<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

                                 ANNUAL REPORT
                        PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

       FOR THE FISCAL YEAR ENDED                   COMMISSION FILE NUMBER
            AUGUST 1, 1999                                 0-21943

                            -----------------------

                               FOUR MEDIA COMPANY
             (Exact Name of Registrant as Specified in its Charter)

                 DELAWARE                        95-4599440
        (State or other jurisdiction          (I.R.S. Employer
      of incorporation or organization)      Identification No.)

         2813 West Alameda Avenue
           Burbank, California                       91505
    (Address of principal executive offices)       (Zip code)

        Registrant's telephone number including area code: 818-840-7000

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                     Common Stock, par value $.01 per share

       SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:  None
                             - - - - - - - - - -

     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 the past 90 days.

                      Yes      X          No
                           -----------      ----------

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

                      Yes      X          No
                           -----------      ----------

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of October 27, 1999 was $29,949,008.

     As of October 27, 1999, 19,693,629 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Part III incorporates information by reference from the definitive proxy
statement for the 1999 Annual Meeting of Stockholders to be held in January
2000.
                        --------------------------------

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                                     PART I

     The following should be read in conjunction with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Form 10-K. When used in
the following discussion, the words "believes," "anticipates," "intends,"
"expects" and similar expressions are intended to identify forward-looking
statements.  These statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.  We
caution you not to place undue reliance on forward-looking statements, which
speak only as of the date of this report.

Item 1.  Business

Overview

     We are a leading provider of technical and creative services to producers
and distributors of television programming, television commercials, feature
films and other entertainment content, as well as to owners of film and
television libraries.  The name Four Media Company is derived from our core
competencies in film, video, sound and data.   These services include the
processing, enhancement, storage and distribution of film and video from the
point it leaves the camera until it is shown, in various formats, to audiences
around the world.   We seek to capitalize on growth in domestic and
international demand for original entertainment content and for existing
television and film libraries without taking production or ownership risk with
respect to any specific television program, feature film or other content.

     Since our formation in 1993, we have invested extensively in new digital
systems and equipment.  In addition, we have successfully identified and either
acquired or started and then integrated fourteen complementary businesses.  The
latest of these acquisitions occurred in June 1999 when we acquired the
operations of Ross Digital Sound and Picture ("DSP").  As a result of our
investments and acquisitions, we are one of the largest and most diversified
independent (not affiliated with or related to a content owner) providers of
technical and creative services to the entertainment industry and therefore are
able to offer our customers a single source for such services.

     We have fourteen wholly-owned operating subsidiaries: 4MC-Burbank, Inc.
("4MC Burbank"), Digital Magic Company ("DMC"), Anderson Video Company
("Anderson"), Four Media Company Asia Pte. Ltd. ("4MC Asia"), 4MC-Company 3,
Inc. ("Co3"), Visualize, d.b.a. Pacific Ocean Post ("POP"), VSDD Acquisition
Corporation ("VSI"), MSCL, Inc., FilmCore Editorial San Francisco, LLC, FilmCore
Editorial Los Angeles, LLC (the latter three collectively "Encore"), Company 11
Productions ("Co11"), 4MC Radiant, Inc. ("Radiant"), Four Media Company (UK)
Limited ("4MC UK"), and Digital Sound & Picture, Inc. ("DSP").  Also, we have
one majority-owned subsidiary, POP Animation, and one minority-owned investee,
Cinram POP DVD Center, LLC.  We continue to be acquisition-oriented and are
continually evaluating acquisition opportunities to enhance our operations and
profitability.

     We have organized our activities into the following four divisions, each of
which offers services that are integral to the creation, enhancement and/or
distribution of entertainment content.

     Television Division.  The television division provides producers of
original television programming and television commercials with certain
technical and creative services that are necessary to conform original film or
video principal photography into a final product suitable for airing on network,
syndicated, cable or foreign television.  These services include developing
negative in our film laboratory; converting developed negative to videotape
and/or digital formats; creating music and sound effects; mixing sound elements
for inclusion with the final program master; creating visual effects;
integrating visual effects into the final program master; correcting color;
removing artifacts and scratches from the program master; formatting for
commercial integration; and delivering (via tape or satellite) the program
master for broadcast.  The division's customer base includes most of the major
domestic studios and broadcast networks that are engaged in the production of
original programming as well as a large number of independent production
companies.  We conduct television operations in Burbank, Hollywood, Universal
City, Culver City, Santa Monica and San Francisco, California.

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     Mastering and Distribution Division.  The mastering and distribution
division (formerly, the studio division) provides owners of television and film
libraries with all of the facilities and services necessary to manage, format
and distribute content worldwide.  These services include restoring and
preserving damaged content, archiving original elements and working masters,
creating working masters from original elements, duplicating masters for
professional applications and formatting masters to meet specific end-user
standards and requirements.  The mastering and distribution division offers
customers lower operating costs, improved response time and reliability, access
to new technology, and adherence to quality standards that are recognized
throughout the technical community.  The division's customer base includes the
major domestic studios (and their international divisions), as well as
independent owners of television and film libraries.  We conduct mastering and
distribution operations in Burbank and Universal City, California, and London,
England.

     Broadcast and Syndication Division.  The broadcast and syndication division
(formerly, the broadcast services division) provides domestic and international
programmers with the facilities and services necessary to assemble and
distribute programming via satellite to viewers in the United States, Canada and
Asia.  These services include assembling programming provided by the customer
into a 24-hour "network" format; creating interstitial and promotional graphics
and other material that support the brand identity of the programming; providing
language translation and subtitling; providing production support and facilities
for the timely creation of original programming such as host and news segments,
and live shows; and providing automated playback systems and satellite uplink
facilities.  In addition, the broadcast and syndication division provides
facilities and services for the delivery of syndicated television programming in
the United States and Canada and also transmits special events, sports or news
segments for insertion in third party networks.  The division's customer base
includes major entertainment companies offering worldwide network programming,
independent content owners offering niche market programming, and pay-per-view
services marketing movies and special events to cable and direct-to-home
viewers.  We conduct broadcast and syndication operations in Burbank, California
and the Republic of Singapore.

     Film and Animation Division.  The film and animation division (formerly,
the visual effects division) provides creators of special visual effects with
certain services required to digitally create or manipulate images in high
resolution formats for integration in feature films and television commercials.
These services include developing negative and correcting color in our film
laboratory; digitally scanning film; digitally compositing multiple layers of
effects; digitally creating computer generated animated sequences and recording
the results on film and creating computer generated animated sequences.  The
division's customer base includes most of the major domestic studios, as well as
independent film production companies.  We conduct film and animation operations
in Santa Monica, California.

Recent Developments

     On November 1, 1999 we announced that we have entered into a letter of
intent to sell 100% of the Company's issued and outstanding common stock to
Liberty Media Corporation (NYSE: LMG.A). As contemplated by the letter of
intent, one hundred percent (100%) of Four Media's issued and outstanding stock
will be acquired in exchange for approximately 6.35 million shares of Class A
Liberty Media Group stock, par value $1.00 ("LMG.A shares(s)"). One LMG.A share
will be issued for each 3.1 shares of Four Media common stock outstanding.

Warburg, Pincus Equity Partners, L.P., Fleming Asset Management USA and Robert
T. Walston, collectively holders of approximately 70% of the issued and
outstanding shares of Four Media, are expected to enter into agreements with
Liberty Media to vote in favor of the transaction. The transaction is subject to
execution of definitive documentation, expiration of applicable waiting periods
under pre-notification regulations, Four Media stockholder and Board of
Directors approval, and other customary closing conditions, including other
appropriate corporate approvals. The parties contemplate that a definitive
agreement will be signed in mid-November 1999 and closing is anticipated to
occur in the first quarter of 2000.

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Markets

     The entertainment industry creates motion pictures, television programming,
and interactive multimedia content for distribution through theatrical
exhibition, home video, pay and basic cable television, direct-to-home, private
cable, broadcast television and on-line services.  Content is released into a
"first-run" distribution channel, and later into one or more additional channels
or media.  In addition to newly-produced content, film and television libraries
may be released repeatedly into distribution.  Entertainment content produced in
the United States is exported and is in increasingly high demand
internationally.  We believe that several trends in the entertainment industry
have had and will continue to have a positive impact on our business.  These
trends include growth in worldwide demand for original entertainment content,
the development of new markets for existing content libraries, increased demand
for innovation and creative quality in domestic and foreign markets, and wider
application of digital technologies to content manipulation and distribution,
including the emergence of new distribution channels.

     Motion Picture Production and Distribution Industry.  The domestic motion
picture industry encompasses the production, distribution and exhibition of
feature-length motion pictures, including their distribution in home video,
broadcast and cable television and other ancillary markets.  While the domestic
motion picture industry is dominated by the major studios, including Paramount
Pictures, Sony Pictures Corporation, Twentieth Century Fox, Universal Pictures,
The Walt Disney Company and Warner Bros., independent production companies also
play an important role in the production of motion pictures for domestic and
international feature film markets.  In 1999, there were 509 feature films
released, up from 507 in 1998.  Our film and animation division creates and
integrates digital visual effects and animation sequences into newly released
feature films.

     Recent growth in international revenue has far exceeded growth in North
American (United States and Canada) revenues, with international revenue now
accounting for approximately half of total revenue.  According to an August 1996
industry forecast, it is expected that by the year 2000, international revenue
from motion pictures produced in the United States will surpass North American
revenue.  Our mastering and distribution division provides services that support
the preparation and delivery of feature films for distribution in domestic and
international home video, television and other ancillary markets.

     Television Production and Distribution Industry.  The North American
television production and distribution industry serves the largest broadcast
market in the world, with a population of approximately 300 million and more
than 97 million television households.  In North America, programming is
delivered to television households via conventional broadcast networks, cable
channels, individual television stations and satellite delivery systems.
Broadcast television networks in the United States include two relatively new
networks, the United Paramount Network and the Warner Bros. Network, as well as
the established networks, ABC, NBC, CBS and Fox.  These networks penetrate
nearly 100% of domestic television households and provide access to a broad-
based mass audience for television advertisers.  Spending for television
advertising, which drives the production of new programming and the sale of
existing content libraries, was $39.9 billion in 1998, a 7.5% annual growth rate
since 1992.  Projected spending for 2002 is estimated at $46.6 billion.  While
the networks have seen an erosion of their penetration and reduced advertising
revenues, the basic cable networks have increased penetration, programming and
advertising revenues.

     The demand for entertainment content has increased significantly as a
result of the introduction of new broadcast networks, cable channels, direct
broadcast satellite systems, pay television, increased cable penetration and the
growth of home video.  The new broadcast and cable television networks have
created the need for more hours of original programming and competition for
viewers has increased the demand for innovation and creative quality resulting
in higher levels of production and related spending.  Our television division
supports the creation of television programming and advertising for domestic
distribution and our broadcast and syndication division supports the delivery of
programming through various channels of distribution including cable,
independent television stations and satellite delivery systems.

     In the last decade, the privatization of broadcasting systems outside the
United States, the proliferation of broadcast licenses, and the introduction of
sophisticated delivery technologies, such as cable and satellite transmission
systems, have led to significant growth of broadcasting and cable television
markets outside North America.  European television is the most visible example
of the growth in programming outlets.  Over the last 15 years, European
governments have encouraged a major expansion of the public and private
broadcasting sectors.

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For example, Germany and France each have added six broadcast networks and the
United Kingdom has added four. The introduction of new television broadcast
systems is just beginning in Asia and Eastern Europe. Most foreign broadcasters
require both indigenous programming to satisfy the local content requirements of
their broadcast licenses and popular international programming, largely produced
in the United States. The substantial growth of broadcast markets outside North
America has also increased the demand for entertainment content produced in the
United States. Our television division supports the creation of programming for
international distribution, our mastering and distribution division supports the
preparation of content to be viewed in international markets, and our broadcast
and syndication division supports the distribution of cable channels in Asia.

     Broadband Production and Distribution Industry.  The interactive multimedia
industry encompasses video games, "edutainment" and on-line interactive
services.  Improvements in technology, the increasing availability and cost
expenditures of communication bandwidth including internet, cable modems, direct
satellite access, the proliferation of distribution channels for entertainment
products and services, and the involvement of large entertainment companies,
provide the critical mass to support continued growth of broadband distribution
of entertainment content.  Advertisers spent an estimated $1.9 billion for
online advertising in 1998, up 112% from 1997.  Online advertising spending in
2002 is expected to exceed $8.0 billion reflecting anticipated increases in
online penetration of worldwide households and advances in online commerce.  The
content currently being created for online access integrates various forms of
media including live action video, animation, graphics and audio.  We anticipate
growing demand for content specifically formulated for interactive applications
both for internet and television distribution.  Our current revenues from these
emerging market segments represent only a small portion of consolidated results.
However, we expect the rapid growth of the broadband production and distribution
industry will positively impact us specifically in the areas of video
compression, digitization, 2D and 3D graphics, and authoring, particularly for
server-based content on-demand services.

Products and Services

     We have defined our operating divisions in terms of the entertainment
industry market segments that each serves.  Each sector is driven by related but
diverse economic factors and, as a result, we are not solely dependent upon any
single market segment within the entertainment industry.  We intend to maintain
and expand the diversity of our revenue sources and view such diversity as a
significant competitive operating and financial advantage.  For each of our
operating divisions, we have defined a set of services which support our
customers' entire technical and creative process.  As such, we seek to provide
complete outsourcing solutions utilizing the full range of its services in each
division.

     Television Division

     The television division provides a broad range of facilities and technical
and creative services directed to producers of original television programming.
Our customer base includes most of the major studios and broadcast networks that
produce original programming, as well as a large number of independent
production companies.  We provide all of the technical and creative services
that are necessary to conform original film or video principal photography to a
final product suitable for network, syndicated, cable or foreign television
distribution.  These services include the following:

     Negative Developing.  Because of the creative freedom, high resolution
image quality and flexibility attained by working with film, the majority of
prime time network and first run syndicated television programming originates on
film.  Camera original negative shot during each production day, called
"Dailies", for a one-hour drama, situation comedy or movie-of-the-week are
delivered to our film laboratory for overnight development.  Our film laboratory
specializes in negative developing for television applications and has increased
its television related activities in each year since our inception.

     Transfer and Digital Formatting Services.  We accept developed negative
from a laboratory and transfer the film to various digital formats including,
among others, videotape.  The transfer process enables the customer to view a
video tape of the previous day's work and begin the creative process of editing.
The transfer process is technically challenging, and is used to integrate
various forms of audio and encode with feet and frame numbers from the original
film.  We also convert film into various digital formats suitable for
distribution through multiple

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mediums such as DVD and direct broadcast satellite services. We believe our
state-of-the-art technology and the highly skilled talent we retain allows us to
produce the highest quality results attainable in the industry today.

     Off-Line Editing.  We deliver low resolution digitized images to the
customer for processing by various non-linear editing work stations.  Using
these systems, the customer determines a program's content and creates an edit
decision list, which will eventually be used to assemble the source material
into a final product suitable for broadcast.  We provide and fully support such
editing with personnel and equipment for use by the customer within our
facilities or at a location designated by the customer.  In addition, we are
currently constructing communications infrastructure to provide digitized images
directly from the film-to-tape transfer process to a work station via dedicated
phone lines.

