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

                                    FORM 10-Q

(MARK ONE)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
                                       OR
[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934
          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


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


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:

         As of July 30, 1999, 8,524,190 shares of common stock, par value $.01
per share, were issued and outstanding.




                                     Page 1
<PAGE>





                                TABLE OF CONTENTS



                          PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>

<S>  <C>                                                                                                       <C>
Item 1.    Financial Statements.............................................................................   3

              Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999 (unaudited)..............  3

              Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1998
                  and June 30, 1999 (unaudited).............................................................   4

              Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and
                  June 30, 1999 (unaudited).................................................................   5

              Notes to Consolidated Financial Statements....................................................   6

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


                           PART II. OTHER INFORMATION


Item 4.    Submission of Matters to a Vote of Security Holders..............................................  19

Item 6.    Exhibits and Reports on Form 8-K.................................................................  20

Signatures.................................................................................................. S-1
</TABLE>





                                     Page 2
<PAGE>





                          PART I. FINANCIAL INFORMATION


ITEM 1.    FINANCIAL STATEMENTS


                                FILM ROMAN, INC.
<TABLE>
<CAPTION>

                                                                                   DECEMBER 31,            JUNE 30,
                                                                                      1998                   1999
                                                                               ----------------         --------------
                                                                                                          (UNAUDITED)
    ASSETS

<S>                                                                                 <C>                    <C>
    Cash and cash equivalents........................................               $11,287,386            $ 8,520,154
    Accounts receivable..............................................                 1,089,218                869,793
    Film costs, net of accumulated amortization of $244,777,898 (1998) and
      $270,176,450 (1999)............................................                20,903,771             17,910,178
    Property and equipment, net of accumulated depreciation and
    amortization of $1,559,112 (1998) and $1,766,374  (1999).........                   979,090                963,392
    Deposits and other assets........................................                   489,205                565,312
                                                                                    -----------          -------------

    Total Assets.....................................................               $34,748,670            $28,828,829
                                                                                    ===========            ===========

    LIABILITIES AND STOCKHOLDERS' EQUITY

    Accounts payable.................................................             $     628,221            $   625,967
    Accrued expenses.................................................                 2,350,695              2,478,746
    Deferred revenue.................................................                19,671,667             14,422,922
                                                                                   ------------             ----------

    Total liabilities................................................                22,650,583             17,527,635


    Stockholders' equity:

    Preferred Stock, $0.01 par value, 5,000,000 shares authorized,
           none issued...............................................                        --                     --

    Common Stock, $0.01 par value, 20,000,000 shares authorized, 8,522,190
    shares issued and outstanding at December 31, 1998 and
      8,524,190 shares issued and outstanding at June 30, 1999.......                    85,223                 85,243

    Additional paid-in capital.......................................                36,305,684             36,308,524

    Accumulated deficit..............................................               (24,292,820)           (25,092,573)
                                                                                   ------------            ------------

    Total stockholders' equity ......................................                12,098,087             11,301,194
                                                                                  -------------             ----------

    Total liabilities and stockholders' equity ......................               $34,748,670            $28,828,829
                                                                                    ===========            ===========
</TABLE>




                             See accompanying notes.



                                     Page 3
<PAGE>





                                FILM ROMAN, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>


                                         THREE MONTHS ENDED            SIX MONTHS ENDED
                                              JUNE 30,                     JUNE 30,
                                            ----------                    ---------
                                       1998            1999            1998            1999
                                   ------------    ------------    ------------    -----------
<S>                                <C>             <C>             <C>             <C>
Revenue ........................   $  8,057,408    $ 15,163,017    $ 17,358,118    $ 27,452,929
Cost of revenue ................      7,620,311      14,002,446      16,589,106      25,398,552
Selling, general and
  administrative expenses ......      1,332,623       1,531,484       2,637,692       3,067,509
                                   ------------    ------------    ------------    ------------
Operating loss .................       (895,526)       (370,913)     (1,868,680)     (1,013,132)
Interest income ................        177,087         104,835         384,534         218,634
Loss before provision for income
  taxes ........................            ---        (266,078)            ---        (794,498)
Provision for income taxes .....            ---             137             ---           5,255
Net loss .......................   $   (718,439)   $   (266,215)   $ (1,484,146)   $   (799,753)
                                   ============    ============    ============    ============
Net loss per common share basic
   and diluted .................   $      (0.08)   $      (0.03)   $      (0.17)   $      (0.09)
                                   ============    ============    ============    ============

Weighted average number of .....
  shares outstanding basic and
   diluted .....................      8,522,190       8,523,838       8,491,610       8,523,010
                                   ============    ============    ============    ============
</TABLE>



                             See accompanying notes.


