<PAGE>
 
                                                                   EXHIBIT 10.12

                             EMPLOYMENT AGREEMENT
                             --------------------

     THIS AGREEMENT is made as of the 30th day of September, 1998, by and
between FILM ROMAN, INC., a California corporation, 12020 Chandler Street, North
Hollywood, California 91607 ("Company") and WILLIAM SHPALL, 460 N. Las Palmas,
Los Angeles, California 90004 ("Executive").

     In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

     1.   Employment:
          ---------- 

          1.1  Company shall employ Executive and Executive accepts such
employment with the Company upon the terms and conditions set forth in this
agreement.

          1.2  During the Term defined below Executive shall serve as Chief
Operating Officer of the Company and of its parent company (Film Roman Inc., a
Delaware corporation) and any direct or indirect wholly owned subsidiary of the
Company or its parent which the Board of Directors ("Board") may designate.
Executive shall be responsible and report to the Chief Executive Officer of the
Company. The duties to be performed by Executive shall include those consistent
with his position as Chief Operating Officer as the Chief Executive Officer of
the Company may from time to time designate. All personnel (other than creative
personnel) shall report directly to Executive or his designees (including, but
not limited to, the Senior Executive in the Company's Finance Department.

          1.3  Executive shall devote Executive's best efforts and, subject to
Section 1.7 below, Executive's exclusive full business time and attention (as
required by the Chief Executive Officer of the Company or the Board) to the
business and affairs of Company, its parent, and their direct or indirect wholly
owned subsidiaries, if any. In connection with the foregoing, Executive shall be
located at and perform his services primarily at the Company's principal
executive offices located in the greater Los Angeles Metropolitan area (it being
understood that the performance of the Executive's duties shall include business
travel from time to time outside of such area).

          1.4  Executive shall perform Executive's duties and responsibility to
the best of Executive's abilities in a diligent, trustworthy, business-like and
efficient manner and shall comply with Company's reasonable instructions and
regulations in all matters, including, if applicable, artistic taste.

          1.5  Reference is made to Company's"Executive Handbook" as the same
may be currently in effect or hereafter modified (modifications, if any, which
are inconsistent with 
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specific provisions of this agreement shall not be deemed incorporated herein).
Said Executive Handbook shall be deemed a part of this Agreement, except that
the Company's termination rights hereunder shall be only as set forth in this
Agreement and if there are any other inconsistencies between the handbook and
this agreement the provisions of this Agreement shall prevail.

          1.6  Executive shall cooperate with Company to enable Company to
obtain, at its expense, life insurance on the life of Executive for the benefit
of Company in such amounts as Company may from time to time determine, but
failure to qualify for insurance shall not be a breach hereof.

          1.7  Notwithstanding that Executive's services are exclusive hereunder
it is agreed that Executive shall be entitled to complete any current
assignments which he may have in such a manner so as not to conflict with the
reasonable time requirements of Company; additionally, Executive may spend a
reasonable amount of time (not in conflict with Company's requirements
hereunder) to maintain business relationships with other companies and
individuals with whom he has established such relationships provided that in no
event shall he engage in any such activities with any companies which are
competitive to Company, nor shall the time spent in connection with maintaining
such relationships be a significant expenditure of time.

     2.   Term:
          -----

          2.1  The term (herein "Term") of this agreement shall commence as of
September 30, 1998, and shall continue, unless sooner terminated as elsewhere
herein provided, for two (2) consecutive "contract years" as defined below. The
date on which the Term is scheduled to expire shall be referred to herein as the
"Expiration Date."

          2.2  The term "contract year" as used above means each period of 
fifty- two (52) consecutive weeks; provided, however, that if the Term were to
                                   --------  -------      
expire in the middle of any week, the Term shall be deemed extended so as to
expire on the Friday of such week.

     3.   Termination and Effect of Termination:
          --------------------------------------

          3.1  Expiration of Term.  Executive's employment by the Company and 
               ------------------     
this Agreement shall automatically expire and terminate on the expiration of the
Term unless sooner terminated pursuant to the provisions of this Section 3.

          3.2  Death.  Executive's employment by the Company and this Agreement
               -----
shall automatically terminate upon Executive's death.