     Audio/Sound Effects.  Through our facilities in Burbank, Culver City and
Santa Monica, we edit and create sound effects, assist in replacing dialog and
re-record all the audio elements for integration with film and video elements.
We design sound effects to give life to the visual images with a proprietary
library of over 30,000 digital sound effects.  Dialog replacement is sometimes
required to improve quality, replace lost dialog or eliminate extraneous noise
from the original recording.  Re-recording combines sound effects, dialog, music
and laughter or applause to complete the final product.  In addition, the re-
recording process allows the enhancement of the listening experience by adding
specialized sound treatments, such as stereo, Dolby(R) SR(R) and
Surroundsound(R).  Our Burbank facility has four studios devoted to situation
comedies and one-hour dramas as well as two theater-sized re-recording stages
targeted at the feature film and made-for-television movie markets.  Our Santa
Monica facility has eleven studios which primarily serve the sound needs of
commercial advertising, music videos and certain home video applications.  We
employ an award winning staff and are well respected for our technical and
creative contribution.

     Visual Effects.  Visual effects are used to enhance the entertainment
experience of the viewing audience by supplementing images obtained in principal
photography with computer generated imagery.  The visual effects are typically
used to create images that cannot be created by any other cost effective means.
Digital Magic and POP, both located in Santa Monica, specialize in creating
visual effects for television.  Our compositing suites are configured for nine
layers of color correction and eight layers of compositing with powerful wipe
generators.  These devices are used to generate bends, warps, morphs, 3D shapes
and transformations in real time.  We also offer an array of graphics and
animation workstations using a variety of software to accomplish unique effects,
including 3D animation.  We are a leader in providing visual effects for the
television industry as evidenced by our involvement in numerous award winning
series, including the X Files(R) and Star Trek(R)--Voyager(R).

     Assembly, Formatting and Duplication.  Once client-directed creative
decisions are complete, including the integration of sound and visual effects,
we utilize the edit decision list to assemble the source material into its final
form.  This assembly is accomplished by using a combination of digital linear
assembly systems and full-resolution non-linear assembly systems.  We believe
that our assembly systems, which became operational in 1996, are among the most
technologically advanced in the industry.  In addition, we utilize sophisticated
computer graphics equipment to generate titles and character imagery and to
format the program to meet specific network requirements (including time
compression and commercial breaks).  Finally, we create multiple master
videotapes for delivery to the network for broadcast, archival and other
purposes designated by the customer.

     Mastering and Distribution Services Division

     The mastering and distribution division offers a broad range of facilities
and technical services to owners of television and film libraries.  The division
provides all of the services necessary to manage, format and distribute content
on an international scale.  These services include the following:

     Storage of Original Elements and Working Masters.  The storage and handling
of videotape and film elements require specialized security and environmental
control procedures.  Throughout the entertainment industry, content representing
millions of dollars of future revenue is stored in physically small units that
are subject to the risk of loss resulting from physical deterioration, natural
disaster, unauthorized duplication or theft.  Our archive is designed to store
approximately 500,000 master videotapes and film elements in an environment
protected from temperature and humidity variation, seismic disturbance, fire,
theft and other external events.  We currently store approximately 340,000
master videotapes and film elements in the archive.  In addition to the physical
security of

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the archive, content owners require frequent and regular access to their
libraries. Speed and accuracy of access is a critical value added factor. We
believe that our archive is the largest among independent service providers and
among the most advanced with respect to security, environmental control and
access features.

     Restoration of Damaged Content.  Substantially all film elements
originating prior to 1983 have faded, degraded or have been damaged.  Damaged
film negative must be restored because submasters produced from damaged film
will generally not meet the minimum quality standards required in domestic and
foreign broadcast markets.  Our technicians restore damaged film negative to
original and sometimes enhanced quality through the use of proprietary optical
and electronic equipment and techniques.  We believe we are well recognized for
our ability to complete technically challenging restoration assignments.

     Preservation of Existing Film.  In order to protect film assets from
degradation, older film is frequently converted to new archival film stock.
Modern film stock is the preferred archival medium because it has the highest
image resolution of any image storage medium and a shelf life that exceeds 100
years.  Using a proprietary process, we take the original (or restored) film
negative and create an archival answer print and interpositive (i.e., a new
negative).  We believe that, due to technical and operational advances in our
proprietary preservation process, we are a market leader in the preservation of
existing film content.

     Transferring Film to Digital Format.  Most film content ultimately is
distributed to the home video, broadcast, cable or pay-per-view television
markets, requiring that film images be transferred to a video format.  Each
frame must be color corrected and adapted to the size and aspect ratio of a
television screen in order to ensure the highest level of conformity to the
original film version.  Because certain film formats require transfers with
special characteristics, it is not unusual for a motion picture to be mastered
in many different versions.  We transfer film to videotape using URSA Diamond(R)
and Spirit(R) telecine equipment and DaVinci(R) digital color correction
systems.  Technological developments, such as the domestic introduction of
television sets with a 16 x 9 aspect ratio and the implementation of advanced
and high definition digital television systems for terrestrial and satellite
broadcasting, should contribute to the growth of our film transfer business.

     Converting Digital Format and Analog Videotape.  Production companies may
choose to originate their work on videotape even though the ultimate market is a
theatrical release on film.  We developed a proprietary process which converts
videotape to film using advanced electronic systems to transform video pictures
from all current broadcast standards to 16mm or 35mm film. This process is used
for theatrical advertising, commercials, studio promotions and trailers, as well
as theatrical length presentations including feature films, concerts and special
events.

     Audio Layback and Standards Conversion.  Audio layback is the process of
creating duplicate videotape masters with sound tracks that are different from
the original recorded master sound track.  Content owners selling their assets
in foreign markets require the replacement of dialog with voices speaking local
languages.  In some cases, all of the audio elements, including dialog, sound
effects, music and laughs, must be recreated, remixed and synchronized with the
original videotape.  Audio sources are premixed foreign language tracks or
tracks that contain music and effects only.  The latter is used to make a final
videotape product that will be sent to a foreign country to permit addition of a
foreign dialogue track to the existing music and effects track.  We attract
audio layback business by offering optimum sound quality and synchronization of
audio to picture within a half frame accuracy.   Standards conversion is the
process of changing the frame rate of one video signal (such as the United
States standard).  We use advanced technologies to provide the highest quality
conversion services available.

     Professional Duplication.  Professional duplication is the process of
creating submasters for distribution to professional end users.  Master tapes
are used to make submasters in up to seven domestic and international broadcast
standards as well as up to 22 different tape formats.  In addition, videotape
content is copied for use in intermediate processes, such as editing, on-air
backup and screening, and for final delivery to cable and pay-per-view
programmers, broadcast networks, television stations, airlines, home video
duplicators and foreign distributors.  We believe that our professional
duplication facility is technically advanced and has unique characteristics that
significantly increase equipment capacity utilization while reducing error rates
and labor cost.

     Broadcast and Syndication Division

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     The broadcast and syndication division offers a broad range of facilities
and technical and creative services to domestic and international programmers.
We service the basic and premium cable, broadcast syndication, Canadian network
first run and direct-to-home market segments (i.e., pay-per-view) by providing
substantially all of the facilities and services necessary to assemble and
distribute programming via satellite to viewers in the United States, Canada and
Asia.  These services include assembling programming provided by the customer
into a 24-hour "network" format, creating interstitial and promotional graphics
and other material that support the brand identity of the programming, providing
production support and facilities for the timely creation of original
programming such as host and news segments and live shows, and providing
automated playback systems to deliver the programming to air via an uplink
facility.  In addition, we provide facilities and services for the delivery of
syndicated television programming in the United States and Canada.  We also
transmit and receive special events, sports or news programs for insertion in
third-party networks.  Our customer base consists of the major studios and
independent distributors offering network programming, world-wide independent
content owners offering niche market programming, and pay-per-view services
marketing movies and special events to the cable industry and direct-to-home
viewers.

     Production.  Timely broadcast programming, such as live shows and news,
requires immediate and precise coordination of on-camera talent, the script,
pre-recorded videotape and graphics materials, and the broadcast schedule.  We
operate a state-of-the-art production studio in Singapore with three cameras,
production and audio control rooms, videotape playback and record, multi-
language prompter, computerized lighting, and dressing and makeup rooms. Our
Singapore facility also offers a small field crew and live-to-satellite
interview and teleconference services.

     On-Air Promotion.  On-screen marketing and broadcast continuity depend on
on-air promotional material to support the channel's brand identity and
programming.  Working in conjunction with a client's writers and producers, we
offer a complete on-air promotion service, including graphics, editing, voice-
over record, sound effects editing, sound mixing and music composition.

     Language Translation.  Programming designed for distribution in markets
other than those for which it was originally produced is prepared for export
through language translation and either subtitling or voice dubbing.  We provide
dubbed language versioning with an audio layback and conform service that
supports various audio and videotape formats to create an international
language-specific master videotape.  Our Burbank facility also creates music and
effects tracks from programming shot before an audience to prepare television
sitcoms for dialog record and international distribution.  Our Singapore
facility supports translation and a complete on-screen and closed-caption
subtitling facility.

     Assembly.  We provide programming to most United States broadcast
television stations through daily satellite feeds and tape shipments.  Prior to
broadcast, all material is quality control checked and may be pre-compiled into
final broadcast form prior to on-air playback.  Pre-compilation is performed in
our editing facilities, often using systems and software which permit the
efficient assembly of high production value visual effects.  Syndicated
programming is also prepared for distribution with commercials and similar
elements inserted prior to distribution.  Control procedures are used to ensure
on-air reliability.  A variety of movie and show formatting and time compression
services are available to prepare programming for distribution.  Commercial,
promotional, billboard, warning, logo and other integration, as well as closed
captioning for the hearing impaired and source identification encoding, is
performed.  We also provide scheduling support to programmers; affiliate
relations and station coordination; library storage of broadcast master tapes;
and a syndication program library and recycled videotape inventory.

     Origination and Distribution.  We provide videotape playback and
origination to cable, pay-per-view and direct-to-home networks.  We accept daily
program schedules, programs, promos and advertising and deliver 24 hours of
seamless daily programming to cable affiliates and home satellite subscribers.
We use automated systems for broadcast playback, which includes proprietary
systems and software.  We also operate industry-standard encryption and/or
compression systems as needed for customer satellite distribution.  We use a
customized approach to satisfy each customer's timeliness, flexibility and
reliability requirements.  Currently, we support over twenty 24-hour channels
from our Burbank facility and seven 24-hour channels originate from our
Singapore facility.

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     Uplink and Satellite Transponder.  Our Burbank facility operates a
satellite earth station facility with eight transmit/receive antennas.  We are
licensed by the Federal Communications Commission ("FCC") and operate as a
common carrier.  Facilities are staffed 24 hours a day and are also used for
downlink and turnaround services.  We currently utilize a transponder on the
Loral Skynet Telstar 4(R) satellite in support of our syndication and Canadian
distribution businesses.  We access various "satellite neighborhoods," including
basic and premium cable, broadcast syndication and direct-to-home markets.  We
resell transponder capacity for ad hoc and other occasional use and bundles its
transponder capacity with other broadcast and syndication services to provide a
complete broadcast package at a fixed price.

     Film and Animation Division

     The film and animation division offers a broad range of facilities and
technical and creative services to creators of special visual effects and
animation sequences for feature films.  We bundle our film and animation to
lower the effective cost of certain visual effects, improve response time and
consistency of results and to provide customers access to new technology.  Our
customer base includes most of the major studios as well as independent visual
effects supervisors contracted by producers of feature films.  We provide
services necessary to digitally create or manipulate images in high resolution
formats for integration into feature films.  These services include the
following:

     Pre-Production and Principal Photography Consulting.  Using a script
provided by the production company, we provide a written outline for
implementing the effects, a time frame and a preliminary effects budget.  We
make recommendations on how best to realize each visual effect, taking into
consideration the complexity of the desired effect, the production schedule and
budget.  Even projects that would not normally be considered a special effect
feature will make use of digital techniques to create sets, backgrounds,
lighting, crowds and similar imagery. Prior to principal photography, we create
a story board as the basis of understanding as to which elements will be shot
and by whom.  Upon request, we will provide a visual effects supervisor to
assist in principal photography that will later be incorporated in a digital
effect.  We will also assemble a film crew to shoot elements that are necessary
to properly integrate a visual effect into a particular scene.

     Effect Design and Creation.  In order to reduce costs and meet shorter
release schedules, studios are limiting the amount of time available for the
effect creation process from twelve to four months.  This acceleration is often
at odds with the responsibility of the visual effects supervisor to evaluate
different alternatives before making a final selection.  In order to minimize
costs, we first design effects in low (i.e., video) resolution.  Once the design
is approved, we create visual effects in high (i.e., film) resolution using
powerful computers, provided by Quantel and SGI, both manufacturers of server
based image processing equipment.  Quantel products are used for high speed
digital image creation, animation, compositing, retouching, rotoscoping, and
motion and color correction.  SGI computers use a variety of software packages
to create elaborate digital effects.

     Film Scanning and Recording.  Scanning is the process of digitally
formatting principal photography so that images can be created or manipulated in
a digital work station.  We digitally format film on a film scanner and transfer
the digital information to a central file server where it can be accessed by any
of our work stations.  Once the effect is completed and approved by the visual
effects supervisor, we download the digital information to a digital film
recorder which records the digital information on film.  The completed
conversion can then be assembled with the film negative.

     Color Correction, Negative Developing and Printing.  Our film laboratory is
utilized to process and print the visual effects segments for viewing in film
resolution.  In preparing the final cut, it is often difficult to integrate the
effect seamlessly with the principal photography on a timely or cost efficient
basis.  Our film laboratory offers a proprietary color correction process
designed to give the visual effects supervisor more control over the integration
of the digitally created images with the principal photography.  We believe that
we have the only visual effects operation incorporating this film laboratory
quality control feature.

                                       9
<PAGE>

Customers

     Our customer base consists of producers and distributors of television
programming, television commercials, feature films and other entertainment
content as well as owners of television and film libraries, including major
domestic studios such as Paramount Pictures, Sony Pictures Corporation,
Twentieth Century Fox, Universal Pictures, The Walt Disney Company and Warner
Brothers.  As of August 1, 1999, our customer base was over 3,000.  We are
committed to building and retaining a loyal customer base by providing a broad
range of service offerings, state-of-the-art equipment and technology, and
superior customer service at competitive prices.

     Our ten largest customers accounted for 44.7% and 37.2% of total revenues
in fiscal 1998 and 1999, respectively.  In addition, 27.7% and 26.1% of our
revenues were generated by the major domestic studios in fiscal 1998 and 1999,
respectively.  No individual customer accounted for 10.0% or more of our
revenues.  Consistent with industry practice, we do not have a long-term
contractual relationship with most of our customers whereby the customer is
obligated to purchase any specified level of services from us.  Our standard
credit term for customers is "Net 30 Days," although, in our experience, the
prevailing practice among major studios and certain other customers is to pay
outstanding accounts within approximately 60 to 90 days.  We review a customer's
credit history and establish an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends and
other information.

     In our television division, customer relationships can also be measured by
the number and types of projects we complete during the production season.  For
example, the number of episodic television programs that we provided one or more
services to has increased from 84 in 1997 to 114 in 1998 to 129 in 1999.  We
believe that the increase in our television customer base is the result of an
increased volume of television production, the construction of a new television
facility in Burbank (which was completed in the fourth quarter of fiscal 1997),
various acquisitions and significantly improved coordination between our
television facilities.

Technology

     We purchase hardware and software developed and manufactured by others and
integrate various systems and technologies in a proprietary manner to accomplish
the objectives of our customers.  The integration of hardware and software often
requires us to develop new proprietary systems and infrastructure.  From time to
time, we form strategic alliances with hardware and software manufacturers to
jointly develop a specific application.

