<PAGE>

================================================================================

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

                                   FORM 10-K
                                  (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, 1997

                                      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. [  ]

     As of March 19, 1998, the aggregate market value of voting stock held by
nonaffiliates of the Registrant was approximately $6,775,889 (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 19, 1998, 8,454,690 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 1998 Annual Meeting of
Stockholders to be held June 16, 1998 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 animated television programming.  Since the Company
was founded by Phil Roman in 1984, it has become a leading independent animation
studio in North America, having produced such series as Bobby's World,  The
Simpsons, King of the Hill, The Mask, Richie Rich, BRUNO the Kid, C-Bear and
Jamal, Felix the Cat, Mortal Kombat, Garfield & Friends, Mighty Max, The Critic
and Klutter.

  From its inception in 1984, the Company established its reputation for 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 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, 1997, Film Roman had delivered 127
episodes of The Simpsons and has committed to deliver approximately 39
additional episodes, including 22 for the 1998-99 season.

  Beginning with Felix The Cat and C-Bear & Jamal, both of which were initially
produced for the 1996-97 broadcast season, the Company began producing
programming in which it controlled certain proprietary rights.  For the
following broadcast season, the Company added BRUNO The Kid and Mortal Kombat to
its slate of proprietary programming.  No additional episodes of these four
series or any other proprietary series were ordered for the 1997-1998 broadcast
season.

  Since 1990, the Company has produced at least three series each season for the
major networks; however, in the past year the animation marketplace has
experienced the effects of a major transformation in the U.S. domestic
television business.  In an effort to become more vertically integrated, major
U.S. studios have sought to combine their distribution and production efforts.
In that regard, four of the six major free T.V. networks and a significant
number of entertainment-based cable networks are owned and/or controlled by
major Hollywood studios which has led to substantially reduced and limited
opportunities for the independent production studio community.

  At the same time that this vertical integration was taking place, license fees
in the U.S. began to decrease substantially, and the Canadian government
continued its course of heavy subsidization of animation production, as did the
French government, making financing animated programming even more difficult,
particularly for independent U.S.-based animation companies.  As a consequence,
animation industries  flourished in both countries throughout 1996 and 1997.
Because producers in both of these countries are generally not reliant on
revenues from U.S. broadcasters, these producers, as well as those in other
countries which subsidize production of animation, have a competitive advantage
in gaining U.S. broadcast time slots in the increasingly deal-driven animation
broadcast industry.

  As a result of these structural  changes in the marketplace, it has become
more difficult for an independent animation studio which is  not aligned with a
major distribution outlet, a television  network or a major studio, to obtain
programming slots or broadcast commitments.  In light of what management
believes to be fundamental changes in the animation industry, the Company has
concluded it must diversify and expand its product focus.  The Company believes
that it can no longer rely solely on animation production, whether on a fee-for-
services or a proprietary basis, for growth.  The Company believes that, to
compete effectively, it must leverage its success and reputation as a quality
producer and position itself as a creative force in the larger independent
production community.

                                       2
<PAGE>

STRATEGY

  Building on the cornerstone of  the reputation that the Company established as
a quality animation supplier to the U.S. network and cable channel marketplace,
the Company has begun to enter into development and, to a lesser extent,
production of other forms of entertainment, both on a proprietary and fee-for-
services basis, including (i) live action television, (ii) major studio financed
feature films, (iii) independent, low-budget feature films, (iv) computer
animation, and (v) direct-to-video production.  The Company has also taken a
fresh approach to this broader range of production in addition to animation,
which will continue to be its core focus.  The Company's current strategy can be
summarized as follows:

  .  CREATE AND DEVELOP POPULAR COMMERCIAL PRODUCTIONS. As the foundation for
     its on-going business, the Company will continue to develop and produce
     popular animated programming for television broadcast. This will be done
     both on a proprietary and fee-for services basis. Because the Company was
     founded by an animator and has a corporate culture that emphasizes artistic
     integrity, the Company believes that it can continue to provide high
     quality animated programming and attract creative artists and storytellers
     in the animation industry. The Company also believes that characters which
     are created by these artists, when imaginatively developed and artistically
     produced, will continue to have and find homes in both the domestic and the
     international marketplace, despite the increasingly competitive landscape.
     The goal of creating and exploiting character franchises remains central to
     the Company's business plan. However, given the combination of increased
     competition from international animation studios that are subsidized by
     their governments (e.g. France and Canada), the lower U.S. license fees,
     and fewer slots on domestic network and cable slots that are available to
     independent producers, the Company believes that potential for growth may
     lie in investing beyond its core television animation business. With its
     track record of producing high quality, popular animated programming and
     its focus on creative freedom, the Company believes that it has the
     capacity to create successful franchises in the live action television,
     feature film, computer animation and direct-to-video industries. The
     Company is developing a number of live action series, ranging from prime
     time dramas and comedies to Saturday morning children's programs. Moreover,
     in addition to the feature film entitled There Goes The Neighborhood, which
     the Company is developing at Universal in conjunction with Dustin Hoffman's
     Punch Productions, the Company is developing several other feature concepts
     which it intends to present to the major studios and other potential
     finance and distribution partners. Additionally, the Company is in the
     process of creating a number of computer animated short films which the
     Company believes can be licensed for broadcast and which may serve as the
     basis for new television series or feature films. Finally, management
     believes that the direct-to-video business, particularly children's
     animation, may provide a meaningful business opportunity, and, in that
     regard, the Company is investigating opportunities for a variety of
     properties for this market. In connection with the foregoing activities,
     the Company may hire executives experienced in feature film, live action
     television, and direct-to-video development. The Company has already hired
     an executive producer in the computer animation division.

  .  PURSUE FEE-FOR-SERVICES PRODUCTION WORK. The Company will continue to
     pursue production work on a fee-for-services basis for television animation
     as well as in the other new areas of production. The fee-for-services
     business, including production of The Simpsons and King of the Hill, will
     remain an important cornerstone for the Company's business.

  .  INCREASE FOCUS ON BUSINESS DEVELOPMENT. The Company intends to out-source
     certain of its licensing and merchandising, public relations, promotion,
     and advertising needs to outside third party suppliers. The Company has
     already instituted a number of these changes. At the same time, however,
     the Company believes that the successful execution of a more aggressive and
     broad production strategy will require it to increase the overall
     investment, including additional personnel, to augment its development
     efforts in animated programming, computer generated animated programming,
     live action television series, feature films and direct-to-video films.

                                       3
<PAGE>

  .  CONTROL AND EXPAND THE COMPANY'S INTERNATIONAL DISTRIBUTION. The Company
     currently intends to continue to operate its international distribution and
     sales division. The Company's programs are currently broadcast in over
     fifty countries, and the Company believes it has strong relationships
     through which it can continue to distribute its animated programming and to
     begin to distribute proprietary, live action programming throughout the
     world. For the years ended December 31, 1996 and 1997, the Company's
     international distribution activities generated revenues of $7.2 million
     and $3.6 million, respectively (or 15% and 8%, respectively, of total
     revenue for such periods).

  .  PURSUE CO-PRODUCTION RELATIONSHIPS. The Company intends to continue to
     pursue and evaluate potential business opportunities with domestic and
     international co-financing partners, with the goal that risks may be
     shared, complementary skills may be exploited and foreign subsidies may be
     utilized in the production of new entertainment properties.

  .  BUILD LIBRARY VALUE. A significant aspect of the Company's long term
     strategy is to continue to build a library of proprietary entertainment
     product by continuing to produce high quality animated programming, as well
     as live action programming, feature films and direct-to-video productions
     which can be licensed and re-licensed in the world-wide television, film
     and video marketplaces. 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 to its library 10 episodes of C-Bear
     and Jamal, eight episodes of Felix the 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 $15.0 million (including $7.3
     million from domestic television distribution) and $4.9 million (including
     $1.0 million from domestic television distribution) for the years ended
     December 31, 1996 and 1997, respectively. The Company believes that its
     ownership and control of the distribution rights to its programming, built
     upon its ability to create popular programming and popular characters is
     its best strategy for building permanent and increasing value for the
     Company.


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."

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.

                                       4
<PAGE>

THE COMPANY'S 1998-1999 TELEVISION PROGRAMMING

   The Company is currently scheduled to produce 22 new episodes of The Simpsons
and 24 new episodes of King of the Hill for Twentieth Century Fox Television for
the 1998-1999 season.  Currently, the major voice-over talent on The Simpsons is
in contract negotiations and there can be no assurance that these negotiations
will be successfully concluded, which could result in the delay or cancellation
of all or part of the series.

PRINCIPAL ELEMENTS OF THE COMPANY'S BUSINESS

   The Company's business of creating, developing, producing and distributing
high quality television and filmed 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
animation programming, and in some cases,  live action programming; (iii)
producing programming; (iv) distributing its programming domestically and
internationally; (v) working with outside licensing and merchandising companies
to exploit the rights to the proprietary programming; (vi) developing products
specifically for feature films, in both the studio and independent film
business; and (vii) building a library.

   ACQUISITION, CREATION AND DEVELOPMENT OF PROGRAMMING

  The Company pursues ideas and properties it believes contain unique and
commercial story lines and/or characters.  These ideas and properties may
originate from a variety of sources.  As a result of the Company's reputation
and position in the entertainment industry, many creators,  rights holders,
writers, broadcasters, and even studios bring new concepts to the Company for
development and production.  The Company may enter into an option agreement to
acquire rights to an existing property, which the Company may  then develop
internally into either an animation or live action program.  It will then be
taken to the networks or the studios for further development, financing and/or
distribution.

  Once the Company has created this new idea or acquired the rights to the
existing property, the Company continues the development process by preparing a
presentation to "pitch" the project to a targeted domestic buyer audience (and,
on some occasions, to international broadcasters and/or theatrical
distributors).  These presentations generally consist of treatments, story
premises, scripts, artwork, designs and/or character designs.  With respect to
television production, if a broadcaster or cable network is interested in
developing the idea further, the broadcaster will generally acquire an exclusive
option to order the production of a certain number of episodes based on the idea
and will agree to reimburse the Company for all or a portion of the 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 the writers, directors, artists, and actors,
and the creation of a pilot script.  The creation, acquisition and development
of a new program can take from three to twelve months, and sometimes longer.

  The Company currently has over a dozen animation programs, over a dozen live
action television series programs, and five to six feature film projects in
various stages of active development.

  FUNDING PRODUCTION--PROPRIETARY PROGRAMMING

  Historically, the Company produced animated programming almost exclusively on
a "fee-for-services" basis.  In 1995 the Company began producing proprietary
animated programming.  The Company generally does not commence production on
proprietary animated programming unless the Company has obtained commitments to
cover at least 50% of the Company's direct production costs.  The Company
generally secures these commitments in one or both of the following ways: (i) a
combination of network, cable, syndication, or other license fees for
exploitation of the program in the United States, and (ii) pre-sale to
distributors and/or co-producing partners in foreign territories.  The balance
of the production costs are cash-flowed by the Company.  As of December 31,
1997, the Company had delivered 83 half-hour episodes and 12 one-hour episodes
of proprietary programming.  As of December 31, 1997, the Company had no
commitments to produce any new episodes of proprietary animated programming for
the 1998-99 television season.

                                       5
<PAGE>

  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
it s 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 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.