                                     Page 4
<PAGE>





                                FILM ROMAN, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                   SIX MONTHS ENDED
                                                                                        JUNE 30,
                                                                                  1998           1999
                                                                              -----------     -----------
OPERATING ACTIVITIES:
<S>                                                                          <C>             <C>
      Net loss ...........................................................   $ (1,484,146)   $   (799,753)
      Adjustments to reconcile net loss to net cash  provided by
          operating activities:
          Depreciation and amortization ..................................        138,463         207,262
          Amortization of film costs .....................................     16,589,106      25,398,552
      Changes in operating assets and liabilities:
      Accounts receivable ................................................         95,890         219,425
      Film costs .........................................................    (17,093,140)    (22,404,959)
      Deposits and other assets ..........................................         12,404         (76,107)
      Accounts payable ...................................................       (493,571)         (2,254)
      Accrued expenses ...................................................         49,563         128,051
      Deferred revenue ...................................................        902,813      (5,248,745)
                                                                              -----------    ------------
          Net cash used in operating activities ..........................     (1,282,618)     (2,578,528)
INVESTING ACTIVITIES:
      Additions to property and equipment ................................       (402,316)       (191,564)
                                                                              -----------    ------------
          Net cash used in investing activities ..........................       (402,316)       (191,564)
FINANCING ACTIVITIES:
      Options exercised ..................................................            675           2,860
                                                                              -----------    ------------
          Net cash provided by financing activities ......................            675           2,860
      Net decrease in cash ...............................................     (1,684,259)     (2,767,232)
                                                                              -----------    ------------
      Cash and cash equivalents at beginning of period ...................     15,986,250      11,287,386
      Cash and cash equivalents at end of period .........................   $ 14,301,991    $  8,520,154
                                                                              ===========    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the
      period for:
          Interest .......................................................   $        --     $        --
                                                                              -----------    ------------
          Income taxes ...................................................   $        --     $        --
                                                                              -----------    ------------

</TABLE>


                             See accompanying notes.



                                     Page 5
<PAGE>





                                FILM ROMAN, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) - BASIS OF PRESENTATION

         Film Roman, Inc., a Delaware corporation (the "Company"), currently
conducts all of its operations through its wholly owned subsidiaries, Film
Roman, Inc., a California corporation; Namor Productions, Inc., a California
corporation; Chalk Line Productions, Inc., a California corporation; Diversion
Entertainment, Inc., a Delaware corporation and Level 13 Entertainment, Inc., a
Delaware corporation. The accompanying consolidated unaudited financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments consisting only of normal recurring accruals
necessary to present fairly the financial position of the Company as of June 30,
1999 and the results of its operations for the three and six months ended June
30, 1998 and 1999 and the cash flows for the six months ended June 30, 1998 and
1999 have been included. The results of operations for interim periods are not
necessarily indicative of the results which may be realized for the full year.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998 (the "Form 10-K") filed with the Securities and Exchange Commission.

(2) - NET LOSS PER COMMON SHARE

         For the three months and the six months ended June 30, 1998 and 1999,
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.

(3) - FILM COSTS

       The components of unamortized film costs consist of the following:
<TABLE>
<CAPTION>

                                                         DECEMBER 31,         JUNE 30,
                                                            1998                1999
                                                        -------------      -------------
                                                                            (UNAUDITED)
<S>                                                       <C>               <C>
Film productions released, net of amortization......      $ 4,185,682       $ 4,016,330
Film productions in process.........................       16,390,064        13,132,601
Film productions in development.....................          328,025           761,247
                                                        -------------       -----------
                                                          $20,903,771       $17,910,178

</TABLE>



                                     Page 6
<PAGE>



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         THIS FORM 10-Q CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE WORDS "EXPECT",
"ESTIMATE", "ANTICIPATE", "PREDICT", "BELIEVE", "PLAN", "SHOULD", "MAY" AND
"PROJECTS" AND SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS RELATE TO,
AMONG OTHER THINGS, TRENDS AFFECTING THE FINANCIAL CONDITION OR RESULTS OF
OPERATIONS OF THE COMPANY, THE 13 EPISODES OF "MISSION HILL" ORDERED BY CASTLE
ROCK ENTERTAINMENT AND TENTATIVELY SCHEDULED TO DEBUT ON THE WB NETWORK ("THE
WB") DURING THE FALL 1999 SEASON; THE COMPANY'S FUTURE PRODUCTION AND DELIVERY
SCHEDULE (INCLUDING THE NUMBER OF EPISODES OF PROGRAMMING TO BE PRODUCED AND
DELIVERED DURING THE 1999-2000 TELEVISION SEASON); PLANS TO ENTER INTO NEW
BUSINESS AREAS BEYOND THE COMPANY'S CORE BUSINESS OF ANIMATION TELEVISION
PRODUCTION; THE COMPANY'S OBJECTIVES, PLANNED OR EXPECTED ACTIVITIES AND
ANTICIPATED FINANCIAL PERFORMANCE AND LIQUIDITY. THESE FORWARD-LOOKING
STATEMENTS ARE BASED LARGELY ON THE COMPANY'S CURRENT EXPECTATIONS AND ARE
SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING WITHOUT LIMITATION,
THOSE DESCRIBED UNDER THE CAPTION "RISK FACTORS" INCLUDED IN THIS REPORT AND IN
THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998. ACTUAL RESULTS
COULD DIFFER FROM THESE FORWARD-LOOKING STATEMENTS. THE COMPANY DOES NOT MAKE
PROJECTIONS OF ITS FUTURE OPERATING RESULTS AND UNDERTAKES NO OBLIGATION TO
PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF
NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

GENERAL

         Film Roman, Inc. ("Film Roman" or the "Company") develops, produces and
distributes a broad range of television programming for the television network,
cable television, first-run domestic syndication and international markets. In
1998, the Company expanded its operations to include, on a limited basis, the
development and production of feature-length theatrical motion pictures. The
Company, founded in 1984, is one of the leading independent animation studios in
North America, having produced numerous high quality animated series including
BOBBY'S WORLD, THE SIMPSONS, KING OF THE HILL, THE MASK, BRUNO THE KID, C-BEAR
AND JAMAL, THE TWISTED TALES OF FELIX THE CAT, MORTAL KOMBAT, GARFIELD &
FRIENDS, THE CRITIC and most recently MISSION HILL. In the past year, the
Company has expanded its feature motion picture development efforts.