     We believe that our infrastructure is state-of-the-art and sets the
industry standard for performance, efficiency and reliability.  (This statement
is based on our belief and is not supported by any independent verification).
We intend to upgrade our broadcast and syndication operation in Burbank to
accommodate new digital technologies and convert the remaining analog portions
of our television business to support digital applications and formats as it
becomes technically and operationally feasible.  The time frames for the upgrade
of our broadcast and syndication operations in Burbank and the remaining analog
portions of our television operations are as follows:

     Broadcast and Syndication Division.  We intend to complete the upgrade of
our broadcast and syndication operations in Burbank by the end of the first
quarter of fiscal 2000.  These upgrades will expand our ability to broadcast
digitally compressed audio and video signals to satellite transponders.

     Television Division.  Digital upgrades to the television division are
conducted on an ongoing basis.  We experience customer demand for services that
require analog infrastructure and, as a result, will continue to maintain analog
infrastructure as necessary to satisfy such demand.  Approximately eighty
percent of the digital upgrades for our television division are complete. The
timing of the remaining digital upgrades will depend upon each facility's
respective workload.  Facilities are upgraded during the time when the business
disruption will be minimal.  We anticipate that the remaining upgrades will be
performed by the end of the second quarter of fiscal year 2000.  See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information regarding these upgrades.

                                       10
<PAGE>

Competition

     Los Angeles is the center of domestic television and feature film
production and the exploitation of content libraries.  It is also the largest
and most competitive market in the world in terms of total revenue potential for
our mastering and distribution, film and animation, and television divisions.
The entertainment services industry in Los Angeles is highly fragmented and no
single industry participant, including us, has a dominant market share in any
service offering.  We believe that we are unique, however, among industry
competitors in terms of the breadth of our operating divisions and the depth of
service offerings within each business segment.  We entered the international
broadcast market with the completion of our Singapore facility in 1995 and seek
to provide services to domestic and foreign programmers in regional television
markets in Asia and abroad.  We compete with local service providers that may
have competitive advantages resulting from their experience in the region,
including in Singapore and elsewhere in Asia, who have well established customer
relationships and business operations.

     We experience intense competition in each of our four business divisions.
Some of our current and potential competitors, particularly those who perform
services in-house, have substantially greater financial, technical, creative,
marketing and other resources than we do.  Our competitors may devote
substantially greater resources to the development and marketing of new
competitive services and the utilization of new technologies.  We expect that
competition will increase substantially as a result of industry consolidations
and alliances, as well as the emergence of new competitors.  We also actively
compete with industry participants operating niche or specialty businesses.  In
addition, many of our customers conduct in-house operations that we consider
competitive.  We believe that all of our service offerings are competitive with
in-house operations and with independent service providers.

Government Regulation

     Under the Communications Act of 1934, as amended, transmissions from our
domestic broadcast division's earth station to satellites must be made pursuant
to a license granted by the FCC.  Catalina Transmission Corp., our indirect
wholly-owned subsidiary, holds three satellite earth station licenses.  The
licenses for these stations were granted for periods of five to ten years and
are routinely renewed.  Our licenses expire in 2001, 2004, and 2007.  While the
FCC generally renews licenses for satellite earth stations routinely, there can
be no assurance that our licenses will be renewed at their expiration dates,
which could have a material adverse effect on us.

     FCC authorization is not required for reception of transmission from
domestic satellites from points within the United States.  We rely on third
party licenses or authorizations when we transmit domestic satellite traffic
through earth stations operated by third parties.  The FCC establishes technical
standards for satellite transmission equipment which change from time to time,
and also requires coordination of earth stations with land-based microwave
systems at certain frequencies to assure non-interference.  Transmission
equipment must also be installed and operated in a manner that avoids exposing
humans to harmful levels of radio-frequency radiation.  The placement of earth
stations or other antennae is typically subject to regulation under local zoning
ordinances.

Employees

     We employ creative, technical, engineering, administrative and managerial
staff in each of our operating divisions.  In addition, we have centralized
certain financial and administrative functions, including accounting, credit,
billing, payroll and human resources.  We have approximately 1,476 full time
employees, of which 611 are located in Burbank, including 68 in Universal City,
384 in Santa Monica, 157 in Hollywood, 220 in London, England, 85 in Singapore
and 19 in San Francisco.  Our acquisitions of TVP Group Plc ("TVP"), TVi Limited
("TVi") and DSP during the fourth quarter of fiscal 1999 added approximately 250
employees.

     As of August 1, 1999, we had entered into employment agreements with
approximately 90 members of our creative and managerial staff to secure their
services for terms ranging from one to seven years.  These employment agreements
are in the ordinary course of our business and are consistent with the practices
of other companies in the post production industry.  In addition, we have
employment agreements with the executives that will be named in the executive
compensation section of the proxy statement for our January 2000 annual meeting.

                                       11
<PAGE>

     We believe that we provide compensation and benefits that are competitive
with the market for persons having the skills we require.  We have not
experienced any work stoppages since our formation in 1993.  Of our 1,476
employees, 130 are members of a collective bargaining unit.

Item 2.  Properties

     At August 1, 1999, our operations were located in Burbank, Hollywood,
Universal City, Culver City, Santa Monica and San Francisco, California, the
Republic of Singapore and London, England.  We own approximately 263,000 square
feet of building space and lease approximately 289,000 square feet of building
space.  Most of our leased properties have renewal options generally for one or
two five-year option periods.

     In Burbank, we lease five facilities, which in the aggregate consists of
approximately 126,000 square feet, under agreements with terms expiring between
December 2000 and August 2009.  These facilities, which include four properties
in the Burbank Media District and one property located in Universal City, are
used to house our executive offices, our domestic broadcast and syndication
operations, equipment rental operations and parts of our television operations.
Two floors of one of the Burbank facilities are sub-leased to a third party with
initial terms through February 2003 and March 2005.  We also own four properties
located in Burbank, including two facilities constituting approximately 44,000
square feet which house our broadcast and syndication, and mastering and
distribution operations, an 18,000 square foot facility used for our film
laboratory and a 95,000 square foot facility of which our archive occupies
45,000 square feet.  The remainder of this fourth facility is leased to a third
party through January 2000.

     In Santa Monica, we lease eight facilities constituting a total of
approximately 91,000 square feet.   These facilities house additional executive
offices, our film and animation division and part of our television division.
The Santa Monica lease agreements expire between January 2000 and March 2003.
We have an option to purchase one of the properties we currently lease, which
consists of approximately 6,500 square feet and intend to exercise such option.
We own two properties in Santa Monica constituting approximately 57,000 square
feet.  Of these two properties, one is approximately 13,000 square feet and is
dedicated to the television division.  The other property, currently not used in
our operations, is being considered for sale.

     In Hollywood, we own four properties totaling approximately 49,000 square
feet and lease one property which consists of approximately 3,000 square feet.
These properties house executive offices and part of our television operations.
The lease agreement on the leased property expires in January 2002.  We have an
option to purchase the leased property and intend to exercise such option.  In
San Francisco, we lease two properties which aggregate approximately 7,000
square feet.  These leases expire in June 2002 and September 2004.  In Culver
City, we lease three properties totaling of approximately 12,000 square feet.
These facilities are used to house part of our television division and expire
between December 2000 and January 2004.

     Internationally, we lease a total of 57,000 square feet in four facilities.
In Singapore, we lease a 20,000 square foot facility, which houses our Singapore
broadcast and syndication operations.  This lease expires in September 2000.  In
London, we lease two facilities constituting a total of approximately 9,000
square feet, assumed in connection with the TVP acquisition, and a 28,000 square
foot facility, assumed in connection with the TVi acquisition.

Item 3.  Legal Proceedings

     On March 16, 1999, we entered into a settlement agreement with the
International Alliance of Theatrical Stage Employees ("IATSE") relating to
several matters pending before the National Labor relations Board ("NLRB").
Under the terms of the settlement agreement, we agreed to enter into a
collective bargaining agreement with IATSE which affects 130 employees and to
pay an aggregate of approximately $240,000 in claims for back pay from certain
current and former employees.  In consideration of this, IATSE has agreed to
cease all negative publicity against us and to dismiss all actions pending
before the NLRB.

                                       12
<PAGE>

     In addition, we are subject to litigation from time to time arising in the
ordinary course of our business.  We do not believe that there is any litigation
pending that would have a material adverse effect on our results of operations
or financial condition.

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

     No matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended August 1, 1999.

                                    PART II

Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters

     Our common stock has been traded on the Nasdaq Stock Market/SM/ under the
symbol "FOUR" since February 7, 1997.  The following table sets forth the high
and low closing prices of our common stock for the periods indicated and are as
reported on The Nasdaq Stock Market/SM/.

<TABLE>
<CAPTION>
Year Ended August 3, 1997                                                    High                       Low
                                                                             ----                       ---
<S>                                                                          <C>                        <C>
Third Quarter (from February 7, 1997)                                         10 1/2                    5 1/4
Fourth Quarter                                                                 8 5/8                    5 7/8

Year Ended August 2, 1998
First Quarter                                                                 10 1/8                    6 3/8
Second Quarter                                                                 9 3/8                    7 5/16
Third Quarter                                                                 10 1/2                    7 1/8
Fourth Quarter                                                                10 1/2                    7 1/8

Year Ended August 1, 1999
First Quarter                                                                  8                        3 5/16
Second Quarter                                                                 8 11/16                  5 3/4
Third Quarter                                                                  7 1/2                    5 5/8
Fourth Quarter                                                                 7 5/8                    5 9/16
</TABLE>

     As of October 27, 1999, there were 14 stockholders of record and an
estimated 1,600 beneficial owners of our common stock.  We have never paid cash
dividends on our stock and anticipate that we will continue to retain our
earnings, if any, to finance the growth of our business.  In addition, our bank
line of credit prohibits the payment of cash dividends on capital stock without
the bank's prior written consent.

     The market price of our common stock is highly volatile and is subject to
wide fluctuations in response to a wide variety of factors including:

     .  quarterly variations in operating results;
     .  announcements of technological innovations or new services by us or our
        competitors;
     .  conditions affecting the entertainment industry;
     .  changes in financial estimates by securities analysts; and
     .  other events or factors.

     For example, during the 12 month period ended October 27, 1999, our common
stock closed as low as $4.38 and as high as $8.69 per share.  In addition, the
stock market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many small
capitalization and technology companies and that often have been unrelated to
the operating performance of such companies.  These broad market fluctuations
may adversely affect the market price of our common stock.  In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company.  If brought against us, such litigation could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on our business, results of operations and financial
condition.

                                       13
<PAGE>

Item 6.  Selected Consolidated Financial Data

     The following selected financial data as of and for the five years ended
August 1, 1999 is derived from our consolidated financial statements.  The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.

<TABLE>
<CAPTION>
                                                                                       Fiscal Years Ended  (2)
                                                                    -------------------------------------------------------------
                                                                    July 30,    August 4,    August 3,    August 2,    August 1,
                                                                      1995         1996         1997         1998         1999
                                                                      ----         ----         ----         ----         ----
Statement of Income Data:                                                   (dollars in thousands, except per share data)
<S>                                                                 <C>         <C>          <C>          <C>          <C>
Revenues:
     Television  ...............................................     $22,712      $23,343      $30,768     $ 60,405     $125,491
     Mastering and distribution  ...............................      20,677       23,468       26,658       35,633       41,571
     Broadcast and syndication  ................................      16,163       20,901       23,694       22,701       22,609
     Film and animation  .......................................       1,452        2,316        3,407       10,429        7,313
                                                                     -------      -------      -------     --------     --------
     Total revenues.............................................      61,004       70,028       84,527      129,168      196,984
                                                                     -------      -------      -------     --------     --------
Operating costs:
     Direct operating costs ....................................      38,696       43,411       53,184       81,144      115,983
     Depreciation and amortization  ............................       6,241       10,165       13,175       18,191       27,476
     Sales, general and administrative  ........................      10,918       11,116       12,899       18,504       34,901
                                                                     -------      -------      -------     --------     --------
     Total operating costs    ..................................      55,855       64,692       79,258      117,839      178,360
                                                                     -------      -------      -------     --------     --------
     Income from operations  ...................................       5,149        5,336        5,269       11,329       18,624
Other income (expense):
     Interest income............................................          --           --           --           12        1,425
     Interest expense  .........................................      (2,917)      (3,906)      (3,887)      (8,151)     (14,178)
     Other expense (3)  ........................................          --           --           --           --         (933)
                                                                     -------      -------      -------     --------     --------
     Total other income (expense)...............................      (2,917)      (3,906)      (3,887)      (8,139)     (13,686)
                                                                     -------      -------      -------     --------     --------
     Income before income tax benefits and extraordinary item  .       2,232        1,430        1,382        3,190        4,938
Income tax benefits  ...........................................         988          994           --           --           --
                                                                     -------      -------      -------     --------     --------
     Income before extraordinary item  .........................       3,220        2,424        1,382        3,190        4,938
Extraordinary loss on early extinguishment of debt  ............          --           --           --       (2,449)          --
                                                                     -------      -------      -------     --------     --------
     Net income.................................................     $ 3,220      $ 2,424      $ 1,382     $    741     $  4,938
                                                                     =======      =======      =======     ========     ========
Earnings per common share - Basic:
     Income before extraordinary item...........................       $0.50        $0.37      $  0.17     $   0.33        $0.37
     Extraordinary item.........................................          --           --           --        (0.25)          --
                                                                     -------      -------      -------     --------     --------
     Net income.................................................       $0.50        $0.37      $  0.17     $   0.08        $0.37
                                                                     =======      =======      =======     ========     ========
Earnings per common share - Diluted:
     Income before extraordinary item...........................       $0.50        $0.37      $  0.16     $   0.29        $0.34
     Extraordinary item.........................................          --           --           --        (0.22)          --
                                                                     -------      -------      -------     --------     --------
     Net income.................................................       $0.50        $0.37      $  0.16     $   0.07        $0.34
                                                                     =======      =======      =======     ========     ========

Weighted average number of common shares outstanding:
     Basic......................................................       6,475        6,475        7,971        9,634       13,271
     Diluted....................................................       6,475        6,475        8,563       10,898       14,729

Other Data:
EBITDA(1)  .....................................................     $11,390      $15,501      $18,444     $ 29,520     $ 46,100
Net cash provided by operations  ...............................       4,588        9,387        7,908        5,268       34,484
Net cash used in investing activities  .........................      30,902       10,318       40,142       54,905      111,360
Net cash provided by (used in) financing activities  ...........      28,102         (410)      33,164       47,347       83,408
</TABLE>

                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                                               As of  (2)
                                          ---------------------------------------------------------------------------------
                                              July 30,          August 4,        August 3,       August 2,       August 1,
                                                1995              1996             1997            1998            1999
                                                ----              ----             ----            ----            ----
<S>                                           <C>                 <C>            <C>             <C>             <C>
                                                                            (in thousands)
Balance Sheet Data:
Cash, including restricted cash  .......      $   7,368           $  6,021       $   6,769       $   3,301       $   9,841
Working capital  .......................          5,665              1,642           1,829          13,149          14,506
Total assets  ..........................         71,780             81,827         132,237         217,298         343,543
Long-term debt  ........................         38,472             42,978          54,633         124,671         171,321
Total debt  ............................         41,942             49,131          65,192         130,855         184,296
Total stockholders' equity  ............         19,617             22,143          49,738          67,113         124,971
</TABLE>
---------------------------------
(1)  EBITDA does not take into account normal capital expenditures and does not
     represent cash generated from operating activities in accordance with GAAP,
     is not to be considered as an alternative to net income or any other GAAP
     measurements as a measure of operating performance and is not indicative of
     cash available to fund all cash needs.  Our definition of EBITDA may not be
     identical to similarly titled measures of other companies.  We believe that
     in addition to cash flows and net income, EBITDA is a useful financial
     performance measurement for assessing the operating performance of our
     company because, together with net income and cash flows, EBITDA is widely
     used to provide investors with an additional basis to evaluate our ability
     to incur and service debt and to fund acquisitions or invest in new
     technologies.  To evaluate EBITDA and the trends it depicts, the components
     of EBITDA, such as net revenues, cost of services, and sales, general and
     administrative expenses should be considered.  See "Management's Discussion
     and Analysis of Financial Condition and Results of Operations."  A
     reconciliation of net income to EBITDA is as follows:

<TABLE>
<CAPTION>
                                                                   Fiscal Years Ended
                                             --------------------------------------------------------------
                                               July 30,    August 4,    August 3,    August 2,    August 1,
                                                1995         1996         1997         1998         1999
                                                ----         ----         ----         ----         ----
<S>                                            <C>          <C>           <C>         <C>           <C>
                                                                     (in thousands)
     Income before extraordinary item.....     $ 3,220      $ 2,424       $ 1,382     $  3,190      $ 4,938
     Add (deduct):
     Interest expense, net................       2,917        3,906         3,887        8,139       12,753
     Income tax benefits..................        (988)        (994)           --           --           --
     Other expense, net...................          --           --            --           --          933
     Depreciation and amortization........       6,241       10,165        13,175       18,191       27,476
                                               -------      -------       -------      -------      -------
     EBITDA ..............................     $11,390      $15,501       $18,444     $ 29,520      $46,100
                                               =======      =======       =======      =======      =======
</TABLE>

(2)  We have made a number of significant acquisitions in each of the years
     presented.  See Note 3 to the Consolidated Financial Statements.