  The Company intends to approach the development and production of live action
proprietary programming in much the same way as it does animated programming.
In most cases the Company intends to have pre-negotiated distribution for the
project, which distribution commitments will be an integral factor in financing
and commencing production of such programming.  The Company currently intends
only to invest in the production of a program if the Company secures a
guaranteed distribution agreement from a major television network, cable
network,  syndication company, or in the case of a feature film, financing and
distribution from a U.S. or international distributor.  As of December 31, 1997
the Company had no commitments  to produce live action programming for
television broadcast or other distribution in 1998.

PRODUCTION

  ANIMATED TELEVISION PRODUCTION

  The Company generally commences production of animated television programs
during the first and second quarters of any year for delivery commencing during
the third quarter, and to a greater 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 the Company.  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.

  LIVE ACTION TELEVISION PRODUCTION

  Live action television productions typically follow a production process
similar to animation.  Independent producers such as the Company generally make
sales  presentations to the broadcast networks and cable channels during the
spring  and fall seasons and receive orders for production  beginning in the
early summer or early winter.  Once an initial series or pilot script has been
ordered, the independent producer  hires a writer approved by the broadcaster,
syndicator or cable channel, that is, the distributor, to write the series or
pilot.  Once the pilot script is delivered to the distributor, the distributor
decides whether to order a pilot or episodes to be produced.  Most broadcasters
and cable channels order pilots before ordering a volume of episodes of a
series, while a syndicator usually orders individual episodes.  Generally the
broadcast networks order a small number such as six to eight episodes for a new
series, while the cable networks or syndicators order 13 to 22 episodes.  Once a
pilot or episodes are ordered, the independent producer  hires the staff of
actors, writers and directors and a sound stage with  the light, camera and grip
equipment necessary to produce a live

                                       6
<PAGE>

action series.  All of the staff and the equipment involved in a live action
production are assigned to the specific production.  The independent producer
edits the footage shot on the sound stage, mixing the video images with sound
and music, and delivers a finished program to the distributor.

  COMPUTER ANIMATION PRODUCTION

  In 1996, the Company closed down its interactive division.  In the fall of
1997, the Company took the existing equipment and software licenses that were
available to the Company from the interactive division, together with some
additional software and hardware, and created a computer animation division.  At
that time, the Company hired a senior executive and creative and technical
personnel who have extensive experience in the computer animation business.
There is a growing trend in the world marketplace towards the use of computer
animation as both a complete delivery and production process, as well as a way
to reduce costs in the cel animation production through digital ink and paint
systems. The Company intends to continue to explore computer animation
opportunities both because of its unique look and style, and the hoped for
economies of scale.

  FEATURE FILM PRODUCTION

  The Company, together with Universal Pictures/MCA and Dustin Hoffman's Punch
Productions, is currently in  development on the feature film titled There Goes
The Neighborhood.  The film will feature a mixture of live action and animation
(similar to that of Who Framed Roger Rabbit?).  While no assurance can be given
that There Goes the Neighborhood will be produced, the Company currently has a
number of other feature film projects in internal development.   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 both strategic alliances with
major studios and independent film distribution companies.  As a result, the
Company may be unable to retain control of all or a significant portion of the
rights associated with these feature films.

  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.

  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

                                       7
<PAGE>

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.  For the years ended December 31, 1996 and 1997, the
Company's international distribution activities generated revenues of  $7.2
million and $3.6 million,  respectively (or 15% and 8%, respectively, of total
revenue for such periods).

  HOME VIDEO DISTRIBUTION.   As described above, one part of the Company's
strategy to expand its product base is to enter the direct-to-video animation
and live action production and distribution business.  The Company may provide,
in some cases, a portion of the production funds in return for distribution
guarantees and/or a substantial portion of the production funds from a major
home video distributor.  The Company believes that it can create and develop
high quality popular direct-to-video animated and live action programming that
can be economically produced and exploited domestically and internationally.

                                       8
<PAGE>

LIBRARY

     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.


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                           Number of                                         Licensing
         Series             Episodes            Domestic    International       and
         Title              Produced          Distribution  Distribution   Merchandising    Interactive
-------------------------  ----------        -------------  ------------- ---------------   -----------
                                             TV      Home   TV      Home
                                                     Video          Video
=======================================================================================================
<S>                         <C>              <C>     <C>    <C>     <C>    <C>               <C>
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.  As a consequence, broadcasters have continued to  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 significant negative impact on the Company's
core animation 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 fully effective in
September 1997, require television broadcast station licensees, over the term of
their licenses, to serve the educational and informational needs of children
through their overall programming and programming specifically designed to serve
such needs.  The FCC strongly encourages broadcasters (through the license
renewal process) to air between the hours of 7:00AM and 10:00PM at least three
hours per week of regularly-scheduled programs each at least 30 minutes in
length that have as a significant purpose serving the educational and
informational needs of children aged 16 and under.  Such programming must be
specifically identified as educational or informational programming.   While the
Company is not subject to the direct jurisdiction of the FCC, these FCC
requirements may influence the content of the Company's programming 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."

  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.

                                       9
<PAGE>

TRADEMARKS

  The Company has a registered service mark for the Film Roman name and logo.
The Company has applications pending with the United States Patent and Trademark
Office to register several trademarks, including C-Bear and Jamal 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, Mighty Max and King of the Hill.

EMPLOYEES

  As of December 31, 1997, the Company had approximately 262 full-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 animated television programs.  The Simpsons, King of the Hill,
and Bobby's World accounted for approximately 32%, 30% and 9%, respectively, of
the Company's total revenue for the year ended December 31, 1997.  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.  Currently, the major voice-
over talent on The Simpsons is in contract negotiations and there can be no
assurance that these negotiations will be successfully concluded, which could
result in the delay or cancellation of all or part of the series.  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 children's 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 and
which are available to independent animation producers 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)).
With the changes in the financial and syndication rules, broadcasters have
become much more likely to order and broadcast programming owned by them or
their affiliated companies, rather than from independent animation companies. As
of March 31, 1998, the Company's newly produced programming is scheduled to
occupy two Network time slots during the 1998-99 season.

  Certain rules of the FCC adopted in August 1996 which became fully effective
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, there has been some significant
impact on the Company. CBS, one of the Company's primary customers over the
years, elected to change its programming slate to one that is educational and in
conformance with the FCC regulations. In its first year implementing this
strategy, CBS ordered no new animated programming from the Company. In its
second year of implementation, CBS reduced its license fees. As a consequence,
Nelvana, a Canadian animation company which the Company believes receives
governmental subsidies and one of the few companies able to deliver programming
to CBS with the lower license fees, entered into an arrangement

                                       10
<PAGE>

with CBS to provide CBS with all or most of CBS' Saturday morning programming .
In addition to this particular effect of the FCC rule change, 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 a number of 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."

  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 network broadcasters 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, as the trend towards vertical
integration discussed above has continued, 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.  The Company believes that 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 development or will renew licenses to
broadcast programs currently produced by the Company.  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.

                                       11
<PAGE>

  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
62%, 9% and 9% of its total revenue from its top three customers, Twentieth
Television (a division of Twentieth Century Fox), UPN, and Fox Children's
Network (an affiliate of Twentieth Century Fox), respectively, for the year
ended December 31, 1997.  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 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 Production--Proprietary Programming." Revenues derived from the
Company's proprietary programming were $15.0 million and $4.9 million for the
years ended December 31, 1996 and 1997, 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 experience
related to the exploitation of such rights.

  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 "--Blues Brothers: The Animated Series."

  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

                                       12
<PAGE>

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.  Moreover, because license fees in the U.S. have been dropping
substantially recently, companies which are not reliant on U.S. broadcast
license fees to finance the production of animation programming, particularly
international animation companies which receive governmental subsidies, have
achieved a competitive advantage and now serve as an additional source of
competition for the limited slots available to independent animation companies.
Management also 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 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.  In the first quarter of 1998, the Company
decided to reduce its fixed overhead by outsourcing its licensing and
merchandising activities.  However, the Company expects that the exploitation of
its licensing and merchandising rights will remain an important part of the
Company's strategy.  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, 1997, the Company derived no significant revenue
from its licensing and merchandising activities.

  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 significant political and/or economic turmoil,
such as, but not limited to, devaluation of the won and other Asian currencies.
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.

                                       13
<PAGE>

     International Sales.  Approximately 15% and 8% of the Company's revenue for
the years ended December 31, 1996 and 1997, 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."

  RISK ASSOCIATED WITH POSSIBLE NEW BUSINESSES

     Due in part to the recent changes in the television industry described in
this Report, the Company is seeking to enter into new business areas beyond its
core business of animation television production.  The Company intends to enter
into live action television production, feature film production (both live
action and animation) and direct-to-video production (both live action and
animation).  Such production may be on a "fee-for-services" or a "proprietary"
basis.  The television, feature film and direct-to-video industries are highly
speculative and involve a substantial degree of risk.  The success of an
individual television program, feature film or direct-to-video release depends
upon unpredictable and changing factors, such as personal tastes of the public
and critics.  Therefore, there is a substantial risk that any of the Company's
projects will not be successful, resulting in costs not being recouped and
anticipated profits not being realized.  Although the Company intends to attempt
to limit the risks involved with television, film and direct-to-video production
through various activities which may include entering into co-production, pre-
sale financing and/or distribution arrangements, the Company will likely be
unable to limit all financial risk associated with a television production,
feature film or direct-to-video release.  In addition, because the success of a
television production, feature film or direct-to-video release is dependent upon
consumer taste and critical response, as well as public awareness of a
production and the successful distribution of a production, the level of
marketing, promotional and distribution activities and expenses necessary in any
particular instance cannot be predicted with certainty.  Moreover, the Company
has no history of developing, producing, or distributing live action television
or film productions and there can be no assurance that the Company can compete
successfully with more established persons or entities.  Live action production
involves many of the risks associated with animation production that are
described in this Report, as well as additional risks inherent to live action
that  are outside of the Company's control, including the risk of work stoppage
or strike, increased union activity, delay in production due to weather and
other local conditions, inability to obtain proper permitting to film at a
desired site, at desired times and/or under desired terms, and accidents or
injury to actors and film crew.  No assurance can be given that the Company will
produce any live action television or film productions or that, if produced,
that such productions will be profitable.

  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.   No assurance can be given that the
introduction and proliferation of three-dimensional digital animation or other
technological changes will not cause the Company's historical  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, although in creating its
digital animation division, the Company is currently attempting to do so.

  DEPENDENCE UPON KEY PERSONNEL.  The Company's success depends to a significant
extent upon the expertise and services of David Pritchard, the Company's
President and Chief Executive Officer, and Phil Roman, the Company's Chairman.
The loss of the services of Mr. Pritchard or 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 Pritchard and certain of its other
key management personnel. The Company does not currently carry "key man" life
insurance policies on any of its executives. There can be no assurance that the
Company will be able to retain its existing management personnel. In addition,
the Company's

                                       14
<PAGE>

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 also has a wholly
owned subsidiary, Namor Productions Inc., which is a signatory to the Writer's
Guild of America collective bargaining agreement. The Company believes that its
future success will depend, in part, on its continuing ability to attract,
retain and motivate qualified personnel in both its existing and new businesses.

  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."

