<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-K/A
                               (AMENDMENT NO. 1)
                                   (MARK ONE)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                                       OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
          For the transition period from _____________ to _____________

                        Commission file number 000-29642

                                FILM ROMAN, INC.

               (Exact name of registrant as specified in charter)

                   DELAWARE                              95-4585357
           (State or other jurisdiction                (I.R.S. Employer
         of incorporation or organization)           Identification Number)

      12020 CHANDLER BOULEVARD, SUITE 200
         NORTH HOLLYWOOD, CALIFORNIA                         91607
   (Address of principal executive offices)               (Zip Code)

     Registrant's telephone number, including area code:  (818) 761-2544

              Securities registered pursuant to 12(b) of the Act:
                                      NONE

              Securities registered pursuant to 12(g) of the Act:
                          COMMON STOCK, $.01 PAR VALUE
                                (Title of Class)

     Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10-K. [ X ]

     As of March 24, 1997, the aggregate market value of voting stock held by
nonaffiliates of the Registrant was approximately $6,549,400 (based upon the
last reported sales price of the Common Stock as reported by the Nasdaq National
Market).  Shares of Common Stock held by each executive officer, director,
holders of greater than 10% of the outstanding Common Stock of the Registrant
and persons or entities known to the Registrant to be affiliates of the
foregoing have been excluded in that such persons may be deemed to be
affiliates.  This assumption regarding affiliate status is not necessarily a
conclusive determination for other purposes.

     Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
at least the past 90 days.  YES [ X ]  NO [  ].

     As of March 24, 1997, 8,449,690 shares of Common Stock, par value $.01 per
share, were outstanding.

     The Exhibit Index appears on page S-2.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders are incorporated by reference to Items 11, 12 and 13 of Part III.
<PAGE>
 
                                     PART I

ITEM 1.     BUSINESS

OVERVIEW

  Film Roman, Inc. ("Film Roman" or the "Company") creates, develops, produces
and distributes high quality, family-oriented animated television programming.
Since the Company was founded by Phil Roman in 1984, it has become a leading
independent animation studio in North America by producing more animated series
for broadcast on the major networks of ABC, CBS, FOX and the USA Network during
the 1996-97 television season than any other independent animation studio.  The
Company produced a total of 10 animated series for the 1996-97 season (Bobby's
World, King of the Hill, The Mask (CBS), The Mask (syndication), Richie Rich,
The Simpsons, BRUNO the Kid, C-Bear and Jamal, Felix the Cat and Mortal Kombat)
and two specials (The Story of Santa Claus and The Magic Pearl), which are
currently airing (or aired) on ABC, CBS, FOX or the USA Network, as well as in
first-run syndication.  Additional previously-produced Film Roman series that
are currently airing during the 1996-97 television season include Garfield &
Friends, Mighty Max, The Critic and Klutter.  The Company has produced at least
three series each season for the major networks since 1990 and, in so doing, has
successfully competed against other independent studios, as well as the major
studios which have financial and other resources greater than the Company.
While major studios have become more vertically integrated in recent years by
combining distribution and production, the Company believes that it can compete
effectively by leveraging its success and position as an independent animation
studio into opportunities for growth and profitability.

  The Company believes that it has a reputation within the entertainment
industry as a reliable producer of high quality animated programming, making it
one of a select group of suppliers of animated programming to the major
networks.  This reputation in the animation industry is critical because
animated series are often ordered for production without the benefit of a pilot
episode.  As a result, programmers rely to a significant degree on a studio's
track record for producing high quality programming that is delivered on
schedule and within budget.  As of December 31, 1996, the Company had produced
almost 600 episodes of animated programming, and will have produced in excess of
that amount at the conclusion of the 1996-97 broadcast season.

HISTORY

  Phil Roman began his animation career in 1955 at The Walt Disney Company as an
assistant animator on Sleeping Beauty.  Over the next 30 years, Mr. Roman worked
at many of the major studios, including MGM Animation and Warner Bros. Cartoons,
and was an animator on such productions as The Cat in the Hat, How the Grinch
Stole Christmas, George of the Jungle, Popeye, Snoopy Come Home and Lord of the
Rings.  Mr. Roman also directed 13 Emmy-nominated Charlie Brown specials.

  From its inception in 1984, the Company quickly developed its reputation for
producing quality animation with the production of the Emmy award-winning
television special, Garfield In The Rough.  Based upon the success of that and
subsequent Garfield specials, the Company was engaged to produce a weekly half-
hour Garfield series on CBS which, in its second season, was expanded to a
weekly one-hour block.  In 1989, the Company, together with comedian Howie
Mandel, developed the concept for the series Bobby's World, which the Company
produced on a "fee-for-services" basis for Fox Children's Network.  Bobby's
World, in its seventh season, continues to be a highly-rated program.  As a
result of the Company's strong record of producing high quality animated series,
Gracie Films and Twentieth Television (a division of Twentieth Century Fox)
approached Film Roman in 1991 to produce on a "fee-for-services" basis the
successful Simpsons series, which had been previously produced by a competitor
of the Company.  At December 31, 1996, Film Roman had produced 105 episodes of
The Simpsons and has committed to deliver approximately 41 additional episodes,
including 22 for the 1997-98 season.

  Historically, the Company has produced substantially all of its programming
for third parties on a "fee-for-services" basis.  The Company has begun
producing programming for which it controls certain proprietary rights,
depending on the availability of such rights (including, for example,
international distribution and licensing and

                                       2
<PAGE>
 
merchandising rights).  Through the retention and exploitation of these
proprietary rights, the Company believes that it can earn an attractive return
on its investment and, at the same time, build a library of characters and
programs that will have lasting value.  Four of the 10 series the Company
produced for the 1996-97 television season are proprietary--Felix the Cat (CBS),
C-Bear and Jamal (FOX), BRUNO the Kid (syndication) and Mortal Kombat (USA
Network).  Blues Brothers: The Animated Series, which began production for the
1997-98 season, but whose production is in hiatus, is also proprietary.  See
"Item 7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Development."  As of March 31, 1997, the Company
had no commitments to produce any new episodes of proprietary programming for
the 1997-98 television season.

  The Company is a Delaware corporation with its principal executive offices
located at 12020 Chandler Boulevard, Suite 200, North Hollywood, California
91607, and its telephone number is (818) 761-2544.


STRATEGY

  Film Roman's business strategy is to:

  .  CREATE AND DEVELOP POPULAR CHARACTERS AND PROGRAMS.  The Company seeks to
     create and develop popular characters and programs that will form the
     foundation of enduring character and program franchises.  Because the
     Company was founded by an animator and has a corporate culture that
     emphasizes artistic integrity, the Company believes that it has
     consistently attracted some of the most creative artists and storytellers
     in the animation industry.  The Company believes that popular characters
     and program concepts, when creatively developed and artistically produced,
     have substantial value in many areas of exploitation, such as international
     distribution, licensing and merchandising, feature film and interactive
     rights.  Popular characters and programs also enhance the value of the
     Company's library and may provide opportunities for exploitation in the
     future as other means of exploitation emerge.  With its track record of
     producing high quality, popular programs, the Company believes it has the
     capacity to create successful character and program franchises.

  .  CONTINUE TO PURSUE PRODUCTION OF PROPRIETARY PROGRAMMING.  The Company
     intends to continue to pursue the production of programming for which it
     owns or controls some or all of the licensing and/or distribution rights
     ("proprietary" programming) while maintaining a base of "fee-for-services"
     programming.  The Company believes that its profits can be enhanced by
     retaining some or all of the proprietary rights to its characters and
     programs because the Company can better exploit these rights due to its
     superior understanding of its properties.  The Company can also optimize
     its investment in each of its character and program franchises by
     coordinating some or all licensing, merchandising, international
     distribution and other activities in order to maximize the value of such
     franchises.  Moreover, by controlling proprietary rights, the Company
     eliminates third party agency and distributor fees and, at the same time,
     may capture the profits such third parties would otherwise retain.  As of
     December 31, 1996, the Company had produced 73 half-hour episodes and 12
     one-hour episodes of proprietary programming.  As of March 31, 1997, the
     Company had no commitments to produce any new episodes of proprietary
     programming for the 1997-98 television season.

  .  EXPLOIT LICENSING AND MERCHANDISING RIGHTS ASSOCIATED WITH CURRENT AND
     FUTURE PROPRIETARY PROGRAMMING.  The Company intends to exploit the
     licensing and merchandising of its proprietary characters in order to
     generate revenue and to increase the popularity of its characters and
     programs.  By licensing its proprietary characters to select manufacturers
     and distributors of consumer products such as toys, apparel, school
     supplies, housewares and books, the Company seeks to capture a portion of
     the growing licensing and merchandising market which features entertainment
     properties, such as animated characters.  In 1996, this segment of the
     merchandising and licensing market had retail sales in the United States
     and Canada of approximately $16.7 billion.  Through December 31, 1996, the
     Company derived no significant revenue from these activities.

                                       3
<PAGE>
 
  .  CONTROL AND EXPAND INTERNATIONAL DISTRIBUTION.  The Company intends to
     generate revenue from the distribution of its proprietary programming to
     the growing international market.  The Company's programs are currently
     broadcast in over 50 countries.  Due in part to the growth in the number of
     international television outlets, the global demand for animated
     programming continues to expand.  Recently, the Company has begun to
     distribute its proprietary programming internationally through its
     international division, rather than selling these international
     distribution rights to third parties.  By retaining these rights, the
     Company seeks to earn distribution fees while ensuring that its
     international distribution rights are properly managed, thereby increasing
     the popularity of its characters and programming worldwide.  For the years
     ended December 31, 1995 and 1996, the Company's international distribution
     activities generated revenues of $1.8 million and $7.2 million,
     respectively (or 5% and 15%, respectively, of total revenues for such
     periods).

  .  ESTABLISH STRATEGIC ALLIANCES WITH THIRD PARTIES. The Company intends to
     pursue business opportunities through which it can gain access to
     additional channels of domestic and international distribution and through
     which it can share more of the costs of developing and producing
     proprietary programming.  Such opportunities may, for example, involve co-
     development, co-financing and co-production arrangements that allow the
     Company to utilize its creative talent to develop popular characters with
     respect to which the Company retains a portion of the proprietary rights.
     In turn, the Company may grant the remaining proprietary rights to a
     strategic partner who, in exchange for such rights, may share more of the
     development and production costs with the Company or may provide the
     Company with access to new channels of distribution.

  .  PURSUE NEW BUSINESS OPPORTUNITIES WHILE MINIMIZING FINANCIAL RISK.  The
     Company intends to pursue new business opportunities with the goal of
     minimizing the Company's financial risk yet allowing for significant
     upside.  With the growth of new outlets and forms of entertainment, both
     domestically and internationally, Film Roman will continue to pursue new
     opportunities to exploit its characters as they arise.  The Company intends
     to pursue new business opportunities beyond the production of animated
     television programming, particularly those which capitalize on the
     Company's proprietary rights.  The Company intends to minimize the
     financial risk associated with such opportunities through various means,
     including the receipt by the Company of commitments from third parties to
     cover its direct costs of production prior to commencing production.
     Although the Company continuously explores new ideas and seeks new business
     opportunities outside animated television programming, the Company has no
     material obligations to produce new projects, except as described in this
     Report.

  .  BUILD A LIBRARY.  The Company is beginning to build a library of
     proprietary programs which can be licensed and relicensed in the growing
     television marketplace.  The Company's ownership and control of
     distribution rights, coupled with the Company's enduring and popular
     characters, should provide permanent and increasing value for the Company's
     programming.  The Company believes that, as the number of exhibition
     outlets grows domestically and internationally, its library will become
     increasingly valuable especially as the need to fill more time periods with
     repeat programming increases.
 
