Form 10-Q

                      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, 1998    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.)


                          5125 Lankershim Blvd.
                   North 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 9, 1998 the Registrant had 3,334,405 shares of its Common Stock, 
$.01 par value, issued and outstanding.









            NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
                                FORM 10-Q
                            September 30, 1998
                                 INDEX


PART I.	 FINANCIAL INFORMATION
                                                                    	PAGE
Item 1. 	Financial Statements (Unaudited)	                          NUMBER
                                                                   ------

         Consolidated Balance Sheets as of  September 30, 1998 
         and June 30, 1998.	                                           3

         Consolidated Statements of Operations for the 
         three-month periods ended September 30, 1998 and 
         September 30, 1997.	                                          4

         Consolidated Statements of Cash Flows for the 
         three-month periods ended September 30, 1998 and 
         September 30, 1997.	                                          5

         Notes to Consolidated Financial Statements	                   6


Item 2. 	Management's Discussion and Analysis of Financial 
         Condition and	Results of Operations	                        7-10

PART II.	OTHER INFORMATION

Item 6.	 Exhibits and Reports on Form 8-K	                            10

Signatures		                                                          11


                               Page 2 of 11


PART 1. FINANCIAL INFORMATION
Item 1. Fiancial Statements


               NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,     JUNE 30,
                                                                     1998            1998
                                                                 -------------  -------------
                                                                  (Unaudited)
<S>                                                             <C>            <C>   
                                   ASSETS
                                   ------
CURRENT ASSETS:
  Cash and cash equivalents                                      $   1,206,073   $    1,634,809
  Accounts receivable, net of allowance of $46,000                   2,366,482        2,285,011 
  Due from officer                                                     155,897          155,897 
  Inventory                                                          1,945,119        1,631,025
  Production costs, net                                                257,021          251,632 
  Other                                                                126,686          134,537 
                                                                  --------------   ------------- 
      TOTAL CURRENT ASSETS                                           6,057,278        6,092,911 

EQUIPMENT,  net                                                      3,265,265        3,157,394

GOODWILL, net                                                        1,912,357        1,938,434

DEPOSITS AND OTHER ASSETS                                              415,842          333,760
                                                                  --------------   -------------
                                                                $   11,650,742   $   11,522,499 
                                                                  ==============   =============

                       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable and production fee advances                  $    2,382,723   $    2,304,092
  Accrued expenses                                                     271,816          265,582 
  Deferred revenue                                                     852,223        1,106,957
  Due to stockholder                                                    36,497           36,497
  Credit facilities                                                    635,717          525,717
  Current portion of capital lease obligations                         823,328          734,329 
                                                                  --------------   -------------
        TOTAL CURRENT LIABILITIES                                    5,002,304        4,973,174 
                                                                  --------------   -------------
CAPITAL LEASE OBLIGATIONS                                            1,348,606        1,337,186 

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

STOCKHOLDERS' EQUITY :
  Preferred stock, $.001 par value, 2,000,000 shares
    authorized; 54,550 shares issued and 
    outstanding                                                        328,585          304,366
  Common stock, $.01 par value, 20,000,000 shares
    authorized; 3,334,405 shares issued and 
    outstanding                                                         33,344           33,344
  Additional paid-in capital                                         4,726,171        4,726,171 
  Retained Earnings                                                    211,232          147,758 
                                                                  --------------   -------------
          TOTAL STOCKHOLDERS EQUITY                                  5,299,332        5,211,639 
                                                                  --------------   -------------
                                                                $   11,650,742   $   11,522,499 
                                                                  ==============   ==============
<FN>
<FN1>
              The accompanying notes are an integral part of the 
                    consolidated financial statements.
</FN>
</TABLE>
                              Page 3 of 11


              NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                        Three Months Ended September 30,
                                          ---------------------------     
                                              1998          1997            
                                          ---------------------------     
                                           (Unaudited)   (Unaudited)

REVENUES:
   Production                             $  6,887,621   $  5,844,337
   Sales                                       999,506        929,533
                                           ------------   ------------   
      TOTAL REVENUES                         7,887,127      6,773,870
                                           ------------   ------------    
EXPENSES:
   Production                                5,989,455      5,114,389
   Cost of goods sold                          529,909        458,737         
   General and administrative                1,189,356      1,106,792
   Amortization of goodwill                     26,078         26,078        
                                           ------------   ------------    
        TOTAL EXPENSES                       7,734,798      6,705,996
                                           ------------   ------------  
OPERATING INCOME                               152,329         67,874
                                           ------------   ------------
OTHER INCOME (EXPENSE):
   Interest income                               3,020          9,910
   Interest (expense)                          (60,612)       (53,759)
   Other income                                  5,834          8,026
                                           ------------   ------------
     TOTAL OTHER INCOME (EXPENSE)              (51,758)       (35,823)
                                           ------------   ------------

INCOME BEFORE PROVISION FOR
  INCOME TAXES                                 100,571         32,051

PROVISION FOR INCOME TAXES                      23,000         18,500
                                           ------------   ------------   