                                       15
<PAGE>

ITEM 2.   PROPERTIES

  The Company conducts its operations through its 65,000 square foot studio and
headquarters located in North Hollywood, California.  These facilities are
occupied pursuant to a lease that expires in August 2003 (and contains renewal
options).

ITEM 3.   LEGAL PROCEEDINGS

  The Company is not a party to any material legal proceedings and is not aware
of any pending or threatened litigation that, if decided adversely to the
Company, would have a material adverse effect upon the Company's business,
results of operations or financial condition.

  On March 20, 1998, the Company received notice that Mad Cow Productions, Inc.,
as assignee of Michael Waeghe, intends to file a Petition of Arbitration on
March 27, 1998 alleging claims against the Company arising out of a
Writer/Producer Agreement dated as of July 17, 1995 by and between Mad Cow
Productions, Inc. and the Company in connection with Blues Brothers: The
Animated Series.  The Company is presently unable to evaluate the claim because
the proceedings have not yet been instituted.  However, the Company believes
that any proceedings which Mad Cow or Michael Waeghe might institute would not
have merit and would not be material.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  No matters were submitted to a vote of security holders during the quarter
ended December 31, 1997.



                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "ROMN."  The following table sets forth the high and low closing sale
price per share for the Common Stock for each quarter since the quarter ending
December 31, 1996.

<TABLE>
<CAPTION>

                       1996         High      Low
                       ----         ----      ---
                  <S>              <C>       <C>
                   4th Quarter     $10.125   $5.875

                       1997
                       ----

                   1st Quarter     $ 7.625   $1.875

                   2nd Quarter     $ 2.625   $ 1.25

                   3rd Quarter     $ 2.875   $1.375

                   4th Quarter     $ 2.375   $1.375
</TABLE>

  On March 19, 1998, the closing sale price of the Common Stock on the Nasdaq
National Market was $1.5625 per share.  At March 19, 1998, there were 34
stockholders of record, excluding the number of beneficial owners whose shares
were held in street name.  The Company believes that the number of beneficial
holders is significantly in excess of this amount.

                                       16
<PAGE>

  The Company has not paid dividends on its Common Stock since inception and
does not anticipate paying dividends in the foreseeable future.  Management
anticipates that all earnings and other cash resources of the Company, if any,
will be retained by the Company for investment in the business.

ITEM 6.   SELECTED FINANCIAL DATA

  The selected financial data set forth below as of December 31, 1994, 1995,
1996 and 1997 and for each of the four  years in the period ended December 31,
1997 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 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,
                                                           -------------------------------------------------------------------
                                                              1993          1994          1995          1996          1997
                                                           -----------   -----------   -----------   -----------   -----------
                                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                        <C>           <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
  Revenue................................................  $   27,867    $   36,201    $   34,341    $   49,698    $   42,296
  Expenses:
    Cost of revenue......................................  $   25,675        33,190        33,156        50,779        43,013
    Selling, general and administrative expenses.........       1,368         1,829         2,963         3,850         4,745
                                                           ----------    ----------    ----------    ----------    ----------
  Operating income (loss)................................         824         1,182        (1,778)       (4,931)       (5,462)
  Interest income (expense), net.........................         (21)          (28)           89           298           649
                                                           ----------    ----------    ----------    ----------    ----------
  Net income (loss)......................................         803         1,154        (1,689)       (4,633)       (4,813)
  Net income (loss) attributable to common stock(1)......  $      803    $    1,154    $   (2,574)   $   (9,267)   $   (4,813)
                                                           ==========    ==========    ==========    ==========    ==========
  Net income (loss) per common share(1)(2) basic and
   diluted...............................................  $     0.17    $     0.25    $    (0.55)   $    (1.67)   $    (0.57)
                                                           ==========    ==========    ==========    ==========    ==========
  Pro forma net income (loss) per common share(3) basic
   and diluted...........................................  $     0.10    $     0.15        $(0.43)   $       --    $       --
                                                           ==========    ==========    ==========    ==========    ==========
  Weighted average number of shares
  outstanding basic and diluted..........................   4,653,750     4,653,750     4,653,750     5,553,094     8,453,440
                                                           ==========    ==========    ==========    ==========    ==========

<CAPTION>
                                                                                   AS OF DECEMBER 31,
                                                           ------------------------------------------------------------------
                                                              1993          1994          1995          1996          1997
                                                           ----------    ----------    ----------    ----------    ----------
                                                                                     (IN THOUSANDS)
<S>                                                        <C>           <C>           <C>           <C>           <C>
BALANCE SHEET DATA (AT END OF PERIOD):
  Cash and cash equivalents..............................  $      448    $      436    $    5,176    $   13,739    $   15,986
  Film costs, net of amortization........................      10,603        12,382        12,379        21,269        16,084
  Total assets...........................................      11,832        13,694        18,950        42,817        34,379
  Short-term debt........................................       1,270         1,363         1,737            --            --
  Redeemable Preferred Stock.............................          --            --         6,749            --            --
  Stockholders' equity...................................         784         1,691         1,832        23,787        18,974
</TABLE>

                                       17
<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)  The Company has adopted Statement of Financial Accounting Standard No. 128,
     Earnings Per Share ("SFAS No. 128"), which is effective for annual and
     interim financial statements issued for periods ending after December 15,
     1997. In accordance with SFAS No. 128, prior years' per share amounts have
     been restated. SFAS No. 128 was issued to simplify the standards for
     calculating earning per share ("EPS") previously in APB No. 15, Earnings
     Per Share. SFAS No. 128 replaces the presentation of primary EPS with a
     presentation of basic EPS. The new rules also require dual presentation of
     basic and diluted EPS on the face of the statement of operations.

     For the years ended December 31, 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") No. 98 whereby common stock, options or
     warrants to purchase common stock or other potentially dilutive instruments
     issued for nominal consideration must be reflected in basic and diluted per
     share calculations for all periods in a manner similar to a stock split,
     even if antidilutive. For the year ended December 31, 1996, the weighted
     average number of common and common equivalent shares outstanding have been
     calculated in accordance with the SAB No. 98 for the period prior to the
     completion of the Company's initial public offering giving effect to the
     conversion of Predecessor Common Stock into 1.25 shares of Common Stock and
     in accordance with SFAS No. 128 for the period after such offering. For the
     year ended December 31, 1997, the per share data has been calculated in
     accordance with SFAS No. 128. Common equivalent shares, consisting of
     outstanding stock options are not included since they are antidilutive.

(3)  The Company operated as an S Corporation until August 4, 1995. As an S
     Corporation, the Company was subject to no federal income taxes and only
     minimum state taxes. The pro forma income (loss) per common share amounts
     reflect adjustments for additional income taxes that would have been
     reported if the Company had been a C Corporation based upon an estimated
     statutory rate of 40% in 1993 and 1994 and 34% in 1995.

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                                     ------------------------------
                                                                      1993       1994       1995
                                                                     -------   --------   ---------
<S>                                                                  <C>       <C>        <C>
Net income (loss) attributable to common stock as
reported..........................................................    $ 803     $1,154     $(2,574)

Pro forma provision for income taxes..............................     (321)      (462)        574
                                                                      -----     ------     -------
Pro forma net income (loss).......................................    $ 482     $  692     $(2,000)
                                                                      =====     ======     =======
Pro forma net income (loss) per common share basic and
diluted...........................................................    $0.10     $ 0.15     $ (0.43)
                                                                      =====     ======     =======
</TABLE>

                                       18
<PAGE>

 ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

GENERAL

    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.  Fees paid to the Company for these production services
generally range from $300,000 to $600,000 per episode and typically cover all
direct production costs plus a profit margin.  The Company has begun to produce
programming for which it controls some of the "proprietary rights" associated
with such programming (including, for example, international distribution and
licensing and merchandising rights.)  Fees paid to the Company for these
production services typically do not cover all direct production costs.
Generally, the Company seeks to cover at least 50% of its production costs prior
to production of its proprietary programs and seeks to cover the remaining
production costs through the exploitation of the proprietary rights associated
with these programs.  As a result, the Company may recognize revenue associated
with its proprietary programming over a period of years.

    The Company produces a limited number of animated 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
limited access to distribution channels (particularly for programs produced by
independent studios), the declining license fees paid to producers of
programming by broadcasters and the regulations implemented by the Federal
Communications Commission governing program content.  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 costs, 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
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.

    The Company is currently seeking to enter into new business areas beyond its
core business of animation television production such as live action television
production, feature film production (both live action and animation) and direct-
to-video production (both live action and animation). The Company's future
performance will be affected by unpredictable and changing factors that
influence the success of an individual television program, feature film or
direct-to-video release such as personal taste of the public and critics as well
as public awareness of a production and the successful distribution of a
production. Although the Company intends to attempt to limit the risks involved
with television, film and direct-to-video production, the Company will likely be
unable to limit all financial risk, and the level of marketing, promotional and
distribution activities and expenses necessary for such production cannot be
predicted with certainty. The Company has no history of developing, producing or
distributing live action television or film productions, and there can be no
assurance that the Company can compete successfully with more established
persons or entities. Live action production involves many of the risks
associated with animation production as well as additional risks inherent to
live action that are outside of the Company's control. These risks include, but
are not limited to, the risk of strike by actors and film crew, increased union
activity, delay in production due to weather and other local conditions,
inability to obtain proper permitting at a desired site, at desired times and/or
under desired terms, and accidents or injury to actors and film crew. No
assurance can be given that the Company will produce any live action television,
film or direct-to-video productions or that, if produced, such productions will
be profitable.

    In the first quarter of 1998, the Company decided to reduce its fixed
overhead by outsourcing its licensing and merchandising, public relations,
promotion, and advertising to third party suppliers.  The Company will consider
bringing these functions in-house again, should the volume indicate that such
action would be prudent.

BLUES BROTHERS: THE ANIMATED SERIES

    The Company put its proprietary production of  "Blues Brothers: The
Animated Series" (the " Blues Brothers") into hiatus in March 1997 following
discussions between the Company and United Paramount Network ("UPN") with
respect

                                       19
<PAGE>

to certain creative aspects of the project. Although in August 1997 UPN
announced its intention to run the series in the fall of 1998, the network
subsequently changed its programming strategy to de-emphasize prime time
animation, which led to UPN's decision in September 1997 to cancel its plans to
air the Blues Brothers. In September 1997, UPN and the Company entered into a
settlement whereby UPN compensated the Company for a portion of the costs
associated with the production of the show. The Company's investment amounted to
approximately $6.0 million as of December 31, 1997, and the Company recorded a
write off for the year ended December 31, 1997, of approximately $2.0 million.

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 ($12.2 million at December 31, 1997).

    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, 1997, the
Company's capitalized film costs balance was $16.1 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 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, however, this may
be offset by collections for sales of the Company's shows in international
markets.

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.

                                       20
<PAGE>

RESULTS OF OPERATIONS

    YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

    Total revenue decreased by 15%, or $7.4 million, to $42.3 million for
the year ended December 31, 1997, from $49.7 million for the prior year.  Total
revenue decreased  primarily because the Company delivered significantly fewer
episodes of programming in 1997 as compared to 1996.  The Company delivered a
total of 68 episodes of programming for the year ended December 31, 1997 as
compared to 141 episodes delivered in 1996.