  There can be no assurance given that the Company will be successful in
implementing this strategy.  The discussion of the Company's strategy contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1993, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act").  Actual
results could differ materially from those projected in these forward-looking
statements as a result of certain risk factors described elsewhere in this
Report or other factors.   See "--Risks Related to the Business."

ANIMATION INDUSTRY OVERVIEW

  Animation has been a major entertainment medium for decades.  Since cartoon
characters appear the same dubbed in any language, animation easily crosses
national and language barriers.  In addition, animation generally

                                       4
<PAGE>
 
does not become "dated" as does live-action programming, allowing an animated
series to be enjoyed by each new generation of children.

  Children are the primary target market for animated television programming.
Nielsen data indicate that children aged two to eleven are the nation's heaviest
consumers of television.  Growth in advertising spending targeted at children
and the expansion in the number of television channels dedicated to children's
programming around the world have caused an increase in the demand for animated
television programming.

  Animated programming has expanded beyond the traditional Saturday morning
line-up.  Monday through Friday mornings and afternoons now attract an even
greater number of young viewers than Saturday morning.  There are many
programming blocks targeted toward children, including "The Disney Afternoon,"
Fox Children's Network and WB Kids.  In addition, many first-run syndicators
provide programming blocks of animation Monday through Friday and on Sunday
mornings.  Furthermore, programming successes such as The Simpsons and Beavis &
Butthead, and more recently King of the Hill,  demonstrate that animation also
appeals to adults.

  Increases in cable and satellite channels worldwide and the privatization, new
entry and expansion in the international broadcast, satellite and cable industry
are providing additional opportunities for growth for animation companies,
especially those companies which own and distribute their own programs.
Notwithstanding the opportunities for potential growth in the animated
programming industry, other factors exert contrary pressures on the number of
"time slots" available for animated programming.  See "--United States
Television"; "--Risks Related to the Business--Limited Number of Time Slots for
Children's and Animated Television Programming; Impact of FCC Regulations
Requiring Educational Content Programming; Vertical Integration and Strategic
Alliances"; "--Recent Developments in the Animation Industry; Increased
Competition Among Broadcasters of Animated Programming for Ratings."

  UNITED STATES TELEVISION

  The United States television market is served primarily by the major networks,
syndicators, cable television and direct broadcast satellite. Recent increases
in the number of cable and satellite channels have provided additional available
"time slots" for programming, including animated programming. Notwithstanding
the foregoing, the increase in the number of available time slots for
programming has generally resulted in a reduced number of viewers watching any
one program. As a result, recent industry reports indicate that there has been a
significant decline in the ratings of most programming offered by many United
States broadcasters during the 1996-97 season and a significant increase in the
competition for ratings among broadcasters of children's programming.
Accordingly, the Company believes that the recent lack of ratings performance
and the increased competition among children's broadcasters will result in even
fewer time slots available for animated programming during the 1997-98
television season. See "--Risks Related to the Business--Limited Number of Time
Slots for Children's and Animated Television Programming; Impact of FCC
Regulations Requiring Educational Content Programming; Vertical Integration and
Strategic Alliances"; "--Recent Developments in the Animation Industry;
Increased Competition Among Broadcasters of Animated Programming for Ratings."

  Networks.  The United States network television market is the most valuable
market to producers of animated programming.  In the past networks have
generally reached the largest audiences and paid the highest license fees,
enabling a producer to finance a more significant portion of its production
costs through network license fees than if a program was licensed to a cable
network or first-run syndicator.  Weekend morning children's programming now
airs on ABC, CBS, FOX, UPN and WB (the "Networks").  In addition, FOX and WB
broadcast animated programming for young audiences during weekday mornings and
afternoons.  NBC has not broadcast children's programming, including animation,
since 1992.
 
  Syndication.  Syndication provides an important first-run, as well as repeat,
broadcast market for animated programs.  Traditionally, syndication has been
populated by programs that support merchandise and whose characters are featured
in toy lines, apparel and other consumer products.  In the 1996-97 season,
syndicators such as Buena Vista Television Distribution, Saban Entertainment,
Bohbot Entertainment and Claster Television are

                                       5
<PAGE>
 
distributing some of the top-rated children's programs, both Monday through
Friday and on Saturdays and Sundays.

  Cable and Direct Broadcast Satellite ("DBS").  Cable and DBS are increasing
their audience share among children.  The growth in the number of cable channels
and the development of DBS provides additional outlets for animated programming.
The cable channels which currently broadcast animated programs include
Nickelodeon, USA Network, The Disney Channel, The Cartoon Network, The Comedy
Channel, The Family Channel, HBO, Showtime and MTV.  Disney recently announced
that it will be launching an all-kids programming cable channel called ABZ and
Fox Kids Network recently announced a similar intention. Recent increases in the
penetration and viewership for Turner-Warners Cartoon Network may indicate that
this avenue of distribution/exhibition will continue to grow as an important
outlet for animated programming.

  INTERNATIONAL TELEVISION

  The growth in the number of international television outlets has created
additional global demand for animated programming.  The privatization of the
international television industry has encouraged a ratings/revenue-oriented
focus among international broadcasters, thereby increasing the demand for high-
quality television entertainment.  Animated programs produced in the United
States have enjoyed wide acceptance internationally.  In addition, the
international market has experienced an increase in the number of cable and
satellite programming services.  These added programming services have created
an opportunity for distributors, including the Company, to license
simultaneously both traditional broadcast and satellite programming rights
within the same territory.  United States producers work in collaboration with
their international peers to develop and produce programs for initial run
simultaneously throughout the world.  International television, cable, satellite
and home video sales of an animated program produced in the United States can
account for half or more of the revenue for a given program.

  LICENSING AND MERCHANDISING

  Due to the significant revenue that can be generated from licensing and
merchandising television characters, producers and owners of animated characters
seek to drive sales of toys and other licensed products through the production
and distribution of programs featuring their characters.  According to "The
Licensing Letter" (a licensing and merchandising trade periodical that is
published monthly), United States and Canadian retail sales of products derived
from licensed entertainment/character properties were approximately $16.7
billion in 1996.  Numerous programs (such as The Teenage Mutant Ninja Turtles,
G.I.  Joe, Power Rangers, Sonic the Hedgehog and Transformers) were initially
produced in large part to support the sales of merchandise associated with these
programs.

                                       6
<PAGE>
 
THE COMPANY'S TELEVISION PROGRAMMING

  At the commencement of the 1996-97 television season, Film Roman had 14 of its
series of animated programming (including new and repeat programming) airing
each week, as described below.  The Company has completed production of
substantially all the 159 new episodes listed in the table below.

                   FILM ROMAN ANIMATED TELEVISION PRODUCTION

 
 FILM ROMAN ANIMATED TELEVISION PRODUCTION
<TABLE> 
<CAPTION> 
 ============================================================================================================================
           SERIES             EPISODES IN                                    CURRENT                    PROGRAM
                              PRODUCTION                                  BROADCASTER(S)               DESCRIPTION
                              FOR 1996-97   PROGRAM         YEARS        (AND SYNDICATOR,
                              SEASON(1)    SCHEDULE(2)    ON AIR(3)       AS APPLICABLE)
-----------------------------------------------------------------------------------------------------------------------------
 
"Fee-For-Services Programming":
-----------------------------------------------------------------------------------------------------------------------------
<S>                           <C>          <C>             <C>           <C>                  <C>   
                                                                                                                                    

Bobby's World                 3            Mon.-Fri.           7         FOX                  Emmy nominated series          
                                                                                              starring Howie Mandel.         
-----------------------------------------------------------------------------------------------------------------------------    
King of the Hill              13             Sunday             1        FOX                  Prime-time series based on    
                                                                                              characters created by Mike    
                                                                                              Judge, creator of Beavis &    
                                                                                              Butthead                      
-----------------------------------------------------------------------------------------------------------------------------    
The Mask                       9            Saturday            2        CBS                  
                                                                                              
--------------------------------------------------------------------------------------------  Based on the blockburser           
The Mask                      30            Mon.-Fri.           1        First-run            film starring Jim Carrey.      
                                                                         Syndication                                         
                                                                         (Bohbot)                                            
-----------------------------------------------------------------------------------------------------------------------------    
Richie Rich                   13            Saturday            1        First-run            Cartoon shorts based on       
                                                                         Syndication          Harvey Comics' classic        
                                                                         (Claster)            character.                    
-----------------------------------------------------------------------------------------------------------------------------    
The Simpsons                  24             Sunday        5/(4)/        FOX                  Emmy award-winning series     
                 ---------------------------------------------------------------------------- starring Homer, Marge,        
                               0            Mon.-Fri.      5/(4)/        Syndication          Bart, Lisa and Maggie         
                                                                         (Twentieth           Simpson.                      
                                                                          Television)                
----------------------------------------------------------------------------------------------------------------------------     
The Critic                      0            Schedule            2       Comedy Central       Highly acclaimed series      
                                             varies                                           which originally aired on     
                                                                                              ABC in prime-time             
                                                                                              featuring the voice of Jon    
                                                                                              Lovitz.                       
-----------------------------------------------------------------------------------------------------------------------------    
Garfield & Friends              0            Mon.-Fri.           7       Cartoon Network      Emmy award-winning series    
                                                                         and TBS              featuring that lazy, lasagna -
                                                                                              eating cat.          
-----------------------------------------------------------------------------------------------------------------------------
Mighty Max                     0            Mon.-Fri.           3        USA Network          Based on Mattel's popular   
                                                                                              children's toy line.        
-----------------------------------------------------------------------------------------------------------------------------
Klutter                        0            Mon.-Fri.           2        FOX                  Cartoon comedy starring a   
                                                                                              pile of clothes that comes to
                                                                                              life.                        
==============================================================================================================================
 
                                                                     Table and footnotes to table continue on following page. 
</TABLE> 

                                       7
<PAGE>
 
<TABLE>
<CAPTION>
                                 EPISODES IN                                    CURRENT               
                                  PRODUCTION                      YEARS      BROADCASTER(S)          
                                 FOR 1996-97       PROGRAM         ON       (AND SYNDICATOR,          PROGRAM
         SERIES                   SEASON(1)      SCHEDULE(2)     AIR(3)      AS APPLICABLE)          DESCRIPTION
====================================================================================================================================

 
"PROPRIETARY PROGRAMMING":
-----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>              <C>            <C>         <C>                       <C>
 
BRUNO the Kid                  36              Mon.-Fri.          1         First-run                 Features voice and persona of
                                                                            Syndication (Active       Bruce Willis as a 12-year old
                                                                            Entertainment)            spy.
------------------------------------------------------------------------------------------------------------------------------------

C-Bear and Jamal               10              Saturday       1/(5)/        FOX                       Features the voice of rap
                                                                                                      star
                                                                                                      Tone Loc as a street-wise
                                                                                                      teddy bear.
-----------------------------------------------------------------------------------------------------------------------------------
Felix the Cat                   8              Saturday           2         CBS                       Features the wonderful,
                                                                                                      wonderful cat popular with
                                                                                                      children and adults for
                                                                                                      decades.
-----------------------------------------------------------------------------------------------------------------------------------
Mortal Kombat                  13              Sunday             1         USA Network               Loosely based on the hit
                                                                                                      video game
====================================================================================================================================

</TABLE>
(1)  Each episode runs for a half hour, except for the 13 Richie Rich cartoons
     which run for seven minutes each.
(2)  The program schedule does not include the Company's two specials The Magic
     Pearl and The Story of Santa Claus.
(3)  Number of seasons for which new episodes were/are being produced, including
     production for the 1996-97 season.  The 1996-97 broadcast season began
     around the second week of September 1996 and will end around the second
     week of September 1997.
(4)  The Simpsons has been produced by the Company for five seasons and has run
     in syndication for two seasons.
(5)  Three additional episodes were produced for broadcast during the 1995-96
     season.