          3.3  Disability. The Company shall have the right and option,
               ----------
exercisable by giving written notice to Executive, to terminate Executive's
employment by the Company and this Agreement at any time after Executive has
been unable to perform the services or duties required of Executive in
connection with Executive's employment by the Company as a result of physical 

                                       2
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or mental disability (or disabilities) which has (or have) continued for a
period of 60 days in the aggregate, during any twelve (12) month period.
Executive shall be deemed to be physically or mentally incapacitated if
Executive is unable for any reason whatsoever to devote substantial time to the
business of the Company, as determined by the Board in good faith. If the
Company determines that Executive is disabled or incapacitated and if Executive
does not agree, determination shall be made by a panel of three (3) doctors, the
first to be chosen by the Company, the second to be chosen by Executive and the
third to be chosen by the first two. Any doctor selected by a party will not be
affiliated, associated or related to the party selecting that doctor in any
manner whatsoever. The opinion of a majority of the panel of doctors shall be
binding on the parties hereto. Each party shall bear its own cost for their own
doctor, and the parties shall split the cost of the third doctor (unless it is
determined that Executive is not permanently incapacitated, in which even all
doctor costs shall be borne by Company).

          3.4  For Cause. The Company shall have the right and option,
               ---------
exercisable by giving written notice to Executive, to terminate Executive's
employment by the Company and this Agreement at any time after the occurrence of
any of the following events or contingencies (any such termination being deemed
to be a termination "for cause"):

               (i)  Executive materially breaches, materially repudiates or
otherwise materially fails to comply with or perform any of the terms of this
Agreement, any duties of Executive in connection with Executive's employment by
the Company or any of the Company's policies or procedures, or deliberately
interferes with the compliance by any other Executive of the Company with any of
the foregoing; provided, that if any action or omission by Executive
constituting one of the foregoing is curable and not "intentional" and does not
constitute any of the events or actions described in clause (ii), below,
Executive shall have five (5) business days to cure such breach following notice
thereof from the Company (which notice shall be written or, if immediate written
notice is not possible, oral notice may be given, provided that such oral notice
is confirmed in writing within the foregoing five business day period.) (For
purposes of this clause (i) and clauses (iii) and (iv), below, an action (or
omission) shall be "intentional" if Executive knows, or reasonably should have
known, that such action (or omission) constitutes a material breach hereof). For
these purposes, actions (or omissions) by the Executive which he in good faith
believes to be in the best interests of the Company and are permitted by this
Agreement shall not be deemed in any circumstance to constitute an action (or
omission) which he "reasonably should have known" to constitute a material
breach of this Agreement;

               (ii) The commission by Executive of a felony (whether or not
prosecuted) or the pleading by Executive of no contest (or similar plea) to any
felony (other than a crime for which vicarious liability is imposed upon
Executive solely by reason of Executive's position with the Company, and not by
reason of Executive's conduct). For purposes of this clause, the Company shall
bear the burden of proof in any action in which the Company attempts to
terminate Executive based upon the "commission of a felony" unless a judgment of
"guilty" has been entered against Executive in a court of competent jurisdiction
with respect to such felony; or

                                       3
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               (iii)   Any act or omission by Executive constituting fraud,
gross negligence or willful misconduct in connection with Executive's employment
by the Company; provided, that if any action or omission by Executive
constituting one of the foregoing is curable and not "intentional" and does not
constitute any of the events or actions described in clause (ii) above,
Executive shall have five (5) business days to cure such breach following notice
thereof from the Company (which notice shall be written or, if immediate written
notice is not possible, oral notice may be given, provided that such oral notice
is confirmed in writing within the foregoing five business day period).

          3.5  Employment Beyond the Term. The Company shall have no obligation
               ---------------------------
to renew or extend the Term. Neither (i) the expiration of the Term, (ii) the
failure or refusal of the Company to renew or extend the Term, this Agreement,
or Executive's employment by the Company upon the Expiration of the Term nor
(iii) the termination of this Agreement by the Company pursuant to any provision
of this Section 3, shall be deemed to constitute a termination of Executive's
employment by the Company "without cause" for the purpose of triggering any
rights of or causes of action by Executive. The Company agrees to provide
Executive with at least six months notice of its determination whether to extend
the Term or allow the Term to expire; provided, however, if the Company provides
                                      --------  -------                         
Executive with less than six months notice, the Term shall be automatically
extended at Executive's option to that date which is six months following the
giving of any such notice.