    The Company delivered 58 "fee-for-services" episodes during the year
ended December 31, 1997, compared to 81 episodes in 1996. Fee-for-services
revenue increased 9%, or $2.6 million, to $30.6 million for the year ended
December 31, 1997, from $28.0 million in 1996 as a result of delivering more
Prime Time episodes which generally generate higher per-episode fees than
Saturday morning episodes.

    The Company delivered 10 "proprietary" episodes for the year ended
December 31, 1997, compared to 60 episodes in 1996.  "Proprietary revenue"
consists of revenue derived from the U.S. license fees paid upon the initial
delivery of a new episode of proprietary programming to a U.S. broadcaster and
from the exploitation of the proprietary rights (e.g., merchandising, licensing
and/or international distribution rights) associated with the proprietary
episodes in the Company's library that were initially delivered in prior
periods.  "Proprietary" revenue decreased by 41%, or $6.1 million, to $8.9
million for the year ended December 31, 1997, from $15 million in 1996.  This
decrease was a result of significantly fewer "proprietary" episodes being
delivered partially offset by $4 million in revenue from the "Blues Brothers"
settlement with UPN and continued international sales of the Company's library
programming.

    Other revenue decreased by approximately $4.0 million for the year
ended December 31, 1997, as compared to the prior year, due primarily to lower
revenues from commercials and specials, interactive revenues and net profit
participations.

    Total cost of revenue decreased by 15%, or $7.8 million, to $43.0
million for the year ended December 31, 1997, from $50.8  million for the year
ended December 31, 1996.  Total cost of revenue as a percentage of sales
remained constant at 102% for both 1997 and 1996.

    Total selling, general and administrative expenses for the year ended
December 31, 1997 increased by $0.8 million to $4.7 million  from $3.9 million
for the comparable period in 1996, due primarily to increased professional fees,
the write off of certain development costs and ongoing costs of operating a
public company.

    Operating loss was $5.5 million for the year ended December 31, 1997,
as compared to a loss of  $4.9 million for the year ended December 31, 1996.


    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.

                                       21
<PAGE>

    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 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.

LIQUIDITY AND CAPITAL RESOURCES

    Greater capital resources are required for the Company to develop and
produce proprietary programs, retain the proprietary rights associated with such
programs, and increase its presence in the licensing and merchandising and
international distribution markets. 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. The Company
seeks to cover the remaining production costs through the exploitation of the
proprietary rights associated with the programs in its library (e.g.,
international distribution rights and/or merchandising,and licensing).
Historically, in the fourth quarter, and to a lesser extent the third quarter,
cash used in operations typically exceeded cash generated by operations as
completed shows were delivered to broadcasters. However, the Company has begun
to exploit, to a greater extent, the international distribution rights
associated with the proprietary programs in its library. As a result, the
Company expects that cash used in or provided by operations will fluctuate
greatly from quarter to quarter, due in part, to the international sales and
collections cycle related to the programs in its library.

    For the year ended December 31, 1997, net cash provided by operating
activities was $2.5 million due to non cash amortization of film cost being
greater than cash spent on film cost additions and cash generated in connection
with a decrease in accounts receivable, offset by fluctuations in other
operating assets and liabilities. For the year ended December 31, 1997, net cash
used for investing activities was $0.3 million due to additions to property and
equipment. The Company had minimal financing activities during 1997.

    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.

                                       22
<PAGE>

IMPACT OF YEAR 2000

    Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.

    The Company has begun an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost, including the cost of modifying the computer software, is not
expected to be material.

    The project is estimated to be completed not later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed on a timely basis, the Year 2000 issue could have a
material impact on the operations of the Company.

    The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.

FORWARD-LOOKING STATEMENTS

    This Report contains certain forward-looking statements, relating to, among
other things, future results of operations, growth plans, plans to enter into
new business areas beyond the Company's core business of animation television
production, 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.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    See the index included at "Item 14. Exhibits, Financial Statements Schedules
and Reports on Form 8-K."

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

    None.

                                       23
<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.............    67   Chairman of the Board of Directors (Class III Director)
David Pritchard........    50   President, Chief Executive Officer (Class I Director)
Jon F. Vein............    34   Senior Vice President
Jacqueline Blum (4)....    36   Senior Vice President-Worldwide Licensing and Marketing
Gregory Arsenault......    40   Senior Vice President--Finance and Administration
Robert Cresci (3)......    54   Class I Director
Dixon Q. Dern (2)......    69   Class III Director
Dennis W. Draper (2)...    49   Class II 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 II Directors, Class III Directors and Class I
     Directors will be held at the Annual Meeting of Stockholders in 1998, 1999,
     and 2000, respectively.
(2)  Member of Compensation Committee.
(3)  Member of Audit Committee.
(4)  Ms. Blum will leave her position with the Company as of April 1, 1998.

     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, Chairman of the Board of Directors.  Mr. Roman was  the Company's
Chief Executive Officer since the Company was founded in 1984 until September,
1997.  Mr. Roman continues to serve as Chairman of the Board of Directors.  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.

  David Pritchard, Chief Executive Officer, President and Director.  Prior to
working at the Company, Mr. Pritchard served as HBO's Vice President of
Corporate Affairs in New York.  After leaving HBO, he formed his own company,
Popular Arts Entertainment.  While there, he produced and developed numerous
projects for A&E, HBO, Comedy Central, as well as providing entertainment news
coverage for many different network shows.  After selling Popular Arts
Entertainment, Mr. Pritchard founded Little Fish Inc., where he developed and
produced shows for Columbia Tri Star, TNT and HBO.  In September of 1997, Mr.
Pritchard joined Film Roman Inc. as President and Chief Executive Officer.

  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
and new business development for the Company.  Mr. Vein also established and
oversees the Company's feature film division.  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 received his Bachelor of Science

                                       24
<PAGE>

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.

  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 and the administrative
activities of the Company.  Prior to joining Film Roman, Mr. Arsenault served as
an accounting systems consultant for LIVE Entertainment and began his
professional career at Peat, Marwick, Mitchell and Co.  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.  Dr. 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.  Dr. Draper
serves as trustee of the First Choice Funds.

  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 Zeneca 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 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.  As of September 1997,
the BCI Affiliate irrevocably waived its right to designate one director to the
Board.

                                       25
<PAGE>

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  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 during the fiscal year ended
December 31, 1997, except as follows:

  William Schultz, former Executive Vice President, sold 3,500 shares of Common
Stock of the Company on March 17, 1997, and a Form 4 was filed subsequent to the
date required to report such transaction.  Anita Roman, the wife of Phil Roman,
Chairman of the Board of Directors, purchased 1,000 shares of Common Stock of
the Company on May 12, 1997, and a Form 5 was filed subsequent to the date
required to report such transaction.  David Pritchard, Chief Executive Officer,
President and Director, amended the Form 3 that was initially filed on August
29, 1997 to reflect options granted to Mr. Pritchard by a third party.

                                       26
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

  The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement filed pursuant to Regulation 14A under the
Exchange Act in connection with the Company's 1998 Annual Meeting of
Stockholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement filed pursuant to Regulation 14A under the
Exchange Act in connection with the Company's 1998 Annual Meeting of
Stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement filed pursuant to Regulation 14A under the
Exchange Act in connection with the Company's 1998 Annual Meeting of
Stockholders.

                                    PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

(a)  Financial Statements and Schedules required to be filed hereunder are
     indexed on page F-1 hereof.

     Schedules for which provision is made in the applicable accounting
     regulations of the Securities and Exchange Commission are either not
     required under the related instructions or are inapplicable, and therefore
     have been omitted.

(b)  No reports on Form 8-K were filed during the quarter ended December 31,
     1997.


(c)  Those Exhibits, and the Index thereto, required to be filed by Item 601 of
     Regulation S-K are attached hereto. Certain management contracts and other
     compensation plans or arrangements required to be filed are identified on
     the attached Index with an asterisk.

                                       27
<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 25th day
of March, 1998.


                               FILM ROMAN, INC.

                               /s/   PHIL ROMAN
                               -------------------------
                                     Phil Roman
                           Chairman of the Board of Directors

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             Chairman of the Board of Directors         March 25, 1998
--------------------------
      Phil Roman

 /s/  DAVID PRITCHARD        Chief Executive Officer, President and     March 25, 1998
--------------------------                  Director
      David Pritchard

 /s/  GREGORY ARSENAULT        Senior Vice President--Finance and       March 25, 1998
--------------------------    Administration (Principal Accounting
      Gregory Arsenault                and Financial Officer)

 /s/  ROBERT CRESCI                         Director                    March 25, 1998
--------------------------
      Robert Cresci

 /s/  DENNIS DRAPER                         Director                    March 25, 1998
--------------------------
      Dennis Draper

 /s/  PETER MAINSTAIN                       Director                    March 25, 1998
--------------------------
      Peter Mainstain

 /s/  DIXON Q. DERN                         Director                    March 25, 1998
--------------------------
      Dixon Q. Dern
</TABLE>