        Historically, the Company has produced most 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




                                     Page 7
<PAGE>





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),
computer generated animation, internet investments and direct-to-video
production (both live action and animation) and alternative forms of
distribution. 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 a very limited history of developing, producing or distributing live action
television, computer generated animation 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.

THE COMPANY'S 1999-2000 PRODUCTION SCHEDULE

         Historically, the Company's primary source of revenue has been the
development and production of high quality, prime time and Saturday morning
animated series.

         The market for television programming is comprised primarily of the
broadcast television networks (ABC, CBS, NBC, Fox, United Paramount Network and
The WB, a division of Time Warner Entertainment Company L.P.), syndicators
of first-run programming (such as Columbia, Inc., and Buena Vista Television)
which license programs on a station-by-station basis, and basic and pay cable
networks (such as the Fox Family Channel).

         For the 1998-1999 broadcast season, the Company produced 24 episodes of
KING OF THE HILL, 23 episodes of THE SIMPSONS and 13 episodes of THE MR. POTATO
HEAD SHOW for the Fox Broadcasting Company. The Company is currently scheduled
to produce the following programming for the 1999-2000 broadcast season.

         THE SIMPSONS. The Company is scheduled to produce 22 new episodes of
THE SIMPSONS for exhibition over the Fox Broadcasting Network. Entering its
eleventh season and now the longest-running prime time animated series in
television history, THE SIMPSONS has been honored with a Peabody Award, 10 Emmy
Awards, seven Annie Awards, three Genesis Awards, three International Monitor
Awards and three Environmental Media Awards, among numerous other nods. THE
SIMPSONS has transformed the way the television industry and audiences perceive
animation and comedy series in general.

         KING OF THE HILL. The Company is currently scheduled to produce 24 new
episodes of KING OF THE HILL to be exhibited on the Fox Broadcasting Network.
KING OF THE HILL is the hit half-hour, animated comedy, voted the Best
Television Show of 1997 by TV Guide and Entertainment Weekly, that tells often
hilarious stories about Hank Hill, his family and their neighbors in the
fictional suburb of Arlen, Texas, the heartland of America.



                                     Page 8
<PAGE>





         MISSION HILL is a new half-hour, prime time television series which is
scheduled to begin broadcast in the fall of 1999 on The WB network. The Company
is currently scheduled to produce 13 episodes of MISSION HILL. MISSION HILL is
the first prime time animated comedy to focus on the lives of twenty-somethings
and teens. MISSION HILL explores the world of four diverse roommates who inhabit
a downtown loft in a fictional big city. The Company is scheduled to produce 13
new episodes of MISSION HILL for The WB during the 1999 fall season.

         In addition to the television series described above, the Company
delivered a movie-of-the-week, JOHNNY TSUNAMI, for the Disney Channel. Through
June 3, 1999, the Company completed production of one episode and substantially
completed production of 15 episodes of FAMILY GUY for Twentieth Century Fox
Television. The production for this series was transferred to Fox on June 1,
1999. The Company has in various stages of development a slate of proprietary
animated programs, including prime time, Saturday morning, teen-oriented and
feature film products.

         There can be no assurance that any of these programs will be relicensed
for additional broadcast seasons through renewal of existing licenses or
issuances of new licenses or, if so, licensed, that the terms of the license
agreements will be as favorable to the Company as those of existing licenses.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998

         Total revenue increased by 88%, or $7.1 million, to $15.2 million for
the three months ended June 30, 1999, from $8.1 million for the comparable
period in the prior year. Total revenue increased primarily because of an
increase in "fee-for-services" revenue.

         The Company delivered 27 "fee-for-services" episodes during the three
months ended June 30, 1999, compared to 11 episodes in the comparable period in
1998. Fee-for-services revenue increased 120%, or $7.8 million, to $14.3 million
for the three months ended June 30, 1999, from $6.5 million during the
comparable period in 1998.

         The Company delivered no "proprietary" episodes during the three months
ended June 30, 1999 or 1998. "Proprietary revenue" consists of revenue derived
from 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. The Company earned no proprietary revenue
during the three months ended June 30, 1999 as compared to $0.4 million in the
comparable three month period in 1998. This decrease was a result of lower
international sales of the Company's proprietary programming in its library.

         Other revenue decreased by approximately $0.3 million during the three
months ended June 30, 1999, as compared to the same period of the prior year,
due primarily to a combined decrease in revenue of approximately $0.7 million
from commercials and specials partially offset by an increase of approximately
$0.4 million in revenue generated by the Company's creative services division
and the Company's live action unit.

         Total cost of revenue increased by 84%, or $6.4 million, to $14.0
million for the three months ended June 30, 1999, from $7.6 million for the
three months ended June 30, 1998. Total cost of revenue, as a percentage of
sales, decreased by 3% to 92%, primarily due to higher fee-for-service margins.

         Total selling, general and administrative expenses for the three months
ended June 30, 1999 increased by $0.2 million to $1.5 million from $1.3 million
for the comparable period in 1998, due primarily to increased development costs
resulting from the development of live action programming and feature film
development.

         Operating loss was $0.4 million for the three months ended June 30,
1999, as compared to a loss of $0.9 million for the three months ended June 30,
1998.


                                     Page 9
<PAGE>





SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

         Total revenue increased by 58%, or $10.1 million, to $27.5 million for
the six months ended June 30, 1999, from $17.4 million for the comparable period
in the prior year. Total revenue increased primarily because the Company
delivered significantly more episodes of programming in the first six months of
1999 as compared to the first six months of 1998.