          3.6  Consequences of Termination. If this Agreement, the Term or
               ---------------------------
Executive's employment by the Company is terminated or expires pursuant to any
provision of this Section 3 (other than Section 3.2, 3.3 or 3.7), or is
terminated by Executive, Executive's right to receive salary or other
compensation from the Company and all other rights and entitlements of Executive
pursuant to this Agreement or as an Executive of the Company shall forthwith
cease and terminate, and the Company shall have no liability or obligation
whatsoever to Executive, except that:

                    (i)  The Company shall be obligated to pay to Executive not
later than the effective date of such termination all unpaid salary, vacation
and reimbursable expenses which shall have accrued as of the effective date of
such termination; and

                    (ii) The terms and conditions of applicable Executive
Benefit Plans, if any, shall control Executive's entitlement, if any, to receive
benefits thereunder.

          3.7  Termination Without Cause. The Company shall not be obligated to
utilize Executive's services or any of the results and proceeds thereof or to
permit Executive to retain any corporate office or to continue to do so; and the
Company shall have the unilateral right, at any time, without notice, in the
Company's sole and absolute discretion, to terminate Executive's employment by
the Company, without cause, and for any reason or for no reason (the Company's
"Termination Rights"). The Company's Termination Rights are not limited or
restricted by, and shall supersede, any policy of the Company requiring or
favoring continued employment of its 

                                       4
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Executives during satisfactory performance, any seniority system or any
procedure governing the manner in which the Company's discretion is to be
exercised. No exercise by the Company of its Termination Rights shall, under any
circumstances, be deemed to constitute (i) a breach by the Company of any term
of this Agreement, express or implied (including without limitation a breach of
any implied covenant of good faith and fair dealing), (ii) a wrongful discharge
of Executive or a wrongful termination of Executive's employment by the Company,
or (iii) a wrongful deprivation by the Company of Executive's corporate office
(or authority, opportunities or other benefits relating thereto). If the Company
elects to terminate Executive's employment by the Company without cause prior to
the expiration of the Term, the Company shall have no obligation or liability to
Executive pursuant to this Agreement or otherwise, except to pay to Executive
not later than the effective date of such termination (i) all unpaid vacation
which shall have accrued as of the effective date of such termination, (ii) a
lump-sum payment equal to the aggregate amount of salary provided in Section 4.1
hereto that would have been payable to Executive during the remainder of the
Term, as if Executive's employment by the Company had not been terminated. If
the Company terminates Executive's employment without cause prior to the
Expiration Date, Executive shall have no obligation to mitigate and the Company
shall have no right to offset the Company's payment obligations against any
employment income received by Executive.

          3.8  Termination by Executive. Executive shall have the right to
               ------------------------
terminate the term of this Agreement prior to the expiration date specified
herein:

               (i)    If the Company purports to require Executive to report to
any officer other than the Chief Executive Officer of Company; or

               (ii)    If the Company materially breaches this Agreement
(including, but not limited to, the provisions of Section 1.2 hereof) and such
breach is not cured within five (5) business days after receipt of written
notice from Executive alleging such breach; or

               (iii)  Executive shall have the right and option, exercisable by
giving written notice to the Company, to terminate Executive's employment by the
Company and this Agreement at any time during the 90-day period following the
occurrence of a Change in Control, in which case the Company shall make the
payments required by Section 3.7. For purposes of this Agreement, a Change in
Control shall be deemed to occur if (x) during any period of two consecutive
years, individuals at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose nomination was
approved by a vote of the majority of the directors of Holdings then still in
office who were either directors at the beginning of such period or whose
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then if office or (y) a
Distribution Date occurs under the terms of that certain Rights Agreement, dated
as of August 21, 1998, by and between the Company and American Stock Transfer &
Trust Corporation.