                                      S-1
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER     DESCRIPTION
--------   -----------
<C>        <S>
    +3.1   Certificate of Incorporation of Film Roman, Inc., a Delaware corporation (the "Company")
    +3.2   Bylaws of the Company
     3.3   Amendment to Bylaws of the Company dated as of August 5, 1997 (Incorporated by reference to
           Exhibit 3.3 to the Company's form 10-Q for the quarter ended September 30, 1997)
    +4.1   Specimen Stock Certificate
  +*10.1   Employment Agreement dated as of August 7, 1995 by and between Film Roman, Inc., a California
           corporation ("Film Roman California") and Mr. Phil Roman
  +*10.2   Employment Agreement dated as of January 2, 1996 by and between Film Roman California
           and Mr. Gregory Arsenault (Exhibit 10.5)
  +*10.3   Employment Agreement dated as of August 1, 1997 by and between Film Roman California and Mr.
           Jon Vein (Incorporated by reference to Exhibit 10.48 to the Company's Form 10-Q for the quarter
           ended September 30, 1997)
   *10.4   Terms of Executive Employment Agreement dated as of August 22, 1997 by and between the
           Company and Mr. David Pritchard
    10.5   Intentionally Omitted
    10.6   Intentionally Omitted
   *10.7   Stock Option Plan of the Company
  +*10.8   Form of Non-Qualified Stock Option Agreement for Employees
  +*10.9   Form of Incentive Stock Option Agreement for Employees
   10.10   Intentionally Omitted
  +10.11   Lease for Registrant's headquarters and studio in North Hollywood, California
   10.12   Intentionally Omitted
   10.13   Intentionally Omitted
  +10.14   Agreement dated December 11, 1990, between Film Roman, Inc. and Alevy Productions, Inc.
  +10.15   Series Production Agreement dated as of April 27, 1990 between Fox Children's Network and
           Film Roman, Inc.
  +10.16   Agreement dated as of June 20, 1995, between Film Roman, Inc. and Starstream Limited
  +10.17   Amendment dated December 18, 1992 between Film Roman, Inc. and Fox Children's Network
  +10.18   Amendment dated March 22, 1994 between Film Roman, Inc. and Fox Children's Network
  +10.19   Agreement dated October 5, 1994 between Flying Heart, Inc. and Film Roman, Inc.
  +10.20   Agreement dated February 20, 1996 with Live Film and Mediaworks, Inc. and Film Roman, Inc.
  +10.21   Letter Agreement dated January 9, 1995 with Agreement dated November 22, 1993, revised December
           9, 1994, December 13, 1993, June 23, 1994 and August 1, 1994 between Fox Children's Network
           ("FCN") and Film Roman, Inc.
  +10.22   Agreement dated June 1, 1995, between Fox Children's Network and Film Roman, Inc.
  +10.23   Amendment dated March 1, 1996 to the Agreement dated as of November 22, 1993 between Fox
           Children Network and Film Roman, Inc.
  +10.24   Agreement dated September 12, 1994 between Film Roman, Inc. and Tone Loc, Inc.
  +10.25   Agreement dated as of May 7, 1993 between Film Roman, Inc. and Adelaide Productions, Inc.
  +10.26   Amendment dated as of May 18, 1994 revised as of June 14, 1994 between Film Roman, Inc. and
           Adelaide Productions, Inc.
  +10.27   Amendment dated as of June 20, 1994 revised as of July 7, 1994 between Film Roman, Inc. and
           Adelaide Productions, Inc.
  +10.28   Agreement dated November 9, 1993 between Film Roman, Inc. and Felix The Cat Creations, Inc.
</TABLE>
                                      S-2
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER   DESCRIPTION
  ------   -----------
  <C>      <S>
  +10.29   Agreement dated as of June 28, 1994 between CBS Entertainment and Film Roman, Inc.
  +10.30   Agreement dated September 27, 1994 between Felix The Cat Creations, Inc. and Film Roman, Inc.
  +10.31   Letter Agreement dated June 6, 1995 between Felix The Cat Corporation and Film Roman, Inc.
  +10.32   Agreement dated September 1, 1995 between Felix Comics, Inc. and Film Roman, Inc.
  +10.33   Agreement dated November 20, 1995 between Felix The Cat Creations, Inc. and Film Roman
  +10.34   Amendment to Output Distribution Agreement dated February 1, 1994 between Film Roman,
           Inc. and Taurus Film GmbH & Company
  +10.35   Output Distribution Agreement dated as of September 1, 1994 between Film Roman, Inc. and
           Taurus Film GmbH & Company
  +10.36   Agreement dated April 1, 1991 between United Media/Mendelson Production and Film Roman,Inc.
           re: Prime Time Television special
  +10.37   Agreement dated April 1, 1991 between United Media/Mendelson Production and Film Roman, Inc.
           re: Saturday Morning Series
  +10.38   Co-Production Agreement dated June 11, 1993 between Canal Plus and Bluebird Toys (the
           U.K.) Limited and Film Roman, Inc. regarding Mighty Max
  +10.39   Agreement dated April 12, 1994 between Canal Plus and Bohbot Entertainment Worldwide, Inc. and
           Film Roman, Inc
  +10.40   Form of Agreement between Film Roman, Inc. and Threshold Entertainment
  +10.41   Agreement dated as of January 29, 1992 between Film Roman, Inc. and 20th Television (Exhibit
           10.43)
  +10.42   Agreement dated as of March 7, 1996, between Film Roman, Inc. and LUK International (Exhibit
           10.44)
  +10.43   Agreement dated as of May 22, 1996, between Film Roman, Inc. and Canal-Plus--Spain (Exhibit
           10.45)
  +10.44   Co-Production Agreement between Television Espanola, S.A. and Film Roman, Inc. (Exhibit 10.46)
    21.1   Subsidiaries of the Registrant
    23.1   Consent of Independent Auditors
    27.1   Financial Data Schedule for the year ended December 31, 1997
    27.2   Financial Data Schedule for the year ended December 31, 1996
    27.3   Financial Data Schedule for the three and nine month period ended September 30, 1996
    27.4   Financial Data Schedule for the year ended December 31, 1995, the six month period ended June
           30, 1996 and the three month period ended March 31, 1996
</TABLE>
                          --------------------------
+Incorporated by reference to the similarly numbered exhibit (or to the exhibit
  number listed in parentheses) to the Company's Registration Statement on
    Form S-1 (Registration No. 333-03987) as filed with the Securities
                and Exchange Commission on September 30, 1996.
        *Management contract or other compensation plan or arrangement.

                                      S-3
<PAGE>

                               FILM ROMAN, INC.

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                           Page
                                                                                           ----
<S>                                                                                        <C>
Index to Consolidated Financial Statements..............................................   F-1

FILM ROMAN, INC.
 Report of Independent Auditors.........................................................   F-2
 Consolidated Balance Sheets as of December 31, 1996 and 1997...........................   F-3
 Consolidated Statements of Operations for the Years Ended December 31, 1995,
 1996, and 1997.........................................................................   F-4
 Consolidated Statements of Stockholders' Equity at December 31, 1995, 1996, and 1997...   F-5

 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
 1996 and 1997..........................................................................   F-6

 Notes to Consolidated Financial Statements.............................................   F-8
</TABLE>

                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS


The Board of Directors
Film Roman, Inc.

   We have audited the accompanying consolidated balance sheets of Film Roman,
Inc. as of December 31, 1996 and 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Film Roman, Inc.
as of December 31, 1996 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.


                                                  Ernst & Young LLP

Los Angeles, California
March 13,  1998

                                      F-2
<PAGE>

                               FILM ROMAN, INC.

                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                             -----------------------------
                                                                                 1996            1997
                                                                             -------------   -------------
<S>                                                                          <C>             <C>
                                ASSETS
Cash and cash equivalents.................................................   $ 13,738,927    $ 15,986,250
Accounts receivable.......................................................      6,956,409       1,228,142
Film costs, net of accumulated amortization of
   $169,094,868 (1996) and $212,107,777 (1997)
   (Notes 1 and 2)........................................................     21,268,945      16,084,110
Property and equipment, net of accumulated depreciation and
   amortization of $934,192 (1996)
   and $1,198,494 (1997) (Notes 1 and 3)                                          537,389         535,200
Deposits and other assets.................................................        315,625         544,927
                                                                             ------------    ------------
Total assets..............................................................   $ 42,817,295    $ 34,378,629
                                                                             ============    ============
                            LIABILITIES AND
                          STOCKHOLDERS' EQUITY
Accounts payable..........................................................   $  3,790,136    $  1,009,586
Accrued expenses..........................................................      1,830,314       2,204,414
Deferred revenue (Note 1).................................................     13,409,592      12,190,650
                                                                             ------------    ------------
Total liabilities.........................................................     19,030,042      15,404,650
Commitments (Note 8)
Stockholders' equity (Note 7):
   Preferred Stock, $.01 par value, 5,000,000
   shares authorized, none issued.........................................             --              --
Common Stock, $.01 par value, 20,000,000 shares authorized,
   8,449,690 shares issued and outstanding in 1996 and 8,454,690 shares
    issued and outstanding in 1997........................................         84,498          84,548
Additional paid-in capital................................................     36,305,684      36,305,684

Retained deficit..........................................................    (12,602,929)    (17,416,253)
                                                                             ------------    ------------
Total stockholders' equity................................................     23,787,253      18,973,979
                                                                             ------------    ------------
   Total liabilities and stockholders' equity.............................   $ 42,817,295    $ 34,378,629
                                                                             ============    ============
</TABLE>
                            See accompanying notes.

                                      F-3
<PAGE>

                               FILM ROMAN, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                 ------------------------------------------
                                                                     1995           1996           1997
                                                                 ------------   ------------   ------------
<S>                                                              <C>            <C>            <C>
Revenue (Note 1)..............................................   $34,340,620    $49,697,655    $42,296,156
Cost of revenue...............................................    33,155,523     50,778,748     43,012,909
Selling, general and administrative expenses..................     2,963,211      3,849,864      4,745,363
                                                                 -----------    -----------    -----------
Operating (loss)..............................................    (1,778,114)    (4,930,957)    (5,462,116)
Interest income...............................................       151,534        348,590        648,792
Interest expense..............................................       (62,596)       (50,657)            --
                                                                 -----------    -----------    -----------
Net (loss)....................................................   $(1,689,176)   $(4,633,024)   $(4,813,324)
                                                                 ===========    ===========    ===========
    Net (loss) attributable to
    common stock..............................................   $(2,574,005)   $(9,267,324)   $(4,813,324)
                                                                 ===========    ===========    ===========
    Net (loss) per common share basic and diluted.............   $     (0.55)        $(1.67)        $(0.57)
                                                                 ===========    ===========    ===========
    Pro forma net (loss) per common share basic and diluted...   $     (0.43)   $        --    $        --
                                                                 ===========    ===========    ===========
    Weighted average number
    of shares outstanding basic and diluted...................     4,653,750      5,553,094      8,453,440
                                                                 ===========    ===========    ===========
</TABLE>
                            See accompanying notes.

                                      F-4
<PAGE>

                               FILM ROMAN, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                            Class B Convertible
                                                                     Common Stock             Preferred Stock
                                                                -----------------------   ------------------------
                                                                  Shares       Amount       Shares       Amount
                                                                ----------   ----------   ----------   -----------
<S>                                                             <C>          <C>          <C>          <C>
Balance as of December 31, 1994.............................    2,463,000      $ 1,000           --            --
Exchange of 750,000 shares of common
   stock to Class B Convertible
   Preferred Stock, $.01 par value..........................     (750,000)        (300)     750,000           300
Issuance of the Class A Stock
   Warrants.................................................           --           --           --            --
Dividends paid to common
   stockholder..............................................           --           --           --            --
Dividends accrued to Class A Preferred
   Stockholders.............................................           --           --           --            --
Dividends accrued to Class B
   Convertible Preferred Stockholder........................           --           --           --
Accretion of Class A Preferred Stock........................           --           --           --            --
Issuance of common stock options to an
   employee.................................................           --           --           --            --
Net loss....................................................           --           --           --            --
                                                                ---------      -------    ---------    ----------
Balance as of December 31, 1995.............................    1,713,000          700      750,000           300
Dividends paid to Class A Preferred
   Stockholders.............................................           --           --           --            --
Dividends paid to Class B
   Convertible Preferred Stockholder........................           --           --           --            --
Accretion of Class A Preferred Stock........................           --           --           --            --
Warrant Commitment Expense..................................           --           --           --            --
Initial Public Offering, net proceeds.......................    3,275,364       32,754           --            --
Exchange of Film Roman California
   common stock.............................................      428,250       20,713           --            --
Redemption of the Redeemable Preferred
   Stock....................................................      586,690        5,867           --            --
Conversion and Exchange of Class B Convertible
   Preferred Stock..........................................      937,500        9,375     (750,000)         (300)
Warrants exercised..........................................    1,505,886       15,059           --            --
Options exercised...........................................        3,000           30           --            --
Net loss....................................................           --           --           --            --
                                                                ---------      -------    ---------    ----------
Balance as of December 31, 1996.............................    8,449,690       84,498           --            --

Options exercised...........................................        5,000           50           --            --
Net loss....................................................           --           --           --            --
                                                                ---------      -------    ---------    ----------
Balance as of December 31, 1997.............................    8,454,690      $84,548           --    $       --
                                                                =========      =======    ---------    ----------
<CAPTION>