  During the 1996-97 season, the Company also began production (now in hiatus)
of 13 episodes of Blues Brothers:  The Animated Series (based on the Dan Aykroyd
and John Belushi characters).  In addition, the Company is currently scheduled
to produce for FOX 24 new episodes of The Simpsons, 22 new episodes of King of
the Hill and 10 new episodes of Bobby's World for the 1997-98 season.  As March
31, 1997, the Company has not entered into any commitments to produce any new
episodes of The Mask, Richie Rich, BRUNO the Kid, C-Bear and Jamal, Felix the
Cat or Mortal Kombat for the 1997-98 season, although the 13 previously-produced
episodes of C-Bear and Jamal are currently scheduled to air on FOX during the
1997-98 season.

PRINCIPAL ELEMENTS OF THE COMPANY'S BUSINESS

  The Company's business of creating, developing, producing and distributing
high quality, family-oriented animated television programming, together with the
exploitation of any proprietary rights controlled by the Company, is described
in the sections below and includes: (i) acquiring, creating and developing
programming properties; (ii) funding a portion of the production costs of
proprietary programming; (iii) producing its programs; (iv) distributing its
programming domestically and internationally; (v) licensing and merchandising
the rights to its proprietary programs; (vi) developing product for feature
films; (vii) developing and licensing distribution rights to interactive
software products; and (viii) building a library.

  ACQUISITION, CREATION AND DEVELOPMENT OF PROGRAMMING

  The Company pursues ideas and properties it believes feature unique and
popular characters with broad appeal.  These ideas and properties may originate
from a variety of sources.  As a result of the Company's reputation and position
in the industry, many creators, rightsholders and even broadcasters bring new
concepts to the Company for development and production.  The Company may enter
into an option agreement to acquire rights to an existing character, such as
Felix the Cat, develop internally a new character based on an existing

                                       8
<PAGE>
 
persona or consumer product, such as C-Bear and Jamal and Mighty Max,
respectively, or create or acquire an entirely new idea or character.

  Once the Company has created a new property or acquired the rights to an
existing property, the Company begins development by preparing a presentation to
"pitch" the project to targeted domestic broadcasters (and, on some occasions,
to international broadcasters and product licensees).  These presentations
generally consist of artwork featuring character designs and "set-ups"
(characters in a story scene) and may also include a brief written description
of the characters and sample storylines.  If a broadcaster is interested in
developing an idea further, it will acquire an exclusive option to order the
production of episodes based upon the idea and will agree to reimburse the
Company for a portion of the further development costs if it does not ultimately
order production of any episodes.  A broadcaster generally collaborates in the
later stages of development and will have the right to approve the selection of
writer, director and voice-over actors and the creation of a pilot script.  The
creation, acquisition and development of a new program normally occurs during a
period of three to twelve months (usually averaging approximately six months).

  The Company currently has numerous projects in various stages of internal
development, including Shamu and the Crew (both being developed with a division
of Anheuser-Busch, owner of Sea World) and 21 (a project which is featured in a
popular comic book series and for which the Company has secured a master toy
license with Playmates Toys), which are in the early stages of development.  The
Company also has three properties in development which it expects would qualify
as meeting the educational and informational needs of children aged 16 and under
pursuant to the Federal Communication Commission's new regulations governing
children's programming.  These regulations may enhance the prospect that these
programs will be produced and broadcast.  Although the Company has many projects
in development and is continuously considering new ideas, only a relatively
small number of such projects will ultimately be produced.

  FUNDING PRODUCTION--PROPRIETARY PROGRAMMING

  Historically, the Company has produced programming almost exclusively on a
"fee-for-services" basis.  Fees paid to the Company for these production
services generally range from $300,000 to $500,000 per episode and typically
cover all direct production costs plus a profit margin.

  For its proprietary programming, the Company generally does not commence
production unless the Company has obtained commitments to cover at least 50% of
the Company's direct production costs through a combination of one or more of
the following sources: (i) network, cable, syndication, or other license fees
for audiovisual exploitation of the program in the United States, (ii) licensing
of merchandising, home video, and international distribution and interactive
rights, and (iii) strategic partners.  For example, production costs for the
Company's first two proprietary programs, Felix the Cat and C-Bear and Jamal,
were substantially covered prior to production by a combination of domestic
licensing commitments from the Networks and international distribution
arrangements.  With capital provided by a 1995 equity private placement, the
Company was able to cover the balance of production costs without having to sell
its other proprietary rights, including licensing and merchandising rights for
C-Bear and Jamal.  Through the retention and exploitation of these rights, the
Company seeks to earn an attractive return on its investment while at the same
time building a library of programming which will have lasting value.  Although
historically the Company produced almost all of its programming on a "fee-for-
services" basis, as of December 31, 1996, the Company had delivered 73 half-hour
episodes and 12 one-hour episodes of proprietary programming, substantially all
of which aired during the 1996-97 television season.  As of March 31, 1997, the
Company had no commitments to produce any new episodes of proprietary
programming for the 1997-98 television season.

  While the Company seeks to limit its financial risk associated with its
proprietary programming by obtaining commitments prior to production to cover at
least 50% of its direct production, there can be no assurance that the Company
will be able to cover the balance of its production costs and overhead costs
relating to production, licensing and distribution through the exploitation of
its remaining rights.  Reasons the Company may not cover its costs include: (i)
a proprietary program may be cancelled; (ii) a proprietary program and/or its
related licensed products may not appeal to the Company's targeted audience or
may not appeal to the same audience targeted

                                       9
<PAGE>
 
by a licensee; or (iii) a licensee may not effectively market and distribute the
Company's programming domestically or internationally.  Moreover, since certain
international distribution arrangements and other domestic and international
licensing activities are conditioned upon the United States broadcast of a
minimum number of programming episodes on a network or cable channel, no
assurance can be given that any series will be broadcast in the United States
for a sufficient period in order to meet these contractual conditions.

  Unlike television production of proprietary programming, the Company does not
intend to commence production of an interactive or feature film projects unless
substantially all of the direct costs of production are funded by a third party.

  ANIMATED TELEVISION PRODUCTION

  The Company generally commences production of a program during the first and
second quarters of any year for delivery during the third quarter, and to a
larger extent, the fourth quarter of that same year.  The Company typically has
seven to nine months to produce and deliver an order of 13 half-hour episodes
(the number of episodes commonly ordered for the first year of a program).  The
first step of the Company's production process is the creation of the script.
The Company selects a story editor to supervise the preparation of each
episode's script by various freelance script writers.  The artists depict the
story and action in storyboards which provide a blueprint for the animation
process.  Voices and songs are recorded and the recordings are analyzed and
timed so that the animation can be synchronized to the voice track.  Based on
the script and storyboard, the Company's artists create character designs, as
well as key background drawings and paintings.  These essential elements are
assembled into a pre-production package for each episode which is then shipped
to an overseas subcontractor.  Subcontractors use the pre-production materials
to perform most of the labor-intensive aspects of production.  Most of these
subcontractors are located in low-cost labor countries in the Far East,
including South Korea, Taiwan, China and the Philippines.  The subcontractor
ships the negative and work print for each episode to Film Roman.  The film is
then taken through a post-production process which includes editing the picture
and dialogue, transferring the filmed images to video tape, creating sound
effects, composing and producing the musical score and mixing and synchronizing
the sound to the picture.  After the post production process, an episode is
ready for delivery.

  DISTRIBUTION OF PROPRIETARY PROGRAMMING

     Domestic Television Distribution.  Prior to commencing production of its
proprietary programming, the Company generally licenses broadcast rights to a
United States broadcaster.  See "--Funding Production--Proprietary Programming."
License fees paid by Networks and cable networks for the Company's proprietary
programming can cover as much as 50% of the Company's direct production costs.
In some cases, however, the license fees can be less than 20% of the Company's
direct production costs.  License fees paid by first-run syndicators for the
Company's proprietary programming generally cover less than 50% of the Company's
direct production costs, and, under certain circumstances, first-run syndicators
pay no license fees.  The Company may choose to enter into such a no-license-fee
arrangement when it can share in a portion of the revenues generated from the
sale of advertising aired by a syndicator during the broadcast of the Company's
programming and when the Company has obtained financing to cover a portion of
its direct production costs from sources other than the syndicator.  If the
Company's program is highly rated in syndication, the Company may earn more in
revenues from advertisers (since those advertisers will often be willing to pay
higher fees to have their commercials aired during the broadcast of the
Company's program) than the Company would have earned in revenues from a license
fee arrangement with a syndicator that does not require the syndicator to share
advertising revenues with the Company.  Conversely, however, if the Company's
program is poorly rated in syndication, the Company will likely earn less in
revenues than if it had negotiated to receive a license fee.

     The license agreement typically includes provisions governing the license
fee, the term during which the program will be broadcast, the number of episodes
and the territories in which the episodes will be broadcast.  Upon the
expiration of an initial broadcast license, the exhibition rights for the
applicable program revert to the Company and are available for relicensing.  In
1995, substantially all of the Company's revenue was generated from the domestic
distribution of its programming to United States television broadcasters.  In
1996,

                                       10
<PAGE>
 
approximately 15% of the Company's revenue was generated from sale of licenses
of proprietary programs to international broadcasters and/or distributors.

     International Distribution.  In 1993, the Company began its transition to
the production of proprietary programming with the establishment of its
international division to capture the economic benefits of owning and
controlling the international distribution rights to its proprietary
programming.  The Company believes that by owning and controlling the
international distribution rights to its programming, it can not only generate
significant revenue from the licensing of such programming, but also it can
establish an international presence for the Company and its properties which
should support its international licensing and merchandising efforts.
Furthermore, a strong international division provides the Company with direct
access to market information and feedback which will enable it to produce
programs that are even more marketable on a worldwide basis.  Since the
establishment of its international distribution division, the Company has
entered into audio-visual license arrangements with international broadcasters
and distributors to exhibit and distribute certain of the Company's proprietary
programming.  The Company has also entered into a significant distribution and
co-production agreement with TaurusFilm GmbH ("TaurusFilm"), a division of Kirch
Group, a German media conglomerate.  Under the terms of the agreement,
TaurusFilm has an exclusive right to review Film Roman's proprietary programs in
development and to license those programs for distribution in certain European
territories prior to the Company providing any other entity with such an
opportunity.  Important features of this arrangement are: (i) TaurusFilm pays a
license fee, ranging from $65,000 to $105,000 (depending on whether the program
was first aired in first-run syndication or by a Network/cable network and
depending on the number of European territories covered by the license), subject
to an annual increase, during production of each program licensed under the
agreement (which the Company estimates will account for between one-third and
two-thirds of the Company's total international audio-visual revenue derived
from any such program); (ii) once TaurusFilm licenses a program, it is required
to license all episodes of that program for all seasons of production; (iii)
TaurusFilm is required to license at least five of the Company's proprietary
programs produced for the 1995-96 through the 1997-98 broadcast seasons; and
(iv) the term of the license for each program is 22.5 years.  The Company
expects that its international distribution activities will increase as it
produces more proprietary programming.  For the years ended December 31, 1995
and 1996, the Company's international distribution activities generated revenues
of $1.8 million and $7.2 million, respectively (or 5% and 15%, respectively, of
total revenues for such periods).