         The Company delivered 45 "fee-for-services" episodes during the six
months ended June 30, 1999, compared to 25 episodes in the comparable period in
1998. Fee-for-services revenue increased 76%, or $11.1 million, to $25.7 million
for the six months ended June 30, 1999, from $14.6 million during the comparable
period in 1998.

         The Company delivered no "proprietary" episodes during the six months
ended June 30, 1999 or 1998. "Proprietary" revenue decreased by 67% or $0.6
million, to $0.3 million for the six months ended June 30, 1999, from $0.9
million in the comparable six month period in 1998. This decrease was a result
of lower international sales of the Company's proprietary programming in its
library.

         Other revenue decreased by approximately $0.3 million during the six
months ended June 30, 1999, as compared to the same period of the prior year,
due primarily to a combined decrease of approximately $0.8 million in revenue
from the Company's participation in net profits from certain of its
fee-for-services series and revenue from commercials and specials. This decrease
was offset by an increase of $0.5 million in revenue generated by the Company's
creative services division and the Company's live action unit.

         Total cost of revenue decreased by 53%, or $8.8 million, to $25.4
million for the six months ended June 30, 1999, from $16.6 million for the six
months ended June 30, 1998. Total cost of revenue, as a percentage of sales,
decreased by 3% to 93%, primarily due to higher fee-for-service margins.

         Total selling, general and administrative expenses for the six months
ended June 30, 1999 increased by $0.5 million to $3.1 million from $2.6 million
for the comparable period in 1998, due primarily to increased costs in the
development department offset by lower costs in the International Department and
the Licensing and Merchandising Department.

         Operating loss was $1.0 million for the six months ended June 30, 1999,
as compared to a loss of $1.9 million for the six months ended June 30, 1998.

LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 1999, the Company had cash and short-term investments of
approximately $8.5 million compared to $11.3 million at December 31, 1998. The
Company's cash and short-term investment balances have continued to decline
since December 31, 1998 and the Company expects to experience further declining
balances during the remainder of fiscal 1999. Management believes that its
existing cash balances and short-term investments, combined with anticipated
cash flow from operations, will nevertheless be sufficient to meet its cash
requirements through the next 12 months. However, if the Company is successful
in the execution of its more aggressive and broad production strategies, it will
be required to make additions to personnel and augment its development and
production capabilities in the areas of animated programming, computer generated
animated programming, live action television series, feature films and internet
investments. In such a case, the Company may need to secure additional equity or
debt financing prior to the end of fiscal 1999 in order to fulfill its growth
strategies. Recent operating losses, the Company's declining cash balances,
trends in the entertainment industry adversely affecting independent production
companies similar to the Company, and the Company's historical stock performance
may make it difficult for the Company to attract equity investments on terms
that are deemed to be favorable to the Company. In addition, the losses in
fiscal 1997 and fiscal 1998 make it more difficult for the Company to attract
significant debt financing. As a consequence, there can be no assurance that the
Company will be successful in arranging for additional equity or debt financing
at levels sufficient to meet its planned needs. The failure to obtain such
financing could have an adverse effect on the implementation of the Company's
growth strategies.



                                    Page 10
<PAGE>



         For the six months ended June 30, 1999, net cash used for operating
activities was $2.6 million due to cash used in connection with film production
activities, and a decrease in deferred revenue offset by cash generated in
connection with a decrease in accounts receivable. For the six months ended June
30, 1999, net cash used for investing activities was $0.2 million due to
additions to property and equipment. For the six months ended June 30, 1999,
cash generated in financing activities was $2,860 from options exercised.

         The Company recognizes revenues in accordance with the provisions of
Financial Accounting Standards Board Statement No. 53 (FAS 53). Cash collected
in advance of revenue recognition is recorded as deferred revenue. As of June
30, 1999, the Company had a balance in its deferred revenue account of $14.4
million. There will be no net cost to the Company (future receipts less future
expenditures) to finish the programs for which cash has been collected in
advance and included in deferred revenue.

IMPACT OF YEAR 2000

GENERAL OVERVIEW:

         The Company's Year 2000 Project is currently proceeding on schedule.
The Company began its assessment in the Spring of 1998 in response to a need to
address the issue of older computer programs and embedded computer chips'
inability to distinguish between the year 1900 and the year 2000. Critical
programs were written to use two digits rather than four digits to define the
applicable year. As a result, those programs have time-sensitive software that
recognizes a date using 00 as the year 1900 rather than the year 2000. This
programming method could cause a system failure or miscalculation which could
cause the disruption of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.

         The assessment project schedule to be Year 2000 compliant by mid-1999
in all areas within the Company has been met. All internal areas deemed critical
with potential to affect the Company's ability to do business (i.e. Computer
Server Room, Finance, Human Resources, Legal) are Year 2000 compliant at this
time. The Company is currently in the process of determining the Year 2000
compliance level of any and all external partners with the potential to affect
the Company's ability to do business as of January 1, 2000. This process is
scheduled to be completed by the end of the third quarter of 1999.

PROJECT:

         The Company's Year 2000 Project is divided into three sections -
Applications software, Communications systems (telephones, voicemail, etc.) and
Infrastructure.

         The methodology used to assess these three primary sections includes:
a) prioritizing by critical area; b) inventorying for potential Year 2000
problems (i.e. computer workstations, servers, software); c) repairing/recoding
program code (where applicable) and/or replacing hardware/software as necessary;
d) testing material items; and e) designing and implementing contingency and
business continuation plans for the Company.