                                                                 Additional       Retained          Total
                                                                  Paid-In         Earnings      Stockholders'
                                                                  Capital        (Deficit)          Equity
                                                                ------------   --------------   --------------
<S>.........................................................    <C>            <C>              <C>
Balance as of December 31, 1994.............................             --    $   1,689,899      $ 1,690,899
Exchange of 750,000 shares of common
   stock to Class B Convertible
   Preferred Stock, $.01 par value..........................             --               --               --
Issuance of the Class A Stock
   Warrants.................................................      4,474,256               --        4,474,256
Dividends paid to common
   stockholder..............................................             --       (1,751,500)      (1,751,500)
Dividends accrued to Class A Preferred
   Stockholders.............................................             --         (400,000)        (400,000)
Dividends accrued to Class B
   Convertible Preferred Stockholder........................             --         (250,000)        (250,000)
Accretion of Class A Preferred Stock........................             --         (484,829)        (484,829)
Issuance of common stock options to an
   employee.................................................        242,400               --          242,400
Net loss....................................................             --       (1,689,176)      (1,689,176)
                                                                -----------    -------------      -----------
Balance as of December 31, 1995.............................      4,716,656       (2,885,606)       1,832,050
Dividends paid to Class A Preferred
   Stockholders.............................................             --         (750,000)        (750,000)
Dividends paid to Class B
   Convertible Preferred Stockholder........................             --         (450,000)        (450,000)
Accretion of Class A Preferred Stock........................             --         (757,544)        (757,544)
Warrant Commitment Expense..................................        225,000               --          225,000
Initial Public Offering, net proceeds.......................     28,258,282               --       28,291,036
Exchange of Film Roman California
   common stock.............................................        (10,713)              --           10,000
Redemption of the Redeemable Preferred
   Stock....................................................      3,125,593       (3,126,755)           4,705
Conversion and Exchange of Class B Convertible
   Preferred Stock..........................................         (9,075)              --               --
Warrants exercised..........................................            (59)              --           15,000
Options exercised...........................................             --               --               30
Net loss....................................................             --       (4,633,024)      (4,633,024)
                                                                -----------    -------------      -----------
Balance as of December 31, 1996.............................     36,305,684     ( 12,602,929)      23,787,253

Options exercised...........................................             --               --               50
Net loss....................................................             --       (4,813,324)      (4,813,324)
                                                                -----------    -------------      -----------
Balance as of December 31, 1997.............................    $36,305,684    $( 17,416,253)     $18,973,979
                                                                ===========    =============      ===========
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                               FILM ROMAN, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                           ---------------------------------------------
                                                               1995            1996            1997
                                                           -------------   -------------   -------------
<S>                                                         <C>             <C>             <C>
OPERATING ACTIVITIES:
   Net (loss).............................................. $ (1,689,176)   $ (4,633,024)   $ (4,813,324)
   Adjustments to reconcile net (loss) to net cash
   (used in) provided by operating activities:
      Depreciation and amortization........................      130,309         385,164         264,302
      Amortization of film costs...........................   33,155,523      50,778,748      43,012,909
      Compensation expense in connection with the
       issuance of common stock options to an employee.....      242,400              --              --

      Warrant commitment...................................           --         225,000              --
   Changes in operating assets and liabilities:
      Accounts receivable..................................      (47,063)     (6,526,225)      5,728,267
      Film costs...........................................  (33,152,650)    (59,668,547)    (37,828,074)
      Refundable income taxes..............................     (487,500)        487,500               0
      Deposits and other assets............................       89,185        (175,042)       (229,302)
      Accounts payable.....................................      302,598       3,281,703      (2,780,550)
      Accrued expenses.....................................      (42,325)      1,148,131         374,100
      Deferred revenue.....................................   (2,918,638)      6,617,813     ( 1,218,942)
                                                            ------------    ------------    ------------
      Net cash (used in) provided by operating
       activities..........................................   (4,417,337)     (8,078,779)      2,509,386

INVESTING ACTIVITIES:
   Additions to property and equipment.....................     (203,437)       (585,678)       (262,113)
                                                            ------------    ------------    ------------
      Net cash used in investing activities................     (203,437)       (585,678)       (262,113)

FINANCING ACTIVITIES:
   Proceeds from issuance of Class A Preferred Stock and
    Warrants, net of issuance costs........................   10,738,215              --              --
   Option and warrants exercised and other.................           --          23,403              50
   Net proceeds from offering..............................           --      28,291,036              --
   Redemption of the Redeemable preferred stock............           --      (7,500,000)             --
   Borrowings under debt...................................   12,350,000       8,895,000              --
   Repayments on debt......................................  (11,975,431)    (10,632,145)             --
   Dividends declared and paid to preferred stockholders...           --      (1,850,000)             --
   Dividends declared and paid to common stockholder.......   (1,751,500)             --              --
                                                            ------------    ------------    ------------
      Net cash provided by  financing
        activities.........................................    9,361,284      17,227,294              50
                                                            ------------    ------------    ------------
   Net increase in cash....................................    4,740,510       8,562,837       2,247,323
   Cash and cash equivalents at beginning of period........      435,580       5,176,090      13,738,927
                                                            ------------    ------------    ------------
   Cash and cash equivalents at end of period.............. $  5,176,090    $ 13,738,927    $ 15,986,250
                                                            ============    ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid during the period for:
      Interest............................................. $    112,355    $     94,100    $     12,837
                                                            ============    ============    ============
      Income taxes......................................... $    487,500    $         --    $         --
                                                            ============    ============    ============
</TABLE>

                                      F-6
<PAGE>

                               FILM ROMAN, INC.

              CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)


SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:

   In 1995, the Company accrued dividends of $400,000 due to the Class A
Redeemable Preferred stockholders and $250,000 due to the Class B Convertible
Preferred stockholder.  In addition, the Company recorded accretion of the
difference between the carrying value and the Liquidation Value of $484,829 on
the Class A Redeemable Preferred Stock.  See Note 6.

   In 1996, the Company recorded accretion of the difference between the
carrying value and the Liquidation Value of $757,544 on the Redeemable Preferred
Stock.  See Note 6.

   Also in 1996, Redeemable Preferred Stock that was not redeemed for cash was
redeemed for 586,690 shares of Common Stock which resulted in a charge of
$298,256 to retained deficit.



                            See accompanying notes.

                                      F-7
<PAGE>

                               FILM ROMAN, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1997



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BUSINESS AND ORGANIZATION

   Film Roman, Inc., a Delaware corporation (the "Company"), was incorporated in
May 1996 in order to hold all of the outstanding stock of Film Roman, Inc., a
California corporation ("Film Roman California"), following a Reorganization as
described below.  The Company currently conducts all of its operations through
its wholly owned subsidiary Film Roman California.  The Company's primary
business is the production of animated series, and the distribution of such
animation products throughout the world.  The consolidated financial statements
include the accounts of the Company and its subsidiary.  All significant
intercompany balances and transactions have been eliminated.

   REORGANIZATION AND INITIAL PUBLIC OFFERING

   On October 3, 1996, the Company effected a reorganization (the
"Reorganization") pursuant to which (i) Film Roman California merged with and
into a wholly owned subsidiary of the Company; (ii) each outstanding share of
common stock of Film Roman California ("California Common Stock") was converted
into 1.25 shares of common stock of the Company, $.01 par value ("Common Stock")
(including shares of California Common Stock issued immediately prior to such
merger upon the "cashless" exercise of certain warrants and upon conversion of
all outstanding shares of Class B Convertible Preferred Stock); (iii) each
outstanding share of Class A Redeemable Preferred Stock was converted into one
share of redeemable preferred stock of the Company, $.01 par value ("Redeemable
Preferred Stock"); (iv) all outstanding employee options and certain warrants
for the purchase of Common Stock, pursuant to the anti-dilution provisions
thereof, became options and warrants to purchase Common Stock (with options and
warrants to purchase each share of California Common Stock becoming options and
warrants to purchase 1.25 shares of Common Stock at 80% of the exercise price
theretofore applicable); and (v) a warrant issued to the President of the
Company for the purchase of 185,000 shares of California Common Stock was
cancelled.  As a result of the foregoing, Film Roman California became a wholly
owned subsidiary of the Company, and the stockholders of Film Roman California
became stockholders of the Company.  The Reorganization was effected pursuant to
a Plan of Reorganization Agreement dated as of May 15, 1996, as amended, by and
among the Company, Film Roman California and the stockholders of Film Roman
California.

   On October 4, 1996, the Company completed its initial public offering
("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 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 paid by
the Company.

   Immediately following the closing of the Offering, the Company redeemed for
cash $7.5 million liquidation preference of Redeemable Preferred Stock.  The
shares of Redeemable Preferred Stock that were not redeemed for cash were
redeemed for Common Stock (at a redemption price of 1.3072 shares of Common
Stock for each share of Redeemable Preferred Stock) and, as a result, 586,690
shares of Common Stock were issued upon such redemption on October 30, 1996.

                                      F-8
<PAGE>

                               FILM ROMAN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1997


   CASH AND CASH EQUIVALENTS AND CONCENTRATION OF CREDIT RISK

   Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments and trade
receivables.  The Company places its temporary cash investments with high
credit, quality financial institutions with original maturities when purchased
of three months or less and therefore are subject to little risk.  The Company
has not incurred any losses relating to these investments.

   The Company performs production services for various companies within the
entertainment industry and licenses various rights in its animation product to
distributors throughout the world.  The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral.  At December 31, 1997, substantially all of the Company's trade
receivables were from customers in the entertainment industry.  Receivables
generally are due within 30 days.  Credit losses relating to customers in the
entertainment industry consistently have been within management's expectations.


   FINANCIAL INSTRUMENTS

   Financial instruments are carried at historical cost which approximates fair
value.


   REVENUE RECOGNITION

   The Company recognizes revenues in accordance with the provisions of
Financial Accounting Standards Board Statement No.  53 (FAS 53).  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 product 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.


   FILM COSTS

   Costs incurred in connection with the acquisition of story rights, the
development of stories, production and allocable production overhead and
interest are capitalized as film costs.  Film costs are stated at the lower of
unamortized cost or estimated net realizable value.  In accordance with FAS 53,
the individual film forecast method is used to amortize film costs.  Costs
accumulated in the production of a film are amortized in the proportion that
gross revenues realized bear to management's estimate of the total gross
revenues expected to be received.  Estimated liabilities for third party
participations are accrued and expensed in the same manner as film costs are
amortized.

   Revenue estimates on a film-by-film basis are reviewed periodically by
management and are revised, if warranted, based upon management's appraisal of
current market conditions.  Based on this review, if estimated future gross
revenues from a film are not sufficient to recover the unamortized costs, the
unamortized film cost shall be written down to net realizable value.  In unusual
cases, such as a change in public acceptance of certain types of films or actual
costs substantially in excess of budgeted costs, a write-down to net realizable
value may be required before the film is released.

                                      F-9
<PAGE>

                               FILM ROMAN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1997

   DEPRECIATION AND AMORTIZATION

   Property and equipment are recorded at cost.  Depreciation on furniture and
equipment is computed by the double-declining balance method over their
estimated useful lives, ranging from five to seven years.  Leasehold
improvements are amortized over their estimated useful lives, or the remaining
term of the related lease, whichever is shorter, using the straight-line method.