          3.9  Consequences of Termination - By Reason of Death or Disability.
               -------------------------------------------------------------- 

                                       5
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               If this Agreement, the Term or Executive's employment by the
Company is terminated or expires pursuant to the provisions of Section 3.2
(Death) or Section 3.3 (Disability), Executive's right to receive salary or
other compensation from the Company and all other rights and entitlements of
Executive pursuant to this Agreement or as an Executive of the Company shall
forthwith cease and terminate, and the Company shall have no liability or
obligation whatsoever to Executive, except that:

               (i)    The Company shall be obligated to pay to Executive or
Executive's estate, as applicable, not later than the effective date of such
termination all unpaid salary, vacation and reimbursable expenses which shall
have accrued as of the effective date of such Termination;

               (ii)   The Company shall be obligated to pay to Executive or
Executive's estate, as applicable, an amount equal to the Base Salary that would
have accrued during the six months following the effective date of such
termination, as if such termination had not occurred; and

               (iii)     The terms and conditions of applicable Executive
Benefit Plans, if any, shall control Executive's entitlement, if any, to receive
benefits thereunder. 

     4.   Salary and Bonuses: Provided Executive fully and faithfully renders
          ------------------
all services required hereunder and is not otherwise in material breach hereof,
Company will pay salary (in equal weekly or bi-weekly installments) and bonuses
as follows:

          4.1  Base Salary:
               ----------- 

               (a)  First contract year   -       $275,000.00
               (b)  Second contract year  -       $300,000.00

          Nothing herein shall preclude Company from reviewing and increasing
any compensation provided for herein which review shall occur not more often
than semi-annually; any such increases shall require the approval of the Board.

          4.2  Bonuses: Executive may be entitled to an annual performance bonus
               -------
as from time to time determined by the Board of Directors (it being acknowledged
that there is no obligation to grant such a Bonus).

          4.3  Company's obligation for payment of compensation hereunder shall
be subject to all present and future laws, rules, regulations and executive
orders affecting such obligation. No withholding, deduction, reduction or
limitation of payments hereunder by reason of any such law, rule, regulation or
order shall be deemed a breach of this agreement or relieve Executive from
Executive's obligations hereunder or give Executive any right to terminate this
agreement. If Company is unable to make full payments hereunder because of any
wage control 

                                       6
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law or regulation, Company shall pay Executive any portion of such payment
(which is not paid when due) at such time when such law or regulation no longer
prohibits such payment (unless such law or regulation prohibits such retroactive
payments).

     5.   Expenses;
          -------- 

          5.1  (a)  Company shall reimburse Executive for such expenses which
are reasonably incurred by Executive on behalf of or for the benefit of Company
in accordance with the Company's then current expense reimbursement policies
applicable to senior executive officers (which in any event shall be no less
favorable than that applicable to the Chief Executive Officer) and the
presentation by Executive from time to time of an itemized account of such
expenditures setting forth the date, the purposes for which incurred, and the
amounts thereof, and such other information as Company may reasonably require,
together with such receipts showing payments as Executive has been able to
obtain. Company shall either pay for or reimburse Executive for all such travel
expenses as well as reasonable living expenses while he is outside of the
greater Los Angeles area.

               (b)  Further, Executive shall be entitled to a Company telephone
credit card. Executive shall also be entitled to a car allowance in the amount
of Five Hundred Dollars ($500.00) per month, which amount shall be reported on
Executive's W-2 or on Form 1099 (as Company may determine) and shall cover all
normal work-related automobile expenses and shall be payable in accordance with
Company's then existing policies (currently, payment to be made at the beginning
of each applicable month). Company shall reimburse Executive for charges
relating to cellular telephone, and car telephone uses pertaining to Company's
business upon receipt of substantiating vouchers. With respect to the Company
telephone credit card, car allowance, cellular telephone and car telephone,
Company shall treat Executive in accordance with the Company's then current
policies applicable to senior executive officers (which in any event shall be no
less favorable than that applicable to the Chief Executive Officer).

     6.   Benefits:
          -------- 

          6.1  Medical Plans, etc.
               -------------------

               (a)  During the Term, Executive shall also be entitled to and
shall be accorded all rights and benefits under any life insurance, disability,
health and major medical insurance policy or policies, and any other plans or
benefits, 401(K) Plan and pension plans which Company may provide during the
Term ("Employee Benefit Plans") to senior executive officers generally (which in
any event shall be no less favorable than the policies applicable to the Chief
Executive Officer). Further, the Company shall consult with Executive with
respect to the Company's decision to adopt a new disability plan for the
Company.

