NETTER DIGITAL ENTERTAINMENT INC, PRE 14A, 1997-09-22

NETTER DIGITAL ENTERTAINMENT INC
PRE 14A, 1997-09-22
MOTION PICTURE & VIDEO TAPE PRODUCTION

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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2)
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12

NETTER DIGITAL ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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NETTER DIGITAL ENTERTAINMENT, INC.
_______________________

NOTICE OF 1997 ANNUAL MEETING OF STOCKHOLDERS
To Be Held on November 14, 1997

_______________________

To the Stockholders of Netter Digital Entertainment, Inc.:

The 1997 Annual Meeting of Stockholders of Netter Digital Entertainment,
Inc., a Delaware corporation, will be held on Friday, November 14, 1997, at
10:00 a.m., P.S.T., at the offices of Netter Digital Entertainment, Inc., 5125
Lankershim Boulevard, North Hollywood, California, for the following purposes:

(1) To elect a Board of Directors;

(2) To consider and act upon a proposal to amend Netter Digital's
Certificate of Incorporation to increase the number of authorized
shares of Common Stock, par value $.01, from 6,000,000 to
20,000,000;

(3) To consider and act upon a proposal to adopt the 1997 Incentive
Stock Option Plan;

(4) To consider and act upon a proposal to adopt the 1997 Director's
Stock Option Plan; and

(5) To transact any other business that may properly come before the
meeting.

Only stockholders of record at the close of business on October 3, 1997
are entitled to notice of and to vote at the meeting and any adjournments
thereof.

All stockholders are cordially invited to attend the meeting in person.
Whether or not you expect to attend the meeting, PLEASE COMPLETE AND SIGN THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. The giving of
your proxy will not affect your right to vote in person should you later decide
to attend the meeting.

By Order of the Board of Directors

John Copeland
Secretary
North Hollywood, California
October ___, 1997

NETTER DIGITAL ENTERTAINMENT, INC.

5125 Lankershim Boulevard
North Hollywood, California 91601
(818) 753-1990

PROXY STATEMENT

October ___, 1997

GENERAL INFORMATION

This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Netter Digital Entertainment, Inc. ("Netter
Digital" or the "Company") for the 1997 Annual Meeting of Stockholders to be
held on November 14, 1997 and any postponements or adjournments thereof. This
Proxy Statement and the accompanying Notice of Annual Meeting and form of proxy
were first mailed to stockholders on or about October ___, 1997.

The execution and return of the enclosed proxy will not in any way affect a
stockholder's right to attend the Annual Meeting in person. Any stockholder
giving a proxy may revoke it before it is voted by so notifying the Secretary of
Netter Digital in writing before or at the meeting, by providing a proxy bearing
a later date or by attending the meeting and expressing a desire to vote in
person. Your cooperation in promptly returning the enclosed proxy will reduce
Netter Digital's expenses and enable its management and employees to continue
their normal duties for your benefit with minimum interruption for follow-up
proxy solicitation.

Only stockholders of record at the close of business on October 3, 1997 are
entitled to receive notice of and to vote at the meeting. On that date, Netter
Digital had outstanding and entitled to vote at the Annual Meeting 3,338,950
shares of Common Stock, each of which is entitled to one vote at the meeting,
except as noted below with respect to the election of directors, and 49,502
shares of Series A Preferred Stock ("Preferred Stock") each of which is entitled
to three votes at the meeting, except as noted below with respect to the
election of directors. The presence at the Annual Meeting, either in person or
by proxy, of the holders of a majority of the shares of Common Stock outstanding
on the record date is necessary to constitute a quorum for the transaction of
business.

Abstentions and broker non-votes (which occur if a broker or other nominee
does not have discretionary authority and has not received voting instructions
from the beneficial owner with respect to the particular item) are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business. Abstentions are counted in tabulations of the votes cast on
proposals presented to the stockholders and have the same legal effect as a vote
against a particular proposal. Broker non-votes are not taken into account for
purposes of determining whether a proposal has been approved by the requisite
stockholder vote.

All proxies will be voted as directed by the stockholder on the proxy card.
If no choice is specified, proxies will be voted "FOR" the directors nominated
by the Board of Directors, "FOR" the amendment to Netter Digital's Certificate
of Incorporation, "FOR" the adoption of 1997 Incentive Stock Option Plan, and
"FOR" the adoption of 1997 Director's Stock Option Plan.

If any other matters are properly presented at the Annual Meeting,
including, among other things, consideration of a motion to adjourn the Annual
Meeting to another time or place for the purpose of soliciting additional
proxies, the persons named in the enclosed form of proxy and acting thereunder
will have discretion to vote on those matters in accordance with their best
judgment, subject to direction by the Board of Directors, to the same extent as
the person signing the proxy. It currently is not anticipated that any other
matters will be raised at the Annual Meeting.

The cost of preparing, printing and mailing the Proxy Statement, the Notice
and the enclosed form of proxy, as well as the cost of soliciting proxies
relating to the Annual Meeting, will be borne by Netter Digital. The original
solicitation of proxies by mail may be supplemented by telephone, telegram and
personal solicitation by officers and other regular employees of Netter Digital,
but no additional compensation will be paid to such individuals on account of
such activities. Netter Digital will reimburse banks, brokerage houses and
other custodians, nominees and fiduciaries for their reasonable expenses in
forwarding proxy materials to their principals.

ELECTION OF DIRECTORS

Nominees and Voting

Six directors are to be elected at the Annual Meeting. All directors hold
office until the next Annual Meeting and until their respective successors are
elected and qualified. Directors need not be stockholders.

Cumulative voting applies to this election. This means that, in the
election of directors, each holder of Common Stock is entitled to a number of
votes equal to the number of his or her shares of Common Stock multiplied by the
number of directors to be elected, and each holder of Preferred Stock is
entitled to a number of votes equal to three times the number of his or her
shares of Preferred Stock multiplied by the number of directors to be elected.
A stockholder may cast all of such votes for a single nominee or distribute them
among the nominees as he or she sees fit. However, no stockholder is entitled
to cumulate votes for a nominee unless the nominee's name has been placed in
nomination prior to the vote and a stockholder has given notice at the meeting,
prior to the voting, of the stockholder's intention to cumulate his or her
votes. If any one stockholder gives such notice, all stockholders may cumulate
their votes for nominees. The persons named in the enclosed form of Proxy may,
in their discretion, cumulate votes pursuant to the proxies for any one or more
nominees.

The Board of Directors has nominated for election as directors six persons
named below, five of whom are incumbent directors. All of the nominees have
indicated that they are able and willing to serve as a director.

Douglas Netter, the Company's Chairman of the Board, President and Chief
Executive Officer, and Paul Costa, a director, own, in the aggregate, 1,930,730
shares of Common Stock, representing 55.4% of the votes entitled to be cast at
the Annual Meeting, which will allow them to elect a majority of the members of
the Company's Board of Directors. Messrs. Netter and Costa have advised the
Board of Directors that they intend to vote all of their shares for the election
of the Board's nominees.

The Board of Directors recommends that the stockholders vote "FOR" the
election of its nominees. Unless otherwise instructed, the Board's proxies
intend to vote the shares of Common Stock represented by the proxies in favor of
the election of these nominees. If for any reason any of these nominees will be
unable to serve, the Board's proxies will vote instead for such other person or
persons as the Board of Directors may recommend.

The following table sets forth certain information as of October 3, 1997
with respect to the Board's current members and nominees:

Director
Name Age Since
---- --- --------

Douglas Netter*......................... 76 1995
John Copeland*.......................... 46 1995
Kate Netter Forte*...................... 42 1995
Leonard Silverman*...................... 57 1996
Paul Costa*............................. 50 1997
Rowland Perkins......................... 63 1995
__________*............................. __ -

* Nominee for Election to the Board of Directors

Business Experience of Directors and Nominee During the Past Five Years

DOUGLAS NETTER is the founder of the Company and has been its President,
Chief Executive Officer and member of its Board of Directors since its inception
in 1979. Mr. Netter was appointed Chairman of the Board in September 1995.

JOHN COPELAND has been with the Company since its inception serving as a
producer on many of the Company's television movies, series and documentaries.
He has been the Executive Vice President and Secretary of the Company since
September 1995.

KATE NETTER FORTE joined the Board of Directors in September 1995. From
1991 to the present, Ms. Netter Forte has been the Executive Vice President of
Oprah Winfrey's Harpo Films, Inc. Ms. Netter Forte is the daughter of Douglas
Netter.

LEONARD SILVERMAN joined the Board of Directors in June 1996. Dr.
Silverman spent most of his professional career at USC and since 1977 has been a
Full Professor of Electrical Engineering. He is currently the Dean of the
School of Engineering at USC. Dr. Silverman is internationally known for his
pioneering work in the theory and application of multivariable control systems
and signal processing and has more than 100 publications to his credit.

PAUL COSTA founded and is presently President of Videssence, Inc.,
established to design, manufacture and distribute media lighting products
incorporating the patented and trademarked SRGB light technology. Videssence,
Inc. became a wholly owned subsidiary of Netter Digital in January 1997.

ROWLAND PERKINS joined the Board of Directors in September 1995. Mr.
Perkins founded and is presently President of Double Eagle Entertainment, Inc.,
established to develop and produce a multitude of entertainment products. Prior
to that and from 1975 to 1994, Mr. Perkins co-founded and became President of
Creative Artists Agency, Inc. Mr. Perkins term will expire upon the election of
the Board members at the Annual Meeting.

The sole family relationship that exists between any of the directors or
officers of Netter Digital is that between Douglas Netter and Kate Netter Forte,
his daughter.

Meetings of the Board of Directors and Committees

Netter Digital maintains an Audit Committee whose current members are Mr.
Perkins, Ms. Forte, and Mr. Silverman. The Audit Committee's responsibilities
include approval of the selection and engagement of independent accountants and
review of the plan and scope of their audit for each year, the results of such
audit when completed and their fees for services performed. The Audit Committee
also assists and makes recommendations to the Board of Directors in fulfilling
the Board's responsibilities relating to Netter Digital's accounting, financial
reporting and internal control functions and reviews and passes upon all
transactions with affiliates and other persons having a material financial
interest in Netter Digital. The Audit Committee met twice during fiscal 1997.

Netter Digital maintains a Compensation Committee whose current members are
Mr. Perkins and Mr. Silverman. The Compensation Committee approves the
compensation of the executive officers of Netter Digital, formulates and reviews
significant compensation policies and decisions and administers Netter Digital's
stock option plan. The Compensation Committee did not meet during fiscal 1997.