(3)  Other expense is comprised primarily of costs incurred related to our
     uncompleted bond offering during fiscal 1999.

                                       15
<PAGE>

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


Forward Looking Statements

          When used in the preceding and following discussion, the words
"believes," "expects," "anticipates," "intends," and similar expressions are
intended to identify forward looking statements.  Such statements are subject to
a number of known risks and uncertainties.  Actual results in the future could
differ materially from these described in the forward looking statements.  Such
risks and uncertainties include, but are not limited to, industry-wide market
factors such as the timing of, and spending on, feature film and television
programming production, foreign and domestic television advertising, and foreign
and domestic spending by broadcasters, cable companies and syndicators on first
run and existing content libraries.  In addition, our failure to maintain
relationships with key customers and certain key personnel, more rapid than
expected technological obsolescence, failure to integrate acquired operations as
well as regulatory developments affecting our operations and acquisitions could
also cause actual results to differ materially from those described in forward
looking statements.


Overview

     We are a leading provider of technical and creative services to owners,
producers and distributors of television programming, feature films and other
entertainment content.  Our services integrate and apply a variety of systems
and processes to enhance the creation and distribution of entertainment content.
We seek to capitalize on domestic and international growth in demand for
original entertainment content as well as from the exploitation of existing
television and film libraries without taking production or ownership risk with
respect to any specific television program, feature film or other content.

     On November 1, 1999, we announced that we have entered into a letter of
intent to sell 100% of the Company's issued and outstanding common stock to
Liberty Media Corporation (NYSE: LMG.A). As contemplated by the letter of
intent, one hundred percent (100%) of Four Media's issued and outstanding stock
will be acquired in exchange for approximately 6.35 million shares of Class A
Liberty Media Group stock, par value $1.00 ("LMG.A shares(s)"). One LMG.A share
will be issued for each 3.1 shares of Four Media common stock outstanding.

Warburg, Pincus Equity Partners, L.P., Fleming Asset Management USA and Robert
T. Walston, collectively holders of approximately 70% of the issued and
outstanding shares of Four Media, are expected to enter into agreements with
Liberty Media to vote in favor of the transaction. The transaction is subject to
execution of definitive documentation, expiration of applicable waiting periods
under pre-notification regulations, Four Media stockholder and Board of
Director approval, and other customary closing conditions, including other
appropriate corporate approvals. The parties contemplate that a definitive
agreement will be signed in mid-November 1999 and closing is anticipated to
occur in the first quarter of 2000.

     We completed a number of acquisitions during 1998 and 1999 including: POP
(February 1998), VSI (May 1998), Encore (September 1998), TVP (April 1999), TVi
(May 1999), and DSP (June 1999).

     Our business is divided into four divisions: television; mastering and
distribution; broadcast and syndication; and film and animation.  In each of
these divisions, we offer most of the systems and technical solutions that
constitute the processes that are integral to the creation, enhancement and
distribution of entertainment content. The television division, located in
Burbank, Hollywood, Culver City, Santa Monica, and San Francisco, California
assembles film or video principal photography into a form suitable for domestic
network, syndicated, cable or foreign television.  The mastering and
distribution services division, located in Burbank and Universal City,
California, and London, England manages, formats and distributes existing
content libraries to end users in the United States and internationally.  The
broadcast and syndication division, located in Burbank and the Republic of
Singapore, assembles and distributes cable television channels and programming
via satellite to viewers in the United States, Canada and Asia. The film and
animation division, located in Santa Monica, California digitally creates and
manipulates images in high resolution formats and creates computer animated
sequences for use in

                                       16
<PAGE>

feature films. The following table sets forth revenues by business division and
the related percentage of consolidated revenues for the periods indicated.

<TABLE>
<CAPTION>
                                                                              Fiscal Years Ended
                                                 ------------------------------------------------------------------------------
                                                     August 3, 1997               August 2, 1998            August 1, 1999
                                                     --------------               --------------            --------------
                                                           Percentage                  Percentage                 Percentage
                                                   Amount       of Total        Amount       of Total       Amount     of Total
                                                   ------       --------        ------       --------       ------     --------
                                                                                (dollars in thousands)
<S>                                              <C>          <C>             <C>           <C>           <C>        <C>
Revenues by division:
     Television.................................  $30,768         36.4%        $ 60,405         46.8%      $125,491       63.7%
     Mastering and distribution.................   26,658         31.5           35,633         27.5         41,571       21.1
     Broadcast and syndication..................   23,694         28.0           22,701         17.6         22,609       11.5
     Film and animation.........................    3,407          4.1           10,429          8.1          7,313        3.7
                                                  -------        ------        --------        ------      --------      ------
     Total revenues.............................  $84,527        100.0%        $129,168        100.0%     $196,984       100.0%
                                                  =======        ======        ========        ======     ========       ======
</TABLE>

     Revenues increased from $84.5 million in fiscal 1997 to $197.0 million in
fiscal 1999.  We attribute this growth to several factors including:

     .    acquisitions and international expansion;

     .    an increase in demand for our services resulting from the growth in
          worldwide demand for entertainment content;

     .    an expansion of capacity resulting from our extensive investment in
          new digital infrastructure;

     .    the diversification of our service offerings; and

     .    the increasing acceptance of our bundled service outsourcing
          solutions.

     EBITDA increased from $18.4 million in fiscal 1997 to $46.1 million in
fiscal 1999.  We attribute this growth to several factors including: (i) growth
in revenues from fiscal 1997 to fiscal 1999; and (ii) decrease in the ratio of
overhead and fixed costs to revenues, as we have generally increased capacity
utilization and decreased the cost of adding new capacity.  See the consolidated
financial statements and the related notes included elsewhere in this Annual
Report for additional information regarding these factors.

     We believe that EBITDA is an important measure of our financial
performance.  "EBITDA" is defined as earnings before interest, taxes,
depreciation and amortization, excluding gains and losses on asset sales and
nonrecurring charges.  Our investments in new infrastructure, machine capacity,
technology and goodwill resulting from our significant acquisition activity have
produced a relatively high depreciation and amortization expense and will remain
a significant non-cash charge to earnings.  EBITDA is calculated before
depreciation and amortization charges and, in businesses with significant non-
cash expenses, is widely used as a measure of cash flow available to pay
interest, repay debt, make acquisitions or invest in capital equipment and new
technologies.  As a result, we intend to report EBITDA as a measure of financial
performance.  EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles ("GAAP") and should
not be considered in isolation or as a substitute for other measures of
performance prepared in accordance with GAAP.  EBITDA does not reflect that
portion of our capital expenditures which may be required to maintain our market
share, revenues and leadership position in our industry.  Moreover, not all
EBITDA will be available to pay interest or repay debt.  Our presentation of
EBITDA may not be comparable to similarly titled measures reported by other
companies.  See footnote 1 of "Selected Financial Data" for additional
information regarding our presentation of EBITDA.

                                       17
<PAGE>

Results of Operations

     The following table sets forth the percentage of revenues represented by
certain items in our statement of operations and EBITDA.
<TABLE>
<CAPTION>
                                                                                         Fiscal Years Ended
                                                                       August 3, 1997     August 2, 1998     August 1, 1999
                                                                       -------------      --------------     --------------
<S>                                                                    <C>                 <C>               <C>
Revenues..........................................................         100.0%             100.0%             100.0%
Operating costs:
     Direct operating costs.......................................          62.9               62.8               58.9
     Depreciation and amortization................................          15.6               14.1               13.9
     Sales, general and administrative............................          15.3               14.3               17.7
                                                                           -----              -----              -----
        Total operating costs.....................................          93.8               91.2               90.5
                                                                           -----              -----              -----
           Income from operations.................................           6.2                8.8                9.5
Other income (expense):
     Interest income (expense), net...............................          (4.6)              (6.3)              (6.5)
     Other income (expense), net..................................          --                 --                 (0.5)
                                                                           -----              -----              -----
        Total other income (expense)..............................          (4.6)              (6.3)              (7.0)
                                                                           -----              -----              -----
        Income before income tax benefits and extraordinary item..           1.6                2.5                2.5
Income tax benefits...............................................            --                 --                 --
                                                                           -----              -----              -----
        Income before extraordinary item..........................           1.6                2.5                2.5
                                                                           -----              -----              -----
Extraordinary loss on early extinguishment of debt................            --               (1.9)                --
                                                                           -----              -----              -----
        Net income................................................           1.6%               0.6%               2.5%
                                                                           =====              =====              =====
EBITDA............................................................          21.8%              22.9%              23.4%
</TABLE>



Fiscal Year Ended August 1, 1999 Compared to Fiscal Year Ended August 2, 1998

     Revenues.  Total revenues for fiscal 1999 increased $67.8 million, or
52.5%, to $197.0 million compared to $129.2 million in fiscal 1998.  The revenue
increase was attributable primarily to the factors set forth below.

     Television revenues for fiscal 1999 increased $65.1 million, or 107.8%, to
$125.5 million compared to $60.4 million in fiscal 1998.  The major components
of this increase include increased sound revenues ($5.4 million), telecine
revenues ($22.4 million), editorial revenues ($23.5 million), graphics revenues
($10.3 million), and duplication revenues ($3.5 million).  These revenue
increases are primarily attributable to the addition of the sound editorial
department ($1.8 million),   POP acquired in February 1998 ($8.9 million), VSI
acquired in May 1998 ($4.2 million), Encore acquired in September 1998 ($44.3
million), and DSP acquired in July 1999 ($0.5 million).

     Mastering and distribution revenues for fiscal 1999 increased $6.0 million,
or 16.9%, to $41.6 million compared to $35.6 million in fiscal 1998.  The major
components of this increase include increased professional duplication revenues
($2.1 million) and telecine revenues ($0.2 million) and revenues of
approximately $2.2 million and $1.9 million from the acquisitions of TVP and
TVi, respectively, offset by decreased laboratory revenues ($0.2 million) and
quality control revenues ($0.2 million).

     Broadcast and syndication revenues for fiscal 1999 decreased $0.1 million,
or 0.4%, to $22.6 million compared to $22.7 million in fiscal 1998.  Revenues
from our Singapore operations increased 6.7% as a result of increased broadcast
services provided to Nickelodeon beginning in November 1998.  Revenues from our
domestic broadcast operations increased 6.5% attributed to additional
contractual and occasional services.  This is offset by a 31.4% decrease in
revenues from our domestic syndication operations.

     Film and animation revenues for fiscal 1999 decreased $3.1 million, or
29.8%, to $7.3 million compared to $10.4 million in fiscal 1998.  This decrease
is the result of a decline in the number of large budget action and effects
feature films available.

                                       18
<PAGE>

     Direct Operating Costs.  Direct operating costs for fiscal 1999 increased
$34.8 million, or 42.9%, to $116.0 million compared to $81.1 million in fiscal
1998.  As a percentage of revenues, direct operating costs decreased 3.9% to
58.9% compared to 62.8% in fiscal 1998.  The 3.9% decrease is primarily
attributable to a 2.5% reduction in material costs and a 1.0% reduction in
equipment rental and leasing.  These reductions are the result of our continued
ability to leverage our existing cost structure to operate our expanded
operations.

     Depreciation and Amortization Expenses.  Depreciation and amortization
expenses for fiscal 1999 increased $9.3 million, or 51.1%, to $27.5 million
compared to $18.2 million in fiscal 1998.  This increase was primarily the
result of capital expenditures during fiscal 1998 and 1999, the acquisition of
equipment and amortization of goodwill recorded as a result of the POP, VSI,
Encore, DSP, TVP and TVi acquisitions.

     Sales, General and Administrative Expenses.  Sales, general and
administrative expenses for fiscal 1999 increased $16.4 million, or 88.7%, to
$34.9 million compared to $18.5 million in fiscal 1998.  As a percentage of
revenues, such expenses increased 3.4% to 17.7% in fiscal 1999 compared to 14.3%
in fiscal 1998.   The increase as a percentage of revenues was primarily
attributable to increased overhead costs associated with the Encore acquisition.

     Interest Income and Expense. Interest expense for fiscal 1999 increased
$6.1 million, or 75.3%, to $14.2 million compared to $8.1 million in fiscal
1998.  The increase is attributable to additional long term borrowings incurred
by the Company to fund its acquisitions and to fund capital expenditures in
fiscal 1998 and 1999.  Interest income is primarily comprised of interest income
recognized on two notes we have with a customer.

     Other Expense.  Other expense for fiscal 1999 is comprised primarily of
costs incurred related to our uncompleted bond offering.

     Earnings Before Interest, Taxes, Depreciation and Amortization.  EBITDA for
fiscal 1999 increased $16.6 million or 56.3% to $46.1 million as compared to
$29.5 million in fiscal 1998.  The increase in EBITDA results from the factors
discussed above.

     Income Taxes.  As a result of the utilization of net operating loss carry
forwards and the tax holiday enjoyed by our Singapore subsidiary, we do not have
a provision for income taxes for fiscal 1999 and 1998.


Fiscal Year Ended August 2, 1998 Compared to Fiscal Year Ended August 3, 1997

     Revenues.  Total revenues for fiscal 1998 increased $44.7 million, or
52.8%, to $129.2 million compared to $84.5 million in fiscal 1997.  The revenue
increase was attributable primarily to the factors set forth below.

     Mastering and distribution revenues for fiscal 1998 increased $8.9 million,
or 33.7%, to $35.6 million compared to $26.7 million in fiscal 1997.  The major
components of this increase include increased professional duplication revenues
($5.2 million), laboratory revenues ($0.7 million), telecine revenues ($2.1
million) and quality control revenues ($0.7 million).  Of those increases,
approximately $4.2 million relates to Anderson, which was acquired in March
1997.

