM 6.   Exhibits and Reports on Form 8-K


(a)        Exhibits

          The following  exhiits are filed  herewith.  Exhibit  numbers refer to
          Item 601 of Regulation S-B.

          Exhibit 3.3    Certificate of Designation

(b)        Reports on Form 8K - None


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                                    SIGNATURE



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


                                            NETTER DIGITAL ENTERTAINMENT, INC.
                                            Registrant


Dated: November 14,1996                     By: /s/Geoffrey Talbot
                                            __________________________________
                                               Geoffrey Talbot
                                               Acting Chief Financial Officer
<PAGE>

                                 EXHIBIT INDEX

Exhibit                                                  Method of Filing

  3.3            Certificate of Designation       Filed herewith electronically