Netter Digital's Board of Directors met four times during fiscal 1997.
Each director attended at least 75% of the meetings of the Board of Directors
and all of the committees on which he or she served, except for Kate Netter
Forte who attended 50% of the meetings of the Board of Directors. Netter
Digital does not maintain a nominating committee.

Compensation of Directors

Netter Digital does not currently pay or intend to pay cash compensation to
its directors for their services in that capacity; however, directors who are
not employees are reimbursed for out-of-pocket expenses incurred in connection
with their attendance at Board of Directors or committee meetings. The Netter
Digital Entertainment, Inc. 1995 Stock Option Plan (the "1995 Plan"), which was
amended by the Board of Directors on September 19, 1997 to eliminate the
provision for any further option grants thereunder to non-employee directors,
provided that each non-employee director, within six months after taking office
as a member of the Board of Directors of the Corporation (whether elected by the
stockholders or the Board of Directors), automatically would be granted a stock
option to purchase 30,000 shares of Common Stock at an exercise price equal to
the fair market value of the Common Stock on the date of grant. Furthermore,
the 1995 Plan provided that each such director would receive additional options
to acquire 10,000 shares of Common Stock on the first anniversary of such
director taking office and another set of options to acquire 10,000 shares of
Common Stock on the second anniversary of such director taking office, provided
the director still held office on that anniversary date. As reported in the
footnotes to "Ownership of Common Stock" below, certain grants have been made to
the current non-employee directors of Netter Digital under the 1995 Plan.

Pursuant to the provisions of the Netter Digital Entertainment, Inc. 1997
Directors' Stock Option Plan, if such plan is adopted by Netter Digital's
stockholders at the Annual Meeting, (a) each current non-employee director, upon
his or her reelection to the Board of Directors at the Annual Meeting will be
granted, immediately following such adoption, an initial stock option to
purchase 10,000 shares of Common Stock at an exercise price equal to the fair
market value on the date of grant, and (b) each new non-employee director, on
the date of his or her election to the Board of Directors (whether elected by
the stockholders or the Board of Directors), will be granted, an initial stock
option to purchase 30,000 shares of Common Stock at an exercise price equal to
the fair market value of the Common Stock on the date of grant. In addition to
receiving such initial stock option, each non-employee director continuing to
serve on the Board automatically will be granted an additional stock option to
purchase 10,000 shares of Common Stock, at an exercise price equal to the fair
market value of the Common Stock on the date of grant, on each successive
anniversary of the date on which such non-employee director was granted an
initial stock option; provided, however, that in no event shall any non-employee
director receive more than four such additional stock options. For a
description of the 1997 Directors' Stock Option Plan, see "Approval of 1997
Directors Stock Option Plan," below.

EXECUTIVE OFFICERS

The current executive officers of Netter Digital, their ages and positions
are as follows:

Name Age Position
---- --- --------
Douglas Netter............................ 76 Chairman of the Board,
President and Chief
Executive Officer
John Copeland............................. 46 Executive Vice President,
Secretary and Director
Thomas Jorgenson.......................... 42 Chief Operating Officer

For a description of the business experience of Mr. Netter and Mr. Copeland
during the past five years, see "Election of Directors - Business Experience of
Directors and Nominee During the Past Five Years", above.

MR. JORGENSON joined the Company as Chief Operating Officer in August 1996.
From 1994 to 1996, Mr. Jorgenson was Co-Chairman of the Board, Chief Operating
Officer and Chief Financial Officer of Spectral, Inc., a manufacturer of digital
audio editing hardware and software products. From 1984 to 1994, Mr. Jorgenson
held various financial, business planning and operations management positions in
the operating business units and the corporate office at Harman International
Industries, Inc., a Fortune 500 manufacturer of audio equipment.

OWNERSHIP OF COMMON STOCK

The following table sets forth information with respect to the beneficial
ownership of Netter Digital Common Stock as of October 3, 1997 by (i) each
director and nominee of the Company, (ii) the Chief Executive Officer of the
Company and the three most highly compensated executive officers whose
compensation and bonus exceeds $100,000 per annum, and (iii) all of the
executive officers and directors as a group. The Company is not aware of any
other person who is a beneficial owner of more than 5% of its outstanding Common
Stock. Unless otherwise indicated, each of the entities and persons named in
the table has sole voting and investment power with respect to all shares of
Common Stock beneficially owned by it or him, except to the extent that
authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
Shares Beneficially Percent
Owned Voting
-----
Name and Address Number Percent (1) Power (2)
---------------- ------ ----------- ---------
<S> <C> <C> <C>
Douglas Netter (3) 1,589,000 47.6% 45.6%
Paul Costa (4) 431,730 12.6% 9.8%
John Copeland (3) 150,000 4.5% 0%
Rowland Perkins (5) 50,000 1.5% 0%
Kate Forte (5) 50,000 1.5% 0%
Leonard Silverman (5) 40,000 1.2% 0%
Thomas Jorgenson (6) 24,700 * *
George Johnsen (7) 24,000 * *
All Directors and Officers as a group 2,185,430 (8) 60.9% (8) 55.4%

_________________
Unless otherwise indicated, the address for all persons listed is 5125
Lankershim Blvd., North Hollywood, CA 91601

* Indicates ownership of less than 1%
<FN>
<F1>
(1) Based on an aggregate of 3,338,950 shares of Common Stock outstanding
and, with respect to particular persons, shares underlying options or
warrants exercisable now or within the next 60 days.
<FN2>
(2) Based on an aggregate of 3,487,456 shares of Common Stock outstanding
and shares of Preferred Stock outstanding, each of which is entitled to
three votes.
<F3>
(3) In December 1989, Mr. Netter granted Mr. Copeland an option to
purchase 100,000 shares owned by Mr. Netter, exercisable at $0.01 per
share, and in September 1995, Mr. Netter granted Mr. Copeland an option
to purchase 50,000 shares owned by Mr. Netter, exercisable at $4.00 per
share. All of such options are presently exercisable and are included in
this table. Mr. Copeland's options remain unexercised.
<F4>
(4) In association with the Company's merger with Videssence, Inc. in
January 1997 (the "Videssence Merger"), Mr. Costa was issued 341,730
shares of the Company's common stock and a non-statutory option, which is
currently fully exercisable, to purchase 90,000 shares of the Company's
Common Stock at an exercise price of $3.00 per share.
<F5>
(5) Under the 1995 Plan, Mr. Perkins, Ms. Forte, and Mr. Silverman were
each granted options to purchase from the Company 50,000 shares of the
Company's Common Stock. Of these options, 50,000 are currently
exercisable at $10.25 per share by Mr. Perkins and Ms. Forte, while
40,000 are currently exercisable at $5.00 per share by Mr. Silverman.
All of such options are included in this table. These options remain
unexercised.
<F6>
(6) Under the 1995 Plan, Mr. Jorgenson was given two grants of 50,000 options
each, of which 20,000 are currently exercisable; 10,000 at $3.00 per
share and 10,000 at $4.13 per share. All are included in this table.
These options remain unexercised.
<F7>
(7) Under the 1995 Plan, Mr. Johnsen was granted 70,000 options to purchase
shares of Company Common Stock, of which 46,000 immediately expired upon
Mr. Johnsen's resignation on August 1, 1997 and 24,000 will expire, if
not exercised, by November 1, 1997.
<F8>
(8) Of the shares included as beneficially owned by all directors and
executive officers as a group, 250,000 shares may be acquired by exercise
of options, not including (a) the 150,000 options granted by Mr. Netter
to Mr. Copeland and (b) the options granted to Mr. Johnsen, who is no
longer an officer of the Company. All of such options are presently
exercisable and are included within this table.
</FN>
</TABLE>

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table summarizes all compensation paid to Netter Digital's
Chief Executive Officer and to each of the other three most highly paid
executive officers receiving compensation and bonus in excess of $100,000 for
services rendered in all capacities to Netter Digital for the fiscal year ended
June 30, 1997.

<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Name and Securities Underlying All Other
Principal Positions Year Salary Bonus (2) Options/SARs Compensation
------------------- ---- ------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Douglas Netter 1997 $228,365 $27,404 N/A $50,535 (4)
CEO/President/Chairman 1996 $234,753 $55,417 N/A $30,052 (3)
of the Board 1995 $156,000 $42,000 N/A N/A

John Copeland 1997 $140,394 $49,606 N/A $26,708 (5)
Executive Vice President 1996 $195,156 $29,167 50,000 $4,223 (6)
1995 $171,600 N/A N/A N/A

Thomas Jorgenson (1) 1997 $118,448 N/A 100,000 N/A
Chief Operating Officer

George Johnsen 1997 $152,870 $23,760 20,000 (7) N/A
Senior Vice President 1996 $127,778 $21,667 50,000 (7) N/A
1995 $86,228 N/A N/A N/A
_________________
<FN>
<F1>
(1) Thomas Jorgenson was hired in August 1996 as the Company's Chief Operating
Officer. His base salary is $140,000. He has received an option to
purchase 100,000 shares of the Company's Common Stock under the 1995 Plan.
Further, his employment agreement provides for an annual bonus to be
determined in the discretion of the Board of Directors.
<F2>
(2) Participation in producer fees of projects produced.
<F3>
(3) Automobile allowance of $11,284 and personal life insurance of $18,768.
<F4>
(4) Automobile allowance of $13,000 and personal life insurance of $37,535.
<F5>
(5) Automobile allowance of $6,500, personal life insurance of $1,255, a
television director's fee of $14,673, which was paid to Mr. Copeland by one
of the Company's subsidiaries and earnings participation of $4,280.
<F6>
(6) Automobile allowance of $3,500 and personal life insurance of $723.
<F7>
(7) George Johnsen resigned from the Company on August 1, 1997. Upon his
resignation, 46,000 of these options immediately expired while the
remaining 24,000 will expire if not exercised by November 1, 1997.
</FN>
</TABLE>

Option Grants in Last Fiscal Year

The following table sets forth certain information at June 30, 1997, and
for the fiscal year then ended, with respect to stock options granted to the
individuals named in the Summary Compensation Table.