     Home Video Distribution.  The Company may also license to a home video
distributor the rights to manufacture and distribute video cassettes and disks
for a specified term and in a defined territory.  The Company generally receives
a non-refundable advance to be applied against royalties which may range from 8%
to 25% of the wholesale selling price of a video cassette or disk.  Although the
Company expects that revenue from licensing its home video distribution rights
may increase in the future, the Company derived only 2% of its total revenue
from such licensing activities in 1996.


  LICENSING AND MERCHANDISING

  The Company's licensing and merchandising division seeks licensing and
merchandising opportunities for characters and programs to which the Company
retains proprietary rights.  Controlling licensing and merchandising rights
provides the Company the opportunity to earn revenue from the sale of products
bearing the likeness of its proprietary characters and other distinctive
features of a program.  The Company also evaluates the licensing potential of
characters the Company is considering for development, formulates a licensing
strategy, and creates artwork depicting proposed licensed products and
merchandise featuring its characters for use in soliciting prospective
licensees, promotion partners and retailers.  Although the Company incurs
expenses to develop and establish a licensing campaign, the Company does not
incur the cost or assume the risk associated with manufacturing, distributing
and marketing the merchandise.  The revenue derived from licensing and
merchandising depends not only on the success, recognition and appeal of a
character, but also on the quality and extent of the marketing efforts of the
Company and its licensees.  Sales of licensed products in turn promote the
programs in which the Company's characters appear.

                                       11
<PAGE>
 
  Historically, under traditional "fee-for-services" arrangements, after
developing and selling a program for United States broadcast, Film Roman has had
to turn over control of its merchandising rights to those entities which
financed the production of its programming.  For example, even though Bobby's
World was created by Film Roman, Twentieth Television acquired most of the
proprietary rights, including the licensing and merchandising rights to such
program.

  The Company expects that it will typically earn royalties between 5% and 12%
of the wholesale revenue derived from the sale of licensed products.  The
Company has recently entered into licenses with manufacturers and distributors
of various products related to its proprietary characters C-Bear and Jamal,
including apparel and school supplies.  Although the Company believes that these
activities can have a significant impact on future earnings, prior to December
31, 1995, the Company derived no revenue from its licensing and merchandising
activities, and for the year ended December 31, 1996, the Company derived no
significant revenue from these activities.

  FEATURE FILMS

  In 1991 and 1992, the Company produced on a "fee-for-services" basis a feature
film, Tom & Jerry: The Movie, which was released theatrically by Miramax Films.
Although the Company has produced no other feature films, it is pursuing feature
film opportunities.  The Company, together with Universal Pictures/MCA and
Dustin Hoffman's Punch Productions, is currently developing (on a fee-for-
services basis) the feature film There Goes The Neighborhood, which is a project
featuring a mixture of live-action and animation (similar to that of Who Framed
Roger Rabbit?).  Universal Pictures has agreed to pay for the development of a
screenplay and the artwork for the project.  No assurance can be given that
There Goes the Neighborhood will be produced.  If the feature film is produced,
the Company will earn a fee for its services and may earn revenues from
financial participations based upon the success of the film and the exploitation
of the Company's rights.  The Company currently has a number of feature film
projects in early stages of internal development, primarily featuring the
Company's proprietary characters.  Although the Company is not currently
producing any feature films (nor has the Company entered into any agreements to
produce any such films), the Company intends to obtain financing for its feature
films through strategic alliances with third parties, such as major motion
picture studios, prior to the production of any such films.  As a result, the
Company may be unable to retain control of all or any of the licensing and
merchandising rights associated with its feature films.

  INTERACTIVE PRODUCTS

  In 1995, Film Roman established an interactive division to produce high-
quality interactive software products for consumer use.  Such products may
feature characters from the Company's programs or may introduce new characters
which may become the basis for the development of future television series and
marketed to broadcasters.  The Company recently ceased production of the
interactive division's two game titles that were being produced for
International Business Machines ("IBM") due to IBM's re-evaluation of its
investments in the CD-ROM game segment in favor of the educational software
segment for children and families.  Nonetheless, the Company continues to pursue
production and distribution relationships for the two titles that were
previously in production.  Prior to December 31, 1995, the Company derived no
revenue from its interactive division, and for the year ended December 31, 1996,
the Company earned $2.3 million in revenue from its interactive division.  As of
March 31, 1997, there were no interactive software products in production.

  LIBRARY

  A library of proprietary programming can provide a future revenue stream as
such programs are re-licensed for broadcast after the expiration of the initial
broadcast license.  Programs in the Company's library can also be licensed to
new channels and outlets in emerging markets around the world.  The Company
began building its library in 1993 with the production of Animated Classic
Showcase, a restoration of existing classic Russian animation.  The Company
added to its library the proprietary programming it produced during the 1995-96
season, including three episodes of C-Bear and Jamal and 13 episodes of Felix
the Cat.  In addition, during the 1996-97 season, the Company added (or will
add) to its library 10 episodes of C-Bear and Jamal, 8 episodes of Felix the

                                       12
<PAGE>
 
Cat, 36 episodes of BRUNO the Kid and 13 episodes of Mortal Kombat.  Revenues
generated from the proprietary programs in the Company's library were $5.6
million (including $3.6 million from domestic television distribution) and $15.0
million (including $7.3 million from domestic television distribution) for the
years ended December 31, 1995 and 1996, respectively.  See "The Company's
Television Programming."

  The Company has retained the proprietary rights set forth below associated
with the programs in its library.  The Company holds the proprietary rights
associated with the Animated Classic Showcase for fifteen years, and holds most
of the other proprietary rights for the programs listed in the table below in
perpetuity, subject to the rights granted to its licensees.  See "--The
Company's Television Programming."
<TABLE>
<CAPTION>
 
 
                                  Number of                                                       Licensing
           Series                 Episodes         Domestic             International                and
           Title                  Produced       Distribution           Distribution            Merchandising   Interactive
----------------------------   ---------------   ------------           -------------           -------------   -----------
<S>                            <C>               <C>            <C>     <C>       <C>           <C>             <C>
                                                      TV        Home     TV       Home
                                                                Video             Video
=========================================================================================================================== 
Animated Classic Showcase      12 (x 1 hr.)            X          X       X         X                X               X
--------------------------------------------------------------------------------------------------------------------------- 
Felix the Cat                  21 (x  1/2 hr.)         X          X       X         X                                X 
--------------------------------------------------------------------------------------------------------------------------- 
C-Bear and Jamal               13 (x  1/2 hr.)         X          X       X         X                X               X
---------------------------------------------------------------------------------------------------------------------------
BRUNO the Kid                  36 (x  1/2 hr.)         X          X       X         X                X               X
---------------------------------------------------------------------------------------------------------------------------
Mortal Kombat                  13 (x  1/2 hr.)         X          X       X         X  
===========================================================================================================================
</TABLE>

GOVERNMENT REGULATIONS

  The Federal Communications Commission ("FCC") repealed its financial interest
and syndication rules, effective as of September 21, 1995.  Those FCC rules,
which were adopted in 1970 to limit television network control over television
programming and thereby foster the development of diverse programming sources,
had restricted the ability of the three established, major United States
television networks (ABC, CBS and NBC) to own (or to be owned by) a syndicated
television programmer and to own financial interests in programming aired on
their networks.  The full impact of the repeal of the FCC's financial interest
and syndication rules on the Company's operations cannot be predicted at the
present time, although there has been, and it is expected that there will
continue to be an increase in-house productions of television programming for
the networks' own use and in the network programs in which a network holds a
financial interest.  The Company believes that this change has had a negative
impact on the Company's business to the extent that the networks target
children's programming.

  Broadcast customers of the Company are subject to the provisions of the
Children's Television Act of 1990 and the implementing rules issued by the FCC.
These rules, which were amended in August 1996 and became effective in part in
January 1997 and will become effective in part in September 1997, strongly
encourage broadcasters (through license renewal procedures) to offer at least
three hours per week of regularly-scheduled programming specifically designed to
serve the educational and informational needs of children aged 16 and under and
identified as such.  As a result, while the Company is not subject to the direct
jurisdiction of the FCC, the content of the Company's programming may be
affected by these rules in order for the Company to place programs on FCC-
licensed stations.  See "Risk Factors--Limited Number of Time Slots for
Children's and Animated Television Programming; Impact of New FCC Regulations
Requiring Educational Content Programming; Vertical Integration and Strategic
Alliances."

  Broadcast customers of the Company are subject to the provisions of the
Children's Television Act of 1990 and the follow-up rules issued by the FCC
which require broadcasters to offer educational and informational programs to
their viewers.  As a result, while the Company is not subject to the direct
jurisdiction of the FCC, the content of the Company's programming may be
affected by these rules in order for the Company to place

                                       13
<PAGE>
 
programs on FCC-licensed television stations.  The Company may be subject to
local content and quota requirements in the international markets, which
effectively prohibit or limit access to particular markets.  The Company also
seeks to comply with self-regulatory rules relating to children's programming of
the Children's Advertising Review Unit of The Council of Better Business Bureaus
and of the national television networks by reviewing the proposed content of
each property prior to acquisition and acquiring rights to and distributing only
those properties for which there will be no material restrictions on exhibition
to children.

TRADEMARKS

  The Company has applications pending with the United States Patent and
Trademark Office to register several trademarks, including Film Roman, C-Bear
and Jamal, King of the Hill and BRUNO the Kid.  Pursuant to arrangements with
the owners of the programs it produces, the Company utilizes certain trademarks
and copyrighted materials, including The Simpsons, Garfield, Bobby's World,
Felix the Cat, The Mask, Richie Rich, Mortal Kombat and Mighty Max.

EMPLOYEES

  As of December 31, 1996, the Company had approximately 359 full-time employees
and 4 part-time employees.  The Company also regularly engages numerous
freelance creative staff and other independent contractors on a project-by-
project basis.  The Company is subject to the terms in effect from time to time
of various industry-wide collective bargaining agreements, including the Screen
Actors Guild.  The Company believes that its relations with its employees are
good.

RISKS RELATED TO THE BUSINESS

  DEPENDENCE ON A LIMITED NUMBER OF TELEVISION PROGRAMS.  The Company's revenue
has historically been derived principally from the production of a relatively
small number of television programs.  The Simpsons, The Mask (syndication) and
Felix the Cat accounted for approximately 29%, 16% and 11%, respectively, of the
Company's total revenue for the year ended December 31, 1996.  As audiences'
tastes change frequently, there can be no assurance that broadcasters will
continue to broadcast the Company's "proprietary" or "fee-for-services" programs
or that the Company will continue to be engaged to produce the programs that it
currently produces on a "fee-for-services" basis.  While the Company continually
endeavors to develop new programming, there can be no assurance that revenue
from existing or future programming will replace a possible loss of revenue
associated with the cancellation of any particular program.

  LIMITED NUMBER OF TIME SLOTS FOR CHILDREN'S AND ANIMATED TELEVISION
PROGRAMMING; IMPACT OF FCC REGULATIONS REQUIRING EDUCATIONAL CONTENT
PROGRAMMING; VERTICAL INTEGRATION AND STRATEGIC ALLIANCES.  Film Roman competes
for time slots with a variety of companies which produce animated or live-action
television programming.  The number of outlets available to producers of
animated programming has expanded in the last decade due, in part, to growth in
the number of broadcast and cable networks.  However, the number of time slots
currently allocated to children's and/or animated television programming remains
limited (a "time slot" being a broadcast time period for a program that either
airs five times per week (Monday through Friday) or once per week (usually on
the weekend)).  Based on the Southern California television market, for the
1996-97 season, children's and/or animated programming occupied:  (i)
approximately 47 time slots each week on the Networks; (ii) approximately 24
time slots (excluding time slots primarily occupied by repeat programming) each
week on cable networks, such as USA Network, Nickelodeon and HBO; and (iii)
approximately 40 time slots in syndication, offered by such syndicators as Buena
Vista Television Distribution, Saban Entertainment, New World Entertainment and
Bohbot Entertainment.  See "--Animation Industry Overview."  For the 1996-97
television season, the Company's programming currently occupies six Network time
slots, one cable time slot and three syndication time slots.  The Company
believes that there will be even fewer time slots available for animated
programming during the 1997-98 season.  See "--Recent Developments in the
Animation Industry; Increased Competition Among Broadcasters of Animated
Programming for Ratings."  As of March 31, 1997, the Company's programming is
scheduled to occupy four Network time slots during the 1997-98 season.