               (b)  During each contract year Executive shall also be entitled
to (i) three (3) weeks of paid vacation at times to be mutually agreed to and
(ii) sick leave on a basis accorded 

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other senior executives generally during the Term (which in any event shall be
no less favorable than that applicable to the Chief Executive Officer).

               (c)  Provided that Executive meets qualifications (including
medical qualifications) for the same Company shall furnish Executive with term
life insurance having a face value of $500,000.00, which insurance coverage
shall remain in effect during the term hereof.

          6.2  Employee Stock Options:
               ---------------------- 

               Executive is entitled to participate in the Employee Stock Option
Plan of Film Roman, Inc., a Delaware corporation ("FRI Delaware"). Said Plan
includes usual provisions included in a non-qualified stock option plan
including the right to satisfy the exercise price with cash, promissory notes
(if secured to the reasonable satisfaction of FRI, Delaware) or stock in the FRI
Delaware. Executive acknowledges that such Plan is not intended to be an
"incentive stock option" within the meaning of Section 422A of the Internal
Revenue Code of 1986 as amended and is to be considered in all respects as "non-
qualified." Company will cause FRI Delaware to grant to Executive options under
the Employee Stock Option Plan of FRI Delaware, containing the terms and
conditions summarized below, to purchase two hundred thousand (200,000) shares
of FRI Delaware's common stock at an exercise price equal to its fair market
value (as defined in the Plan) as of June 16, 1998, which options shall vest as
follows:

               (i)  an option as to 100,000 shares to vest immediately upon
signing of this agreement; and

               (ii) an option as to 100,000 shares to vest in twelve monthly
installments, the first installment date being the first day of the second
contract year with respect to 16,667 shares; the following 10 installment dates
being the first day of each of the following ten months with respect to 7,575
shares; and the last installment date being the first day of the last month of
the second contract year with respect to all remaining unvested shares.

          Said options shall remain exercisable for a period ending on the
earlier to occur of (i) ten (10) years from the date of the grant, (ii) nine
months from the effective date of termination of this Agreement for any reason
other than Death (Section 3.2) or Disability (Section 3.3); and (iii) two years
from the effective date of termination of this Agreement by reason of Death
(Section 3.2) or Disability (Section 3.3). Notwithstanding anything above to the
contrary, with respect to stock options granted Executive, Executive may elect
to exercise such options on a cashless basis, deducting from the number of
option shares to be received a number of shares equal in value to the exercise
price of the option as determined in accordance with the provisions of the Plan,
as applicable. Without limiting the foregoing, in the event of termination of
this Agreement, unvested stock options granted hereunder shall be canceled as
and to extent provided in the Plan; except that if termination of this agreement
is by reason of Death (as provided in Section 3.2), Disability (as provided in
Section 3.3), without cause (as provided in Section 3.7 

                                       8
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above) or by Executive (as provided in Section 3.8 (i), (ii) or (iii) above)
then and in such event all options granted hereunder but not yet vested shall be
accelerated and shall be considered vested as of the date of such termination.

          6.3  Office; Assistant: Executive will be furnished with a private
               -----------------
office, office equipment as reasonably required, and the services of an
assistant exclusive to Executive during the Term hereof. Company acknowledges
that Executive will be moving his office from its present location to the office
space provided at Company's headquarters; Company agrees to pay to Executive a
flat amount of $5,000.00 to reimburse Company for any expenses incurred in
connection with such move, as well as any expenses (including legal expenses)
incurred by Executive in connection with the review of this agreement. Such
amount shall be treated as additional income to Executive and shall be reported
on Form 1099.

          7.   Company's Rights:
               ---------------- 

               7.1  Executive acknowledges that Company, as employer of
Executive, shall own all right, title and interest in and to the results of
Executive's services hereunder, including all material developed or conceived by
Executive within the scope of Executive's employment. Company shall have the
right to use all such materials and the elements thereof and the programs or
other productions in which the material is contained worldwide and in
perpetuity, without limitation or restriction whatsoever and Company may
distribute, broadcast and otherwise exhibit, use and/or exploit, in whole or in
part, worldwide, in perpetuity, same in any manner and through any media,
whether presently in existence or subsequently devised, as Company may elect.
Executive hereby waives the so-called "moral rights" of an author. Executive
agrees and acknowledges that for purposes of Section 201 of the United States
Copyright Act and for ownership purposes, Company is the "employer for hire" of
Executive and shall have all ownership rights in the material and services of
Executive hereunder as the author thereof. Company shall have no obligation to
use the product of Executive's services.