Number of Percent
Securities of Total Grant
Underlying Granted to Exercise Date
Options Employees in Price Per Market Expiration
Name Granted(1) Fiscal 1997 Share (2) Price Date
- ---- ---------- ------------ --------- ----- ----------
Thomas Jorgenson 50,000 38.5% $3.00 $3.00 12/23/06
Thomas Jorgenson 50,000 38.5% $4.13 $4.13 4/15/07
George Johnsen 20,000(3) 15.4% $4.13 $4.13 4/15/07
________________
(1) All options have a ten-year term and are subject to vesting over a five-year
period, with 20% of the options becoming exercisable on each successive
anniversary of the date of grant.
(2) The exercise price may be paid by delivery of owned shares of Common Stock
valued at fair market value on the date of exercise.
(3) George Johnsen resigned from the Company on August 1, 1997. Upon his
resignation, 16,000 of these options immediately expired, while the
remaining 4,000 will expire if not exercised by November 1, 1997.

Option Exercises in Last Fiscal Year and Fiscal Year End Value

The following table sets forth information with respect to the named
executive officers with respect to the unexercised stock options held by them as
of the end of the fiscal year ended June 30, 1997. On June 26, 1996, the
Company cancelled outstanding stock options to purchase an aggregate of 302,000
shares of the Company's Common Stock at an exercise price of $10.25 per share
which had been issued under the 1995 Plan and reissued to the original optionees
new stock options to purchase an aggregate of 302,000 shares of the Company's
Common Stock at an exercise price of $5.00 per share, the fair market value of
the shares on the date of grant, under the 1995 Plan. However, no stock options
issued under the 1995 Plan have been exercised.

Number of Securities
Underlying Value of Unexercised
Unexercised Options held at In-the-Money Options at
June 30, 1997 June 30, 1997 (1)
------------- -----------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- ------------
Thomas Jorgenson 20,000 80,000 $8,800 $35,200
George Johnsen (2) 24,000 46,000 0 0
_________________
(1) Based upon the difference between the closing price of the Common Stock on
June 30, 1997 of $3.88 and the option exercise price.
(2) George Johnsen resigned from the Company in August 1997. Upon his
resignation, the unexercisable options immediately expired while the
remaining exercisable options expire within 90 days of the date of his
resignation.

Employment Agreements

In September 1995, the Company entered into a five year employment
agreement with Douglas Netter. The Company and Mr. Netter modified his
employment agreement, effective October 1, 1996, to provide (a) for a base
salary of $250,000 and (b) that Mr. Netter will be entitled to warrants to
purchase 10,000 shares of Common Stock in any year the Company attains a net
income level determined by the Compensation Committee. Mr. Netter will be
granted "piggyback" registration rights in conjunction with any such warrant
grant. Mr. Netter was not entitled to receive any such warrants for fiscal
1997. He also receives customary executive benefits and a $2,000,000 life
insurance policy for his designated beneficiary's benefit.

In September 1995, the Company also entered into a five year employment
agreement with John Copeland. Under this agreement, his base salary is
$140,000, and he is entitled to 25% of the executive producer fees earned by the
Company for his services rendered in that capacity for each production
("Producer Fees"). Mr. Copeland's total base salary plus Producer Fees were
capped at $190,000 for the first year of service. The Compensation Committee
may adjust Mr. Copeland's base salary and base salary cap in its reasonable
discretion in any year. Under the agreement, Mr. Copeland is also entitled to
(a) an annual bonus of 2% of the Company's net income before taxes and (b) 2,500
warrants in any year the Company attains a net income level determined by the
Compensation Committee. Mr. Copeland will be granted "piggyback" registration
rights in conjunction with any such warrant grant. Mr. Copeland was not
entitled to receive any such warrants for fiscal 1997. He also receives
customary executive benefits and a $1,000,000 life insurance policy for his
designated beneficiary's benefit.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On November 20, 1995, Douglas Netter, the Company's Chairman of the Board,
Chief Executive Officer, and President, entered into a promissory note with the
Company in the amount of $194,876, bearing interest at 7.25% per annum. In May
1997, the Board of Directors elected to extend the term of the note by one year.
At that time, Mr. Netter paid all interest payable as well as a portion of the
principal. The entire unpaid principal balance and all the accrued interest
(collectively, $159,582 as of September 17, 1997) is due on May 20, 1998.

During the years ended June 30, 1996 and June 30, 1997, the Company rented
trailers in connection with one of its productions for approximately $118,000
per annum from a company which is 50% owned by John Copeland, an officer and
director of the Company, and his spouse.

In March 1996, the Company entered into a business consulting agreement
which expired in February 1997 with Geoffrey Talbot, a former member of the
Company's Board of Directors, which provided for a monthly fee of $5,000. Under
the terms of the agreement, Mr. Talbot was to locate suitable acquisitions or
joint ventures or assist the Company in consummating similar transactions. A
similar agreement was entered into with Mr. Talbot in March 1997 providing for
the payment of monthly fees of $3,000 for six months. Mr. Talbot left the Board
of Directors in March 1997. In a separate consulting agreement entered into by
Mr.Talbot and the Company in June 1996, the Company agreed to pay $10,000 per
month for two months to assist with the completion of the Videssence Merger and
to advise Videssence, Inc. with regard to its current operations.

During the year ended June 30, 1996, the Company contracted with a computer
graphics company to produce certain visual effects for two of its productions in
the aggregate amount of approximately $1,834,000. Until February 1996, the
computer graphics company was 10% owned by the spouse of John Copeland, the
Executive Vice President and Secretary and a director of the Company.

APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK

General

The Board of Directors believes that it is in the best interests of the
Company and its stockholders to amend the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock from 6,000,000 to
20,000,000 shares. Accordingly, the Board of Directors has approved, and
recommends that the stockholders of the Company approve, an amendment to the
Company's Certificate of Incorporation to effect the increase in the number of
authorized shares of Common Stock. The additional shares of Common Stock for
which authorization is sought would be identical to the shares of Common Stock
of the Company now authorized. Holders of Common Stock do not have preemptive
rights to subscribe to additional securities which may be issued by the Company.
The following description of the proposed amendment to the Certificate of
Incorporation (the "Amendment") is merely a summary, is not intended to be
complete and is qualified in its entirety by reference to the copy of the
resolution approving the Amendment which is attached hereto as Appendix A.

Purposes of the Increase in the Authorized Number of Shares of Common Stock

The Company's Certificate of Incorporation currently authorizes the
issuance of 6,000,000 shares of Common Stock, par value $.01 per share. As of
October 3, 1997 there were 3,338,950 shares of Common Stock issued and
outstanding. In addition, 162,651 shares are reserved for issuance upon the
conversion of outstanding shares of Preferred Stock and shares of Preferred
Stock issuable upon conversion of outstanding warrants, 386,000 shares are
reserved for unexercised options granted to employees and members of the Board
of Directors under the 1995 Plan, 1,048,500 shares are reserved for unexercised
warrants and options, 932,444 shares are reserved for issuance under the
Agreement and Plan of Merger between the Company and Videssence, Inc. in the
event certain earnings targets are met. Accordingly, as of October 3, 1997,
Netter Digital has issued and/or was obligated to hold in reserve an aggregate
of 5,868,545 shares of Common Stock. Further, the Company has reserved an
additional 114,000 shares of Common Stock for issuance under the 1995 Plan, and,
if the Company's 1997 Incentive Stock Plan and 1997 Directors' Stock Option Plan
(for a description of these plans see "Approval of 1997 Incentive Stock Option
Plan" and "Approval of 1997 Directors' Stock Option Plan" below) are approved at
the Annual Meeting, the Company will reserve an additional 950,000 shares of
Common Stock for issuance under these plans. As a result, Netter Digital needs
to increase its number of authorized shares of Common Stock to provide
sufficient shares in reserve to meet such existing and contingent obligations.

The proposed increase in authorized shares of Common Stock also will
enhance the Company's flexibility in connection with possible future actions,
such as acquisitions, financing transactions, stock splits, stock dividends and
such other corporate purposes that may arise. Having such authorized Common
Stock available for issuance in the future would give the Company greater
flexibility and would allow additional shares of Common Stock to be issued
without the expense and delay of obtaining the approval or consent of
stockholders at the same time such shares are needed. The Company is not
presently engaged in any negotiations with respect to the use of any shares of
the additional authorized capital stock, nor are there currently any
commitments, arrangements or understandings with respect to the issuance of such
shares.

Effect of Increasing the Authorized Number of Shares of Common Stock

The future issuance of additional shares of Common Stock may dilute the
existing stockholders' percentage ownership and may have a potential
anti-takeover effect by enhancing the ability of the Company to issue additional
shares which could be used to dilute the stock ownership of stockholders seeking
to control the Company. The Board of Directors is not aware of any present
efforts by and persons to accumulate Common Stock or to obtain control of the
Company, and the increase in the authorized number of shares of Common Stock is
not intended to be an anti-takeover device. The increase of authorized shares
of Common Stock will not alter the par value of the Common Stock or the rights
of stockholders. The Board of Directors cannot predict what effect the increase
in the authorized number of shares of Common Stock will have on the market price
of the Common Stock.

Appraisal Rights

Under the Delaware General Corporation Law, dissenting stockholders are not
entitled to appraisal rights with respect to the Company's proposed amendment to
its Certificate of Incorporation to increase the number of authorized shares of
Common Stock, and the Company will not provide stockholders with any such right.

Voting Requirement

Approval of the proposal to increase the number of authorized shares of
Common Stock requires the affirmative vote of the holders of stock representing
a majority of the votes entitled to be cast at the Meeting.

Messrs. Netter and Costa who own, in the aggregate, 1,930,730 shares of
Common Stock, representing 55.4% of the votes entitled to be cast at the Annual
Meeting, have advised the Board of Directors that they intend to vote all of
their shares in favor of the increase in the authorized number of shares of
Common Stock.

The Board recommends the stockholders vote "FOR" the increase in the
authorized number of shares of Common Stock.

APPROVAL OF 1997 INCENTIVE STOCK OPTION PLAN

Introduction

On August 29, 1997, the Board of Directors adopted, subject to stockholder
approval, the Netter Digital Entertainment, Inc. 1997 Incentive Stock Option
Plan (the "1997 Plan"). The 1997 Plan enables the Board of Directors to grant
to executive officers, key employees and consultants of the Company and its
subsidiaries, including employee directors, options to purchase shares of Common
Stock. The 1997 Plan provides that the maximum number of shares of Common Stock
issuable upon the exercise of options granted under the 1997 Plan (sometimes
called "Option Shares" herein) is limited to 600,000.

The Board of Directors believes the opportunity to receive options under
the 1997 Plan provides an important incentive to employees to make significant
and extraordinary contributions to the long-term performance and growth of the
Company. While the Company currently has in place the 1995 Plan, as a result of
prior grants made under the 1995 Plan, there were only 114,000 Option Shares
available for future grants as of September 17, 1997. Accordingly, the Board of
Directors recommends that stockholders vote "FOR" the 1997 Plan in order to
assure that the Company will have available sufficient options and Option Shares
to serve as a vehicle for attracting and retaining employees of exceptional
ability.