                                       14
<PAGE>
 
  Certain rules of the FCC adopted in August 1996 which became effective in part
in January 1997 and will become effective in part in September 1997 may
adversely affect the number of time slots available for the Company's animated
productions.  These regulations strongly encourage broadcasters (through license
renewal procedures) to offer at least three hours per week of programming
specifically designed to serve the educational and informational needs of
children aged 16 and under, to identify each program as such, to schedule such
programming weekly, and to offer such programming in 30-minute formats.  While
the full impact of the new regulations on aggregate demand for children's
programming remains uncertain, it is possible that programming qualifying for
the new FCC requirements will have a competitive advantage over non-qualifying
programs, and that this could diminish the number of time slots available for
the Company's existing programs, thus intensifying the strong competition for
the remaining time slots.  On the other hand, the Company has three properties
in development which it expects will qualify under the new regulations and which
it is seeking to produce for future seasons; the new regulations may enhance the
prospect that these programs will be produced and broadcast.  See "--Principal
Elements of the Company's Business--Acquisition, Creation and Development of
Programming;--Government Regulations"; "--Recent Developments in the Animation
Industry; Increased Competition Among Broadcasters of Animated Programming for
Ratings."

  Over the last decade, broadcasters, distributors and producers of television
and motion picture programming have become increasingly integrated vertically
through mergers, acquisitions, partnerships, joint ventures or other
affiliations.  Film Roman has not entered into any such relationships.  These
relationships, coupled with the recent repeal of certain regulations of the FCC
which had limited the ability of ABC, NBC and CBS to control certain rights in
television programming, has resulted in broadcasters favoring the producers of
animated programming with which they are affiliated, thereby reducing the number
of time slots available for other producers.  There can be no assurance that the
number of time slots currently available for children's and/or animated
programming and, specifically, for animated programming supplied by independent
animation studios such as the Company, will not decrease, or that the Company
will compete successfully for available time slots.

  DECLINING VALUE OF LICENSE FEE AGREEMENTS AND INCREASING CONTROL OF
PROPRIETARY RIGHTS BY BROADCASTERS.  Competition created by the emergence of new
broadcasters (such as UPN, WB, Nickelodeon and the USA Network) has provided
television audiences with an increased number of available time slots for
programming, thereby generally reducing the number of viewers watching any one
program.  As a result, the market share of, and license fees paid by, FOX, CBS
and ABC have decreased.  There continues to be intense competition for the time
slots offered by the Networks, especially FOX, CBS and ABC.  This trend has
continued to depress license fees to a level which may make it difficult for
financing certain proprietary programs.  Moreover, broadcasters have recently
begun to demand a greater percentage of the revenue generated from the
exploitation of proprietary rights associated with the programs which they
license, and may seek to control and exploit all of the proprietary rights
associated with programs which they license.  These industry-wide trends, should
they continue, may have a significant adverse impact on the Company's business,
results of operations and financial condition.

  POSSIBLE DECLINE IN DEMAND FOR CURRENT PROGRAMS AND UNCERTAINTY OF ACCEPTANCE
OF NEW PROGRAMS; NEILSEN RATINGS.  Substantially all of the Company's revenue
has been derived from the production and distribution of animated television
programs.  Each production is an individual artistic work, and there can be no
assurance that the Company will be able to continue to create entertaining
episodes for its existing programs or new programs that appeal to broadcasters.
Since a program's existing (or expected) Neilsen rating is one of the most
significant factors that an advertiser considers in determining what it is
willing to pay for commercial time during a program's broadcast, a program's
existing (or expected) Neilsen rating is an important factor which a broadcaster
considers in determining whether or not to license or renew a program.  In
addition, since producers of syndicated programs often receive payments from
syndicators based on a share of the revenue derived from advertisers whose
commercials air during a program's broadcast, Neilsen ratings can play an even
greater role in determining what programs will be aired in syndication.  As a
result, the Company attempts to create, develop and produce programs that will
perform well in the Neilsen ratings system.  The Neilsen ratings associated with
the Company's productions, as well as the ultimate commercial success of its
productions, depend on a variety of factors, including audience reaction,
competing programs, other forms of entertainment, and other factors beyond the
Company's control.  There can be no assurance that the Company's programs will
obtain favorable Neilsen ratings or that broadcasters will license the rights to
broadcast any of the Company's programs in

                                       15
<PAGE>
 
development or will renew licenses to broadcast programs currently produced by
the Company.  The Company experienced low ratings on BRUNO the Kid which had a
significant negative impact on the overall financial success of the series
during the 1996-97 television season.  While the Company's series C-Bear and
Jamal performed well in the ratings, FOX nonetheless made the decision to move
the program from its Saturday morning time slot to a Friday morning time slot
for the 1997-98 broadcast season.  Even if licenses to broadcast the Company's
existing programming are renewed, the popularity of a particular program and its
Neilsen rating may diminish.  It is likely that a decrease in the popularity of
the Company's programming will result in reduced revenue generated by the
Company's licensing, merchandising, distribution and other activities associated
with such programs.

  RECENT DEVELOPMENTS IN THE ANIMATION INDUSTRY; INCREASED COMPETITION AMONG
BROADCASTERS OF ANIMATED PROGRAMMING FOR RATINGS.  Due to the increase in both
the number of broadcasters and the number of time slots devoted to children's
programming, including animated programming, recent industry reports indicate
that there has been a significant decline in the ratings of most programming
offered by many broadcasters during the 1996-97 season.  For example, industry
articles have reported that CBS and WB are disappointed with the ratings being
achieved by their 1996-97 programs, that UPN has obtained less-than-expected
market share for its 1996-97 programs and that USA Network has not achieved
ratings sufficient to generate profitable time slots for the animated
programming that it airs.  Moreover, the Company believes that its syndicated
series, BRUNO the Kid, failed to achieve anticipated ratings levels, in part
because it was placed in time slots which historically have not generated high
ratings and in part because the program faced competition from other popular
programming aired during the same time slots.

  The Company believes that CBS has not ordered any new animated series for
production for the 1997-98 season because of the poor ratings performance
achieved by its 1996-97 animated programs and because its new owner announced a
mandate to shift the content of its children's programming to shows that are
more educationally based.  In addition, the Company believes that the lack of
ratings performance and the increased competition among children's broadcasters
lead UPN to announce that it would reduce its animation program schedule for
1997-98 and was the primary reason that USA Network did not order any new
animated programs for the upcoming season.  This reduction in the number of
animation time slots for the 1997-98 season, and possibly for other future
seasons, could have a material adverse effect on the Company's business, results
of operation and financial condition.

  CONCENTRATION OF CUSTOMERS.  Since the number of outlets for the Company's
productions is limited, certain customers have historically accounted for a
significant portion of the Company's revenue.  The Company derived approximately
29%, 21% and 10% of its total revenue from its top three customers, Twentieth
Television (a division of Twentieth Century Fox), Sunbow Productions and Fox
Children's Network (an affiliate of Twentieth Century Fox), respectively, for
year ended December 31, 1996.  The loss of any one or more of these customers
could have a material adverse effect on the Company's financial position and
results of operations.  No assurance can be given that the Company's existing
programs will continue to be broadcast by its current customers or that
broadcasters will be interested in the Company's new programs.

  RISKS RELATED TO EXPANSION OF PRODUCTION OF PROPRIETARY PROGRAMMING.
Substantially all of the programming produced by the Company has historically
been on a "fee-for-services" basis ("fee-for-services" programming), in which
the Company does not own or control licensing or distribution rights, but may
have profit participation rights based on a percentage of adjusted gross profits
or net profits earned by the owners of such distribution rights.  (For example,
the Company has profit participation rights for The Critic, Garfield & Friends,
Mighty Max and Bobby's World).  Fees paid to the Company for these production
services typically cover all direct production costs plus a profit margin.  The
Company intends to produce programming for which it owns or controls licensing
and/or distribution rights ("proprietary" programming).  Such rights may include
domestic and international broadcast distribution, home video distribution,
licensing and merchandising, feature film and interactive/game development
("proprietary rights").  While the Company seeks to limit the financial risk
associated with its proprietary programming by obtaining commitments prior to
production to cover at least 50% of its direct production costs, there can be no
assurance that the Company will be able to recover the balance of its production
and overhead costs through the exploitation of its remaining rights.  See "--
Funding

                                       16
<PAGE>
 
Production--Proprietary Programming." Revenues derived from the Company's
proprietary programming were $5.6 million and $15.0 million for the years ended
December 31, 1995 and 1996, respectively.  For example, the Company cannot
predict with any certainty the ratings that will be achieved, and therefore the
revenue derived from, the syndication of one of its proprietary programs.  See
"Item 7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations--Revenue and Cost Recognition."  Since the Company has
only recently begun to retain the proprietary rights associated with its
animated programs, it has a limited history of operations and management
experience related to the exploitation of such rights.  See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Development."

  BUDGET AND COST OVERRUNS.  The Company reviews cost reports and updates its
cost projections regularly.  Although the Company has generally completed its
productions within its budget, there can be no assurance that the actual
production costs for its programming will remain within budget.  Risks such as
production delays, higher talent costs, increased subcontractor costs, political
instability overseas, and other unanticipated events may substantially increase
production costs and delay completion of the production of any one or more of
the Company's programs.

  RISKS RELATED TO OVERESTIMATION OF REVENUE OR UNDERESTIMATION OF COSTS.  The
Company follows Financial Accounting Standards Board Statement No. 53,
"Individual Film Forecast" ("FASB 53"), regarding revenue recognition and
amortization of production costs.  All costs incurred in connection with an
individual program or film, including acquisition, development, production and
allocable production overhead costs and interest, are capitalized as television
and film costs.  These costs are stated at the lower of unamortized cost or
estimated net realizable value.  Estimated total production costs for an
individual program or film are amortized in the proportion that revenue realized
relates to management's estimate of the total revenue expected to be received
from such program or film.  As a result, if revenue or cost estimates change
with respect to a program or film, the Company may be required to write-down all
or a portion of unamortized costs for such program or film.  No assurance can be
given that these write-downs will not have a significant impact on the Company's
results of operations and financial condition.  See "Item 7.  Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Revenue and Cost Recognition," and "--Recent Development."

  SEASONALITY.  Results of operations in any period depend on the Company's
production and delivery schedule of television programs.  Broadcasters typically
make most of their annual programming commitments in the first and second
quarters of any calendar year so that new programs will be ready for delivery in
the third quarter and, to a greater extent, the fourth quarter of that year.
Revenues from license and production agreements are typically recognized when
the finished product has been delivered to and accepted by the customer.  As a
result of the production cycle, the Company's revenue is not recognized evenly
throughout the year and a significant portion of such revenue is recognized in
the fourth quarter.  The Company's results of operations fluctuate materially
from quarter to quarter and year to year and the results of any one period are
not necessarily indicative of results for future periods.  Cash flows also
fluctuate and do not necessarily correlate with revenue recognition.  See "Item
7.  Management's Discussion and Analysis of Financial Condition and Results of
Operations--Revenue and Cost Recognition."