               7.2  Without limiting the foregoing, Executive agrees that all
inventions, innovations, improvements, developments, methods, designs, analyses,
drawings, reports, and all similar or related information which relates to
Company's or any of its subsidiaries' actual or anticipated business, research
and development or existing or future products or services and which are
conceived, developed or made by Executive while employed by Company or its
predecessor belong to Company or such subsidiary. Executive will promptly
disclose to the Board and perform all actions reasonably requested by the Board
at Company's expense (whether during or after the Term) to establish and confirm
such ownership (including, without limitation, assignments, consents, powers of
attorney and other instruments).

               7.3  Company shall have the right to use, disseminate, reproduce,
print and publish Executive's name, likeness, voice and approved biographical
material concerning Executive as news or informative matter in connection with
Company's business.

                                       9
<PAGE>
 
          7.4  Executive's services and rights herein granted are unique in
character and value such that the loss thereof could not reasonably compensable
in damages in an action at law. According, Company shall be entitled to seek
equitable relief by way of injunction or otherwise to prevent the breach or
continued breach of this Agreement. The sole right of Executive as to any breach
or alleged breach hereof by Company shall be the recovery of money damages, and
the rights herein granted by Executive shall not be terminated by reason of such
breach. The waiver by either party of any breach hereof shall not be deemed a
waiver of any prior or subsequent breach hereof. All remedies of either party
shall be cumulative and the pursuit of one remedy shall not be deemed a waiver
of any other remedy.

     8.   Federal Communications Act:
          -------------------------- 

          To the extent that the same may be deemed applicable to any product
hereunder, reference is hereby made to Section 507 of the Federal Communications
Act, making it a criminal offense for any person, in connection with the
production or preparation of any program intended for broadcasting, to accept or
pay any money, service or other valuable consideration for the inclusion of any
matter as part of any such program or program matter without disclosing in
advance the same to the employer of the person to whom such payment is made or
to the person for whom such program is being produced, or to the station over
which such program is broadcast. Executive understands that it is the policy of
Company not to permit any employee of Company to accept or pay any such
consideration, and Executive represents and agrees that Executive has not
accepted and will not accept, and has not paid and will not pay, any money,
services, or other valuable consideration for the inclusion of any "plug,"
reference or product identification, or any other matter in the programs
produced hereunder.

     9.   Confidential Information:
          ------------------------ 

     Executive acknowledges that the information, observations, work product,
trade secrets and data obtained by Executive while employed by Company and its
subsidiaries concerning the business or affairs of the Company or any subsidiary
thereof ("Confidential Information") are the property of Company or such
subsidiary. Therefore, Executive agrees that Executive shall not disclose to any
unauthorized person or use for Executive's own account any Confidential
Information without the prior written consent of the Board, unless and to the
extent that the aforementioned matters (i) become generally known to and
available for use by the public other than as a result of Executive's acts or
omissions to act or (ii) must be disclosed under a subpoena or other
governmental order or (iii) was possessed by Executive prior to Executive's
employment by the Company or (iv) are disclosed within scope of period, or at
any other time Company may request, all memoranda, notes, plans, records,
reports, computer tapes and software and other documents and data (and copies
thereof) relating to the Confidential Information, work product or the business
of Company or any subsidiary which Executive may then possess or have under
Executive's control; provided that Executive may retain his personal rolodex.

                                       10
<PAGE>
 
     10.  Non-Compete, Non-Solicitation:
          ----------------------------- 

          10.1  Executive acknowledges that in the course of Executive's
employment with Company Executive has and will become familiar with Confidential
Information concerning Company and its subsidiaries and that Executive's
services have been and will be of special, unique and extraordinary value to
Company and its subsidiaries. Therefore, during the Term, Executive will not be
an employee, consultant, advisor, or director of any other person, firm or
corporation. Further, Executive shall not become financially interested or
associated with, directly or indirectly, a Competitive Business.