         As of August 1, 1999, the priority assessment has been completed as it
relates to the Company's computer systems. Year 2000 issues as they relate to
the physical premises (building power, incoming phone service, etc.) are outside
the Company's control and correspondence inquiring as to Year 2000 compliance
has been delivered to the principals of the building's property management,
phone system suppliers, alarm system suppliers and communications service
providers (i.e. MCI, Pacific Bell). The Company has received assurances
indicating that the Company's internal alarm systems and communications systems
are Year 2000 compliant. The concern now is whether or not incoming services are
Year 2000 compliant. Because it is not possible to gauge the readiness of
third-party vendors, the Company is in the process of drafting a contingency
plan in the event that the Company's third-party vendors do not complete their
Year 2000 implementations in time. This contingency plan is scheduled to be
implemented by the end of the third-quarter 1999.

         Inventorying of potential Year 2000 systems is 100% completed. As of
August 1, 1999, the main accounting system in use by the Company, Show Auditor,
has been recoded to comply with Year 2000 issues

                                    Page 11
<PAGE>


and has been tested as compliant. Software changes have also been
implemented within the Company's network servers, Human Resources division,
International Division and Legal divisions to meet Year 2000 compliance.
Compliance is also about 100% completed at the desktop application level (word
processing, spreadsheets and operating systems) at each of the Company's
computer workstations. This has been accomplished by either installing the
latest software patches, upgrading software or replacing software as necessary.
The Company's Communications systems are Year 2000 compliant as mentioned above;
therefore, recoding or replacing is not necessary at this time. The Company has
instituted a policy of buying only Year 2000 compliant computer systems and
applications to assure that all new machines are Year 2000 compliant. Further,
the Company acquired hardware technology from Micro2000, Inc. to insert into
older computer systems to make them Year 2000 compliant at the hardware level.
As of August 1, 1999, the Centurion Y2K hardware card has been tested and
implemented. All Infrastructure activities are completed as of August 1, 1999.

         The Company has implemented a policy of periodic checking/testing of
all internal applications software and hardware systems until the Year 2000. The
purpose of this phase is to assure that all Year 2000 compliance changes
continue working as expected. This phase will also involve the installation of
any last minute software patches as provided by software
developers/manufacturers. Further the Company is in the process of installing
software onto the Company's computers that will disable the capability of users
to load any potential non-Y2K compliant software being loaded onto their
desktops without prior screening by the Information Technologies division for
Year 2000 issues. This process is scheduled to be completed by the end of the
third-quarter 1999.

         The Company is involved in prioritizing non-computer-related systems to
assess their potential impact to the Company's operations. These systems would
include operations such as delivery services, materials suppliers, etc. A
contingency plan to address any of these systems which prove to be critical to
the Company's operations will be implemented by the end of the third quarter
1999.

COSTS:

         The total cost of the required modifications necessary to become Year
2000 compliant is not expected to be material to the Company's financial
position and is estimated at approximately $100,000. This does not include the
Company's potential share of Year 2000 costs that may be incurred by the Company
by way of partnerships and joint ventures in which the Company participates but
is not the controlling entity. Accordingly, the foreseeable costs arising from
such third-party relationships cannot be determined at this time. The total
amount expended on the Year 2000 Project through August 1, 1999 was $25,000
solely related to the cost to repair or replace software and related hardware
problems.

RISKS:

         The failure to correct material Year 2000 problems could result in an
interruption in, or a failure of, certain normal business operations. These
failures could potentially materially affect the Company's results of operations
and financial condition; however, due to the general uncertainty which is
inherent in potential Year 2000 problems, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers, customers or partners, the
Company is unable to determine, at this time, whether the consequences of Year
2000 failures will have a material impact on the Company's results of operations
or financial condition.

         The Year 2000 assessment project is the Company's response to this
potential problem and is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and the compliance and readiness of its
material third-party vendors. The Company believes that with the implementation
of new systems and completion of the Year 2000 project as scheduled, the
possibility of significant interruptions affecting the Company's operations
should be reduced.

         Readers are cautioned that forward-looking statements contained in this
Year 2000 disclosure should be read in conjunction with the Company's
disclosures under the heading, "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 and in this Report. Readers
should understand that the dates on which the Company believes the Year 2000
project will be completed are based


                                    Page 12
<PAGE>



upon Management's best estimates, which were derived utilizing numerous
assumptions of future events, including the availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, or that there will not be a
delay in, or increased costs associated with, the implementation of the
Company's Year 2000 compliance project. A delay in specific factors that might
cause differences between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in these areas, the
ability to correct all relevant computer code, timely responses to and
corrections by third-parties and suppliers, the ability to implement interfaces
between the new systems and the systems not being replaced, and similar
uncertainties. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of Year 2000 readiness of third-parties
and the inter-connection of national and international businesses, the Company
cannot ensure that its ability to timely and cost effectively resolve problems
associated with the Year 2000 issue may not affect its operations and business,
or expose it to third-party liability.

RISK FACTORS

     DEPENDENCE ON A LIMITED NUMBER OF TELEVISION PROGRAMS

     Our revenue has historically come from the production of a relatively small
number of animated television programs. THE SIMPSONS, KING OF THE HILL, and THE
MR. POTATO HEAD SHOW accounted for approximately 40%, 41% and 6%, respectively,
of our total revenue for the year ended December 31, 1998. As audiences' tastes
change frequently, we cannot assure you that broadcasters will continue to
broadcast our "proprietary" or "fee-for-services" programs or that we will
continue to be engaged to produce such programs. We currently enjoy limited
profit participation and/or limited licensing and merchandising participation in
KING OF THE HILL and MISSION HILL. However, we cannot assure you that:

     o    those shows will remain on the air,
     o    we will continue to produce them, or
     o    they will be sufficiently successful to generate participation to us

While we continually endeavor 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.