  COMPETITION.  The creation, development, production and distribution of
television programming, together with the exploitation of the proprietary rights
related to such programming, is a highly competitive business.  The Company
faces intense competition from producers, distributors, licensors and
merchandisers, many of whom are larger and have greater financial resources than
the Company.  Management believes that it faces competition with a variety of
companies in three principal areas: (i) for the time slots for animated
programming offered by broadcasters, (ii) for the acquisition of characters,
story lines, plots and ideas and (iii) for the right to license and distribute
its products throughout the United States and internationally.

     Creative Properties and Creative Personnel.  Film Roman competes with other
animation companies in the acquisition of characters, storylines, plots and
ideas created by third parties.  Such competition is generally on the basis of
which animation company is perceived to be best able to create and develop a
successful program from the initial idea or character.  Film Roman also competes
with other animation companies (including the film and television animation
operations of major studios) for the animators, writers, producers and other
creative

                                       17
<PAGE>
 
personnel needed to successfully develop and produce animated programming.
Management believes that it competes for creative properties and creative
personnel with a variety of companies including The Walt Disney Company, Warner
Bros., Hanna-Barbera, DIC, Klasky-Csupo, Marvel Entertainment, Saban
Entertainment, Cinar Films, DreamWorks SKG, Nelvana, Universal Cartoon Studios,
Sony Cartoon Studios and Hyperion Productions, many of which have greater
financial resources to obtain creative properties and creative personnel.

     Licensing and Merchandising.  An important element of the Company's
strategy is to license the characters in its proprietary programs to
merchandisers that produce and distribute a variety of products, ranging from
toys to apparel, throughout the United States and internationally.  As a result,
the Company competes with other owners of creative content who seek to license
their characters and properties to a limited number of manufacturers and
distributors.  In connection with the Company's recent initiatives to exploit
the proprietary rights associated with its programming, it has entered into
several licensing and merchandising agreements.  However, for the year ended
December 31, 1996, the Company derived no significant revenue from its licensing
and merchandising activities.  See "--Principal Elements of the Company's
Business--Licensing and Merchandising."

  RISKS RELATED TO INTERNATIONAL SUB-CONTRACTING AND SALES

     Overseas Subcontractors.  The Company, like other producers of animated
programming, subcontracts some of the less creative and more labor-intensive
components of its production process to animation studios located in low-cost
labor countries, primarily in the Far East.  With a growing number of animated
feature films and animated television programs being produced in recent years,
the demand for the services of overseas studios has increased substantially.
This increased demand may lead overseas studios to raise their fees which may
result in increased animated programming production costs incurred by the
Company or the inability of the Company to contract with its preferred overseas
studios.

     Many of the subcontractors used by the Company are located in South Korea
and, to a lesser extent, Taiwan, the Philippines and China.  Each of these areas
has recently experienced some degree of political unrest or unusual military
activity.  The exacerbation of such conditions could cause significant
disruptions in the delivery of animation products to the Company.  In such
event, the Company may be required to retain new subcontractors.  No assurance
can be given that different subcontracting arrangements will be as favorable to
the Company as its current arrangements.

     International Sales.  Approximately 5% and 15% of the Company's revenue for
the years ended December 31, 1995 and 1996, respectively, were derived from
licensing international distribution rights to the Company's proprietary
programming, and the Company anticipates that revenue from these activities can
grow substantially.  The Company's ability to continue to expand its
international business (as well as its ability to contract upon favorable terms
with overseas studios) depends, in part, on the local economic conditions,
currency fluctuations, local changes in regulatory requirements, compliance with
a variety of foreign laws and regulations, and cultural barriers.  In addition,
political instability in a foreign nation may adversely affect the ability of
the Company to distribute its product in that country.  As a result of the
foregoing, as well as many other factors affecting domestic businesses, there
can be no assurance that the Company's international operations will be
profitable.  See "--Principal Elements of the Company's Business--Distribution
of Proprietary Programming--International Distribution."

  TECHNOLOGICAL CHANGES; POSSIBLE CHANGES IN PRODUCTION OF COMPANY'S PRODUCTS.
The proliferation of new production technologies may change the manner in which
the Company's programming is created and distributed.  Recently, certain
animators have begun to use computer-generated animation, including three-
dimensional digital animation, instead of two-dimensional cel animation, to
create their animated programming.  Although the Company utilizes computers in
several stages of the animation production process, the Company does not
currently contemplate making any significant expenditures for any new computer
technology.  The Company utilizes three-dimensional digital animation in the
production of certain of its video games, and, to the extent that any three-
dimensional digital animation is used in any of its animated programming, the
Company expects that it will contract with third parties to produce such
animation.  No assurance can be given that the introduction and

                                       18
<PAGE>
 
proliferation of three-dimensional digital animation or other technological
changes will not cause the Company's current methods of producing animation to
become less cost competitive or less appealing to its audiences.  In addition,
there can be no assurance that the Company will be able to adapt to such changes
in a cost-effective manner.

  DEPENDENCE UPON KEY PERSONNEL.  The Company's success depends to a significant
extent upon the expertise and services of Phil Roman, the Company's President
and Chief Executive Officer, and other key personnel, including William Schultz,
its Executive Vice President.  The loss of the services of Mr. Roman and/or
other key management personnel could have an adverse effect upon the Company's
business, results of operations and financial condition.  The Company has
entered into employment agreements with Messrs.  Roman and Schultz and certain
of its other key management personnel.  In addition, the Company maintains $5.0
million and $2.0 million "key man" life insurance policies on Messrs.  Roman and
Schultz, respectively.  There can be no assurance that the Company will be able
to retain its existing management personnel.  In addition, the Company's
continued success is highly dependent on the artistic and production
capabilities of its creative staff.  The Company is currently a signatory to the
Screen Actors Guild collective bargaining agreement and certain of the Company's
voice-over actors are Screen Actors Guild members.  The Company believes that
its future success will depend, in part, on its continuing ability to attract,
retain and motivate qualified personnel.

  CASUALTY RISKS.  Substantially all of the Company's operations and personnel
are located in its North Hollywood headquarters, resulting in vulnerability to
fire or other local conditions, including the risk of seismic activity.

  LIMITED HISTORY OF TRADING ON NASDAQ NATIONAL MARKET; VOLATILITY OF STOCK
PRICE.  The Company's Common Stock began trading on the Nasdaq National Market
on October 1, 1996.  There can be no assurance that an active trading market in
the Company's Common Stock will be maintained.  The market price of the shares
of Common Stock could be subject to significant fluctuations in response to the
Company's operating results and other factors.  In addition, the stock market in
recent years has experienced significant price and volume fluctuations that
often have been unrelated or disproportionate to the operating performance of
particular companies.  These fluctuations, as well as a shortfall in sales or
earnings compared to public market analysts' expectations, changes in analysts'
recommendations or projections, and general economic and market conditions, may
adversely affect the market price of the Common Stock.

  FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS.  This Report contains certain
forward-looking statements, relating to, among other things, future results of
operations, growth plans, anticipated production, revenue and expense trends and
general industry and business conditions applicable to the Company.  These
forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties.  Actual
results could differ materially from these forward-looking statements.  In
addition to the other risks described elsewhere in this section, important
factors to consider in evaluating such forward-looking statements include
changes in external competitive market factors, changes in the Company's
business strategy or an inability to execute its strategy due to unanticipated
changes in the animation industry or the economy in general, a reduction in the
availability of time slots for animated programming, a further increase in the
vertical integration of the production and distribution of animation and various
other competitive factors that may prevent the Company from competing
successfully in existing or future markets.  In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this Report will in fact be realized.  See "Item 7.  Management's
Discussion and Analysis of Financial Condition and Results of Operation."

                                       19
<PAGE>
 
                                    PART II

ITEM 6.   SELECTED FINANCIAL DATA

  The selected financial data set forth below as of December 31, 1994, 1995 and
1996 and for each of the three years in the period ended December 31, 1996 are
derived from the Company's consolidated financial statements audited by Ernst &
Young LLP, independent auditors.  The selected financial data presented below as
of and for the year ended December 31, 1993 have been derived from the financial
statements of the Company audited by Tanner, Mainstain & Hoffer.  The selected
financial data presented below as of and for the year ended December 31, 1992
are derived from the Company's unaudited financial statements.  The unaudited
financial statements from which such selected financial data are derived include
all adjustments which management considers necessary for a fair presentation.
The selected financial data presented below and under "Item 7. Management's
Discussion and Analysis of Financial Condition and results of Operations" should
be read in conjunction with the Company's consolidated financial statements,
including the notes thereto, appearing elsewhere in this Report.

<TABLE>
<CAPTION>
 
                                                                                  YEAR ENDED DECEMBER 31,                  
                                                         ---------------------------------------------------------------------------
                                                                 1992            1993           1994           1995           1996
                                                                 ----            ----           ----           ----           ----
                                                                                                                                  
                                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)     
STATEMENT OF OPERATIONS DATA:                                                                                                     
<S>                                                         <C>              <C>             <C>             <C>             <C>  
  Revenue................................................   $   21,943     $   27,867     $   36,201     $   34,341     $   49,698
  Expenses:
    Cost of revenue......................................   $   20,716         25,675         33,190         33,156         50,779
    Selling, general and administrative expenses.........          699          1,368          1,829          2,963          3,850
                                                             ---------     ----------     ----------     ----------     ----------

  Operating income (loss)................................          528            824          1,182         (1,778)        (4,931)
  Interest income (expense), net.........................          (16)           (21)           (28)            89            298
                                                             ---------     ----------     ----------     ----------     ----------

  Income (loss) before provision for income taxes........          512            803          1,154         (1,689)        (4,633)
  Provision for income taxes.............................           --             --             --             --             --
                                                             ---------     -----------    -----------    -----------    -----------

  Net income (loss)......................................          512            803          1,154         (1,689)        (4,633)
  Net income (loss) attributable to common stock (1).....   $      307     $      482     $      692     $   (2,000)    $   (9,267)
                                                             =========     ==========     ==========     ==========     ==========

  Net income (loss) per  common share(1)(2)..............   $     0.06     $     0.10     $     0.14     $    (0.41)    $    (1.63)
                                                            ==========     ==========     ==========     ==========     ==========

  Weighted average number of shares                                                                                                 
  outstanding............................................    4,824,519      4,824,519      4,824,519      4,824,519      5,681,170)
                                                            ==========     =========      ==========     ==========     ==========


                                                                                       AS OF DECEMBER 31,
                                                           -------------------------------------------------------------------------
                                                               1992              1993           1994           1995           1996
                                                            -------        ----------     ----------     ----------     ----------
BALANCE SHEET DATA (AT END                                                               (IN THOUSANDS)
 OF PERIOD):
  Cash and cash equivalents..............................   $     463      $      448     $      436     $    5,176     $   13,739
  Film costs, net of amortization........................       7,660          10,603         12,382         12,379         21,269
  Total assets...........................................       8,608          11,832         13,694         18,950         42,817
  Short-term debt........................................         356           1,270          1,363          1,737             --
  Redeemable Preferred Stock.............................          --              --             --          6,749             --
  Stockholders' equity...................................         345             784          1,691          1,832         23,787

</TABLE>

                                       20
<PAGE>
 
(Footnotes to Selected Financial Information on previous page.)