          10.2  Notwithstanding anything to the contrary contained herein,
Executive may own up to five percent (5%) of any class of a Competitive
Business' outstanding securities which are listed on any national securities
exchange, registered under Section 12(g) of the Securities Exchange Act of 1934
or otherwise publicly traded, provided that the holdings of Executive of any
such security of a Competitive Business do not represent more than 10% of the
aggregate of Executive's investment portfolio at any time. For these purposes,
"Competitive Business" means all persons engaging in any business which directly
competes with that of the business of the Company.

          10.3  During Executive's employment and for two (2) years after the
end of the Term Executive will not attempt to solicit (for Executive's own
purposes or for any other company) any employee of or independent contractor
rendering exclusive services to Company at the time of such attempt or
solicitation. Further, during Executive's employment and for two (2) years
after the end of the Term Executive will not (i) transfer or attempt to transfer
any projects in which Company is involved (whether in negotiation, development
or production) from Company to Executive or to any other company and/or (ii)
encourage any company or business with whom Company is doing business (e.g. a
network or other exhibitor) from ceasing to do business with Company with
respect to any project which is then in negotiation, development or production.

     11.  Notices:
          ------- 

          All notices required to be given hereunder shall be in writing and
shall be delivered personally, or by express, certified or registered mail to
the respective addresses of the parties hereto set forth elsewhere in this
Agreement, or at such other addresses as may be designated by written notice.
Delivery of any notice shall be deemed conclusively made (i) if personally
delivered at the time of delivery, (ii). if delivered by any private overnight
express mail service, twenty-four (24) hours after deposit with such service
(this period shall be seventy-two (72) hours if addressed to or from a party
outside the United States), and (iii) if mailed, properly addressed and postage
prepaid, three (3) business days from date of mailing (seven (7) business days
if mailed to or from a country other than U.S.). A copy of any notice hereunder
to Company shall also be given to the Law Offices of Dixon Q. Dern, P.C., 1901
Avenue of the Stars, Suite 400, Los Angeles, California 90067; a copy of any
notice to Executive shall also be given to Kenneth

                                       11
<PAGE>
 
Kleinberg, Esq., Kleinberg Lopez Lange Brisbin & Cuddy, 2049 Century Park East,
Suite 3180, Los Angeles, California 90067.

     12.  Immigration:
          ----------- 

          Company's engagement of Executive is subject to Executive's compliance
with the terms and provisions of the Federal Immigration and Naturalization Act
which compliance has been effected. In that regard concurrently with the
execution of this agreement Executive shall provide Company with such proof of
Company's United States Citizenship or authorization to work in the United
States as may be required by the Immigration and Naturalization Service and
shall also complete and return to Company an I-9 Form or such other forms as may
be required.

     13.  Arbitration:
          ----------- 

          Any controversy or claim arising out of, or relating to, this
agreement, the breach thereof, or the coverage of this arbitration provision
shall be settled by arbitration pursuant to the provisions of Section 1280, et
seq. of the California Code of Civil Procedure (or such substitute provisions
therefor then in effect); provided, that any arbitrator(s) selected shall have
experience in or knowledge of the business(es) in which Company is engaged. Any
such arbitration shall be conducted in Los Angeles, California. The arbitration
of such issues, including the determination of the amount of any damages
suffered by any party hereof by reason of the acts or omissions of another shall
be to the exclusion of any court of law except as set forth below. The decision
of the arbitrators or a majority of them shall be final and binding on all
parties and their respective heirs, executors, administrators, successors and
assigns. Any action to secure a judicial confirmation of the arbitration award
may be brought in any state or federal court of competent jurisdiction. If the
parties or the arbitrators appointed by them are unable to agree upon the
selection of a neutral arbitrator then either party may, at its election,
require that the arbitration shall be conducted under the auspices and rules of
the American Arbitration Association (AAA) and that the neutral arbitrator shall
be selected by the AAA. Arbitration hereunder shall not, in any event, (i)
prevent any party from seeking and obtaining equitable relief, including, but
not limited to, prohibitory or mandatory injunctions, specific performance or
extraordinary writs, in any court of law or equity having jurisdiction, nor (ii)
prevent any party from joining any other party as defendant in any action
brought by or against a third party, nor (iii) prevent any party from filing
legal action hereunder to effectuate any attachment or garnishment, provided
that such party stipulates in such action, at any other party's request, to
arbitration on the merits of said case, nor (iv) prevent a party from filing
legal action to compel arbitration under the arbitration provisions hereof.