   INCOME TAXES

   The Company uses the liability method required by Financial Accounting
Standards Board Statement No.  109, "Accounting for Income Taxes."

   Prior to August 4, 1995 (the "Termination Date"), the Company was treated as
a Subchapter S Corporation for federal and state income tax purposes.  Upon the
Termination Date, the Company is subject to federal and state corporate income
taxes.


   STOCK-BASED COMPENSATION

   The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board (APB) No.  25, "Accounting for Stock
Issued to Employees" and intends to continue to do so.


   USE OF ESTIMATES

   The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.


                                      F-10
<PAGE>

                               FILM ROMAN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1997

   NET (LOSS) PER COMMON SHARES

   The Company has adopted Statement of Financial Accounting Standard No. 128,
Earnings Per Share ("SFAS No. 128"), which is effective for annual and interim
financial statements issued for periods ending after December 15, 1997.  In
accordance with SFAS No. 128, prior years' per share amounts have been restated.
SFAS No. 128 was issued to simplify the standards for calculating earnings per
share ("EPS") previously in APB No. 15, Earnings Per Share.  SFAS No. 128
replaces the presentation of primary EPS with a presentation of basic EPS.  The
new rules also require dual presentation of basic and diluted EPS on the face of
the statement of operations.

   For the year ended December 31, 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 California Common Stock
into 1.25 shares of Company Common Stock, and are calculated in accordance with
Staff Accounting Bulletin of the Securities and Exchange Commission  (SAB) No.
98 whereby common stock, options or warrants to purchase common stock or other
potentially dilutive instruments issued for nominal consideration must be
reflected in basic and diluted per share calculations for all periods in a
manner similar to a stock split, even if anti-dilutive.  For the year ended
December 31, 1995, the net loss per common share gives effect to the accretion
of the difference between the carrying value and the Liquidation Value of the
Redeemable Preferred Stock of $484,829 and to the accrual of dividends of
$400,000 on the Redeemable Preferred Stock.

    For the year ended December 31, 1996, the weighted average number of common
and common equivalent shares outstanding have been calculated in accordance with
SAB 98 for the period prior to the offering giving effect to the conversion of
California Common Stock into 1.25 shares of Company Common Stock and in
accordance with SFAS No. 128 for the period after the offering.  For the year
ended December 31, 1996, the net loss per common share gives effect to (i)
accretion of the difference between the carrying value and the liquidation value
of the Redeemable Preferred Stock of $757,544 (ii) the excess of the price paid
for the redemption of the Redeemable Preferred Stock over its carrying value of
$3,126,755 and (iii) to dividends of $750,000 on the Redeemable Preferred Stock.
For the year ended December 31, 1997, the per share data is based on the
weighted average number of common and common equivalent shares outstanding
during the period.  Common equivalent shares, consisting of outstanding stock
options, are not included since they are antidilutive.

   The pro forma loss per common share amount reflects an adjustment for an
income tax benefit that would have been reported if the Company had been a C
Corporation based upon an estimated statutory  rate of 34% in 1995.

<TABLE>
<S>                                                          <C>
Net (loss) attributable to common stock as reported           $(2,574,005)
Pro forma benefit for income taxes                                574,000
                                                              -----------
Pro forma net (loss)                                          $(2,000,005)
                                                              ===========
Pro forma net (loss) per common share basic and diluted       $     (0.43)
                                                              ===========
</TABLE>


                                      F-11
<PAGE>

                               FILM ROMAN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1997

2.  FILM COSTS

     The components of unamortized film costs consist of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                           -------------------------
                                                              1996          1997
                                                           -----------   -----------

<S>                                                        <C>           <C>
Animated film productions released, less amortization      $ 7,946,483   $ 5,041,950
Animated film productions in process                        13,069,981    10,820,744
Animated film productions in development                       252,481       221,416
                                                           -----------   -----------
                                                           $21,268,945   $16,084,110
                                                           ===========   ===========
</TABLE>

   Based on management's estimates of future gross revenues as of December 31,
1997, approximately 75% of unamortized film costs applicable to released films
will be amortized during the three years ending December 31, 2000.

   Interest capitalized to film costs in 1995, 1996, and 1997 was $62,596,
$50,657 and $0 respectively.


3.  PROPERTY AND EQUIPMENT

   Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                           December 31,
                                                    --------------------------
                                                       1996           1997
                                                    -----------   ------------

<S>                                                 <C>           <C>
Leasehold improvements............................. $  142,410    $   186,104
Furniture and fixtures.............................    239,412        292,401
Office equipment...................................  1,089,759      1,255,189
                                                    ----------    -----------
                                                     1,471,581      1,733,694
Less accumulated depreciation and amortization.....   (934,192)    (1,198,494)
                                                    ----------    -----------
                                                    $  537,389    $   535,200
                                                    ==========    ===========
</TABLE>

4.  BLUES BROTHERS: THE ANIMATED SERIES

   The Company put its proprietary production of the "Blues Brothers" into
hiatus in March 1997 following discussions between the Company and UPN with
respect to certain creative aspects of the project.  Although in August 1997 UPN
announced its intention to run the series in the fall of 1998, the network
subsequently changed its programming strategy to de-emphasize prime time
animation, which led to UPN's decision in September 1997 to cancel its plans to
air the Blues Brothers. In September 1997, UPN and the Company entered into a
settlement whereby UPN compensated the Company for a portion of the costs
associated with the production of the show.  The Company's investment amounted
to approximately $6.0 million as of December 31, 1997, and the Company recorded
a write off for the year ended December 31, 1997, of approximately $2.0 million.

                                      F-12
<PAGE>

                               FILM ROMAN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1997


5.  INCOME TAXES

   Prior to the Termination Date, the Company was treated as a Subchapter S
Corporation under the Internal Revenue Code ("IRC") and, consequently, was not
subject to federal income tax prior to that date; the sole shareholder of the
Company included the income (loss) of the Company through the Termination Date
in his own income tax return for federal income tax purposes.  Accordingly, the
Company has not recognized any deferred taxes and has no available federal net
operating loss carryforwards prior to the Termination Date.  S Corporations pay
tax to the State of California on their taxable incomes at a rate of 1.5% in
1995.  The state tax provision recorded by the S Corporation prior to the
Termination Date is immaterial to the financial statements.

   The significant components of the Company's net deferred tax assets
(liabilities), for which a 100% valuation allowance has been provided and which
have not been recognized in the Company's financial statements, are as follows:
<TABLE>
<CAPTION>
                                                    December 31,
                                       ----------------------------------------
                                          1995          1996           1997
                                       ----------   ------------   ------------
<S>                                    <C>          <C>            <C>
Film costs                             $  97,000    $   397,000    $  (306,000)
Fixed assets                               9,000          9,000        (13,000)
Nondeductible accrual                     21,000         53,000        136,000
Other                                         --        133,000        228,000
Net operating loss carryforwards         262,000      1,338,000      4,306,000
                                       ---------    -----------    -----------
                                         389,000      1,930,000      4,351,000
Valuation allowance                     (389,000)    (1,930,000)    (4,351,000)
                                       ---------    -----------    -----------
                                       $            $       --     $       --
                                       =========    ===========    ===========
</TABLE>

   A reconciliation of income tax computed at the statutory federal income tax
rate to the effective tax rate for the Company is as follows:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                             ----------------------------------------
                                                                1995          1996           1997
                                                             ----------   ------------   ------------
<S>                                                          <C>          <C>            <C>
Provision for income taxes at statutory rate of 35%          $(551,000)   $(1,622,000)   $(1,685,000)
Taxable loss incurred prior to the Termination Date            154,000             --             --
 Permanent Differences                                              --        105,000         22,000
Benefit of deferred tax assets not currently recognized        397,000      1,517,000      1,663,000
                                                             ---------    -----------    -----------
                                                             $      --    $        --    $        --
                                                             =========    ===========    ===========
</TABLE>

   At December 31, 1997, the Company had available federal and state tax net
operating loss carryforwards of approximately $10,241,000 and $5,773,000
respectively, expiring through 2012 and 2002, respectively.

6.  REDEEMABLE PREFERRED STOCK

   In July 1995, pursuant to a Securities Purchase Agreement entered into among
the Company and several  purchasers, such entities purchased 1,200,000 shares of
Redeemable Preferred Stock and 1,200,000 stock purchase warrants (the
"Warrants") (1,500,000 after giving effect to the Reorganization) from the
Company for $12,000,000.

   The Redeemable Preferred Stock had a par value of $0.01 per share.  The
holders of such stock are entitled to an annual dividend of $0.80 per share, as
declared by the Board of Directors.  Dividends of $400,000 and $750,000 were
declared and accrued on the Redeemable Preferred Stock as of December 31, 1995
and 1996, respectively.  The

                                      F-13
<PAGE>

                               FILM ROMAN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1997


Redeemable Preferred Stock ranked senior to the Convertible Preferred Stock and
common stock. The terms of the Redeemable Preferred Stock contained in the
Company's Articles of Incorporation restricted the declaration or payment of
dividends as long as the Redeemable Preferred Stock remains outstanding. The
liquidation value of each share of Redeemable Preferred Stock is $10
("Liquidation Value"). The net proceeds from the issuance of the Redeemable
Preferred Stock and Warrants were $10,738,000. The Company determined the fair
value of the Warrants to be approximately $4,474,000, net of issuance costs,
and, as such, allocated $4,474,000 of the net proceeds to the Warrants and
$6,264,000 to the Redeemable Preferred Stock. The difference between the
carrying value and the Liquidation Value of the Redeemable Preferred Stock is
being amortized to retained deficit on a straight-line basis from the issuance
date to the mandatory redemption dates. Accretion recorded for the year ended
December 31, 1995 and 1996 was $484,829 and $757,544 respectively. In October
1996 the Company redeemed all of the outstanding shares of the Redeemable
Preferred Stock for cash and Common Stock (see Note 1). The excess of the price
paid for the Redeemable Preferred Stock over its carrying value was $3,126,755
and was charged to the retained deficit. In connection with the Reorganization
as described in Note 1, the Warrants were exercised.

7.  STOCKHOLDERS' EQUITY

   The Convertible Preferred Stock had a par value of $0.01 per share.  The
holder of such stock, who was the sole common shareholder of the Company before
the Offering,was entitled to an annual dividend of $0.80 per share, as declared
by the Board of  Directors.  Dividends of  $250,000 and $450,000 were declared
and accrued on the Convertible Preferred Stock as of December 31, 1995 and 1996,
respectively.  In connection with the Reorganization as described in Note 1, the
holders converted the Convertible Preferred Stock into Common Stock.

     In August 1995, the Company issued a warrant to purchase 46,250 shares of
the Company's Common Stock at an exercise price of $9.60.  In connection with
the Reorganization as described in Note 1, such warrant was exercised.  In
addition, the Company issued a warrant to the President of the Company to
purchase 231,250 shares of the Company's Common Stock at an exercise price of
$25.94.  In connection with the Reorganization as described in Note 1, such
warrant was cancelled.

   In August 1995, a former officer was granted options to purchase 75,000
shares of Common Stock at an exercise price of $0.008 per share in accordance
with his employment agreement.  Such options are exercisable immediately and
will remain exercisable until June 30, 1999 or until a Liquidity Event as
defined in the agreement.  The Company recorded compensation expense of $242,400
associated with the granting of these options as such options were granted at an
exercise price less than the deemed fair value of the Common Stock at the date
of grant.