(1) For the year ended December 31, 1995, the net loss attributable to common
    stock gives effect to the accretion of the difference between the carrying
    value and the liquidation value of the Company's Class A Redeemable
    Preferred Stock of $484,829 and to the accrual of dividends of $400,000 on
    the Class A Redeemable Preferred Stock.  For the year ended December 31,
    1996, net loss attributable to common stock gives effect to the accretion of
    the difference between the carrying value and the liquidation value of the
    Class A Redeemable Preferred Stock of $757,544 and to the accrual of
    dividends of $750,000 on the Class A Redeemable Preferred Stock, and the
    excess of the price paid for the redemption of the Class A Redeemable
    Preferred Stock over its carrying value of $3,126,755.

(2) For the years ended December 31, 1992, 1993, 1994 and 1995, the per share
    data is based on the weighted average number of common and common equivalent
    shares outstanding during the period giving effect to the conversion of the
    common stock of the Company's predecessor ("Predecessor Common Stock") into
    1.25 shares of Common Stock of the Company ("Common Stock") and are
    calculated in accordance with a Staff Accounting Bulletin of the Securities
    and Exchange Commission ("SAB") whereby common and common share equivalents
    issued within a 12-month period prior to an initial public offering are
    treated as outstanding for all periods presented if the issue price was less
    than the proposed initial public offering price.  In addition, shares
    issuable upon the exercise of options and warrants and convertible preferred
    stock within the 12-month period are considered to have been outstanding
    since inception of the Company.  For the year ended December 31, 1996, the
    per share data is based on the weighted average number of common and common
    equivalent shares outstanding during the period giving effect to the
    conversion of Predecessor Common Stock into 1.25 shares of Common Stock.
    Common equivalent shares, consisting of outstanding stock options are not
    included since they are antidilutive.  The weighted average number of common
    and common equivalent shares outstanding have been calculated in accordance
    with the SAB for the period prior to the completion of the Company's initial
    public offering and in accordance with APB Opinion No. 15 for the period
    after such offering.

                                       21
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

  The Company creates, develops, produces and distributes high quality, family-
oriented animated television programming.  Historically, the Company has
produced substantially all of its programming for third parties on a "fee-for-
services" basis.  Increasingly, the Company is producing programming for which
it controls the "proprietary rights" associated with such programming
(including, for example, international distribution and licensing and
merchandising rights).

  The Company produces a limited number of television series in any year and is
substantially dependent on revenues from licensing these programs to
broadcasters.  The Company's future performance will be affected by issues
facing all producers of animated programming, including risks related to the
limited number of time slots allocated to children's and/or animated television
programming, the intense competition for those time slots, the declining license
fees paid to producers of programming by broadcasters and the regulations
implemented by the FCC governing program content.  In addition, the Company has
recently begun to expand its internal creative development of proprietary
characters and program concepts by establishing an international distribution
division and a licensing and merchandising division to support the exploitation
of its proprietary rights.  As a result of these new initiatives, the Company
has incurred additional overhead and other costs which has depressed operating
results.  While the Company seeks to limit its financial risk associated with
its proprietary programming by obtaining commitments prior to production to
cover the balance of its production costs and overhead costs relating to
production, licensing and distribution through the exploitation of its
proprietary rights.  As a result of the foregoing risks, there can be no
assurance that the Company will be able to generate revenues that exceed its
costs.

RECENT DEVELOPMENT

  Following recent discussions between the Company and UPN regarding certain
creative aspects of the Company's proprietary production of Blues Brothers: The
Animated Series for the 1997-98 season, the Company put production into hiatus.
The Company is reconsidering various elements of the project, is seeking a
possible new financial partner for the production, and may or may not be
successful in ultimately recovering its investment, which amounted to
approximately $3.0 million at December 31, 1996 and approximately $5.3 million
at March 31, 1997.  In the event the Company determines that all or a portion of
its investment is not recoverable, it will write off the appropriate amount.

REVENUE AND COST RECOGNITION

  The Company follows FASB 53 for accounting practices related to revenue
recognition and amortization of production costs for its fee-for-services and
proprietary programming.

  Revenues from license and production agreements, which may provide for the
receipt by the Company of nonrefundable guaranteed amounts, are recognized when
the license period begins and the programming is available pursuant to the terms
of the agreement, typically when the finished episode has been delivered to or
made available to and accepted by the customer.  Amounts in excess of minimum
guarantees under such agreements are recognized when earned.  Cash collected in
advance of the time of availability of programming is recorded as deferred
revenue ($13.4 million at December 31, 1996).

  Broadcasters typically make most of their annual programming commitments in
the first and second quarters so that programs will be ready for broadcast in
the third and fourth quarters of the same year.  As a result, the Company's
revenues are concentrated in the third and fourth quarters.

  All costs incurred in connection with an individual program or film, including
acquisition, development, production and allocable production overhead costs and
interest are capitalized as film costs.  At December 31, 1996, the Company's
capitalized film costs balance was $21.3 million.  These costs are stated at the
lower of unamortized cost or estimated net realizable value.  Estimated total
production costs for an individual program or film are amortized in the
proportion that revenue realized relates to management's estimate of the total
revenue

                                       22
<PAGE>
 
expected to be received from such program or film.  Estimated liabilities for
third party participations are accrued and expensed in the same manner as film
costs are amortized.  Due to the inherent uncertainties of forecasting both
total revenue and total expense, at any time one or the other can be overstated
or understated, resulting in potential adjustments to the amortization rate or
net realizable value calculation.

  The Company's cash flows are not necessarily related to revenue recognition
and amortization of production costs.  Cash is received and costs are incurred
(and paid) throughout the year.  In the fourth quarter, and to a lesser extent
the third quarter, cash used in operations typically exceeds cash generated by
operations as completed shows are delivered to broadcasters.

OVERHEAD ALLOCATION

  Overhead is allocated to particular productions on the basis of the total
allocable overhead times the ratio of direct production costs incurred on a
program to total production costs incurred during the period.  Total allocable
overhead is determined on the basis of management's estimates of the percentage
of overhead costs which can be attributed to the productions in progress during
the period.

INCOME TAXES

  Prior to August 4, 1995, the Company was an S Corporation subject to taxation
under Subchapter S of the Internal Revenue Code of 1986, as amended (the
"Code").  As a result, the net income of the Company, for federal (and some
state) income tax purposes, was reported by and taxed directly to the Company's
sole stockholder, rather than the Company.  The Company's S Corporation status
terminated on August 4, 1995 and the Company became a C Corporation subject to
corporate taxation.  No provision for income taxes has been recorded by the
Company since August 4, 1995, as the Company has only recorded losses since that
date.

RESULTS OF OPERATIONS

  YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

  Total revenues for the year ended December 31, 1996 increased by 45% to $49.7
million from $34.3 million in 1995, primarily due to the delivery of more
episodes.  In 1996 the Company delivered 141 episodes compared to 73 episodes in
1995, an increase of 68 episodes or a 93% increase.

  Episodic revenue increased by $12.3 million to $43.0 million for the year
ended December 31, 1996 from $30.7 million for the year ended December 31, 1995.
For the four series that were produced and delivered in both 1996 and 1995, 14
fewer episodes were delivered in 1996 than in 1995, while revenue for such
series decreased by $0.8 million.  The Company produced two series in 1995 (13
episodes) which were not renewed in 1996, resulting in a revenue decrease of
$6.1 million, and added five new series (95 episodes) in 1996, resulting in an
additional $19.2 million in revenue.

  Total other revenue increased by $3.1 million in 1996 compared to 1995,
primarily due to $2.3 million of revenue associated with the interactive
division.

  Total costs of revenue increased by $17.6 million to $50.8 million in 1996
from $33.2 million in 1995.

  Included in costs of revenue are episodic costs which increased by $13.9
million to $44.1 million for the year ended December 31, 1996 from $30.2 million
for 1995.  For the four series that were produced in both 1996 and 1995, 14
fewer episodes were delivered in 1996, while costs for such series declined by
$2.0 million.  Costs decreased by $6.0 million as a result of the two series
which were not renewed in 1996, while costs increased by $21.9 million as a
result of the five new series in 1996.

  Included in the episodic costs of the new series were the cost of two
proprietary series for which the Company sustained significant write-downs.  C-
Bear & Jamal was not renewed for its Saturday morning time slot, although

                                       23
<PAGE>
 
Fox Children's Network has agreed to repeat the 13 original episodes on Friday
mornings.  The Company recorded $0.5 million more in costs than revenue for this
series for the year ended December 31, 1996.  BRUNO the Kid, which is currently
in syndication, received significantly lower ratings and worse time slots than
originally projected, resulting in lower domestic revenue to the Company which
was a primary factor in the Company's reporting $3.4 million more in costs than
revenue on this series for the year ended December 31, 1996.

  Other costs increased by $3.7 million primarily as a result of $1.9 million of
costs associated with the interactive division and a $0.8 million increase in
costs associated with ancillary revenue.

  Total selling, general and administrative expenses increased by 29% to $3.9
million in 1996 from $3.0 million in 1995, primarily due to increased costs
related to the expansion of the Company's licensing and merchandising division
($0.3 million), interactive division ($0.2 million) and rent and salaries ($0.5
million) and a decreased cost in the international division ($0.1 million).  As
a percentage of total revenue, selling, general and administrative expenses
decreased to 7.7% in 1996 from 8.6% in 1995.

  YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994

  Total revenue decreased by 5% to $34.3 million in 1995 from $36.2 million in
1994, primarily due to a decrease in the total number of episodes produced and
delivered.  For the three series that were produced and delivered in both 1994
and 1995, six fewer episodes were produced and delivered in 1995 than in 1994
($1.3 million).  In addition, the Company produced three series in 1994 which
were not renewed ($12.8 million).  This was partially offset by three new series
produced and delivered in 1995 ($10.8 million).  These three new series produced
in 1995 represented 19 fewer episodes than the three series produced in 1994.
Although 25 fewer episodes were produced and delivered in 1995 than in 1994,
revenues per episode increased 22%.  This decrease in total revenue was
partially offset by an increase in 1995 of revenue from profit participations
($0.9 million) and an increase in other revenue ($0.5 million), primarily
related to an increase in revenue derived from commercials and specials.

  Although 25 fewer episodes were produced and delivered in 1995, cost of
revenue was $33.2 million in 1995 and 1994.  Cost of revenue, as a percentage of
revenue, increased to 97% in 1995 from 92% in 1994.  This increase was primarily
due to higher direct production costs of new shows produced and delivered in
1995 and an increase in total allocable overhead.

  Total selling, general and administrative expenses increased by 62% to $3.0
million in 1995 from $1.8 million in 1994, primarily due to increased costs
related to the expansion of the Company's licensing and merchandising division
($0.4 million), interactive division ($0.2 million) and international division
($0.2 million) and an increase in rent and salaries ($0.3 million).  As a
percentage of total revenue, selling, general and administrative expenses
increased to 8.6% in 1995 from 5.0% in 1994.

  Operating income (loss) decreased by $3.0 million to ($1.8 million) in 1995
from $1.2 million in 1994.

  The pro forma income tax benefit was $0.6 million in 1995, compared to a
provision of $0.5 million in 1994.

LIQUIDITY AND CAPITAL RESOURCES

  As the Company endeavors to develop and produce more proprietary programs,
retain more of the proprietary rights thereto, and increase its presence in the
licensing and merchandising and international distribution markets, greater
capital resources will be required.  The Company seeks to limit the financial
risk associated with its proprietary programming by obtaining commitments prior
to production to cover at least 50% of its direct production costs, but the
Company must utilize its own funds to cover remaining production costs and
overhead costs relating to production, licensing and distribution.