     14.  General Provisions:
          ------------------ 

          14.1  Warranties: Executive warrants that he[she] is free to enter
                ----------
into this Agreement and will not knowingly do or permit any act which will
interfere with or derogate from the full performance of his services or
Company's exercise of the rights herein granted.

                                       12
<PAGE>
 
          14.2  Indemnity: Executive shall hold Company, its licensees and
                ---------
assigns, and the directors, officers, employees and agents of the foregoing,
harmless from all claims, liabilities, damages, costs and legal fees arising
from any breach by Executive of any warranty or agreement made by Executive
hereunder. Company will hold Executive harmless from all claims, liabilities,
damages, costs and legal fees arising from the use of any material supplied
Executive by Company or incorporated at Company's discretion or in connection
with or arising out of the performance of his duties pursuant to this agreement.
The party receiving notice of any claim or action subject to indemnity hereunder
shall promptly notify the other party. This indemnity shall survive any
termination or expiration of this Agreement. Company shall maintain directors
and officers liability coverage during the Term which coverage shall apply to
all officers of Company including Executive, to extent provided therein.

          14.3  Waiver: A waiver by either party of any of the terms or
                ------
conditions of this agreement in any one instance shall not be construed to be a
waiver of such term or condition for the future, or any subsequent breach
thereof; all remedies, rights, undertakings, obligations and agreements
contained in this agreement shall be cumulative, and none of them shall be in
limitation of any other remedy, right, undertaking, obligation or agreement of
either party.

          14.4  Construction: This agreement shall be governed by and construed
                ------------
in accordance with the laws of the State of California applicable to contracts
entered into and fully to be performed therein. In view of the fact that this
agreement was in whole or in part negotiated and entered into in California, the
parties consent to and agree to submit to the jurisdiction of the courts of the
State of California (and/or the federal courts within California), and each
party agrees that service of process may be effected by mail (certified or
registered mail, return receipt requested), to or by personal service upon such
party (or any officer of a corporate party) at such party's address as set forth
in this agreement or such other address as such party may specify in writing.

                Wherever the context of this agreement requires it, each gender
shall be deemed to embrace and include the others, and the singular shall be
deemed to embrace and include the plural.

          14.5  Public Announcement. Subject to the Company's obligations as a
                -------------------
public company, the Company shall provide Executive with the right to review and
approve any public announcement of the terms, provisions, or execution of this
Agreement; provided, however, that Executive shall not unreasonably withhold
           --------  -------                                                
such approval.  Further, the Company and Executive shall mutually approve the
timing of the release of any public announcement made with respect to
Executive's employment; provided, however, that any such release shall be made
                        --------  -------                                     
within ten days of the date of execution of this Agreement.

          14.6  Severability of Provisions: If any provision hereof as applied
to either party or to any circumstance shall be adjudged by a court to be void
or unenforceable, the same shall 

                                       13
<PAGE>
 
in no way affect any other provisions hereof, the application of such provision
in any other circumstances or the validity or enforceability hereof.

          14.7  Entire Understanding: This agreement and the Stock Option
                --------------------
Agreement executed concurrently herewith contains the entire understanding of
the parties hereto relating to the subject matter herein contained and
supersedes any and all prior negotiations, understanding and agreements between
the parties (whether oral or in writing); this agreement cannot be changed,
rescinded or terminated except by a writing signed by the Company. 

          14.8  Successors and Assigns: Except where expressly provided to the
                ----------------------
contrary, this agreement, and all provisions hereof, shall inure to the benefit
of and be binding upon the parties hereto, their successors in interest,
assigns, administrators, executors, heirs and devisees.

          14.9   Section Titles: The titles of the Sections of this agreement
                 --------------
are for convenience only and shall not in any way affect the interpretation of
any paragraphs of this agreement or of the agreement itself.

          IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the day and year first above written.


                                        FILM ROMAN, INC.
                                         "Company"

                                        By  /s/ David Pritchard
                                            -------------------
                                            Its President and CEO

                                            William Shpall
                                            --------------
                                            WILLIAM SHPALL, Executive

                                             Soc. Sec. _____________________

                                       14