Messrs. Netter and Costa, who own, in the aggregate, 1,930,730 shares of
Common Stock, representing 55.4% of the votes entitled to be cast at the Annual
Meeting, have advised the Board of Directors that they intend to vote all of
their shares in favor of the 1997 Plan.

The full text of the 1997 Plan is set forth as Appendix B hereto, and
stockholders are urged to refer to it for a complete description of the 1997
Plan. The summary of the principal features of the 1997 Plan which follows is
qualified in its entirety by reference to the complete text of the 1997 Plan.

Principal Features of the Plan

Stock options granted under the 1997 Plan are intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), if so designated on the date of
grant. Stock options that are not designated or do not qualify as incentive
stock options are nonstatutory stock options and are not eligible for the tax
benefits applicable to incentive stock options.

No stock options may be granted under the 1997 Plan after August 28, 2007.
If a stock option expires, terminates or is canceled for any reason without
having been exercised in full, the shares of Common Stock not purchased
thereunder are available for future grants.

The 1997 Plan is administered by the Board of Directors. Employee
directors are eligible to receive awards under the 1997 Plan. Non-employee
directors are eligible to receive awards under the 1997 Directors' Stock Option
Plan (see "Approval of 1997 Directors' Stock Option Plan" below), but not under
the 1997 Plan. The Board of Directors has complete authority, subject to the
express provisions of the 1997 Plan, to approve the employees nominated by the
management of the Company to be granted stock options, to determine the number
of stock options to be granted to employees (up to a maximum of 300,000 stock
options per employee), to set the terms and conditions of stock options, to
remove or adjust any restrictions and conditions upon stock options and to adopt
such rules and regulations, and to make all other determinations, deemed
necessary or desirable for the administration of the 1997 Plan.

In selecting optionees, consideration is given to factors such as
employment position, duties and responsibilities, ability, productivity, length
of service, morale, interest in the Company and supervisor recommendations.
Awards may be granted to the same employee on more than one occasion. Each
stock option is evidenced by a written option agreement in a form approved by
the Board of Directors.

The purchase price (the "Exercise Price") of Option Shares must be at least
equal to the fair market value of such shares on the date the stock option is
granted. The determination of fair market value of Option Shares is based on
Nasdaq quotations. The stock option term is for a period of ten years from the
date of grant or such shorter period as is determined by the Board of Directors.
Each stock option may provide that it is exercisable in full or in cumulative or
noncumulative installments, and each stock option is exercisable from the date
of grant or any later date specified therein, all as determined by the Board of
Directors. The Board of Directors' authority to take certain actions under the
1997 Plan includes authority to accelerate vesting schedules and to otherwise
waive or adjust restrictions applicable to the exercise of stock options.

Each stock option may be exercised in whole or in part (but not as to
fractional shares) by delivering a notice of exercise to the Company, together
with payment of the Exercise Price. The Exercise Price may be paid in cash, by
cashier's or certified check or, if the Board of Directors authorizes payment in
stock, by surrender of previously owned shares of Common Stock.

Except as otherwise provided below, an optionee may not exercise a stock
option unless from the date of grant to the date of exercise the optionee
remains continuously in the employ of the Company. If the employment of the
optionee terminates for any reason other than death or disability, the stock
options then currently exercisable remain exercisable for a period of three
months after such termination of employment, subject to earlier expiration at
the end of their fixed term. If the employment of the optionee terminates
because of death, the stock options then currently exercisable remain in full
force and effect and may be exercised at any time during the option term
pursuant to the provisions of the 1997 Plan. If the employment of the optionee
terminates because of disability, the stock options then currently exercisable
remain exercisable for a period of twelve months after such termination of
employment, subject to earlier expiration at the end of their fixed term.

An employee may receive incentive stock options covering Option Shares of
any value, provided that the value of all Option Shares subject to one or more
of such incentive stock options which are first exercisable in any one calendar
year may not exceed the maximum amount permitted under Section 422 of the Code
(currently $100,000).

Each stock option granted under the 1997 Plan is exercisable during an
optionee's lifetime only by such optionee or by such optionee's legal
representative. Incentive stock options are transferable only by will or the
laws of intestate succession, but the Board of Directors has the discretion to
grant non-statutory stock options free of such restrictions.

The Board of Directors may at any time suspend, amend or terminate the 1997
Plan. Stockholder approval is required, however, to materially increase the
benefits accruing to optionees, materially increase the number of securities
which may be issued (except for adjustments under anti-dilution clauses) or
materially modify the requirements as to eligibility for participation. The
1997 Plan authorizes the Board of Directors to include in stock options
provisions which permit the acceleration of vesting in the event of a change in
control of the Company resulting from certain occurrences.

To date, no stock options have been granted under the 1997 Plan. Future
grants under the 1997 Plan will be made at the discretion of the Board of
Directors and are not yet determinable.

The Company intends to maintain a current Registration Statement on Form
S-8 under the Securities Act of 1933, as amended (the "Securities Act") with
respect to the Option Shares issuable upon the exercise of stock options granted
under the 1997 Plan.

Summary of Federal Income Tax Consequences

The following discussion is a short summary of the Federal income tax
consequences of the grant and exercise of stock options under the 1997 Plan.

Tax Consequences to Optionees

Incentive Stock Options. An optionee recognizes no taxable income upon the
grant of an incentive stock option. In addition, there will be no taxable
income recognized by the optionee at the time of exercise of an incentive stock
option provided the optionee has been in the employ of the Company at all times
during the period beginning on the date of grant and ending on the date three
months before the date of exercise.

Gain recognized upon a disposition of the Option Shares generally will be
taxable as long-term capital gain if the shares are not disposed of within (i)
two years from the date of grant of the incentive stock option and (ii) one year
from the exercise date. If both of these conditions are not satisfied, the
disposition is a "disqualifying disposition". In that event, gain equal to the
excess of the fair market value of the Option Shares at the exercise date over
the Exercise Price generally will be taxed as ordinary income and any further
gain will be taxed as long-term capital gain if the shares were held more than
12 months. Different rules apply if an optionee exercises a stock option by
surrendering shares of Common Stock which were previously acquired upon the
exercise of an incentive stock option and with respect to which the optionee has
not satisfied certain holding periods.

Shares acquired upon the exercise of an incentive stock option by the
payment of cash will have a basis equal to the Exercise Price of the stock
option. Different rules apply if an optionee exercises a stock option by
surrendering previously owned shares of Common Stock.

Upon the exercise of an incentive stock option, an amount equal to the
excess of the fair market value of the Option Shares at the exercise date over
the Exercise Price is treated as alternative minimum taxable income for purposes
of the alternative minimum tax.

Incentive stock options exercised by an optionee who has not satisfied the
applicable requirements as to continuous employment do not qualify for the tax
treatment discussed above. Instead, the exercise of such options will be
subject to the rules which apply to the exercise of nonstatutory stock options.

Nonstatutory Stock Options. An optionee recognizes no taxable income upon
the grant of a nonstatutory stock option. In general, upon the exercise of a
nonstatutory stock option, the optionee will recognize ordinary income in an
amount equal to the excess of the fair market value of the Option Shares on the
exercise date over the Exercise Price.

Shares acquired upon the exercise of a nonstatutory stock option by the
payment of cash will have a basis equal to their fair market value on the
exercise date and have a holding period beginning on the exercise date.
Different rules apply if an optionee exercises a stock option by surrendering
previously owned shares of Common Stock. Gain or loss recognized on a
disposition of the Option Shares generally will qualify as long-term capital
gain or loss if the shares have a holding period of more than 12 months.

The Company generally must collect and pay withholding taxes upon the
exercise of a nonstatutory stock option. Withholding tax obligations arising
from the exercise of a nonstatutory stock option may be satisfied by any payment
method deemed appropriate by the Board of Directors, including by withholding
from the Option Shares otherwise issuable upon the exercise of the nonstatutory
stock option the number of Option Shares having a fair market value equal to the
amount of the withholding tax obligation. If Option Shares are withheld upon
exercise in order to satisfy withholding taxes, such withholding will be treated
as though the optionee had received the withheld Option Shares upon the exercise
of the nonstatutory stock option and immediately sold them to the Company at
their fair market value on the exercise date. The optionee accordingly must
recognize ordinary income in an amount equal to the excess of the fair market
value of the withheld Option Shares on the exercise date over the amount he or
she is deemed to have paid for them, in addition to the ordinary income
attributable to the Option Shares which were not withheld.

Tax Consequences to the Company

The Company generally is allowed an income tax deduction for amounts that
are taxable to optionees as ordinary income under the foregoing rules, if it
satisfies all Federal income tax withholding requirements. Amounts deemed to be
compensation to executive officers as a result of the exercise of stock options
or the sale of Option Shares will not be taken into account in determining
whether the compensation paid to the executive exceeds the limits on
deductibility imposed under Section 162(m) of the Code.

APPROVAL OF 1997 DIRECTORS' STOCK OPTION PLAN

Introduction

On August 29, 1997, the Board of Directors adopted, subject to stockholder
approval, the Netter Digital Entertainment, Inc. 1997 Directors' Stock Option
Plan (the "1997 Directors' Plan"). The 1997 Directors' Plan is intended to
allow each non-employee director ("Non-Employee Director") of the Company to
receive annual grants of options to purchase shares of Common Stock.
Non-Employee Directors are not eligible to participate in the 1997 Plan.

The purpose of the 1997 Directors' Plan is to promote an increased
incentive and personal interest in the welfare of the Company by those
individuals who are primarily responsible for shaping the long-range plans of
the Company, to assist the Company in attracting and retaining on the Board
persons of exceptional competence and to provide compensation for services as a
director of the Company. Stock options may not be granted under the 1997
Directors' Plan to any director who also is an employee of the Company or any of
its subsidiaries.

The Company currently does not pay any cash compensation to Non-Employee
Directors in consideration of their regular services as members of the Board of
Directors; however, Non-Employee Directors are reimbursed for out-of-pocket
expenses incurred in their attendance at Board of Directors or committee
meetings. The Board of Directors believes compensating Non-Employee Directors
through the grant of stock options aligns the interests of the Non-Employees
Directors and stockholders and is in the best interests of the Company and its
stockholders. Further, the Company has amended the 1995 Plan to eliminate the
provision for further option grants thereunder to Non-Employee Directors.
Accordingly, the Board of Directors recommends that stockholders vote "FOR" the
1997 Directors' Plan in order to assure that the Company will have available
sufficient options and option shares to serve as a vehicle for attracting and
retaining on its Board persons of exceptional competence and provide
compensation for service as a director of the Company.