  On October 4, 1996, the Company completed its initial public offering (the
"Offering") of 3,300,000 shares of its Common Stock.  Of the 3,300,000 shares of
Common Stock sold in the Offering, 3,275,364 shares were

                                       24
<PAGE>
 
issued and sold by the Company and 24,636 shares were sold by certain
stockholders of the Company.  Net proceeds to the Company pursuant to the
Offering totaled approximately $28.3 million, after deducting underwriting
discounts and offering expenses payable by the Company.  Approximately $9.3
million of such proceeds were used to pay accrued and unpaid dividends on the
Company's Class Redeemable Preferred Stock and Class B Convertible Preferred
Stock and to redeem $7.5 million liquidation preference of the Class A
Redeemable Preferred Stock.

  For the year ended December 31, 1996, net cash used in operating activities
was $8.1 million due to use of cash in connection with film production
activities offset by an increase in deferred revenue and fluctuations in other
operating assets and liabilities.  For the year ended December 31, 1996, net
cash used for investing activities was $0.6 million due to additions to property
and equipment.  Net cash provided by financing activities for the year ended
December 31, 1996, was $17.2 million due primarily from the receipt of proceeds
from the offering.

  The Company had a $1.2 million revolving credit facility with a bank which
expired in October 1996.  The Company is seeking to obtain a new bank facility
in the principal amount of approximately $5.0 million.  There can be no
assurance that it will be able to obtain a new bank facility on terms that are
satisfactory to the Company.  Management believes that the Company's cash and
cash equivalents and anticipated cash flow from operations will be sufficient to
fund the Company's operating requirements for at least the next year, whether or
not the Company enters into a new bank facility.

FORWARD-LOOKING STATEMENTS

  This Report contains certain forward-looking statements, relating to, among
other things, future results of operations, growth plans, anticipated
production, revenue and expense trends and general industry and business
conditions applicable to the Company.  These forward-looking statements are
based largely on the Company's current expectations and are subject to a number
of risks and uncertainties.  Actual results could differ materially from these
forward-looking statements.  Important factors to consider in evaluating such
forward-looking statements include changes in external competitive market
factors, changes in the Company's business strategy or an inability to execute
its strategy due to unanticipated changes in the animation industry or the
economy in general, a reduction in the availability of time slots for animated
programming, a further increase in the vertical integration of the production
and distribution of animation and various other competitive factors that may
prevent the Company from competing successfully in existing or future markets.
In light of these risks and uncertainties, many of which are described in
greater detail in "Item 1.  Business -- Risks Related to the Business," there
can be no assurance that the forward-looking statements contained in this Report
will in fact be realized.

                                       25
<PAGE>
 
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

  The directors and executive officers of the Company are identified below:
<TABLE>
<CAPTION>
 
             Name                 Age                        Position (1)
-------------------------------   ---   ------------------------------------------------------
<S>                               <C>   <C>
Phil Roman.....................    66   President, Chief Executive Officer and Chairman of the
                                        Board of Directors (Class III Director)
William Schultz................    36   Executive Vice President
Jon F. Vein....................    33   Senior Vice President
Jacqueline Blum................    35   Senior Vice President--Worldwide Licensing and
                                        Marketing
Gregory Arsenault..............    39   Senior Vice President--Finance and Administration
Robert Cresci (3)..............    53   Class I Director
Dixon Q. Dern (2)..............    68   Class III Director
Dennis W. Draper (2)...........    48   Class II Director
Theodore T. Horton, Jr.  (2)...    45   Class I Director
Peter Mainstain (3)............    49   Class II Director
 
</TABLE>
-------------------------------
(1)  Each director holds office until his resignation or removal and until his
     successor shall have been duly elected and qualified.  Elections with
     respect to the Class I Directors, Class II Directors and Class III
     Directors will be held at the annual meeting of stockholders in 1997, 1998,
     and 1999, respectively.
(2)  Member of Compensation Committee.
(3)  Member of Audit Committee.

  The principal occupations and positions for the past five years and in certain
cases prior years, of the directors and executive officers named above are as
follows:

  Phil Roman, President, Chief Executive Officer and Director.  Mr. Roman has
been the Company's Chief Executive Officer since the Company was founded in
1984.  Phil Roman began his animation career in 1955 at The Walt Disney Company
as an assistant animator on Sleeping Beauty.  Over the next 30 years, Mr. Roman
worked at many of the major studios, including MGM Animation and Warner Bros.
Cartoons, and was an animator on such productions as The Cat in the Hat, How the
Grinch Stole Christmas, George of the Jungle, Popeye, Snoopy Come Home and Lord
of the Rings.  Mr. Roman also directed 13 Emmy-nominated Charlie Brown specials.

  William Schultz, Executive Vice President.  In 1989, Mr. Schultz joined the
Company as a Vice President and in 1993 was promoted to Executive Vice
President.  Mr. Schultz currently oversees production and development, as well
as the Company's international division, and coordinates new business
opportunities.  Prior to joining the Company, Mr. Schultz was employed by New
World Entertainment, where he served in a variety of positions including
Production Controller and Director of Development at the animation studio Marvel
Productions, a subsidiary of New World Entertainment.  Mr. Schultz received his
Bachelor of Science degree from the University of Illinois at Champaign--Urbana
in 1982.

  Jon F.  Vein, Senior Vice President.  In February 1995, Mr. Vein joined Film
Roman as a Senior Vice President where he oversees business and legal affairs
for the Company.  Mr. Vein also established and oversees the Company's feature
film, MIS and interactive divisions.  Prior to joining the Company, Mr. Vein
practiced entertainment law at Dern & Donaldson from 1990 to 1993 and at Dern &
Vein from 1993 to 1995.  Mr. Vein

                                       26
<PAGE>
 
received his Bachelor of Science degree in electrical engineering-computer
science and material sciences engineering from University of California at
Berkeley in 1986 and his Juris Doctor degree from The Harvard Law School in
1989.

  Jacqueline Blum, Senior Vice President--Worldwide Licensing and Marketing.
Ms. Blum joined the Company in 1993 as a Vice President to establish and oversee
the Company's licensing and merchandising division.  In 1996, she was promoted
to Senior Vice President.  Ms. Blum also oversees the Company's publicity and
creative services departments.  Prior to joining the Company, Ms. Blum co-
founded Imagination Factory, a licensing and merchandising agency, in 1991.
Previously, Ms. Blum was a principal of Brentwood Licensing Properties, handling
television packaging and merchandising of the multi-million dollar property
Kliban's Cat.

  Gregory Arsenault, Senior Vice President--Finance and Administration.  Mr.
Arsenault joined the Company in 1991 as Accounting Manager, served as Controller
for two years, served as Vice President of Finance for two years and was
promoted to Senior Vice President--Finance and Administration in 1996.  Mr.
Arsenault oversees the Company's accounting department.  Prior to joining Film
Roman, Mr. Arsenault served as an accounting systems consultant for LIVE
Entertainment.  Mr. Arsenault received his Bachelor of Science degree in
accounting from the University of Southern California in 1980.

  Robert Cresci--Director.  Mr. Cresci has been a Director of Film Roman since
August 1995 and has been a Managing Director of Pecks Management Partners Ltd.,
an investment management firm, since September 1990.  Mr. Cresci currently
serves on the board of directors of Bridgeport Machines, Inc., Serv-Tech, Inc.,
EIS International, Inc., Sepracor, Inc., Vestro Natural Foods, Inc., Olympic
Financial, Ltd., GeoWaste, Inc., Hitox, Inc., Natures Elements, Inc., Garnet
Resources Corporation, HarCor Energy, Inc., Meris Laboratories, Inc. and
Educational Medical, Inc.

  Dixon Q. Dern--Director.  Mr. Dern has been a Director of Film Roman since
August 1995.  Mr. Dern has practiced entertainment law for over 40 years and
currently owns and operates his own private practice which specializes in
entertainment, copyright and communications law.

  Dennis W. Draper--Director.  Mr. Draper has been a Director of Film Roman
since August 1995 and has been an Associate Professor of Finance at the
University of Southern California's School of Business since 1977.  Mr. Draper
serves as trustee of the Pacifica Funds.

  Theodore T. Horton, Jr.--Director.  Mr. Horton has been a Director of Film
Roman since August 1995 and has been a Managing Director of BCI Advisors, Inc.,
an investment management firm, since January 1990.  Mr. Horton also serves as a
director of People's Choice TV.

  Peter Mainstain--Director.  Mr. Mainstain has been a Director of Film Roman
since August 1995 and has been a partner of Tanner, Mainstain & Hoffer, an
accountancy corporation, since 1976.

BOARD OF DIRECTORS

  The Company's Bylaws provide that directors are divided into three classes,
each having a term of three years, with the term of one class expiring each
year.  The directors shall be elected by a plurality vote, with no cumulative
voting, at the annual meeting of stockholders.  Each elected director holds
office until his resignation or removal and until his successor shall have been
duly elected and qualified.

  In connection with the non-cash redemption of certain shares of senior
preferred stock of the Company held by Delaware State Employees' Retirement
Fund, Declaration of Trust for Defined Benefit Plans of ICI American Holding
Inc. and Declaration of Trust for Defined Benefit Plans of Zeneco Holding Inc.
(collectively, the "Pecks Affiliate") and by BCI Growth, III, L.P.  (the "BCI
Affiliate", and together with the Pecks Affiliate, the "Affiliate") following
the Company's initial public offering, the Company and each Affiliate agreed
that each Affiliate has the right to designate one director to the Board, and
the Company has agreed to nominate such designated director to the Board and to
use all reasonable efforts to cause the Board to recommend to the stockholders
that such

                                       27
<PAGE>
 
stockholders vote in favor of such designated director.  If the Pecks Affiliate
transfers in excess of 264,011 shares of Common Stock or if the BCI Affiliate
transfers, in excess of 264,009 shares of Common Stock, then the Company and
such Affiliate have agreed that: (i) in the event the annual meeting of
stockholders at which such Affiliate's designated director is to be placed on
the ballot for election has not yet been held, such Affiliate will not have the
right to designate a director (and the Company shall not be required to nominate
such director); and (ii) in the event such annual meeting of stockholders has
been held, the Affiliate will, if requested by the Company, use all reasonable
efforts to cause such director to resign from the Board.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

  Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership (Forms 3, 4 and 5) with the Securities and Exchange Commission.
Officers, directors and greater-than-ten-percent holders are required to furnish
the Company with copies of all such forms which they file.

  To the Company's knowledge, based solely on the Company's review of such
reports or written representations from certain reporting persons, the Company
believes that during the fiscal year ended December 31, 1996 all filing
requirements applicable to its officers, directors, greater-than-ten-percent
beneficial owners and other persons subject to Section 16(a) of the Exchange Act
were complied with.

                                       28
<PAGE>
 
                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized as of the 28th day
of April, 1997.


                                         FILM ROMAN, Inc.

                                         /s/   Phil Roman
                                         ----------------------------------
                                            Phil Roman
                                            President, Chief Executive
                                            Officer and Director

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

<TABLE>

 
<S>                          <C>                                      <C> 
/s/   PHIL ROMAN             President, Chief Executive Officer and   April 28, 1997
--------------------------   Director (Principal Executive Officer)
      Phil Roman
 /s/  GREGORY ARSENAULT          Senior Vice President--Finance       April 28, 1997
--------------------------    Administration (Principal Accounting
      Gregory Arsenault             and Financial Officer)
 /s/  ROBERT CRESCI                         Director                  April 28, 1997
--------------------------
      Robert Cresci
 /s/  DENNIS DRAPER                         Director                  April 28, 1997
--------------------------
      Dennis Draper

--------------------------                  Director
      Theodore T. Horton, Jr.
 /s/  PETER MAINTAIN                        Director                  April 28, 1997
--------------------------
      Peter Mainstain
 /s/  DIXON Q. DERN                         Director                  April 28, 1997
------ --------------------
      Dixon Q. Dern
</TABLE>

                                       S-1