     Broadcast and syndication revenues for fiscal 1998 decreased $1.0 million,
or 4.2%, to $22.7 million compared to $23.7 million in fiscal 1997. Revenues
from our Singapore operations decreased 23.8% in fiscal 1998 compared to fiscal
1997 as a result of the completion in 1997 of a one year contract with MGM Gold
and translation losses caused by a devaluation of the Singapore dollar.  The
decrease in revenues from the Singapore operations was offset by (i) a 17.1%
increase in revenues from our domestic broadcast and syndication operations, due
primarily to expanded service relationships with TVN Entertainment, Inc., and
(ii) a 36.2% increase in syndication revenue, driven by capacity expansion to
meet enhanced demand from studio relationships.

     Television revenues for fiscal 1998 increased $29.6 million, or 96.3%, to
$60.4 million compared to $30.8 million in fiscal 1997.  The major components of
this increase include increased sound revenues ($4.8 million), telecine revenues
($11.0 million), editorial revenues ($6.7 million), graphics revenues ($4.2
million), and duplication revenues ($3.0 million).  These revenue increases are
primarily attributable to completion of our new

                                       19
<PAGE>

digital television facility in Burbank ($5.0 million), Anderson ($3.4 million),
the fiscal 1998 start-up of our commercial operation, Co3 ($8.8 million), POP
acquired in February 1998 ($11.7 million), and VSI acquired in May 1998 ($0.7
million).

     Film and animation revenues for fiscal 1998 increased $7.0 million, or
206.1%, to $10.4 million compared to $3.4 million in fiscal 1997.  This increase
is attributable to several new film projects obtained during the period, of
which $5.7 million was contributed by POP, which was acquired in February 1998.

     Direct Operating Costs.  Direct operating costs for fiscal 1998 increased
$27.9 million, or 52.4%, to $81.1 million compared to $53.2 million in fiscal
1997.  As a percentage of revenues, direct operating costs remained relatively
constant at 62.8% in fiscal 1998 compared to 62.9% in fiscal 1997.

     Depreciation and Amortization Expenses.  Depreciation and amortization
expenses for fiscal 1998 increased $5.0 million, or 38.1%, to $18.2 million
compared to $13.2 million in fiscal 1997.  The increase was primarily the result
of $52.4 million in capital expenditures during fiscal 1998, the acquisition of
the equipment of Anderson in March 1997, the acquisition of the equipment of POP
and VSI in February 1998 and May 1998, respectively, and amortization of
goodwill recorded from the Anderson, POP, and VSI acquisitions.

     Sales, General and Administrative Expenses.  Sales, general and
administrative expenses for fiscal 1998 increased $5.6 million, or 43.5%, to
$18.5 million compared to $12.9 million in fiscal 1997.  As a percentage of
revenues, such expenses decreased 1.0% to 14.3% in fiscal 1998 compared to 15.3%
in fiscal 1997.  The dollar increase is primarily attributed to the acquisitions
of Anderson, POP and VSI.  The improvement of 1.0% as a percentage of revenues
is a result of our continued ability to leverage our existing corporate overhead
to manage our expanded domestic and international operations.

     Interest Expense.  Interest expense for fiscal 1998 increased $4.2 million,
or 109.4%, to $8.1 million compared to $3.9 million in fiscal 1997.  The
increase is attributable to additional long term borrowings we incurred to fund
the POP acquisition, pay loan fees and other costs associated with our debt
refinancing, and to fund capital expenditures in fiscal 1997 and fiscal 1998.

     Earnings Before Interest, Taxes, Depreciation and Amortization.  EBITDA for
fiscal 1998 increased $11.1 million, or 60.0%, to $29.5 million as compared to
$18.4 million in fiscal 1997.  The increase in EBITDA results from the factors
discussed above.

     Extraordinary Loss.  To effect our growth and acquisition plans, in
February 1998, we entered into a new $200.0 million credit facility.  See "--
Liquidity and Capital Resources" below for a description of this facility.  Part
of the facility was used to retire approximately $80.0 million of existing debt.
The new facility has significantly more favorable interest rates and
amortization requirements than the replaced debt.  However, we incurred
prepayment penalties from the early retirement of debt resulting in an
extraordinary loss of $2.4 million.


Liquidity and Capital Resources

     Net Cash Provided by Operating Activities.  Our net cash provided by
operating activities was $7.9 million, $5.3 million, and $34.5 million in fiscal
1997, 1998 and 1999, respectively.  The increase in net cash provided by
operations in fiscal 1999 was primarily attributable to increased income before
depreciation and amortization ($32.4 million) and improved collection of
accounts receivable.

     Net Cash Provided by Financing Activities.  Our net cash provided by
financing activities was $33.2 million, $47.3 million, and $83.4 million in
fiscal 1997, 1998 and 1999, respectively.  The increase in cash provided by
financing activities in 1999 is attributed to amounts borrowed on our new credit
facility and funding received from the sale of 10.2 million shares of our common
stock to Warburg, Pincus Equity Partners, L.P. and certain of its affiliates in
April 1999.  As of August 1, 1999, we had borrowed $169.0 million under the
credit agreement.  The funds from the credit facility and Warburg transaction
were used to repay our outstanding debt (including the repayment of most of
Encore's outstanding debt), fund the Encore, TVP, TVi, and DSP acquisitions,
purchase a building in Burbank, fund capital expenditures and for working
capital purposes.

                                       20
<PAGE>

     Capital Expenditures.  Since our inception in 1993, we have made
substantial investments to convert its infrastructure from analog to digital,
develop management information systems, consolidate various operations, expand
into the Asian market, design and build broadcast facilities in exchange for
long-term contractual commitments from clients, acquire and create new
businesses, and convert maturing or short term lease obligations into ownership
on certain properties in which we conduct our principal operations.  We expect
to continue to make substantial capital investments particularly with respect to
new digital infrastructure for recently acquired operations, incremental
capacity investments to support the anticipated growth in demand for our
services and certain projects associated with new long term contracts primarily
in our broadcast and syndication division.  The following table sets forth
capital expenditures in each business division as well as capital expenditures
associated with new management information systems, real estate purchases and
businesses acquired by amount and percentage of total capital expenditures for
the periods indicated.

<TABLE>
<CAPTION>
                                                                         Fiscal Years Ended
                                       ----------------------------------------------------------------------------------
                                                August 3, 1997              August 2, 1998           August 1, 1999
                                                --------------              --------------           --------------
                                                       Percentage                  Percentage                Percentage
                                         Amount       Of Total        Amount        of Total        Amount       of Total
                                         ------                       ------        --------        ------       --------
                                                                      (dollars in thousands)
<S>                                     <C>           <C>             <C>              <C>          <C>          <C>
Capital expenditures (1):
     Television  ......................   $24,745        51.4%          $28,690        54.7%         $45,995        54.5%
     Mastering and distribution  ......     7,812        16.2             5,025         9.6            7,572         9.0
     Broadcast and syndication  .......     2,215         4.6             1,814         3.5            9,504        11.3
     Film and animation................       774         1.6             4,627         8.8              693         0.8
     Management information systems....       822         1.7               681         1.3            1,244         1.5
     Land and building.................    11,811        24.5            11,563        22.1           19,352        22.9
                                          -------       -----           -------       -----          -------       -----
        Total capital expenditures  ...   $48,179       100.0%          $52,400       100.0%         $84,360       100.0%
                                          =======       =====           =======       =====          =======       =====
</TABLE>
---------------------------------
     (1)  Includes assets acquired from the acquisition of Anderson Video ($5.6
          million) in 1997, POP ($11.7 million), and VSI ($2.0 million) in 1998
          and Encore ($28.5 million), TVP ($1.0 million), TVi ($2.8 million),
          and DSP ($2.1 million) in 1999.

     Credit Agreements.  On February 27, 1998, we entered into a financing
agreement representing $200.0 million in credit facilities from a group of
banks, including Canadian Imperial Bank of Commerce ("CIBC").  The facilities
include two $75.0 million term loans (the "Term A loan" and the "Term B loan")
and a $50.0 million revolver (the "Revolver").  The Term A loan and the Revolver
both mature on January 31, 2004 and are reduced by quarterly amounts beginning
April 30, 2000, as specified in the financing agreement.  The Term A loan and
the Revolver bear interest at Libor (5.24% at August 1, 1999) plus a margin
ranging from 1.5% to 2.5%, based upon our leverage ratios.  In addition, we must
pay a commitment fee of 0.50% on the unused portions of the Term A loan and
Revolver commitments.  At August 1, 1999, $75.0 million and $20.0 million were
outstanding on the Term A loan and the Revolver, respectively.  The Term B loan
matures on July 31, 2004 and is reduced quarterly by amounts specified in the
financing agreement beginning April 30, 1998.  The Term B loan bears interest at
Libor plus a margin ranging from 1.75% to 2.75% based upon our leverage ratios.
At August 1, 1999, $73.9 million was outstanding on the Term B loan.

     Since August 1, 1999, we have borrowed $6.0 million under the Revolver for
capital expenditures and other working capital requirements.  At October 15,
1999 total borrowings under the credit facilities were approximately $175.0
million.

     We believe that the cash flow from operations combined with amounts
available under the credit facilities and our other borrowing capabilities, will
be sufficient to meet our anticipated working capital and capital expenditure
requirements through the end of 2000.  We would have to obtain other financing,
either debt or equity, if we were to acquire additional businesses for cash.
Given recent capital market volatility, we believe it may not be possible to
increase our current bank facilities, obtain financing through equipment notes
and leases, private equity financing or high yield debt financing at acceptable
prices until markets become more stabilized and receptive.

                                       21
<PAGE>

Quarterly Fluctuations

     We have experienced significant quarterly fluctuations in operating results
and anticipate that these fluctuations will continue.  These fluctuations have
been caused by a number of factors, including:

     .    with respect to our television division, the unpredictability of
          television production schedules;

     .    with respect to our mastering and distribution division, seasonal and
          sometimes fluctuating demand for programming by international
          broadcasters and other content buyers, increased labor costs and
          uneven capacity utilization due to delays caused by factors outside
          our control (for example, changes in customers' production schedules),
          and unanticipated production downtime due to equipment failure, work
          stoppages or the absence of key personnel;

     .    with respect to our broadcast and syndication division, the expiration
          of month-to-month service contracts, the unpredictable use of our
          facilities for the broadcast of news stories and special events, and
          our inability to remarket our unused transponder capacity
          consistently; and

     .    with respect to our film and animation division, our absorption of
          cost overruns in fixed price contracts and delays in meeting
          completion deadlines (for reasons other than the fault of our
          company). We therefore believe that quarter-to-quarter comparisons of
          our results of operations are not necessarily meaningful and should
          not be relied upon as indications of future performance.


     Year 2000 Compliance Issue

     State of Readiness.  We are currently working to resolve the potential
impact of the Year 2000 problem on our computer systems and computerized
equipment.  The Year 2000 problem is a result of computer programs having been
written using two rather than four digits to identify an applicable year.  Any
information technology systems that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000.  The problem also
extends to non-information technology systems that rely on embedded chip
systems.

     We have divided the Year 2000 readiness task by the following functional
areas: IT infrastructure, business systems, operational systems, facilities, and
third party business partners.  IT infrastructure includes our wide area
networks, local area networks, servers, desktop computers, and telephone
systems.  Business systems include mainframe and midrange computer hardware and
applications.  Operational systems include equipment used for our day-to-day
operations in the post-production business including telecine machines,
satellite broadcasting systems, editing and graphics equipment.  Facilities
include fire, life, and safety equipment, elevators, alarm systems, and
environmental monitoring equipment.  Business partners include suppliers and
vendors, financial institutions, benefit providers, payroll services, and
customers.  We have appointed a task force chaired by our chief technology
officer and coordinated by our information systems manager.  Representatives of
each of our divisions are included on the task force, as well as an attorney
from our legal department.

     We have developed a four phase approach to resolving the Year 2000 issues
that is reasonably within our control.  The four phases of the program include
inventory, assessment, remediation and testing, and implementation.  The
inventory phase consists of a company wide inventory of computer hardware,
software, business applications, and operational and facilities equipment.  The
inventory is then used to generate a master assessment list and identify
equipment vendors.  The assessment phase consists of identifying at-risk systems
and products and ranking the products by criticality to the business.  Each
product is then assigned to a task force member to determine whether the product
is in compliance and, if not, whether the system should be upgraded or replaced.
The remediation and testing phase consists of developing a project plan,
defining and implementing steps required to bring the systems or products into
compliance, defining a test plan to verify compliance, and documenting the test
results.  The final phase is implementing remediation on systems and products
company wide.

     We have been in the process of analyzing and upgrading our information
technology ("IT") systems (i.e., our IT infrastructure and business systems)
since early 1998, including upgrading all of our PC hardware, operating systems,
and office automation software.  Our business applications, which include human
resources and financial

                                       22
<PAGE>

software, as well as the software used for inventory, scheduling, work orders
and job management, has been fully upgraded to a Year 2000 compliant release.
With respect to the remaining IT systems, we have completed our inventory,
assessment, and testing phases. Implementation on IT systems is approximately
80% complete. We have targeted November 30, 1999 for completion of all phases of
our compliance program for our IT systems. With respect to our operational
systems, we have completed our inventory, assessment, and testing phases and
have completed the implementation phase for all but a few of our operational
systems. We anticipate that we will complete implementation for these remaining
systems by mid-November 1999. We anticipate completion of all phases of our
compliance program for our facilities equipment by November 30, 1999.

     Third Parties.  Like every other business, we are at risk from potential
Year 2000 failures on the part of our major business counterparts, including
suppliers, vendors, financial institutions, benefit providers, payroll services,
and clients, as well as potential failures in public and private infrastructure
services, including electricity, water, transportation, and communications.  We
initially requested information from significant third party businesses
regarding their efforts in addressing Year 2000 issues in early 1999.  Second
and third requests for information were sent in May and August 1999,
respectively.  We will continue to follow up where questions remain with respect
to Y2K readiness of our business partners.  The process of determining our
vulnerability if these third parties fail to remediate their Year 2000 problems
is ongoing.  There can be no guarantee that the systems of third parties will be
timely remediated, or that such parties' failure to remediate Year 2000 issues
would not have a material adverse effect on us.

     Costs.  We have incurred approximately $138,998 to date in addressing the
Year 2000 issue.  These costs are being funded through operating cash flows.  We
anticipate that we will incur an additional $25,000 to $50,000 by the end of the
1999 calendar year.  In addition, we have and anticipate that we will continue
to incur additional costs in the form of redeployment of internal resources from
other activities.  We do not expect these redeployments to have a material
adverse effect on other ongoing business operations.

     Risks.  System failures resulting from the Year 2000 problem could
potentially affect operations and financial results in all aspects of our
business.  For example, failures could affect all aspects of our television,
film and animation, mastering and distribution, and broadcast and syndication
operations, as well as inventory records, payroll operations, security, billing,
and collections.  At this time we believe that its most likely worst case
scenario involves potential disruption in areas in which our operations must
rely on third parties whose systems may not work properly after January 1, 2000.
As a result of Year 2000 related failures of our or third parties' systems, we
could suffer a reduction in its operations.  Such a reduction may result in a
fluctuation in the price of our common stock.

     Contingency Plan.  We do not currently have a comprehensive contingency
plan with respect to the Year 2000 problem.  However, we have created a task
force comprised of accounting, legal, and technical employees that is prepared
to address any Year 2000 issues as they arise.  We will continue to develop our
contingency plan during 1999 as part of our ongoing Year 2000 compliance effort.



Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risks

     As of August 1, 1999, we had fixed interest rate debt of approximately $7.2
million and floating interest rate debt of approximately $177.1 million.  The
floating interest rates are based upon the prevailing LIBOR rate.  For floating
rate debt, interest rate changes do not generally effect the market value of
debt but do impact future earnings and cash flows, assuming other factors are
held constant.  Conversely, for fixed rate debt, interest rate changes do effect
the market value of debt but do not impact earnings or cash flows.  A
hypothetical one percentage change in the prevailing LIBOR rate would impact our
earnings by $1.8 million per year.  A similar change in the interest rate would
impact the total fair value of our fixed rate debt by less than $0.8 million.

                                       23
<PAGE>

Foreign Currency Risk

     Substantially all of our foreign transactions are denominated in foreign
currencies, including the liabilities of our foreign subsidiaries, 4MC Asia,
TVP, and Tvi.  Although our foreign transactions are not generally subject to
foreign exchange transactions gains or losses, the financial statements of our
foreign subsidiaries are translated into United States dollars as part of our
consolidated financial reporting.  Fluctuations in the exchange rate therefore
will affect our consolidated balance sheets and statements of operations.  Until
the recent Asian economic difficulties, the Singapore dollar and British pound
have been stable relative to the United States dollar.  However, during fiscal
1998, the Singapore dollar lost approximately 20% of its value relative to the
US dollar.  Our total revenues denominated in a currency other than US dollars
for the fiscal year ended August 1, 1999 were approximately 7.8% of total
revenues.  Our net assets maintained in a functional currency other than US
dollars for the fiscal year ended August 1, 1999 were approximately 5.2% of
total net assets.


Item 8.  Financial Statements and Supplementary Data

     The Financial Statements required to be filed hereunder are set forth on
pages F-1 to F-22 of this report.


Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

     On April 9, 1999, the Audit Committee of our Board of Directors voted to
dismiss PricewaterhouseCoopers LLP as our accountants and retain the accounting
firm of Ernst & Young LLP.  On April 9, 1999, we retained Ernst & Young as our
accountants for the fiscal year ending August 1, 1999.  Our decision to retain
Ernst & Young was not motivated by any disagreements between us and
PricewaterhouseCoopers LLP concerning any accounting principles or practices,
financial statement disclosure or auditing scope or procedure, but rather by our
desire to use the same accounting firm as Warburg, Pincus, our principal
stockholder.

     Since our inception, PricewaterhouseCoopers LLP's report on our financial
statements has not contained an adverse opinion or a disclaimer of opinion, nor
were any opinions qualified or modified as to uncertainty, audit scope or
accounting principles, nor were there any events of the type requiring
disclosure under Item 304(a)(1)(v) of Regulation S-K under the Securities Act.
In addition, from our inception to April 9, 1999, we did not consult with Ernst
& Young LLP with respect to the matters described in Item 304(a)(2) of
Regulation S-K.


                                   PART III

Items 10, 11 and 12

     The information required by Items 10, 11 and 12 is hereby incorporated by
reference from the Registrant's definitive proxy statement for the Annual
Meeting of Stockholders to be held in January 2000 which relates to the election
of directors and which will be filed with the Commission within 120 days after
the close of the Registrant's fiscal year.


Item 13.  Certain Relationships and related Transactions

Preferred Stock Conversion

     In connection with the Warburg, Pincus transaction, pursuant to a
conversion agreement (the "Conversion Agreement"), Fleming US Discovery Fund
III, L.P. and Fleming US Discovery Offshore Fund III, L.P. (collectively, the
"Fleming Funds") converted the 150,000 shares of our Series A Convertible
Preferred Stock owned by such Funds into an aggregate of 2,250,000 shares of our
common stock (subject to adjustment).  For so long as the Fleming Funds own at
least 50% of the common stock issued pursuant to the Conversion Agreement, the
Funds will, collectively, have the right to nominate one person to our Board.
The Fleming Funds elected Eytan Shapiro, a general partner of Fleming US
Discovery Fund III, L.P. and a director of Fleming Capital Management, to our
Board in connection with the Warburg, Pincus transaction.

Certain Voting Agreements

     In connection with the Warburg, Pincus transaction, Warburg, Pincus entered
into (i) a voting agreement, dated as of January 18, 1999, with Robert T.
Walston, our Chief Executive Officer (the "Walston Voting Agreement"), and (ii)
a voting agreement dated as of January 18, 1999 with the Fleming Funds (the
"Fleming Voting Agreement"). Under the terms of the Walston Voting Agreement,
for so long as Warburg, Pincus is entitled to nominate directors to our Board,
Mr. Walston has agreed to vote all of the shares of common stock he owns in
favor of any of Warburg, Pincus' nominees to our Board. In exchange for Mr.
Walston's voting covenant, Warburg, Pincus has agreed to vote all of the shares
of common stock it owns in favor of Mr. Walston for election to the Board for so
long as he remains our Chief Executive Officer pursuant to the terms of his
employment agreement.

      Under the terms of the Fleming Voting Agreement, for so long as Warburg,
Pincus is entitled to nominate directors to our Board under the securities
purchase agreement, the Fleming Funds have agreed to vote all of the shares of
common stock they own in favor of any of Warburg, Pincus' nominees to our Board.
In exchange for this voting covenant, Warburg, Pincus has agreed to vote of the
shares of common stock it owns in favor of the Fleming Funds' nominees to our
Board for so long as they are entitled to nominate a director to our Board.

                                       24
<PAGE>

                                    PART IV


Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

      (a)  The following documents are filed as a part of this Report:


<TABLE>
<CAPTION>
  Exhibit
   Number                                                 Description
   -----                                                  -----------
<S>            <C>
    2.1        Letter of Intent dated October 29, 1999 by and among Four Media Company, Liberty Media
               Corporation Technical Services Partners, L.P. and Warburg, Pincus Equity Partners, L.P.,
               Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity
               Partners II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V. (18)

    3.1        Certificate of Incorporation of the Company. (1)

    3.2        Certificate of Designations of Series A Convertible Preferred Stock filed with the Delaware
               Secretary of State on February 26, 1998.(7)

    3.3        By-Laws of the Company. (6)

    4.1        Specimen Common Stock Certificate. (3)

    10.1       Four Media Company 1997 Stock Plan and Stock Option Agreement. (11)*

    10.2       First Amendment to Four Media Company Stock Plan and Stock Option Agreement. (12)*

    10.3       Four Media Company 1997 Director Option Plan and Director Stock Plan Stock Option Agreement, as
               amended. (11)*

    10.4       Form of Amended and Restated Indemnity Agreement between the Company and each of its officers
               and directors. (6)*

    10.5       Agreement dated as of February 13, 1995 between MTV Asia LDC and Four Media Company Asia PTE.
               Ltd. (2)+

    10.6       Guaranty by Viacom International, Inc of MTV Asia's of obligations of Four Media Company Asia
               PTE. Ltd. dated February 13, 1995. (1)

    10.7       Guaranty by Four Media Company of obligations of Four Media Company Asia PTE. Ltd. dated
               February 13, 1995. (1)

    10.8       January 18, 1996 Amendment Letter re Agreement dated as of February 13, 1995 between MTV Asia
               LDC and Four Media Company Asia PTE. Ltd. (1)+

    10.9       August 1, 1996 Amendment Letter re Agreement dated as of February 13, 1995 between MTV Asia and
               Four Media Company Asia PTE. Ltd. (2)+

   10.10       Satellite Services Agreement dated April 12, 1996 re Transponder 7 between Global Access
               Telecommunications Services, Inc. and Four Media Company. (1)

   10.11       Satellite Services Agreement dated April 12, 1996 re Transponder 5 between Global Access
               Telecommunications Services, Inc. and Four Media Company. (1)

   10.12       Global Access Telecommunications Services, Inc. Standard Terms and Conditions. (1)
</TABLE>

                                       25
<PAGE>

<TABLE>
<CAPTION>
  Exhibit
   Number                                                 Description
   -----                                                  -----------
<S>            <C>
   10.13       August 28, 1996 Letter Agreement to the Satellite Services Agreement re Transponder 5 dated
               April 12, 1996 and to the Satellite Service Agreement re Transponder 7 dated April 12, 1996. (1)

   10.14       Financing Agreement dated October 17, 1996 between the CIT Group/Business Credit, Inc., The CIT
               Group/Equipment Financing, Inc., 4MC-Burbank, Inc. and Digital Magic Company. (2)

   10.15       Lease between Singapore Telecommunications Limited and Four Media Company Asia PTE. Ltd.
               commencing December 15,1 994. (1)

   10.16       Office Building Lease between Ford Motor Credit Company and Four Media Company dated August 1,
               1994. (1)

   10.17       Purchase and Sale Agreement dated July 29, 1996 and Escrow Instructions between C.P. Private
               Partners, L.P.I. and Four Media Company. (1)

   10.18       Term Loan Agreement dated December 5, 1996 between Tokai Bank of California and Four Media
               Company. (3)

   10.19       Letter Agreement dated February 24, 1997 between Anderson Film Industries Corp. d/b/a/ Anderson
               Video and Four Media Company. (5)

   10.20       Asset Purchase and Sale Agreement dated March 7, 1997 between Earle Hagen, Assignee for the
               Benefit of Creditors of Anderson Film Industries Corp. d/b/a/ Anderson Video and AV Acquisition
               Corp. (5)

   10.21       Agreement dated March 10, 1997 between AV Acquisition Corp. and Anderson Graphics, LLC. (5)

   10.22       Employment Agreement dated March 10, 1997 between Four Media Company and Darrell L. Anderson. (5)

   10.23       Consulting Agreement dated March 10, 1997 between Four Media Company and Darrell A. Anderson. (5)

   10.24       Credit Agreement dated as of February 27, 1998 among Four Media Company, the several lenders
               from time to time parties thereto, Bank of America NT&SA, as Syndication Agent, Union Bank of
               California, N.A., as Documentation Agent, Societe Generale, as Co-Agent, and Canadian Imperial
               Bank of Commerce as Administrative Agent. (7)

   10.25       Stockholders' Agreement dated February 27, 1998 among Four Media Company, Fleming US Discovery
               Fund III, L.P., Fleming U.S. Discovery Offshore Fund III, L.P., Robert T. Walston, John Donlon,
               Gavin Schutz and Robert Bailey.(7)

   10.26       Stock Purchase Agreement dated November 14, 1997 between Alan Kozlowski, Sandra Hay, Jerry
               Kramer, Rena Kramer, Andrew Ungerlerdes, Joan Hay and James Fancher who are the shareholders of
               Visualize d/b/a POP and Four Media Company. (8)

   10.27       Amendment to Stock Purchase Agreement dated January 30, 1998 between the shareholders of
               Visualize d/b/a POP and Four Media Company.(8)

   10.28       Employment Agreement dated February 2, 1998 between Four Media Company and Alan Kozlowski.(8)
</TABLE>

                                       26
<PAGE>

<TABLE>
<CAPTION>
  Exhibit
   Number                                                 Description
   -----                                                  -----------
<S>            <C>
   10.29       Consulting Agreement dated February 2, 1998 between Four Media Company and Jerry Kramer.(8)

   10.30       Consulting Agreement dated February 2, 1998 between Four Media Company and Sandra Hay.(8)

   10.31       Asset Purchase Agreement and Plan of Reorganization dated April 27, 1998 by and among Video
               Symphony, Inc., Digital Doctors, Inc., Four Media Company and VSDD Acquisition Corp. (9)

   10.32       Stock Purchase Agreement dated September 15, 1998 by and among Four Media Company, MSCL, Inc.,
               Charles H. Chubak and Patricia A. Chubak, Trustees of the Chubak Family Trust dated January 10,
               1992, John S. McCoy and Elaine L. McCoy, Trustees of the McCoy Family Trust dated November 11,
               1991, Larry E. Chernoff and Deborah H. Chernoff, Trustees of the Chernoff Family Trust dated
               October 31, 1991, Robert Solomon and Pamela Solomon, Trustees of the Solomon Family Trust dated
               January 23, 1997, Paul Norling and Douglas Walker who are the shareholders of MSCL, Inc.(10)

   10.33       Agreement of Purchase and Sale and Escrow Instructions dated September 10, 1998 between John S.
               McCoy and Elaine L. McCoy Trustees of the McCoy Family Trust dated November 11, 1991, Larry E.
               Chernoff and Deborah H. Chernoff, Trustees of the Chernoff Family Trust dated October 31, 1991,
               Charles H. Chubak and Patricia A. Chubak, Trustees of the Chubak Family Trust dated January 10,
               1992, Robert Solomon and Pamela Solomon, Trustees of the Solomon Family Trust dated January 23,
               1997, collectively, as Sellers, and Four Media Company, as Purchaser.(10)

   10.34       Employment Agreement dated as of September 18, 1998 between Four Media Company and Lawrence
               Chernoff.(10)

   10.35       Employment Agreement dated as of September 18, 1998 between Four Media Company and Robert
               Solomon.(10)

   10.36       Employment Agreement dated as of September 18, 1998 between Four Media Company and Charles
               Chubak.(10)

   10.37       Employment Agreement dated as of September 18, 1998 between Four Media Company and John Stephen
               McCoy.(10)

   10.38       Securities Purchase Agreement, dated as of January 18, 1999, among Four Media Company and
               Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V.,
               Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands Equity
               Partners III, C.V., as Purchasers. (12)

   10.39       Stock Purchase Agreement, dated as of January 18, 1999, among Technical Services Partners, L.P.
               and Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V.,
               Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands Equity
               Partners III, C.V., as Purchasers. (12)

   10.40       Stock Purchase Agreement, dated as of January 18, 1999, among John H. Donlon, Gavin W. Schutz,
               Robert Bailey and The Estate of John H. Sabin and Warburg, Pincus Equity Partners, L.P.,
               Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners
               II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V., as Purchasers. (12)

   10.41       Preferred Stock Conversion and Stockholders Agreement, dated as of January 18, 1999 among Four
               Media Company, Fleming US Discovery Fund III, L.P. and Warburg, Pincus Equity Partners, L.P.,
               Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners
               II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V., as Purchasers. (12)
</TABLE>

                                       27
<PAGE>

<TABLE>
<CAPTION>
  Exhibit
   Number                                                 Description
   -----                                                  -----------
<S>            <C>
   10.42       Voting Agreement, dated as of January 18, 1999 among Fleming US Discovery Fund III, L.P.,
               Fleming US Discovery Offshore Fund III, L.P. and Warburg, Pincus Equity Partners, L.P., Warburg,
               Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V.
               and Warburg, Pincus Netherlands Equity Partners III, C.V., as Purchasers. (12)

   10.43       Voting Agreement, dated as of January 18, 1999 among Robert T. Walston, Technical Services
               Partners, L.P. and Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity
               Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus
               Netherlands Equity Partners III, C.V., as Purchasers. (12)

   10.44       Voting and Option Agreement, dated as of January 18, 1999, among Technical Services Partners,
               L.P. and Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I,
               C.V., Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands
               Equity Partners III, C.V., as Purchasers. (12)

   10.45       Employment Agreement dated January 1, 1999 by and between Four Media Company and Robert T.
               Walston. (16)*

   10.46       Employment Agreement dated January 1, 1999 by and between Four Media Company and Jeffrey J.
               Marcketta. (16)*

   10.47       Employment Agreement dated February 1, 1999 by and between Four Media Company and Christopher
               Phillips. (16)*

   10.48       Employment Agreement dated January 1, 1999 by and between Four Media Company and John H. Donlon.
               (16)*

   10.49       Employment Agreement dated January 1, 1999 by and between Four Media Company and Gavin W.
               Schutz. (16)*

   10.50       Employment Agreement dated January 1, 1999 by and between Four Media Company and Robert Bailey.
               (16)*

   10.51       Share Capital Sale and Purchase Agreement, dates as of April 29, 1999, by and between Four Media
               Company (UK) Limited and TVP Group Plc. (14)

   10.52       Service Agreement, dated as of April 29, 1999, by and between TVP Group Plc and Simon Paul Kay.
               (14)

   10.53       Service Agreement, dated as of April 29, 1999, by and between TVP Group Plc and Nicholas Paul
               Pannaman. (14)

   10.54       Share Purchase Agreement, dated as of May 25, 1999, by and between TVP Group Plc and Carlton
               Communications Plc. (15)

   10.55       Asset Purchase Agreement, dated as of June 22, 1999, by and among Four Media Company, 4MC Ross
               Acquisition Co., Ross Digital Sound & Picture, Inc., Michael John Ross and Nancy Elaine Ross.
               (17)

   10.56       Origination, Uplink and Post-Production Services Agreement dated May 28, 1999 by and between
               4MC-Burbank, Inc. and TVN Entertainment Corporation (filed herewith).