     IMPACT OF FCC REGULATIONS REQUIRING EDUCATIONAL CONTENT PROGRAMMING

     Certain FCC rules may adversely affect the number of time slots available
for our productions. These regulations strongly encourage broadcasters (through
license renewal procedures) to (1) offer at least three hours per week of
programming specifically designed to serve the educational and information needs
of children ages 16 and under, (2) identify each program as educational, (3)
schedule this programming weekly, and (4) offer this programming in 30-minute
formats. While the full impact of the regulations on aggregate demand for
children's programming remains uncertain, we have experienced some significant
impact. CBS, one of our primary customers over the years, elected to change its
programming slate to conform to the FCC regulations. In its first year
implementing this strategy, CBS did not order any new animated programming from
us. In its second year of implementation, CBS reduced its license fees. In
addition, it is possible that programming qualifying for the new FCC
requirements will have a competitive advantage over non-qualifying programs.
This could further diminish the number of time slots available for our existing
programs, thus intensifying the strong competition for the remaining time slots.

     RISKS OF VERTICAL INTEGRATION

     Over the last decade, broadcasters, distributors and producers of televison
and motion picture programming have become increasingly integrated vertically
through mergers, acquisitions, partnerships, joint ventures or other
affiliations. We have not entered into any of these 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 working with their
affiliated producers of animated programming. This result limits the number of
time slots available for other producers. We cannot assure you 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, will not decrease, or that we will compete successfully for available
time slots.


                                    Page 13
<PAGE>


     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 more
choices, 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 continues
to depress license fees to a level that may make it difficult for us to finance
certain proprietary programs. Moreover, broadcasters are demanding a greater
percentage of the revenue generated from the exploitation of proprietary rights
associated with the programs which they license. Broadcasters may also seek to
control and exploit all of the proprietary rights associated with the programs
which they license. We believe that these industry-wide trends may have a
significant adverse impact on our business, results of operations and financial
condition.

     IT IS POSSIBLE THAT OUR CURRENT PROGRAMS MAY NOT SUSTAIN THEIR POPULARITY
AND OUR NEW PROGRAMS MAY NOT BECOME POPULAR

     We derive substantially all of our revenue from the production and
distribution of animated television programs. Each production is an individual
artistic work, and consumer reaction will determine its commercial success. We
cannot assure you that we will be able to continue to create entertaining
episodes for our existing programs or that we will be able to create new
programs that are appealing to broadcasters. When advertisers decide whether to
pay for advertising during a program's broadcast, they look closely at Nielsen
ratings. Broadcasters also consider Nielsen ratings when deciding whether to
renew a series or license a new series. Producers of syndicated programming,
like us, often receive payments from syndicators based on a share of the revenue
received from advertisers who advertise during a specific program. We try to
develop and produce programming that will perform well in the Nielsen ratings
system. Nielsen ratings for our programming depend on many factors beyond our
control, including:

     o    audience reaction
     o    competing programming
     o    availability of alternative forms of entertainment
     o    time slots when aired
     o    critical reviews

     We cannot assure you that our programs will obtain favorable Nielsen
ratings or that broadcasters will license the rights to broadcast any of our
programs in development or will renew licenses to broadcast programs which we
currently produce. Even if a broadcaster renews the license to broadcast our
programming, we cannot guarantee that our program will remain popular. If our
programming becomes less popular, we will most likely derive less revenue which
could impact our financial condition.

     OUR REVENUES RESULT FROM SALES TO A LIMITED NUMBER OF MAJOR CUSTOMERS.

     During the year ended December 31, 1998, we derived approximately 80% and
5% of our net sales from our top two customers, Twentieth Century Fox Television
(a Division of Twentieth Century Fox) and Fox Kids Network. Neither of these
customers is contractually obligated to continue to do business with us. On May
13, 1999, Twentieth Century Fox Television and we jointly announced that due to
production differences, we mutually agreed that Fox should assume responsibility
for the production of FAMILY GUY. The transfer was effective June 1, 1999. In
order to be successful, we must continue our relationships with our customers;
we must continue to develop relationships with new customers; and our existing
programs must continue to be broadcast. In the event our relationship with
either of our top customers terminates, we could experience an adverse impact on
our business.

     RISKS RELATED TO EXPANSION OF PRODUCTION OF PROPRIETARY PROGRAMMING

     We produce substantially all of our programming on a "fee-for-services"
basis. As a result, we do not typically 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 these distribution
rights. The fees we receive for these production services typically cover all
direct production costs plus a margin. We intend to expand our production of
programming for which we own or control licensing and/or distribution rights
("proprietary programming"). These rights may include domestic and international
broadcast distribution, home video distribution, licensing and merchandising,
feature film and interactive/game development ("proprietary rights"). While we
seek to limit the financial risk associated with our proprietary programming by
obtaining commitments prior to production to cover


                                    Page 14
<PAGE>


at least 50% of our direct production costs, we cannot be sure that we will be
able to recover the balance of our production and overhead costs through the
exploitation of our remaining rights. We derived $4.9 million, and $3.3 million,
in revenues from proprietary programming for the years ended December 31, 1997
and 1998, respectively. Since we only recently have begun to retain the
proprietary rights associated with our animated programs, we have a limited
history of operations and experience related to the exploitation of these
rights.

     RISK OF BUDGET AND COST OVERRUNS

     We review cost reports and update our cost projections regularly. Although
we have generally completed each of our productions within its budget, we cannot
assure you that the actual production costs for our 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 our programs.