The full text of the 1997 Directors' Plan is set forth as Appendix C
hereto, and stockholders are urged to refer to it for a complete description of
the 1997 Directors' Plan. The summary of the principal features of the 1997
Directors' Plan which follows is qualified in its entirety by reference to the
complete text of the 1997 Directors' Plan.

Principal Features of the Plan

The 1997 Directors' Plan provides for annual grants of stock options to
each Non-Employee Director. Pursuant to the provisions of the 1997 Directors'
Plan, (a) each current Non-Employee Director, upon his or her reelection to the
Board of Directors at the Annual Meeting, will be granted an Initial Stock
Option ("Initial Stock Option") to purchase 10,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date of
grant and (b) each new Non-Employee Director, on the date of his or her election
to the Board of Directors (whether elected by the stockholders or the Board of
Directors), will be granted an Initial Stock Option to purchase 30,000 shares of
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date of grant. In addition to receiving an Initial Stock Option,
each Non-Employee Director continuing to serve on the Board automatically will
be granted an additional stock option to purchase 10,000 shares of Common Stock,
at an exercise price equal to the fair market value of the Common Stock on the
date of grant, on each successive anniversary of the date on which the
Non-Employee Director was granted an Initial Stock Option; provided, however,
that in no event shall any Non-Employee Director receive more than four such
additional stock options. The determination of fair market value of the Common
Stock is based on Nasdaq quotations.

A stock option, once granted to a Non-Employee Director, will remain in
effect in accordance with its terms, even if the Non-Employee Director later
enters the employ of the Company or one of its subsidiaries. However, if a
Non-Employee Director becomes an employee of the Company or one of its
subsidiaries, he or she no longer will be eligible for future grants under the
1997 Directors' Plan. Consulting services performed on behalf of the Company by
a Non-Employee Director will not affect his or her eligibility to participate in
the Plan.

A maximum of 350,000 shares of Common Stock may be issued under the 1997
Directors' Plan. If a stock option expires, terminates or is canceled for any
reason without having been exercised in full, the shares of Common Stock not
purchased thereunder are available for future grants. No stock options may be
granted under the 1997 Directors' Plan after August 28, 2007.

The stock option term is for a period of five years from the date of grant.
Each stock option may be exercised in whole or in part by delivering it for
surrender or endorsement to the Company, together with payment of the exercise
price. The exercise price may be paid in cash, by cashier's or certified check
or, if authorized by the Board or a committee thereof, by surrender of
previously owned shares of Common Stock.

Except as otherwise provided below, a Non-Employee Director may not
exercise a stock option unless from the date of grant to the date of exercise
the Non-Employee Director continuously serves on the Board of Directors. Upon
the termination of the service of a Non-Employee Director as a director of the
Company for any reason, the stock options then currently exercisable remain
exercisable for a period of 90 days after the date of such termination, subject
to earlier termination at the end of their fixed term.

Each stock option granted under the 1997 Directors' Plan is exercisable
during a Non-Employee Director's lifetime only by the Non-Employee Director or
by the Non-Employee Director's legal representative. Stock options are subject
to such restrictions on transferability as the Board of Directors, in its sole
discretion, may impose.

The 1997 Directors' Plan is administered by the Board of Directors or by a
duly authorized committee of the Board. The Board or its duly authorized
committee has complete authority, subject to the express provisions of the 1997
Directors' Plan, to adopt such rules and regulations, and to make all other
determinations, deemed necessary or desirable for the administration of the 1997
Directors' Plan. However, neither the Board nor any committee has any
discretion as to (i) the selection of the directors to whom stock options may be
granted, (ii) the number of stock options that may be granted to each director,
(iii) the times at which or the periods within which stock options may be
exercised, or (iv) except for the determination of fair market value in
accordance with the provisions of the 1997 Directors' Plan, the price at which
stock options may be exercised.

The Board of Directors may at any time suspend, amend or terminate the 1997
Directors' Plan. Stockholder approval is required, however, to materially
increase the benefits accruing to Non-Employee Directors, materially increase
the number of securities which may be issued (except for adjustments under
anti-dilution clauses) or materially modify the requirements as to eligibility
for participation.

The following table sets forth certain information regarding the benefits
to be received under the 1997 Directors' Plan by all non-executive directors as
a group. No other directors, and no executive officers or other employees, are
eligible to participate in the 1997 Directors' Plan.

New Plan Benefits
1997 Directors' Stock Option Plan

Dollar Value Number of Units
Non-executive director
group (3 persons) (1) 50,000(2)

- -----------------------------
(1) The dollar value of the stock options granted under the Directors' Plan
depends on the excess of the market price of the Common Stock on the
date the option is exercised over the exercise price and cannot be
determined at this time.
(2) Represents (a) the stock options to purchase 10,000 shares of Common
Stock to be granted to the current Non-Employee Directors who have been
nominated to serve on the Board, upon their re-election at the Annual
Meeting and (b) the stock options to purchase 30,000 shares of Common
Stock to be granted to the new Non-Employee Director who has been
nominated to serve on the Board, upon his election at the Annual
Meeting. In addition, each Non-Employee Director who continues to serve
on the Board and who does not enter into the employ of the Company or
one of its subsidiaries will be granted an additional stock option to
purchase 10,000 shares of Common Stock on each of the first four
successive anniversaries of the date of grant of his
or her initial stock option.

The Company intends to maintain a current Registration Statement on Form
S-8 under the Securities Act with respect to the shares of Common Stock issuable
upon the exercise of stock options granted under the 1997 Directors' Plan.

Summary of Federal Income Tax Consequences

The following discussion is a short summary of the Federal income tax
consequences of the grant and exercise of stock options under the 1997
Directors' Plan.

Tax Consequences to Non-Employee Directors

A Non-Employee Director recognizes no taxable income upon the grant of a
stock option under the 1997 Directors' Plan. In general, upon the exercise of
the option, the Non-Employee Director will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares purchased on
the exercise date over the exercise price.

Shares acquired upon the exercise of an option by the payment of cash will
have a basis equal to their fair market value on the exercise date and have a
holding period beginning on the exercise date. Different rules apply if a
Non-Employee Director exercises a stock option by surrendering previously owned
shares of Common Stock. Gain or loss recognized on a disposition of the shares
issuable upon exercise of an option generally will qualify as long-term capital
gain or loss if the shares have a holding period of more than 12 months.

Withholding tax obligations arising from the exercise of an option under
the 1997 Directors' Plan may be satisfied by any payment method deemed
appropriate by the Board, including by withholding from the shares of Common
Stock otherwise issuable upon the exercise of the stock option the number of
shares having a fair market value equal to the amount of the withholding tax
obligation. If shares are withheld upon exercise in order to satisfy
withholding taxes, such withholding will be treated as though the Non-Employee
Director had received the withheld shares upon the exercise of the stock option
and immediately sold them to the Company at their fair market value on the
exercise date. The Non-Employee Director accordingly must recognize ordinary
income in an amount equal to the excess of the fair market value of the withheld
shares on the exercise date over the amount he is deemed to have paid for them,
in addition to the ordinary income attributable to the shares which were not
withheld.

Tax Consequences to the Company

SELECTION OF AUDITORS

The Board of Directors has selected the accounting firm of Feldman Radin &
Co., P.C. to serve as independent auditors for the current fiscal year. Feldman
Radin & Co., P.C. has served as the Company's independent auditors since 1995.

It is anticipated that representatives of Feldman Radin & Co., P.C. will be
present at the Annual Meeting, and such representatives will be given the
opportunity to make a statement, if they so desire, and to answer appropriate
questions.

MISCELLANEOUS

Stockholder Proposals

Stockholder proposals intended to be presented at the 1998 Annual Meeting
of Stockholders must be received by Netter Digital by July 18, 1998 to be
considered by Netter Digital for inclusion in Netter Digital's proxy statement
and form of proxy relating to that meeting. Such proposals should be directed
to the attention of the Secretary, Netter Digital Entertainment, Inc., 5125
Lankershim Blvd., North Hollywood, California 91601.

Compliance with Section 16(a) of the Securities Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires Netter
Digital's officers and directors, and persons who own more than ten percent of a
registered class of Netter Digital's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten percent stockholders are required by
the Securities and Exchange Commission regulations to furnish Netter Digital
with copies of all Section 16(a) forms they file.

Based solely on a review of the copies of such forms furnished to Netter
Digital, or written representations that no Forms 5 were required, Netter
Digital believes that, during fiscal 1997, all Section 16(a) filing requirements
were complied with in regards to its officers, directors and greater than
ten-percent beneficial owners.

Other Matters

Neither Netter Digital nor any of the persons named as proxies knows of any
matters to be voted on at the Annual Meeting other than as described in this
Proxy Statement. However, if any other matters are properly presented at the
meeting, it is the intention of the persons named as proxies to vote in
accordance with their judgment on such matters, subject to direction by the
Board of Directors.

The 1997 Annual Report to Stockholders accompanies this Proxy Statement,
but is not to be deemed a part of the proxy soliciting material.

While you have the matter in mind, please complete, sign and return the
enclosed proxy card.

APPENDIX A

RESOLVED, that the Certificate of Incorporation of this corporation shall
be amended so that Article 4 reads in its entirety as follows:

"4. The total number of shares of stock which the corporation shall have
authority to issue is 22,000,000 shares of which 20,000,000 shares shall be
Common Stock, with the par value of One Cent ($.01) per share, and 2,000,000
shares shall be Preferred Stock, with the par value of One-Tenth of One Cent
($.001) per share, amounting in the aggregate to Two Hundred Two Thousand
Dollars ($202,000)."

APPENDIX B

NETTER DIGITAL ENTERTAINMENT, INC.
1997 INCENTIVE STOCK OPTION PLAN

1. Purpose. This Netter Digital Entertainment, Inc., 1997 Incentive
-------
Stock Option Plan (the "Plan") is intended to allow designated employees,
executive officers and consultants, including employee directors, (all of whom
are sometimes collectively referred to herein as "Employees") of Netter Digital
Entertainment, Inc., a Delaware corporation ("Netter Digital"), and Sub-
sidiaries which it may have from time to time (Netter Digital and such
Subsidiaries being together referred to herein as the "Company") to receive
certain options under the Plan ("Stock Options") to purchase Netter Digital's
common stock, $.01 par value per share ("Common Stock"), as herein provided.
"Subsidiary" shall mean each corporation which is a "subsidiary corporation" of
Netter Digital, within the definition contained in Section 424(f) of the
Internal Revenue Code of 1986, as amended (the "Code"). The purpose of the Plan
is to provide Employees with additional incentives to make significant and
extraordinary contributions to the long-term performance and growth of the
Company and to attract and retain Employees of exceptional ability.