   10.57       Services Agreement entered into on October 19, 1999 by and between Four Media Company Asia Pte Ltd
               and MTV Asia LDC (filed herewith)

    16.1       Letter from PricewaterhouseCoopers LLP (13)

    21.        Subsidiaries of Four Media Company (filed herewith).
</TABLE>

                                       28
<PAGE>

<TABLE>
<CAPTION>
  Exhibit
   Number                                                 Description
   -----                                                  -----------
<S>            <C>
    23.1       Consent of Ernst & Young LLP Independent Auditors (filed herewith)

    23.2       Consent of PricewaterhouseCoopers LLP. (filed herewith)

    27.1       Financial Data Schedule. (filed herewith)
--------------------------------------
     *         Management contract, compensatory plan or arrangement.
     +         Portions of this exhibit have been deleted and filed separately with the Securities and Exchange
               Commission pursuant to a request for confidentiality.
    (1)        Incorporated herein by reference to the Company's Registration Statement on Form S-1 filed
               October 8, 1996.
    (2)        Incorporated herein by reference to Amendment No. 1 to the Company's Registration Statement
               filed December 27, 1996.
    (3)        Incorporated herein by reference to Amendment No. 2 to the Company's Registration Statement
               filed February 4, 1997.
    (4)        Incorporated herein by reference to Amendment No. 3 to the Company's Registration Statement
               filed February 5, 1997.
    (5)        Incorporated herein by reference to the Company's Current Report on Form 8-K filed March 24,
               1997.
    (6)        Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year
               ended August 3, 1997.
    (7)        Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter
               ended February 1, 1998.
    (8)        Incorporated herein by reference to the Company's Current Report on Form 8-K filed February 17,
               1998.
    (9)        Incorporated herein by reference to the Company's Current Report on Form 8-K filed May 18, 1998.
    (10)       Incorporated herein by reference to the Company's Current Report on Form 8-K filed October 5,
               1998.
    (11)       Incorporated herein by reference to the Company's Registration Statement on Form S-8 filed July
               28, 1998.
    (12)       Incorporated herein by reference to the Company's Current Report on Form 8-K filed January 21,
               1999.
    (13)       Incorporated herein by reference to the Company's Current Report on Form 8-K/A filed April 21,
               1999.
    (14)       Incorporated herein by reference to the Company's Current Report on Form 8-K filed April 23,
               1999.
    (15)       Incorporated herein by reference to the Company's Current Report on Form 8-K filed May 14, 1999.
    (16)       Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter
               ended May 2, 1999.
    (17)       Incorporated herein by reference to the Company's Current Report on Form 8-K filed July 7, 1999.

    (18)       Incorporated by reference to the Company's Current Report on Form 8-K filed November 1, 1999.
</TABLE>

      (b)  Reports on Form 8-K.

                    (i) Current report on Form 8-K filed with the Commission on
                        July 7, 1999 announcing the Company's acquisition of
                        DSP.

      (c)  The exhibits required by Item 601 of Regulation S-K have been listed
           above.

      (d)  Financial Statement Schedules.

               See attached index on page F-1.

                                       29
<PAGE>

                              Four Media Company

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                    <C>
Report of Ernst & Young LLP, Independent Auditors...................................   F-2

Report of Independent Accountants...................................................   F-3

Consolidated Balance Sheets at August 2, 1998 and August 1, 1999....................   F-4

Consolidated Statements of Income for the fiscal years ended August 3, 1997
    August 2, 1998 and August 1, 1999...............................................   F-5

Consolidated Statements of Stockholders' Equity for the fiscal years ended,
    August 3, 1997, August 2, 1998 and August 1, 1999...............................   F-6

Consolidated Statements of Cash Flows for the fiscal years ended
    August 3, 1997, August 2, 1998 and August 1, 1999...............................   F-7

Notes to Consolidated Financial Statements..........................................   F-8

Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts.....................................  F-23
</TABLE>

                                      F-1
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Stockholders of Four Media Company

We have audited the accompanying consolidated balance sheet of Four Media
Company as of August 1, 1999, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended.  Our audit also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Four Media Company
at August 1, 1999 and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.  Also, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.


                                                          /s/  ERNST & YOUNG LLP



Los Angeles, California
October 25, 1999

                                      F-2
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS



Board of Directors
Four Media Company
Burbank, California

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of Four Media
Company (the "Company") and its subsidiaries at August 2, 1998, and the results
of their operations and their cash flows for each of the two years in the period
ended August 2, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in the index presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.



                                      PricewaterhouseCoopers LLP

Los Angeles, California
October 21, 1998

                                      F-3
<PAGE>

                               Four Media Company
                          CONSOLIDATED BALANCE SHEETS
                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                          August 2,          August 1,
                                                                                            1998               1999
                                                                                          ---------          ---------
                                     ASSETS
<S>                                                                                 <C>                <C>
Current assets:
 Cash................................................................................      $  3,301           $  9,841
 Trade accounts receivable, net of allowance for doubtful accounts of $1,258
    (1998) and $1,618 (1999).........................................................        31,657             34,777
 Inventory...........................................................................         1,263              1,793
 Prepaid expenses and other current assets...........................................         2,442              4,692
 Property held for sale..............................................................            --             10,654
                                                                                           --------           --------
       Total current assets..........................................................        38,663             61,757
Property, plant and equipment, net...................................................       124,230            173,266
Deferred income taxes................................................................         7,526              8,582
Long-term receivable.................................................................         3,276              4,103
Goodwill, less accumulated amortization of $529 (1998) and $3,343 (1999).............        37,507             88,952
Note receivable from officer.........................................................            --              2,000
Other assets.........................................................................         6,096              4,883
                                                                                           --------           --------
  Total assets.......................................................................      $217,298           $343,543
                                                                                           ========           ========

                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Current maturities of long-term debt and capital lease obligations..................      $  6,184           $ 12,975
 Accounts payable....................................................................        10,781             19,593
 Accrued and other liabilities.......................................................         5,980             12,510
 Deferred income taxes...............................................................         2,569              2,173
                                                                                           --------           --------
    Total current liabilities........................................................        25,514             47,251
Long-term debt and capital lease obligations.........................................       124,671            171,321
                                                                                           --------           --------
    Total liabilities................................................................       150,185            218,572

Commitments and contingencies

Stockholders' equity:
 Preferred stock, $.01 par value; 5,000,000 shares authorized, 150,000 Series A
    Convertible shares issued and outstanding; liquidation preference $15,000,000....             2                 --
 Common stock, $.01 par value; 50,000,000 shares authorized, 9,876,770 (1998)
    and 19,693,629 (1999) shares issued and outstanding..............................            99                196
 Additional paid-in capital..........................................................        59,577            112,441
 Retained earnings...................................................................         9,002             13,940
 Accumulated other comprehensive loss................................................        (1,567)            (1,606)
                                                                                           --------           --------
    Total stockholders' equity.......................................................        67,113            124,971
                                                                                           --------           --------
    Total liabilities and stockholders' equity.......................................      $217,298           $343,543
                                                                                           ========           ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-4
<PAGE>

                              Four Media Company
                       CONSOLIDATED STATEMENTS OF INCOME
                     (In thousands, except per share data)

<TABLE>
<CAPTION>

                                                                                              Fiscal Year Ended
                                                                                    ------------------------------------
                                                                                    August 3,     August 2,    August 1,
                                                                                      1997          1998         1999
                                                                                      ----          ----         ----
<S>                                                                                 <C>            <C>          <C>
Revenues:
 Television....................................................................     $30,768     $ 60,405     $125,491
 Mastering and distribution....................................................      26,658       35,633       41,571
 Broadcast and syndication.....................................................      23,694       22,701       22,609
 Film..........................................................................       3,407       10,429        7,313
                                                                                    -------     --------     --------
    Total revenues.............................................................      84,527      129,168      196,984
                                                                                    -------     --------     --------
Operating costs:
 Direct operating costs........................................................      53,184       81,144      115,983
 Depreciation and amortization.................................................      13,175       18,191       27,476
 Sales, general and administrative.............................................      12,899       18,504       34,901
                                                                                    -------     --------     --------
    Total operating costs......................................................      79,258      117,839      178,360
                                                                                    -------     --------     --------
       Income from operations..................................................       5,269       11,329       18,624
Other income (expense):
   Interest income.............................................................          --           12        1,425
   Interest expense............................................................      (3,887)      (8,151)     (14,178)
 Other expense.................................................................          --           --         (933)
                                                                                    -------     --------     --------
    Total other income (expense)...............................................      (3,887)      (8,139)     (13,686)
                                                                                    -------     --------     --------
       Income before extraordinary item........................................       1,382        3,190        4,938
Extraordinary loss on early extinguishment of debt.............................          --       (2,449)          --
                                                                                    -------     --------     --------
       Net income..............................................................     $ 1,382     $    741     $  4,938
                                                                                    =======     ========     ========

Earnings per common share - Basic:
   Income before extraordinary item............................................     $  0.17     $   0.33     $   0.37
   Extraordinary item..........................................................          --        (0.25)          --
                                                                                    -------     --------     --------
       Net income per common share.............................................     $  0.17     $   0.08     $   0.37
                                                                                    =======     ========     ========

Earnings per common share - Diluted:
   Income before extraordinary item............................................     $  0.16     $   0.29     $   0.34
   Extraordinary item..........................................................          --        (0.22)          --
                                                                                    -------     --------     --------
       Net income per common share.............................................     $  0.16     $   0.07     $   0.34
                                                                                    =======     ========     ========

Weighted average number of common shares outstanding:
   Basic.......................................................................       7,971        9,634       13,271
                                                                                    =======     ========     ========
   Diluted.....................................................................       8,563       10,898       14,729
                                                                                    =======     ========     ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-5
<PAGE>

                              Four Media Company
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                (In thousands)

<TABLE>
<CAPTION>

                                                             Preferred Stock     Common Stock         Additional
                                                             ---------------                           Paid-In
                                                             Shares     Amount    Shares    Amount     Capital
                                                             ------     ------              ------     -------
<S>                                                         <C>         <C>       <C>       <C>        <C>
 Balance, August 4, 1996  .................................    --        $  --         1     $ --      $ 15,010

 Comprehensive Income:
   Net income
   Foreign currency translation
   adjustments, net of tax

 Comprehensive income

 Reorganization and stock dividend.........................                        6,474       65           (65)
 Issuance of common stock..................................                        3,078       31        26,705
                                                             ------     ------    ------       --        ------
 Balance, August 3, 1997...................................    --           --     9,553       96        41,650

 Comprehensive Income (loss):
   Net income
   Foreign currency translation
   adjustments, net of tax

 Comprehensive income (loss)

 Issuance of preferred stock, net of costs.................     150          2                           14,830
 Issuance of common stock..................................                          324        3         3,097
                                                              ------     ------    ------       --        ------
 Balance, August 2, 1998...................................     150          2     9,877       99        59,577

 Comprehensive Income:
   Net income
   Foreign currency translation adjustments, net of tax.

 Comprehensive income

 Issuance of common stock - Encore
    acquisition............................................                          486        4         2,126
 Issuance of common stock -  Warburg
    transaction............................................                        6,583       65        50,595
 Issuance of common stock - exercise
    of stock options.......................................      --         --       498        5           164
 Convert preferred stock to common
    stock..................................................     150         (2)    2,250       23           (21)
                                                             ------     ------    ------   ------      --------
 Balance, August 1, 1999...................................      --     $   --    19,694     $196      $112,441
                                                             ======     ======    ======     ====      ========
</TABLE>

<TABLE>
<CAPTION>
                                                                           Accumulated
                                                                              Other                        Total
                                                                          Comprehensive    Retained   Stockholder's
                                                                               Loss        Earnings        Equity
                                                                               ----        --------        ------
<S>                                                                        <C>             <C>           <C>
 Balance, August 4, 1996.............................................          $   254     $ 6,879      $ 22,143

 Comprehensive Income:
   Net income........................................................                        1,382         1,382
   Foreign currency translation
   adjustments, net of tax...........................................             (523)                     (523)
                                                                                                            ----
 Comprehensive income................................................                                        859

 Reorganization and stock dividend
 Issuance of common stock............................................                                     26,736
                                                                               ------       ------        ------
 Balance, August 3, 1997.............................................            (269)       8,261        49,738

 Comprehensive Income (loss):
   Net income........................................................                          741           741
   Foreign currency translation
   adjustments, net of tax...........................................          (1,298)                    (1,298)
                                                                                                          ------
 Comprehensive income (loss).........................................                                       (557)

 Issuance of preferred stock, net of costs...........................                                     14,832
 Issuance of common stock............................................                                      3,100
                                                                               ------       ------        ------
 Balance, August 2, 1998.............................................          (1,567)       9,002        67,113

 Comprehensive Income:
   Net income........................................................                        4,938         4,938
   Foreign currency translation adjustments, net of tax..............             (39)                       (39)
                                                                                                          ------
 Comprehensive income................................................                                      4,899

 Issuance of common stock - Encore
    acquisition......................................................                                      2,130
 Issuance of common stock -  Warburg
    transaction......................................................                                     50,660
 Issuance of common stock - exercise
    of stock options.................................................              --           --           169
 Convert preferred stock to common
    stock............................................................                                         --
                                                                              -------      -------      --------
 Balance, August 1, 1999.............................................         $(1,606)     $13,940      $124,971
                                                                              =======      =======      ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-6
<PAGE>