NET INCOME                                $     77,571   $     13,551
                                           ============   ============  

Cumulative preferred stock dividend             14,097         10,611


Net Income to common shareholders         $     63,474   $      2,940
                                           ============   ============   

Net Income per common share-basic
   and assuming dilution                  $       0.02   $       0.00
                                           ============   ============   

Weighted average common shares outstanding   3,334,405      3,327,742
                                           ============   ============   


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


                             Page  4 of 11



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

                                                           Three Months Ended September 30,
                                                            ------------------------------
                                                                 1998             1997
                                                            -------------     -------------
<S>                                                        <C>               <C>
                                                            
CASH FLOWS FROM OPERATING ACTIVITIES: 
 Net income                                                $      77,571    $      13,551

 Adjustments to reconcile net income to net cash 
       provided by operating activities: 
            Depreciation                                         208,145          108,583
            Amortization                                          26,078           26,078
  
 Changes in operating assets and liabilities: 
    (Increase) in accounts receivable                            (81,471)        (608,447)
    Decrease/(Increase) in other current assets                    7,851          (32,363)  
    (Increase) in inventory                                     (314,094)        (226,822) 
    (Increase) in production costs                                (5,389)         (10,966)
    (Increase)/Decrease in deposits and other assets             (82,082)          54,865  
    Increase/(Decrease) in accounts payable                       78,631         (899,134)   
    Increase/(Decrease) in accrued expenses                        6,234          (24,114)
    Decrease in deferred revenue                                (254,734)        (158,863)
                                                          ---------------   ---------------
                                                                (410,831)      (1,771,183)
                                                          ---------------   ---------------

    NET CASH USED IN OPERATING ACTIVITIES                       (333,260)       1,757,632
                                                          ---------------   ---------------

CASH FLOWS FROM INVESTING ACTIVITIES: 
    Capital expenditures                                         (55,475)         (54,345)
                                                          ---------------   ---------------
    NET CASH USED IN INVESTING ACTIVITIES                        (55,475)         (54,345)
                                                          ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES: 
    Proceeds from line of credit                                 130,000          537,259
    Notes payable principal payments                             (20,000)         (42,990)
    Principal payments of capital lease obligations             (150,001)         (46,539)
                                                          ---------------   ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES              (40,001)         447,730
                                                          ---------------   ---------------

NET DECREASE IN CASH                                            (428,736)      (1,364,247)

Cash, beginning of period                                      1,634,809        2,574,522
                                                          ---------------   -------------

Cash, end of period                                         $  1,206,073     $  1,210,275
                                                          ===============   ===============   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 
 Cash paid during the year for:
      Cash paid for interest                                 $     60,612     $     53,759
      Cash paid for income taxes                             $     38,000     $      9,800
 Noncash activity:
   Stock issued for legal fee settlement                     $          -     $     50,000
   Stock dividend                                            $     14,097     $     10,611
   Purchase of equipment through leases payable              $    250,212     $    531,531

<FN>
<FN1>
                The accompanying notes are an integral part of the 
                     consolidated financial statements. 
</FN>
</TABLE>

                               Page 5 of 11



          NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PREPARATION

The accompanying audited and 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-Q 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, 1998 included in 
the Form 10-KSB 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, 1998, and the results of operations and cash flows 
for the three-month periods ended September 30, 1998 and 1997 have been 
included.

The results of operations for the three-month period ended September 30, 1998, 
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 10-KSB as filed with the 
Securities and Exchange Commission for the year ended June 30, 1998.

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 remaining unpaid principal balance of $155,897 and accrued 
interest of $2,825 is due on May 20, 1999.  The Board of Directors has agreed to
allow the note to be repaid in shares of the Company's Common 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.


                              Page 6 of 11


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

General

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 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.  The Company has produced the award winning series "Babylon 5" and 
is currently producing a follow-on series entitled "Crusade."  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.  The Company has also established an objective to retain 
greater equity participation in the projects it produces by increasing its 
overhead and equity commitments for future projects (see "Liquidity and Capital 
Resources" below).

-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, especially "Babylon 5" 
and "Crusade," 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 (or "production services") to market 
computer graphics and digital post-production services to outside clients.  
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.  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 sound stage, motion picture, 
theater and theme park industries, as well as in the video conferencing, 
distant learning, and pre-press digital photography markets.  With the 
introduction of new technology in the middle of fiscal 1998, Videssence products
are now suitable for all media production lighting applications using either 
film or video platforms.  The Company's high-tech fluorescent lights consume 
significantly less electricity than traditional incandescent production lighting
products while generating greatly reduced amounts of heat.  Thus, these lights 
are more comfortable for the talent working under them and can generate 
significant electricity and air-conditioning related savings.  The Company 
markets its lighting products in the USA and internationally through a network 
of manufacturer's representatives, distributors, dealers, and direct sales 
staff.