     RISKS RELATED TO OVERESTIMATION OF REVENUE OR UNDERESTIMATION OF COSTS

     We follow 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. We amortize our estimated total production costs
for an individual program or film 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, we may be required to write-down all or a portion
of our unamortized costs for the program or film. We cannot assure you that
these write-downs will not have a significant impact on our results of
operations and financial condition.


     SEASONALITY

     Our results of operations depend on our 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. Producers typically recognize
revenues from license and production agreements when the producer delivers the
finished product to the customer and the customer accepts it. As a result of the
production cycle, we do not recognize revenue evenly throughout the year. We
typically recognize a significant portion of our revenue in the fourth quarter.
Our results of operations fluctuate materially from quarter to quarter and year
to year. The results of any one period do not necessarily indicate results for
future periods. Cash flows also fluctuate and do not necessarily correlate with
revenue recognition

     COMPETITION

           PROGRAMMING. 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. We compete
with producers, distributors, licensors and merchandisers, many of whom are
larger and have greater financial resources than we do. Although the number of
outlets available to producers of animated programming has increased with the
emergence of new broadcasters, the number of time slots available to independent
producers of children's and animated programming remains limited. Moreover,
because license fees in the United States have dropped substantially recently,
companies that do not rely 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. These companies now serve as an additional source of competition for
the limited slots available to independent animation companies. We also believe
that we face competition from a variety of companies in three principal areas:
(1) for the time slots for animated programming offered by broadcasters, (2) for
the acquisition of characters, story lines, plots and ideas and (3) for the
right to license and distribute our products throughout the United States and
internationally.

               CREATIVE PROPERTIES AND CREATIVE PERSONNEL. We compete with other
animation companies for characters, storylines, plots and ideas created by third
parties. Third parties select us based on their perception of whether we are
best able to create and develop a successful program from the initial idea or
character. We also compete 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.

                                    Page 15
<PAGE>


We believe that we compete 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, we decided
to reduce our fixed overhead by outsourcing our licensing and merchandising
activities. However, we expect that the exploitation of our licensing and
merchandising rights will remain an important part of our strategy. We compete
with other owners of creative content who seek to license their characters and
properties to a limited number of distributors. In connection with our recent
initiatives to exploit the proprietary rights associated with our programming,
we have entered into several licensing and merchandising agreements. However,
for the year ended December 31, 1998, we derived no significant revenue from our
licensing and merchandising activities and we cannot assure you that we will
derive significant revenue in the future.

     RISKS RELATED TO INTERNATIONAL OPERATIONS

           RISKS OF INTERNATIONAL BUSINESS GENERALLY. Part of our strategy
involves our current and planned activities in a number of developing nations.
There are many risks inherent in our international business activities.
Our projects could be adversely affected by:

     o      reversals or delays in the opening of foreign markets to new
            competitors;
     o      unexpected changes in regulatory requirements;
     o      export controls, tariffs and other barriers;
     o      currency fluctuations;
     o      investment policies;
     o      nationalization, expropriation and limitations on repatriation of
            cash, and
     o      social and political risks.

     OVERSEAS SUBCONTRACTORS. Like other producers of animated programming, we
subcontract some of the less creative and more labor-intensive components of our
production process to animation studios located in low-cost labor countries,
primarily in the Far East. As the number of animated feature films and animated
television programs increases, 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 or our inability to contract with our preferred overseas studios.

     Many of the subcontractors we use 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. The Asian
markets may continue to deteriorate, which could have a substantial impact on
our ability to contract favorably with studios in Asia. These conditions could
cause significant disruptions in the delivery of animation products to us. In
that event, we may be required to retain new subcontractors. We cannot assure
you that different subcontracting arrangements will be as favorable to us as our
current arrangements.

           INTERNATIONAL SALES-MARKET FRACTIONALIZATION. We derived
approximately 8% and 4% of our revenue for the years ended December 31, 1997 and
1998, respectively, from licensing international distribution rights to our
proprietary programming. We anticipate that revenue from these activities will
not grow substantially until we produce additional proprietary programming for
which we own and control international distribution rights. Just as in the US,
there are an increasing number of broadcast outlets for animation in most major
international territories. While this has created more opportunities to sell
product, on the one hand, the total advertising dollars available is now being
spread amongst this larger number of outlets, so the revenues each broadcaster
receives and, consequently, the amount of the license fees they can pay, has
begun to diminish substantially. Our ability to continue to expand our
international business (as well as our 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 our ability to
distribute our product in that country. As a result, we cannot assure you that
our international operations will be profitable.




                                    Page 16
<PAGE>

    RISKS ASSOCIATED WITH POSSIBLE NEW BUSINESSES

     Due in part to the recent changes in the television industry described in
this Report, we have made, and intend to continue to make a substantial
commitment to new business areas beyond our core business of animation
television production. We have begun live action television production, feature
film development with the expectation of production (both live action and
animation), internet investments and direct-to-video production (both live
action and animation). Some of this 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. In addition, we are evaluating entering the Internet
distribution market through the Level 13 branded animation destination. This is
a new business for us that may require that we use significant resources in an
effort that may not be successful. Therefore, there is a substantial risk that
our projects will not be successful, resulting in costs not being recouped and
anticipated profits not being realized. Although we intend to limit the risks of
production through co-production, pre-sale financing and/or distribution
arrangements, we will likely be unable to limit all of the financial risk of 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, and Internet distribution depends upon consumer taste and critical
response, as well as public awareness and the successful distribution of a
production, we cannot predict the level of marketing, promotional and
distribution activities and expenses necessary in any particular instance.
Moreover, we have no history of developing, producing, or distributing live
action television or film productions, or with exhibition over the Internet and
we cannot assure you that we 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 our 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. We cannot be
sure that we will produce any live action television or film projects or that,
if produced, that such projects will be profitable. The World Wide Web is an
evolving marketplace, and we cannot predict consumer taste or the underlying
technology. Likewise, we cannot assure you that we will be successful should we
decide to promote Level 13 as an independent animation destination/network.