2. Administration.
--------------
2.1 The Plan shall be administered by the Board of Directors of
Netter Digital (the "Board").

2.2 The Board shall have full and complete authority, in its
discretion, but subject to the express provisions of the Plan: to approve the
Employees nominated by the management of the Company to be granted Stock
Options; to determine the number of Stock Options to be granted to an Employee;
to determine the time or times at which Stock Options shall be granted; to
establish the terms and conditions upon which Stock Options may be exercised; to
remove or adjust any restrictions and conditions upon Stock Options; to specify,
at the time of grant, provisions relating to the exercisability of Stock Options
and to accelerate or otherwise modify the exercisability of any Stock Options;
to reprice Stock Options; and to adopt such rules and regulations and to make
all other determinations deemed necessary or desirable for the administration of
the Plan. All interpretations and constructions of the Plan by the Board, and
all of its actions hereunder, shall be binding and conclusive on all persons for
all purposes.

2.3 The Company hereby agrees to indemnify and hold harmless each
Board member and each employee of the Company, and the estate and heirs of such
Board member or employee, against all claims, liabilities, expenses, penalties,
damages or other pecuniary losses, including legal fees, which such Board member
or employee or his or her estate or heirs may suffer as a result of his or her
responsibilities, obligations or duties in connection with the Plan, to the
extent that insurance, if any, does not cover the payment of such items.

3. Eligibility and Participation. Employees eligible under the Plan
-----------------------------
shall be approved by the Board from those Employees who, in the opinion of the
management of the Company, are in positions which enable them to make
significant and extraordinary contributions to the long-term performance and
growth of the Company. In selecting Employees to whom Stock Options may be
granted, consideration shall be given to factors such as employment position,
duties and responsibilities, ability, productivity, length of service, morale,
interest in the Company and recommendations of supervisors.

4. Grants. The Board may grant Stock Options in such amounts, at such
------
times, and to such Employees nominated by the management of the Company as the
Board, in its discretion, may determine; provided, however, that the maximum
number of shares of Common Stock for which Stock Options may be granted to any
one Employee shall be 300,000. Stock Options granted under the Plan shall
constitute "incentive stock options" within the meaning of Section 422 of the
Code, if so designated by the Board on the date of grant. The Board shall also
have the discretion to grant Stock Options which do not constitute incentive
stock options and any such Stock Options shall be designated non-statutory stock
options by the Board on the date of grant. The aggregate fair market value
(determined as of the time an incentive stock option is granted) of the Common
Stock with respect to which incentive stock options are exercisable for the
first time by any Employee during any one calendar year (under all plans of the
Company and any parent or subsidiary of the Company) may not exceed the maximum
amount permitted under Section 422 of the Code (currently $100,000.00).
Non-statutory stock options shall not be subject to the limitations relating to
incentive stock options contained in the preceding sentence. Subject to the
provisions of paragraph 11 hereof, the number of shares of Common Stock issued
and issuable pursuant to the exercise of Stock Options granted hereunder shall
not exceed 600,000. Each Stock Option shall be evidenced by a written agreement
(the "Option Agreement") in a form approved by the Board, which shall be
executed on behalf of the Company and by the Employee to whom the Stock Option
is granted. If a Stock Option expires, terminates or is cancelled for any
reason without having been exercised in full, the shares of Common Stock not
purchased thereunder shall again be available for purposes of the Plan.

5. Purchase Price. The purchase price (the "Exercise Price") of shares
--------------
of Common Stock subject to each Stock Option ("Option Shares") shall equal the
fair market value ("Fair Market Value") of such shares on the date of grant of
such Stock Option. Notwithstanding the foregoing, the Exercise Price of Option
Shares subject to an incentive stock option granted to an Employee who at the
time of grant owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of any parent or Subsidiary
shall be at least equal to 110% of the Fair Market Value of such shares on the
date of grant of such Stock Option. The Fair Market Value of a share of Common
Stock on any date shall be equal to the closing price of the Common Stock for
the last preceding day on which Netter Digital's shares were traded, and the
method for determining the closing price shall be determined by the Board.

6. Option Period. The Stock Option period (the "Term") shall commence
-------------
on the date of grant of the Stock Option and shall be ten years or such shorter
period as is determined by the Board. Notwithstanding the foregoing, the Term
of an incentive stock option granted to an Employee who at the time of grant
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of any parent or subsidiary shall not exceed
five years. Each Stock Option shall provide that it is exercisable over its
term in such periodic installments as the Board in its sole discretion may
determine. Such provisions need not be uniform. If an Employee shall not in
any period purchase all of the Option Shares which the Employee is entitled to
purchase in such period, the Employee may purchase all or any part of such
Option Shares at any time prior to the expiration of the Stock Option.

7. Exercise of Options.
-------------------
7.1 Each Stock Option may be exercised in whole or in part (but not
as to fractional shares) by delivering it for surrender or endorsement to the
Company, attention of the Corporate Secretary, at the principal office of the
Company, together with payment of the Exercise Price and an executed Notice and
Agreement of Exercise in the form prescribed by paragraph 7.2. Payment may be
made in cash, by cashier's or certified check or by surrender of previously
owned shares of the Company's Common Stock valued pursuant to paragraph 5 (if
the Board authorizes payment in stock).

7.2 Exercise of each Stock Option is conditioned upon the
agreement of the Employee to the terms and conditions of this Plan and of such
Stock Option as evidenced by the Employee's execution and delivery of a Notice
and Agreement of Exercise in a form to be determined by the Board in its
discretion. Such Notice and Agreement of Exercise shall set forth the agreement
of the Employee that: (a) no Option Shares will be sold or other-wise
distributed in violation of the Securities Act of 1933 (the "Securities Act")
or any other applicable federal or state securities laws, (b) each Option Share
certificate may be imprinted with legends reflecting any applicable federal and
state securities law restrictions and conditions, (c) the Company may comply
with said securities law restrictions and issue "stop transfer" instructions to
its Transfer Agent and Registrar without liability, (d) if the Employee (a
"Section 16 Reporting Person") is subject to the reporting requirements of
Section 16(a) of the Securities and Exchange Act of 1934 ("Exchange Act"), the
Employee will furnish to the Company a copy of each Form 4 or Form 5 filed by
said Employee and will timely file all reports required under federal securities
laws, and (e) the Employee will report all sales of Option Shares to
the Company in writing on a form prescribed by the Company.

7.3 No Stock Option shall be exercisable unless and until any
applicable registration or qualification requirements of federal and state
securities laws, and all other legal requirements, have been fully complied
with. The Company will use reasonable efforts to maintain the effectiveness of
a Registration Statement under the Securities Act for the issuance of Stock
Options and shares acquired thereunder, but there may be times when no such
Registration Statement will be currently effective. The exercise of Stock
Options may be temporarily suspended without liability to the Company during
times when no such Registration Statement is currently effective, or during
times when, in the reasonable opinion of the Board, such suspension is necessary
to preclude violation of any requirements of applicable law or regulatory bodies
having jurisdiction over the Company. If any Stock Option would expire for any
reason except the end of its term during such a suspension, then, if the
exercise of such Stock Option is duly tendered before its expiration, such Stock
Option shall be exercisable and exercised (unless the attempted exercise is
withdrawn) as of the first day after the end of such suspension. The Company
shall have no obligation to file any Registration Statement covering resales of
Option Shares.

8. Continuous Employment. Except as provided in paragraph 10 below, an
---------------------
Employee may not exercise a Stock Option unless from the date of grant to the
date of exercise such Employee remains continuously in the employ of the
Company. For purposes of this paragraph 8, the period of continuous employment
of an Employee with the Company shall be deemed to include (without extending
the term of the Stock Option) any period during which such Employee is on leave
of absence with the consent of the Company, provided that such leave of absence
shall not exceed three (3) months and that such Employee returns to the employ
of the Company at the expiration of such leave of absence. If such Employee
fails to return to the employ of the Company at the expiration of such leave of
absence, such Employee's employment with the Company shall be deemed terminated
as of the date such leave of absence commenced. The continuous employment of an
Employee with the Company shall also be deemed to include any period during
which such Employee is a member of the Armed Forces of the United States,
provided that such Employee returns to the employ of the Company within ninety
(90) days (or such longer period as may be prescribed by law) from the date such
Employee first becomes entitled to discharge. If an Employee does not return to
the employ of the Company within ninety (90) days (or such longer period as may
be prescribed by law) from the date such Employee first becomes entitled to
discharge, such Employee's employment with the Company shall be deemed to have
terminated as of the date such Employee's military service ended.

9. Restrictions on Transfer. Incentive stock options granted under this
------------------------
Plan shall be transferable only by will or the laws of descent and distribution.
The Board shall have discretion to grant non-statutory stock options that are
not subject to the restrictions on transfer relating to incentive stock options
contained in the preceding sentence; provided, however, that non-statutory stock
options granted to a Section 16 Reporting Person shall be subject to such
restrictions on transfer as may be required to qualify for the exemption
provided for in Rule 16b-3 promulgated by the Securities and Exchange Commission
pursuant to the Exchange Act ("Rule 16b-3") or otherwise imposed by the Board in
its sole and absolute discretion. No interest of any Employee under the Plan
shall be subject to attachment, execution, garnishment, sequestration, the laws
of bankruptcy or any other legal or equitable process. Each Stock Option shall
be exercisable during an Employee's lifetime only by such Employee and, in the
case of non-statutory stock options, such Employee's permitted transferees.

10. Termination of Employment.
-------------------------
10.1 Subject to the discretion of the Board with respect to non-
statutory Stock Options, upon termination of an Employee's employment with the
Company by reason of death, all outstanding Stock Options to the extent
exercisable on the date of death of the Employee shall remain in full force and
effect and may be exercised pursuant to the provisions thereof at any time prior
to expiration at the end of the fixed term thereof. Upon termination of an
Employee's employment with the Company by reason of Disability, all outstanding
Stock Options to the extent exercisable on the date of termination of employment
may be exercised pursuant to the provisions thereof at any time until the
earlier of the end of the fixed term thereof and the expiration of twelve months
following termination of the Employee's employment. Unless otherwise provided
by the Board, all Stock Options to the extent not presently exercisable by such
Employee at the date of death or termination of employment by reason of
Disability shall terminate as of the date of death or such termination of
employment and shall not be exercisable thereafter.