                               Page 7 of 11


Results of Operations

Revenues.  The Company's revenues increased to approximately $7.89 million for 
the first quarter ended September 30, 1998, an increase of 16.4%, as compared to
approximately $6.77 million for for the quarter ended September 30, 1997.  This 
increase resulted primarily from approximately $1.35 million in additional 
revenues generated from the Company's Netter Digital Technologies Division.  
These revenues resulted primarily from the Company's work on "Voltron" and the 
video game for "Sega," but also can be attributed to the growth of the Division 
as a whole over the year.  This increase was partially offset by a $350,000 
decrease in revenues from the "Babylon 5,"  "Crusade," and related movies 
productions as compared to the same period of the prior year.  These variations
 are the result of production timing, as total production budgets are similar.  
The remaining $120,000 of increased revenues came from Videssence and the 
Company's "Babylon 5" Fan Club.

Gross Margin.  The Company's gross profit for the quarter ended September 30, 
1998 was approximately $1.37 million, or 17.3% of revenues, as compared to 
approximately $1.20 million, or 17.7% of revenues, for the quarter ended 
September 30, 1997.  This decrease in gross margin resulted from a decrease in 
Videssence's gross margin to 47.0% during the quarter ended September 30, 1998, 
as compared to 50.7% during the quarter ended September 30, 1997.  This 
decrease was primarily due to the expansion of the dealer network during the 
sales restructuring in fiscal 1998 and a change in the product mix of sales to 
incorporate the new products developed in the middle of fiscal 1998 which have 
somewhat lower gross margins. This Videssence decrease was partially offset by 
an increase in gross margin from the Company's entertainment production and 
production services activities to 13.0% this quarter, as compared to 12.5% for 
the same period in the prior year, primarily due to additional revenues from the
Netter Digital Technologies Division which realizes higher gross margins than 
the entertainment production business.

General and Administrative Expenses.  General and administrative expenses as a 
percentage of net revenues decreased to 15.1%, or approximately $1.19 million, 
during the quarter ended September 30, 1998 as compared to 16.3%, or 
approximately $1.11 mllion, during the quarter ended September 30, 1997.  This 
decrease resulted from the economies of scale realized by the Company as it 
brought in additional work in its Netter Digital Technologies Division, thereby 
spreading similar general and administrative expenses over an expanded revenue 
base.

Operating Income (Loss).  The Company achieved operating incomes of 
approximately $152,000 and $68,000 for the quarters ended September 30, 1998 and
September 30, 1997, respectively.  For the quarter ended September 30, 1998, 
operating income of approximately $250,000 from the Company's entertainment 
production and production services activities (as compared to $191,000 in the 
quarter ended September 30, 1997) offset an operating loss of approximately 
$98,000 at its Videssence operation (as compared to $123,000 in the prior 
period).  The improvement in operating income resulted primarily from production
services for the new "Voltron" television series.  The operating loss at 
Videssence can be attributed to lower than expected sales.


                                Page 8 of 11


Other Income and Expenses.  Interest income decreased to $3,020 for the quarter 
ended September 30, 1998 compared to $9,910 for the same prior year period, as 
proceeds from the Company's November 1995 initial public offering were fully 
drawn from short term investments and used for working capital for Videssence by
the end of the Company's fiscal year ended June 30, 1998.  Interest expense 
increased to $60,612 for the quarter ended September 30, 1998 from $53,759 in 
the same period of the previous year due to the Company's further utilization of
capital lease lines for continued expansion of its computer animation and visual
effects facilities.

Liquidity and Capital Resources

The Company has funded its operations to date primarily through cash flows from 
operations, its 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 who 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 of 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 the quarter ended September 30, 1998 and September 30, 1997, 
respectively, the Company derived approximately 79% and 90% of its 
entertainment production revenues from its agreements with Warner Bros. relating
to the production of the "Babylon 5" series, "Crusade" series, and the 
associated 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 $333,000 for the 
three-months ended September 30, 1998.  The biggest uses of cash were a build-up
of inventory at Videssence and a decrease in deferred revenue as the Company 
used pre-billed funds for production.

Effective July 1997, the Company's Videssence subsidiary 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 agreement also requires the Company to comply with 
certain restrictive covenants, including maintaining a minimum working capital 
and specific financial ratios.  As of September 30, 1998, the Company owed an 
outstanding principal amount of approximately $588,000 on such line.

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, 1998, the Company's sources of liquidity included cash and 
cash equivalents totaling approximately $1.2 million, of which approximately 
$400,000 is contractually committed to fund specific Projects.  The Company has 
approximately $672,000 of outstanding debt and approximately $2,172,000 of 
outstanding capital leases as of September 30, 1998.  The Company uses capital 
leases primarily for equipment additions to its in-house post-production and 
graphics/animation facilities.


                               Page 9 of 11


PART  II.     OTHER INFORMATION

Item 6.	      Exhibits and Reports on Form 8-K

(a.)	         Exhibits

             	Exhibit	       Description
              -------        -----------
               		27	         Financial Data Schedule. (1)
              ----------------------
              (1) Filed herewith.

(b.)	         Reports on Form 8-K

             	None.


                                 Page 10 of 11



                                   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 13, 1998	                By: /s/Chad Kalebic
                                         -------------------
                                         Chad Kalebic
                                         Chief Financial Officer


                               Page 11 of 11