     TECHNOLOGICAL CHANGES; POSSIBLE CHANGES IN PRODUCTION OF OUR PRODUCTS

     The proliferation of new production technologies may change the manner in
which we create and distribute programming. 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. We cannot be sure that the introduction and proliferation of
three-dimensional digital animation or other technological changes will not
cause our historical methods of producing animation to become less cost
competitive or less appealing to our audiences. In addition, we cannot be sure
that we will be able to adapt to such changes in a cost-effective manner.

     DEPENDENCE UPON KEY PERSONNEL

     Our success depends to a significant extent upon the expertise and services
of David Pritchard, our President and Chief Executive Officer. The loss of the
services of Mr. Pritchard and/or other key management personnel could have an
adverse effect on our business, results of operations and financial condition.
We have employment agreements with Mr. Pritchard and certain of our other key
management personnel. We do not currently carry "key man" life insurance
policies on any of our executives. We cannot be sure that we will be able to
retain our existing management personnel. In addition, our continued success is
highly dependent on the artistic and production capabilities of our creative
staff. We are a signatory to the Screen Actors Guild collective bargaining
agreement and certain of our voice-over actors are Screen Actors Guild members.
We also have a wholly owned subsidiary, Namor Productions Inc., which is a
signatory to the Writer's Guild of America collective bargaining agreement. We
believe that our future success will depend, in part, on our continuing ability
to attract, retain and motivate qualified personnel in both our existing and new
businesses.

     CASUALTY RISKS

     Substantially all of our operations and personnel are located in our North
Hollywood headquarters, resulting in vulnerability to fire, flood, power loss,
telecommunications failure or other local conditions, including the risk of

                                    Page 17
<PAGE>

seismic activity. If a disaster were to occur, our disaster recovery plans may
not be adequate to protect the Company and our business interruption insurance
may not fully compensate us for our losses.

     POSSIBLE ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS

     Certain provisions of our certificate of incorporation, by-laws and
Delaware law (including a stockholders rights plan (sometimes referred to as a
"poison pill") which we adopted in 1998) could be used by our incumbent
management to make it substantially more difficult for a third party to acquire
control of the Company. These provisions could discourage potential takeover
attempts and could adversely affect the market price of our common stock.

     In addition, our corporate documents authorize the Board of Directors to
issue shares of preferred stock and to establish the rights of that preferred
stock without stockholder approval. If the Board issues preferred stock, it
could have the effect of delaying or preventing a change in control of our
company, even if a change in control were in our best interests.


                                    Page 18
<PAGE>

                           PART II. OTHER INFORMATION

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

     The 1999 Annual Meeting of Stockholders of the Company was held on June 16,
1999. The following matters were submitted to stockholders for a vote:

 1.      Election of Dixon Q. Dern as a Class III director to
         serve until the 2001 annual meeting of stockholders or
         until his successor is elected and has qualified.

                                Shares Voted

        FOR                                         WITHHELD AUTHORITY
        8,139,428                                   64,970

         Election of James M. McNamara as a Class III director
         to serve until the 2001 annual meeting of stockholders
         or until his successor is elected and has qualified.

                                Shares Voted

        FOR                                         WITHHELD AUTHORITY
        8,139,428                                   64,970

         Election of Daniel D. Villanueva as a Class III
         director to serve until the 2001 annual meeting of
         stockholders or until his successor is elected and has
         qualified.

                                Shares Voted

        FOR                                         WITHHELD AUTHORITY
        8,139,428                                   64,970

         In addition, Messrs. David Pritchard, Peter Mainstain,
         Dennis Draper and Robert Cresci continue to serve as
         directors of the Company.

 2.      To approve a Second Amendment to the Company's 1996
         Stock Option Plan, as amended, to increase the maximum
         number of shares of Common Stock that may be issued
         pursuant to awards granted under the plan from
         1,750,000 shares to 2, 100,000 shares.

                                Shares Voted

        FOR                     AGAINST           ABSTENTIONS        UNVOTED
        6,020,016               88,385            1,300              2,094,697

 3.      To approve the Company's 1999 Non-Employee Directors
         Stock Option Plan.

                                Shares Voted

        FOR                     AGAINST           ABSTENTIONS        UNVOTED
        6,059,216               41,585            8,900              2,094,697



                                    Page 19
<PAGE>



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)      EXHIBITS


INDEX TO EXHIBITS


EXHIBIT
NUMBER     DESCRIPTION
 27        FINANCIAL DATA SCHEDULE


(B)      REPORTS ON FORM 8-K.

          No reports on Form 8-K were filed by the Company during the quarter
     ended June 30, 1999.


                                    Page 20
<PAGE>



                                   SIGNATURES


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


Dated: August   , 1999


                                       FILM ROMAN, INC.




                                       By: /S/ DAVID PRITCHARD
                                           -----------------------------------
                                           David Pritchard
                                           President and Chief Executive Officer



                                       By: /S/ GREG ARSENAULT
                                           -----------------------------------
                                           Greg Arsenault
                                           Senior Vice President -
                                           Finance and Administration