10.2 Subject to the discretion of the Board with respect to non-
statutory Stock Options, upon the termination of the Employee's employment with
the Company for any reason other than the reasons set forth in paragraph 10.1
hereof, the Stock Option may be exercised during the period of three months
following the date of such termination of employment, but only to the extent
that such Stock Option was outstanding and exercisable on such date of
termination of employment. Unless otherwise provided by the Board, all Stock
Options to the extent not then presently exercisable by such Employee shall
terminate as of the date of such termination of employment and shall not be
exercisable thereafter.

10.3 For purposes of this Plan, "Disability" shall mean total
and permanent incapacity of an Employee, due to physical impairment or
legally established mental incompetence, to perform the usual duties of such
Employee's employment with the Company, which disability shall be
determined: (i) on medical evidence by a licensed physician designated by the
Board, or (ii) on evidence that the Employee has become entitled to receive
primary benefits as a disabled employee under the Social Security Act in effect
on the date of such disability.

11. Adjustments Upon Change in Capitalization.
-----------------------------------------
11.1 The number and class of shares subject to each outstanding
Stock Option, the Exercise Price thereof (but not the total price) and the
maximum number of Stock Options that may be granted under the Plan shall be
proportionately adjusted in the event of any increase or decrease in the number
of the issued shares of Common Stock which results from a split-up or
consolidation of shares, payment of a stock dividend or dividends exceeding a
total of five percent (5%) for which the record dates occur in any one fiscal
year, a recapitalization (other than the conversion of convertible securities
according to their terms), a combination of shares or other like capital
adjustment, so that upon exercise of the Stock Option, the Employee shall
receive the number and class of shares such Employee would have received had
such Employee been the holder of the number of shares of Common Stock for which
the Stock Option is being exercised upon the date of such change or increase or
decrease in the number of issued shares of the Company.

11.2 Upon a reorganization, merger or consolidation of the
Company with one or more corporations as a result of which Netter Digital is
not the surviving corporation or in which Netter Digital survives as a wholly-
owned subsidiary of another corporation, or upon a sale of all or substantially
all of the property of the Company to another corporation, or any dividend or
distribution to shareholders of more than ten percent (10%) of the Company's
assets, adequate adjustment or other provisions shall be made by the
Company or other party to such transaction so that there shall remain and/or
be substituted for the Option Shares provided for herein, the shares,
securities or assets which would have been issuable or payable in respect of or
in exchange for such Option Shares then remaining, as if the Employee had
been the owner of such Option Shares as of the applicable date. Any
securities so substituted shall be subject to similar successive adjustments.

11.3 In the sole discretion of the Board, Stock Options may include
provisions, on terms (which need not be uniform) authorized by the Board in its
sole discretion, that accelerate the Employees' rights to exercise Stock Options
upon a "Change in Control" (as defined by the Board in its sole discretion) of
the Company.

12. Withholding Taxes. The Company shall have the right at the time of
-----------------
exercise of any Stock Option to make adequate provision for any federal, state,
local or foreign taxes which it believes are or may be required by law to be
withheld with respect to such exercise ("Tax Liability"), to ensure the payment
of any such Tax Liability. The Company may provide for the payment of any Tax
Liability by any of the following means or a combination of such means, as
determined by the Board in its sole and absolute discretion in the particular
case: (i) by requiring the Employee to tender a cash payment to the Company,
(ii) by withholding from the Employee's salary, (iii) by withholding from the
Option Shares which would otherwise be issuable upon exercise of the Stock
Option that number of Option Shares having an aggregate fair market value
(determined in the manner prescribed by paragraph 5) as of the date the
withholding tax obligation arises that is equal to the Employee's Tax Liability
or (iv) by any other method deemed appropriate by the Board. Satisfaction of
the Tax Liability of a Section 16 Reporting Person may be made by the method of
payment specified in clause (iii) above upon satisfaction of such additional
conditions as the Board shall deem in its sole and absolute discretion as
appropriate in order for such withholding of Option Shares to qualify for the
exemption provided for in Section 16b-3 of the Exchange Act.

13. Relationship to Other Employee Benefit Plans. Stock Options granted
--------------------------------------------
hereunder shall not be deemed to be salary or other compensation to any Employee
for purposes of any pension, thrift, profit-sharing, stock purchase or any other
employee benefit plan now maintained or hereafter adopted by the Company.

14. Amendments and Termination. The Board of Directors may at any time
--------------------------
suspend, amend or terminate this Plan. No amendment or modification of this
Plan may be adopted, except subject to shareholder approval, which would
materially increase the number of securities which may be issued under this Plan
(except for adjustments pursuant to paragraph 11 hereof) or change the
designation of Employees eligible to receive incentive stock options under the
Plan.

15. Successors in Interest. The provisions of this Plan and the actions
----------------------
of the Board shall be binding upon all heirs, successors and assigns of the
Company and of Employees.

16. Other Documents. All documents prepared, executed or delivered in
---------------
connection with this Plan shall be, in substance and form, as established and
modified by the Board or by persons under its direction and supervision;
provided, however, that all such documents shall be subject in every respect to
the provisions of this Plan, and in the event of any conflict between the terms
of any such document and this Plan, the provisions of this Plan shall prevail.
All Stock Options shall be evidenced by written agreements executed by the
Company and the Employees to whom the Stock Options have been granted.

17. No Obligation to Continue Employment. This Plan and grants
------------------------------------
hereunder shall not impose any obligation on the Company to continue to employ
any Employee. Moreover, no provision of this Plan or any document executed or
delivered pursuant to this Plan shall be deemed modified in any way by any
employment contract between an Employee (or other employee) and the Company.

18. Misconduct of an Employee. Notwithstanding any other provision of
-------------------------
this Plan, if an Employee commits fraud or dishonesty toward the Company or
wrongfully uses or discloses any trade secret, confidential data or other
information proprietary to the Company, or intentionally takes any other action
materially inimical to the best interests of the Company, as determined by the
Board, in its sole and absolute discretion, such Employee shall forfeit all
rights and benefits under this Plan.

19. Term of Plan. This Plan was adopted by the Board effective August
------------
29, 1997. No Stock Options may be granted under this Plan after August 28,
2007.

20. Governing Law. This Plan shall be construed in accordance with, and
-------------
governed by, the laws of the State of Delaware.

21. Shareholder Approval. No Stock Option shall be exercisable unless
--------------------
and until the shareholders of the Company have approved this Plan and all other
legal requirements have been fully complied with.

22. Privileges of Stock Ownership. The holder of a Stock Option shall
-----------------------------
not be entitled to the privileges of stock ownership as to any shares of the
Company common stock not actually issued to such holder.

IN WITNESS WHEREOF, this Plan has been executed effective as of the 29th
day of August, 1997.

NETTER DIGITAL ENTERTAINMENT, INC.

By
--------------------------------

Its
-------------------------------

APPENDIX C

NETTER DIGITAL ENTERTAINMENT, INC.
1997 DIRECTORS' STOCK OPTION PLAN

1. Purpose.
-------

This Netter Digital Entertainment, Inc. 1997 Directors' Stock Option Plan
(the "Plan") is intended to promote the best interests of Netter Digital
Entertainment, Inc., a Delaware corporation ("Netter Digital"), and its
stockholders by providing to each member of Netter Digital's Board of Directors
(the "Board") who is a Non-Employee Director (as defined in paragraph 3 herein)
the opportunity to acquire a proprietary interest in Netter Digital by receiving
options ("Stock Options") to purchase Netter Digital's common stock, $.01 par
value ("Common Stock"), as herein provided. The Plan is intended to promote an
increased incentive and personal interest in the welfare of Netter Digital by
those individuals who are primarily responsible for shaping the long-range plans
of Netter Digital, assist Netter Digital in attracting and retaining on its
Board persons of exceptional competence and provide compensation for service as
a director of Netter Digital.

2. Administration.
--------------

2.1 The Plan shall be administered by the Board or by a duly
authorized committee of the Board. Unless and until the Board specifically
delegates administration of the Plan to a committee of the Board empowered to
administer the Plan, all references in the Plan to the "Committee" shall mean
the Board.

2.2 The Committee shall have no discretion as to (a) the selection
of directors to whom Stock Options may be granted, (b) the number of Stock
Options granted to each director, (c) the times at which or the periods within
which Stock Options may be exercised, or (d) except to the limited extent
provided in paragraph 5, the price at which Stock Options may be exercised.
However, the Committee shall have full and complete authority, subject to the
express provisions of the Plan, to adopt such rules and regulations and to make
all other determinations that are deemed necessary or desirable for the
administration of the Plan. All interpretations and constructions of the Plan
by the Committee, and all of its actions hereunder, shall be binding and
conclusive on all persons for all purposes.

2.3 Netter Digital shall indemnify and hold harmless each Committee
member and each director and employee of Netter Digital, and the estate and
heirs of such Committee member, director or employee, against all claims,
liabilities, expenses, penalties, damages or other pecuniary losses, including
legal fees, which such Committee member, director or employee or his or her
estate or heirs may suffer as a result of his or her responsibilities,
obligations or duties in connection with the Plan, to the extent that insurance,
if any, does not cover the payment of such items.

3. Eligibility.
-----------

Each member of the Board who is not an employee of Netter Digital or any of
its Subsidiaries (as herein defined) or of any parent corporation of Netter
Digital (a "Non-Employee Director") automatically shall receive annual grants of
Stock Options under the Plan. Consulting services performed on behalf of Netter
Digital or any of its affiliates by a member of the Board will not affect his or
her eligibility to participate in the Plan. Eligibility shall be determined
with respect to each director reelected or first elected after this Plan is
adopted by the Board, on the date such director is so reelected or elected, as
the case may be, and on each anniversary thereof. A Stock Option, once granted
to a Non-Employee Director, shall remain in effect in accordance with its terms
even if the optionee later enters the employ of Netter Digital or a Subsidiary
or parent. "Subsidiary" shall mean each corporation which is a "subsidiary
corporation" of Netter Digital within the definition contained in Section 424(f)
of the Internal Revenue Code of 1986, as amended (the "Code").

4. Grants.
------

4.1 Each Non-Employee Director who is reelected after this Plan is
adopted by the Board shall be automatically granted an initial Stock Option
("Initial Stock Option") to purchase 10,000 shares of Common Stock on the date
of such reelection, and each Non-Employee Director who is first elected a
director after this Plan is adopted by the Board shall be automatically granted
an Initial Stock Option to purchase 30,000 shares of Common Stock on the date of
such election.