   The Company's Board of Directors, without the approval of the holders of the
Common Stock, is authorized to designate for issuance up to 5,000,000 shares of
preferred stock, par value $0.01 per share, in such series and with such rights,
privileges and preferences as the Board of Directors may from time to time
determine.  Issuance of preferred stock may adversely affect the rights,
privileges and preferences afforded the holders of Common Stock, including a
decrease in the amount available for distribution to holders of the Common
Stock in the event of a liquidation or payment of preferred dividends.
Issuance of shares of preferred stock may also have the effect of preventing or
delaying a change in control of the Company without further action by the
stockholders and could make removal of present management of the Company more
difficult.  The Company currently has no plans to designate and/or issue any
shares of preferred stock.

                                      F-14
<PAGE>

                               FILM ROMAN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1997


8.  COMMITMENTS


   The Company leases facilities for office space and its animation studios
under an operating lease for a five-year period expiring August 31, 2003 with an
option for an additional five-year term.  Under the terms of the lease agreement
the Company is required to pay a pro-rata share of the building's operating
expenses, maintenance and property taxes.  The lease agreement includes certain
free rent periods and an escalation in the monthly rental amount, as defined.
The accompanying statement of operations for the years ended December 31, 1995,
1996 and 1997 reflects rent expense on a straight-line basis over the term of
the lease.  The Company also has various lease agreements for equipment and
additional office space which expire through 2002, certain of which are
personally guaranteed by the President of the Company.  The following is a
schedule of the future minimum lease payments under all noncancelable operating
lease agreements:
<TABLE>
     <S>                                <C>
     YEAR ENDING DECEMBER 31
     1998                               $1,205,622
     1999                                1,290,808
     2000                                1,297,572
     2001                                1,282,971
     2002                                1,263,050
     Thereafter                            858,026
                                        ----------
     Total minimum lease payments       $7,198,049
                                        ==========
</TABLE>

   Rent expense for the years ended December 31, 1995, 1996 and 1997, prior to
any allocation of rent to capitalized film costs, was $1,109,006, $1,399,573,
and $1,316,520 respectively.

   At December 31, 1997, the Company had outstanding employment agreements with
various employees with initial terms ranging from one to five years.  Under the
terms of the agreements, the Company is obligated to pay the following amounts:
<TABLE>
     <S>                      <C>
     YEAR ENDING DECEMBER 31
     1998                     $1,676,500
     1999                        648,700
     2000                        210,000
     2001                            -0-
     2002                            -0-
                              ----------
                              $2,535,200
                              ==========
</TABLE>

   Collectively, certain of these employment agreements provide for minimum
annual compensation that can be increased for incentives based on the Company
obtaining certain earning levels, the relationship of earnings to projected
earnings, and/or discretionary incentives to be determined by the Board of
Directors.  Such incentives shall not exceed 100% of the employees' base salary.

   In September 1996, the Company secured a commitment (the "Commitment") from
certain of its existing stockholders to purchase up to $3.0 million of its 12%
Senior Secured Notes due December 20, 1996 ("Senior Notes").  No Senior Notes
have been or will be issued.  As consideration for the receipt of the
Commitment, the Company issued certain warrants which, in connection with the
Reorganization and pursuant to the anti-dilution provisions thereof,

                                      F-15
<PAGE>

                               FILM ROMAN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1997

became warrants for the purchase of 72,066 shares of Common Stock at an exercise
price of $7.00 per share. The New Warrants are currently exercisable and expire
in September 2001. In 1996 the Company recorded an expense of $225,000 relating
to the issuance of the New Warrants and transactions costs associated with the
Commitment. As of December 31, 1997, no warrants had been exercised.


9.  401(K) PROFIT SHARING PLAN

   The Company has a defined contribution Profit Sharing 401(k) Savings Plan
which covers substantially all of its employees.  The plan became effective on
January 1, 1991 and was amended effective January 1, 1992.  Under the terms of
the plan, employees can elect to defer up to 15% of their wages, subject to
certain Internal Revenue Service (IRS) limitations, by making voluntary
contributions to the plan.  Additionally, the Company, at the discretion of
management, can elect to match up to 100% of the voluntary contributions made by
its employees.  The Company has received determination letters from the IRS
indicating that the above plan is qualified within the terms of the applicable
provisions of the Employee Retirement Income Security Act of 1974.

   For the years ended December 31, 1995, 1996 and 1997, the Company contributed
$93,081, $104,923, and $120,431 respectively, to the plan on behalf of its
employees.


10.  SIGNIFICANT CUSTOMERS AND PROPERTIES AND GEOGRAPHIC INFORMATION

   In 1995, the Company earned revenues from five significant customers of
approximately $11,967,000 (35%), $4,516,000 (13%), $4,400,000 (13%), $4,229,000
(12%), and $3,575,000 (10%).  In 1996, the Company earned revenue from three
significant customers of $14,330,000 (29%), $10,311,000 (21%) and $4,930,000
(10%).  In 1997, the Company earned revenue from three significant customers of
$26,400,000 (62%), $4,000,000 (9%), and $3,750,000 (9%).

   In 1995, the Company earned revenues from four significant properties of
$11,967,000 (35%), $5,034,000 (15%), $4,516,000 (13%) and $4,229,000 (12%).  In
1996, the Company earned revenues from three significant properties of
$14,330,000 (29%), $7,869,000 (16%) and $5,627,000 (11%).  In 1997, the Company
earned revenue from four significant properties of $13,660,000 (32%),
$12,750,000 (30%), $4,000,000 (9%) and $3,750,000 (9%).

   In 1996 and 1997 the Company earned significant export revenues from Europe
of approximately $7,000,000 and $2,300,000 respectively.


11.  STOCK OPTION PLAN

   In 1996 the Company adopted a stock option plan ("Plan").  All regular
salaried employees of the Company may, at the discretion of the compensation
committee of the Board of Directors, be granted incentive and non-qualified
stock options to purchase shares of Common Stock at an exercise price not less
than 100% of the fair market value of such shares on the grant date.  Directors
of the Company, consultants and other persons who are not regular salaried
employees of the Company are not eligible to receive incentive stock options,
but are eligible to receive non-qualified stock options.

                                      F-16
<PAGE>

                               FILM ROMAN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1997


   The maximum number of shares subject to the Plan is 1,227,695 and the Plan
will terminate on August 7, 2005, unless sooner terminated by the Board of
Directors.  The options vest over a five-year period.

   Pursuant to the Plan, in January 1996, the Company granted options to certain
employees and directors of the Company to purchase 507,500 shares of the
Company's Common Stock at an exercise price of $8.00 per share, which was deemed
to be the fair market value at that time.  In May 1996, the Company granted
options to an officer to purchase 125,000 shares and options to certain
employees and directors of the Company to purchase 43,125 shares of the
Company's Common Stock at $8.52 per share, which was deemed to be the fair
market value at that time.  Further pursuant to the plan, in January 1996, the
Company granted options to a former officer to purchase 92,500 shares of the
Company's Common Stock at $8.00 per share, which was deemed to be the fair
market value at that time.  These options were canceled when the officer left
his position at the Company in June 1997.

   As of December 31, 1995, 1996 and 1997,  75,000,  840,125 and 1,000,023
shares of Common Stock were reserved for future issuances related to options,
respectively.

   The Company applies Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for the
Plan.  Accordingly, no compensation cost has been recognized for its Plan.  Had
compensation cost for the Plan been determined based on the fair value at the
grant date for such awards, as set forth under FASB Statement No.  123,
Accounting for Stock-Based Compensation (FAS 123), the Company's net loss, net
loss attributable to common stock, and net loss per common share would have been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                           ------------------------------------------
                                               1997           1996           1995
                                           ------------   ------------   ------------
<S>                                        <C>            <C>            <C>
NET LOSS
  As reported                              $(4,813,324)   $(4,633,024)   $(1,689,176)
  Pro forma                                $(5,110,690)   $(5,157,820)   $(1,689,176)

NET LOSS ATTRIBUTABLE TO COMMON STOCK
 As reported                               $(4,813,324)   $(9,267,324)   $(2,574,005)
 Pro forma                                 $(5,110,690)   $(9,792,120)   $(2,574,005)

NET LOSS PER SHARE
 As reported                               $     (0.57)   $     (1.67)   $    (0 .55)
 Pro forma                                 $     (0.60)   $     (1.76)   $    (0 .55)
</TABLE>

   Since compensation expenses associated with option grants is recognized over
the vesting period, the initial impact of applying FAS 123 on pro forma net
loss, pro forma net loss attributable to common stock, and pro forma loss per
share is not representative of the potential impact on pro forma amounts in
future years, when the effect of the recognition of a portion of compensation
expenses from multiple awards would be reflected.

   The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995, 1996 and 1997, respectively; dividend
yields of 0% for all years; expected volatility of 33.3%, 28.7% and  89.7%;
risk-free interest rates of 5.83%, 6.29% and 6.18%; and expected lives of 3
years, 8 years and 8 years.  The weighted average fair value of options granted
during the year was $3.23, $3.80 and $2.86 for the years ended December 31,
1995, 1996 and 1997, respectively.

                                      F-17
<PAGE>

                               FILM ROMAN, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1997

A summary of stock option activity under the Plan is as follows:

<TABLE>
<CAPTION>
                                                                                      Weighted Average
                                                                           Shares      Exercise Price
                                                                         ----------   ----------------
<S>                                                                      <C>           <C>
Balance at January 1, 1995............................................          --
Granted...............................................................      75,000              $0.008
Exercised.............................................................          --
Cancelled.............................................................          --
                                                                         ---------
Balance at December 31, 1995 (all exercisable)........................      75,000

Granted...............................................................     768,125              $ 8.11
Exercised.............................................................      (3,000)             $0.008
Cancelled.............................................................          --
                                                                         ---------
Balance at December 31, 1996 (including 192,000 options exercisable
at a weighted average exercise price of $5.00 per share)..............     840,125

Granted...............................................................     388,023              $1.625
Exercised.............................................................      (5,000)             $0.008
Cancelled.............................................................    (223,125)             $ 8.01
                                                                         ---------
Balance at December 31, 1997 (including 252,375 options exercisable
 at a weighted average exercise price of $5.95 per share).............   1,000,023
                                                                         =========
</TABLE>



   Exercise prices for options outstanding as of December 31, 1997, ranged from
$0.008 to $8.52.  The weighted-average remaining contractual life of these
options is 7.3 years.

   As of December 31, 1996 and 1997,  shares  available under the Plan for
future grants of options were 459,570 and 294,672 respectively.


12.  RELATED PARTY TRANSACTIONS

   A firm in which an outside director of the Company is a shareholder provides
accounting and tax services to the Company and fees paid to that firm during
1995, 1996  and 1997 amounted to $66,000, $7,900 and $12,350, respectively.  A
firm in which an outside director of the Company is a partner acts as a legal
consultant to the Company and fees paid to that firm during 1995, 1996  and 1997
amounted to $84,000, $91,000 and $135,000, respectively.  An outside director of
the Company acts as a financial consultant to the Company and fees paid to that
director during 1995, 1996 and 1997 amounted to $22,000, $0 and $145,000,
respectively.

                                      F-18