4.2 Each Non-Employee Director serving on the Board also
automatically shall be granted an additional Stock Option ("Additional Stock
Option") to purchase 10,000 shares of Common Stock on each successive
anniversary of the date on which the Non-Employee Director was granted an
Initial Stock Option, provided that the Non-Employee Director continues to
satisfy the eligibility requirements set forth in paragraph 3, and provided
further that in no event shall any Non-Employee Director be granted more than
four such Additional Stock Options.

4.3 Subject to the provisions of paragraph 11 of this Plan, the
number of shares of Common Stock issued and issuable upon the exercise of Stock
Options granted under this Plan shall not exceed 350,000.

5. Purchase Price.
--------------

The purchase price (the "Exercise Price") of shares of Common Stock subject
to each Stock Option ("Option Shares") shall equal the fair market value ("Fair
Market Value") of such shares on the date of grant (the "Date of Grant") of such
Stock Option. The Fair Market Value of a share of Common Stock on any date
shall be equal to the closing price of the Common Stock for the last preceding
day on which Netter Digital's shares were traded, and the method for determining
the closing price shall be determined by the Committee.

6. Option Period.
-------------

The term of each Stock Option shall commence on the Date of Grant and shall
be five years. Each Stock Option shall first be exercisable in full six months
and one day after the Date of Grant.

7. Exercise of Options.
-------------------

7.1 Each Stock Option may be exercised in whole or in part (but not
as to fractional shares) by delivering it for surrender or endorsement to Netter
Digital, attention of the Corporate Secretary, at Netter Digital's principal
office, together with payment of the Exercise Price and an executed Notice and
Agreement of Exercise in the form prescribed by paragraph 7.2. Payment may be
made in cash, by cashier's or certified check or by surrender of previously
owned shares of Netter Digital's Common Stock valued pursuant to paragraph 5 (if
the Committee authorizes payment in stock).

7.2 Exercise of each Stock Option is conditioned upon the
agreement of the Non-Employee Director to the terms and conditions of this Plan
and of such Stock Option as evidenced by the Non-Employee Director's execution
and delivery of a Notice and Agreement of Exercise in a form to be determined by
the Committee in its discretion. Such Notice and Agreement of Exercise shall
set forth the agreement of the Non-Employee Director that: (a) no Option Shares
will be sold or otherwise distributed in violation of the Securities Act of 1933
(the "Securities Act") or any other applicable federal or state securities laws;
(b) each Option Share certificate may be imprinted with legends reflecting any
applicable federal and state securities law restrictions and conditions; (c)
Netter Digital may comply with said securities law restrictions and issue "stop
transfer" instructions to its Transfer Agent and Registrar without liability;
and (d) each Non-Employee Director will furnish to Netter Digital a copy of each
Form 4 or Form 5 filed by said Non-Employee Director under Section 16(a) of the
Securities Exchange Act of 1934 (the "Exchange Act") and will timely file all
reports required under the federal securities laws.

7.3 No Stock Option shall be exercisable unless and until any
applicable registration or qualification requirements of federal and state
securities laws, and all other legal requirements, have been fully complied
with. Netter Digital will use reasonable efforts to maintain the effectiveness
of a Registration Statement under the Securities Act for the issuance of Stock
Options and shares acquired thereunder, but there may be times when no such
Registration Statement will be currently effective. The exercise of Stock
Options may be temporarily suspended without liability to Netter Digital during
times when no such Registration Statement is currently effective, or during
times when, in the reasonable opinion of the Committee, such suspension is
necessary to preclude violation of any requirements of applicable law or
regulatory bodies having jurisdiction over Netter Digital. If any Stock Option
would expire for any reason except the end of its term during such a suspension,
then, if the exercise of such Stock Option is duly tendered before its
expiration, such Stock Option shall be exercisable and exercised (unless the
attempted exercise is withdrawn) as of the first day after the end of such
suspension. Netter Digital shall have no obligation to file any Registration
Statement covering resales of Option Shares.

8. Continuous Directorship.
-----------------------

Except as provided in paragraph 10 below, a Non-Employee Director may not
exercise a Stock Option unless from the Date of Grant to the date of exercise
such Non-Employee Director continuously serves as a director of Netter Digital.

9. Restrictions on Transfer.
------------------------

Each Stock Option granted under this Plan shall be subject to such
restrictions on transfer as may be required to qualify for the exemption
provided for in Rule 16b-3 promulgated by the Securities and Exchange
Commission pursuant to the Exchange Act or otherwise imposed by the Board in its
sole discretion. No interest of any Non-Employee Director under the Plan shall
be subject to attachment, execution, garnishment, sequestration, the laws of
bankruptcy or any other legal or equitable process. Each Stock Option granted
under this Plan shall be exercisable during a Non-Employee Director's lifetime
only by such Non-Employee Director or by such Non-Employee Director's legal
representative.

10. Termination of Service.
----------------------

Upon the termination of the service of a Non-Employee Director as a
director of Netter Digital for any reason, (a) all Stock Options to the extent
then presently exercisable by such Non-Employee Director shall remain
exercisable only for a period of ninety (90) days after the date of such
termination of service and may be exercised pursuant to the provisions thereof,
including expiration at the end of the fixed term thereof, and (b) all Stock
Options to the extent not then presently exercisable by such Non-Employee
Director shall terminate as of the date of such termination of service and shall
not be exercisable thereafter.

11. Adjustments Upon Change in Capitalization.
-----------------------------------------

11.1 The number and class of shares subject to each outstanding
Stock Option, the Exercise Price thereof (but not the total price) and the
maximum number of Stock Options that may be granted under the Plan shall be
proportionately adjusted in the event of any increase or decrease in the number
of the issued shares of Common Stock which results from a split-up or
consolidation of shares, payment of a stock dividend or dividends exceeding a
total of five percent (5%) for which the record dates occur in any one fiscal
year, a recapitalization (other than the conversion of convertible securities
according to their terms), a combination of shares or other like capital
adjustment, so that upon exercise of the Stock Option, the Non-Employee Director
shall receive the number and class of shares such Non--Employee Director would
have received had such Non-Employee Director been the holder of the number of
shares of Common Stock for which the Stock Option is being exercised upon the
date of such change or increase or decrease in the number of issued shares of
Netter Digital.

11.2 Upon a reorganization, merger or consolidation of Netter
Digital with one or more corporations as a result of which Netter Digital is not
the surviving corporation or in which Netter Digital survives as a subsidiary of
another corporation, or upon a sale of all or substantially all of the property
of Netter Digital to another corporation, or any dividend or distribution to
stockholders of more than ten percent (10%) of Netter Digital's assets, adequate
adjustment or other provisions shall be made by Netter Digital or the other
party to such transaction so that there shall remain and/or be substituted for
the Option Shares provided for herein, the shares, securities or assets which
would have been issuable or payable in respect of or in exchange for such Option
Shares then remaining, as if the Non-Employee Director had been the owner of
such Option Shares as of the applicable date. Any securities so substituted
shall be subject to similar successive adjustments.

12. Withholding Taxes.
-----------------

Netter Digital shall have the right at the time of exercise of any Stock
Option to make adequate provision for any federal, state, local or foreign taxes
which it believes are or may be required by law to be withheld with respect to
such exercise ("Tax Liability"), to ensure the payment of any such Tax
Liability. Netter Digital may provide for the payment of any Tax Liability by
any of the following means or a combination of such means, as determined by the
Committee in its sole and absolute discretion in the particular case: (i) by
requiring the Non-Employee Director to tender a cash payment to Netter Digital;
(ii) by withholding from the Non-Employee Director's cash compensation; (iii) by
withholding from the Option Shares which would otherwise be issuable upon
exercise of the Stock Option that number of Option Shares having an aggregate
fair market value (determined in the manner prescribed by paragraph 5) as of the
date the withholding tax obligation arises that is equal to the Non-Employee
Director's Tax Liability; or (iv) by any other method deemed appropriate by the
Committee. Satisfaction of the Tax Liability of a Non-Employee Director may be
made by the method of payment specified in clause (iii) above upon satisfaction
of such additional conditions as the Committee shall deem in its sole and
absolute discretion as appropriate in order for such withholding of Option
Shares to qualify for the exemption provided for in Section 16b-3 of the
Exchange Act.

13. Amendments and Termination.
--------------------------

The Board of Directors may at any time suspend, amend or terminate this
Plan; provided, however, that the provisions of paragraphs 3, 4, 5 and 6 of this
Plan may not be amended more than once every six months, other than to comport
with changes in the Code or the Employee Retirement Income Security Act or the
rules and regulations thereunder. No amendment or modification of this Plan may
be adopted, except subject to stockholder approval, which would: (a) materially
increase the benefits accruing to Non-Employee Directors under this Plan; (b)
materially increase the number of securities which may be issued under this Plan
(except for adjustments pursuant to paragraph 11 hereof); or (c) materially
modify the requirements as to eligibility for participation in the Plan.

14. Successors in Interest.
----------------------

The provisions of this Plan and the actions of the Committee shall be
binding upon all heirs, successors and assigns of Netter Digital and of Non-
Employee Directors.

15. Other Documents.
---------------

All documents prepared, executed or delivered in connection with this Plan
shall be, in substance and form, as established and modified by the Committee or
by persons under its direction and supervision; provided, however, that all such
documents shall be subject in every respect to the provisions of this Plan, and
in the event of any conflict between the terms of any such document and this
Plan, the provisions of this Plan shall prevail.

16. Misconduct of a Non-Employee Director.
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Notwithstanding any other provision of this Plan, all unexercised Stock
Options held by a Non-Employee Director shall automatically terminate as of the
date his or her directorship is terminated, if such directorship is terminated
on account of any act of fraud, embezzlement, misappropriation or conversion of
assets or opportunities of Netter Digital. Upon termination of such Stock
Options, such Non-Employee Director shall forfeit all rights and benefits under
this Plan.

17. Term of Plan.
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This Plan was adopted by the Board on August 29, 1997. No Stock Options
may be granted under this Plan after August 28, 2007.

18. Governing Law.
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This Plan shall be construed in accordance with, and governed by, the laws
of the State of Delaware.

19. Privileges of Stock Ownership.
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The holder of a Stock Option shall not be entitled to the privileges of
stock ownership as to any shares of Netter Digital Common Stock not actually
issued to such holder.

IN WITNESS WHEREOF, this Plan has been executed on August 29, 1997.

NETTER DIGITAL ENTERTAINMENT, INC.

By:
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Its:
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