                              Four Media Company
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                                            Fiscal Year Ended
                                                                                               ------------------------------------
                                                                                                August 3,    August 2,    August 1,
                                                                                                  1997         1998         1999
                                                                                               ----------   ----------   ----------
<S>                                                                                            <C>          <C>          <C>
Cash flows from operating activities:
  Net income    ............................................................................    $  1,382     $    741    $   4,938
  Adjustments to reconcile net income to net cash provided by
          operating activities:
     Depreciation and amortization  ........................................................      13,175       18,191       27,476
     Amortization of debt issuance costs....................................................          --          230          576
     Provision for doubtful accounts  ......................................................         871          794          954
     Extraordinary loss on early extinguishment of debt.....................................          --        2,449           --
     Deferred taxes  .......................................................................          --          438         (234)
     Gain on sale of equipment..............................................................          --           --           62
     Changes in operating assets and liabilities, net of
          Acquisitions of businesses:
        Decrease in restricted cash  .......................................................          --          625           --
        (Increase) decrease in trade and long-term receivables  ............................     (11,305)      (8,836)       5,888
        Increase in inventory  .............................................................          --         (174)        (157)
        (Increase) decrease in prepaid expenses and other assets  ..........................      (1,796)         346       (3,491)
        Increase (decrease) in accounts payable  ...........................................       5,277       (1,263)      (1,855)
        Increase (decrease) in accrued and other liabilities................................         304       (8,273)         327
                                                                                                --------     --------    ---------
          Net cash provided by operating activities  .......................................       7,908        5,268       34,484
Cash flows from investing activities:
  Cash paid for capital expenditures (1)  ..................................................     (30,720)     (29,561)     (42,404)
  Proceeds from sale of equipment...........................................................          --           --        1,172
  Acquisitions of businesses, net of cash acquired  ........................................      (9,422)     (25,344)     (70,128)
                                                                                                --------     --------    ---------
          Net cash used in investing activities  ...........................................     (40,142)     (54,905)    (111,360)
Cash flows from financing activities:
  Net proceeds from Warburg transaction.....................................................          --           --       50,660
  Proceeds from exercise of stock options...................................................          --           --          169
  Proceeds from preferred stock.............................................................          --       14,832           --
  Proceeds from public offering of common stock.............................................      26,736           --           --
  Proceeds from long term borrowings........................................................      28,983      118,699       45,000
  Repayments of long term borrowings  ......................................................     (27,842)     (84,485)     (25,076)
  Net proceeds from revolving credit facility...............................................       5,287        1,713       13,000
  Payment of debt issuance costs............................................................          --       (3,412)        (345)
                                                                                                --------     --------    ---------
          Net cash provided by (used in) financing activities  .............................      33,164       47,347       83,408
Effect of exchange rate changes on cash  ...................................................        (153)        (498)           8
                                                                                                --------     --------    ---------
Net increase (decrease) in cash  ...........................................................         777       (2,788)       6,540
Cash at beginning of year  .................................................................       5,312        6,089        3,301
                                                                                                --------     --------    ---------
Cash at end of year  .......................................................................    $  6,089     $  3,301    $   9,841
                                                                                                ========     ========    =========
Supplemental disclosure of cash flow information:
  Cash paid during the fiscal year for:
    Interest  ..............................................................................    $  4,305     $  8,086    $  13,528
    Income taxes  ..........................................................................          --          378           28
  Non cash investing and financing activities:
    Capital lease obligations incurred  ....................................................    $  9,915     $  9,050    $     967
    Notes issued to sellers in connection with POP purchase.................................          --        1,257           --
    Stock issued in connection with VSI purchase............................................          --        3,100           --
    Stock issued in connection with Encore acquisition......................................          --           --        2,130

     (1)   Cash paid for capital expenditures...............................................     $30,720      $29,561      $42,404
           Change in accounts payable related to capital expenditures.......................          --           --        6,572
                                                                                                 -------      -------      -------
     Total capital expenditures.............................................................     $30,720      $29,561      $48,976
                                                                                                 =======      =======      =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-7
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Description of Business

     Four Media Company (the "Company") is a provider of technical and creative
services to producers and distributors of television programming, television
commercials, feature films and other entertainment content, as well as to owners
of film and television libraries.  These services include the processing,
enhancement, storage and distribution of film and video from the point it leaves
the camera until it is shown, in various formats, to audiences around the world.


2.   Summary of Significant Accounting Policies

     Principles of Consolidation.  The consolidated financial statements include
the accounts of Four Media Company and its wholly owned and majority owned
subsidiaries.  All intercompany accounts and transactions have been eliminated.
Results of operations include the results of businesses acquired from the date
of acquisition.

     Fiscal Year.  The Company's fiscal year is the 52-53 week period ending on
the Sunday closest to July 31.  The fiscal years ended August 3, 1997, August 2,
1998 and August 1, 1999 each consisted of 52 weeks.

     Reclassifications.  Certain amounts in previously issued financial
statements have been reclassified to conform to the 1999 presentation.

     Revenue Recognition.  Revenues are recognized when a product is shipped or
a service is provided.

     Foreign Currency Translation.  All balance sheet accounts of Four Media
Company Asia ("4MC Asia"), TVP and TVi are translated at the current exchange
rate as of the end of the year.  Statement of income items are translated at
average currency exchange rates.  The resulting translation adjustment is
recorded as a separate component of stockholders' equity.  The functional
currency in which 4MC Asia transacts business is the Singapore dollar and in
which TVP and TVi transact business is the UK pound.  Transaction gains and
losses included in operations were not significant in fiscal 1997, 1998, or
1999.

     Inventory.  Inventories are stated at the lower of cost (first-in, first-
out) or market, and are comprised of raw materials and supplies.

     Property, Plant and Equipment.  Property, plant and equipment are recorded
at cost.

     Depreciation and Amortization.  Depreciation of property, plant and
equipment is computed by use of the straight-line method based on the estimated
useful lives of 3 to 10 years of the respective assets, except for leasehold
improvements, which are amortized using the straight-line method over the life
of the improvement or the length of the lease, whichever is shorter.  Interest
costs incurred during construction totaling  $1,229,000, $940,000 and
$1,566,000, were capitalized for the years ended August 3, 1997, August 2, 1998
and August 1, 1999 respectively, and are being amortized over the related
assets' estimated useful lives.

     Goodwill.  Goodwill represents the excess of cost over the fair value of
net assets acquired and is amortized using the straight-line method over 20 to
40 years, with a weighted average life of 28 years.  Goodwill amortization
expense was $0, $529,000 and $2,814,000 for fiscal 1997, 1998 and 1999,
respectively.  Useful lives are determined on a case by case basis for each
business acquired.  The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired.  If this review indicates that
goodwill will not be recoverable, as determined based on estimated undiscounted
cash flows of the Company over the remaining amortization period, the Company's
carrying value would be reduced by the estimated shortfall of discounted cash
flows.  No impairment charges have been recognized to date.

     Other Assets.  Other assets include costs incurred relating to obtaining
the credit facility in February 1998.  Such costs are being amortized over the
term of the respective agreement.

2.   Summary of Significant Accounting Policies, Continued

                                      F-8
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Use of Estimates.  The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions for the reporting period and as of the financial
statement date.  These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses.  Actual results could differ from
those estimates.

     Long Lived Assets.  Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.

     Stock Based Compensation.  Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value.  The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and to adopt the disclosure-only provisions of SFAS No. 123.

     Earnings Per Share.   Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS No. 128") establishes standards for computing and
presenting earnings per share and requires dual presentation of basic and
diluted earnings per share on the face of the income statement.

     Advertising.  Advertising costs are expensed as incurred and included in
sales, general and administrative expenses.  Advertising expenses amounted to
$225,000, $365,000 and $852,000 in the years ended August 3, 1997, August 2,
1998 and August 1, 1999, respectively.

     Other Comprehensive Income/(Loss).  As of August 3, 1998, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income".  SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components.  SFAS No. 130 requires foreign currency translation adjustments
to be included in other comprehensive income/(loss).

     Recently Issued Accounting Standards. During the year ended August 1, 1999,
the Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information".  SFAS No.
131 requires publicly-held companies to report financial and descriptive
information about its operating segments in financial statements issued to
shareholders for interim and annual periods.  The statement also requires
additional disclosure with respect to products and services, geographic areas of
operation, and major customers.

     In June 1998 and June 1999, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133."  These Statements require companies to recorded
derivatives on the balance sheet as assets or liabilities, measured at fair
value.  Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting.  The new rules will be effective the
first quarter of 2001.  The Company is in the process of determining the impact
of this new standard and anticipates that it will not have a material impact on
the Company's financial results when effective.

3.   Business Acquisitions

     On February 2, 1998, the Company acquired all the outstanding shares of
capital stock of Visualize d/b/a Pacific Ocean Post ("POP").  The purchase price
of the transaction was $30,100,000, of which $25,400,000 was paid in cash,
$1,200,000 was represented by promissory notes, and $3,500,000 represented
transaction costs.  The acquisition was accounted for using the purchase method
of accounting.  The purchase price was allocated to the fair value of the assets
and liabilities acquired as follows: $4,700,000 to current assets, $11,700,000
to property, plant and equipment, $31,400,000 to goodwill, $2,900,000 to
deferred taxes, $700,000 to other assets, $5,000,000 to

                                      F-9
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

accounts payable and accrued liabilities, and $16,300,000 to debt and capital
lease obligations. Immediately following the closing, the Company extinguished
$8,500,000 of POP's debt, capital lease obligations, and certain operating lease
obligations.

     On September 18, 1998, the Company acquired all the outstanding shares of
capital stock of MSCL, Inc. ("Encore") and the real estate occupied by Encore.
The purchase price of the transaction was approximately $45.0 million.  This
amount includes $41.9 million paid in cash to the Encore shareholders (including
$11.2 million for the purchase of real estate), $1.0 million in estimated
transaction costs, and the issuance of 486,486 shares of Company common stock
valued at $4.38 per share.  The acquisition was accounted for using the purchase
method of accounting.  The purchase price was allocated to the fair value of the
assets and liabilities acquired as follows:  $7,300,000 to current assets,
$28,500,000 to property, plant and equipment, $34,100,000 to goodwill,
$1,200,000 to deferred taxes, $900,000 to other assets, $7,400,000 to accounts
payable and accrued liabilities, and $19,600,000 to debt and capital lease
obligations. Immediately following the closing, the Company extinguished
$18,900,000 of Encore's debt and capital lease obligations.

     On April 29, 1999, the Company acquired all of the outstanding shares of
capital stock of TVP Group Plc ("TVP"), a London based provider of post
production services for approximately $10.3 million in cash, including the
repayment of debt and $0.3 in estimated transaction costs.  In addition, the
Company is required to pay the former shareholders of TVP up to an additional
$0.8 million (the "Deferred Consideration" if, within the first twelve months
following the TVP acquisition, (1) the Company acquires another U.K. company
engaged in a line of business similar to that of TVP, or (2) TVP achieves
certain operating results.  The acquisition was accounted for using the purchase
method of accounting.  The purchase price was allocated to the fair value of the
assets and liabilities acquired as follows:  $3,000,000 to current assets,
$1,100,000 to property, plant and equipment, $7,400,000 to goodwill, and
$1,200,000 to accounts payable and accrued liabilities.

     On May 25, 1999, the Company acquired all of the outstanding shares of
capital stock of TVi Limited ("TVi") from Carlton Communications Plc, a London
based provider of post production services, for approximately $11.7 million in
cash, including $0.3 in estimated transaction costs.  Upon completion of the TVi
acquisition, the Company paid out approximately $0.4 million of the Deferred
Consideration.  The acquisition was accounted for using the purchase method of
accounting.  The purchase price was allocated to the fair value of the assets
and liabilities acquired as follows: $3,600,000 to current assets, $2,800,000 to
property, plant and equipment, $7,000,000 to goodwill, and $1,700,000 to
accounts payable and accrued liabilities.

     On June 22, 1999, the Company acquired all of the outstanding shares of
capital stock of Ross Digital Sound and Picture, Inc. ("DSP") for approximately
$7.7 million in cash, including $0.5 million in estimated transaction costs.
The acquisition was accounted for using the purchase method of accounting.  The
purchase price was allocated to the fair value of the assets and liabilities
acquired as follows: $377,000 to current assets, $2,100,000 to property, plant
and equipment, $5,300,000 to goodwill, and $77,000 to accounts payable and
accrued liabilities.

     The following unaudited pro forma summary combines the consolidated results
of operations of the Company and POP, VSI, Encore, TVP, TVi and DSP, as if the
acquisitions had occurred at the beginning of fiscal 1998, after giving effect
to certain adjustments, including adjustments to depreciation, amortization,
interest and taxes.  The pro forma summary does not necessarily reflect the
results of operations as they would have been if the Company and POP, VSI,
Encore, TVP, TVi and DSP, had constituted a single entity during such periods
(in thousands except per share data):

                                      F-10
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                             1998              1999
                                                                                             ----              ----
<S>                                                                                       <C>                <C>
Revenues.............................................................................       $226,516          $224,928
    Income before extraordinary item.................................................          2,543             5,832
Net income...........................................................................             94             5,832

Earnings per common share - Basic:
   Income before extraordinary item..................................................           0.25              0.44
   Net income........................................................................           0.01              0.44

Earnings per common share - Diluted:
   Income before extraordinary item..................................................           0.22              0.39
   Net Income........................................................................           0.01              0.39
</TABLE>


4.   Business and Credit Concentrations

     The Company grants credit to its customers, substantially all of whom are
participants in the entertainment industry.  The Company reviews a customer's
credit history before extending credit.  The Company establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends, and other information.  For the fiscal years ended
August 3, 1997, August 2, 1998, and August 1, 1999, no single customer accounted
for a significant amount of the Company's total revenues.

     In August 1997, the Company revised a long term agreement for services with
a customer and as a part of the agreement, the parties agreed to defer payment
in the amount of $4,400,000.  This amount is payable over five years in monthly
installments of principal and interest at 10%.  The balance at August 1, 1999 is
$3,600,000 of which $870,000 is reflected as a current asset and $2,730,000 as a
non-current asset.  In addition, in May 1999, the Company further revised the
agreement with this customer and deferred additional amounts owed from this
customer of $2,200,000.  This amount is payable over five years in monthly
installments of principal and interest at 6%. The balance at August 1, 1999 is
$1,800,000 of which $400,000 is reflected as a current asset and $1,400,000 as a
non-current asset.  In addition, the Company is contractually committed to a
maximum $15,000,000 capital expenditure limit in order to redesign the facility
per the design specifications of the customer.  Of this amount, any expenditures
in excess of $10,000,000 will be repaid to the Company over the initial term of
the contract.  The Company incurred approximately $8,000,000 of those capital
expenditures during fiscal 1999.


5.   Property Held for Sale

     Property held for sale consists of a building in Santa Monica, California
comprised of approximately 44,000 square feet.  The property is no longer used
in the Company's operations and is stated at cost which is less than estimated
net realizable value.  Management anticipates the sale of the building to occur
during fiscal 2000.

                                      F-11
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   Property, Plant and Equipment

     The following is a summary of property, plant and equipment (in thousands):

<TABLE>
<CAPTION>
                                                                                   August 2,        August 1,
                                                                                     1998              1999
                                                                                     ----              ----
<S>                                                                                <C>               <C>
Land...........................................................................     $ 17,508         $ 18,419
Buildings and building improvements............................................       11,020           23,446
Machinery and equipment........................................................      126,249          167,563
                                                                                    --------         --------
                                                                                     154,777          209,428
Less, accumulated depreciation and amortization................................       46,610           68,837
                                                                                    --------         --------
                                                                                     108,167          140,591
Construction in progress.......................................................       16,063           32,675
                                                                                    --------         --------
     Property, plant and equipment, net........................................     $124,230         $173,266
                                                                                    ========         ========

Included above is property and equipment under capital leases of:
     Machinery and equipment...................................................     $  12,150        $ 14,040
     Less, accumulated amortization............................................         2,730           4,714
                                                                                    ---------         --------
     Machinery and equipment under capital leases, net.........................     $   9,420        $  9,326
                                                                                    =========         ========
</TABLE>

7.   Income Taxes

     Deferred income taxes are determined in accordance with SFAS No. 109,
"Accounting for Income Taxes."  Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each year-end based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established to reduce deferred tax assets to the amount
expected to be realized.

  The income tax provision (benefit) consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                  1997         1998         1999
                                  ----         ----         ----
Current:
<S>                              <C>          <C>          <C>
  Federal  ...................    $  --       $   --       $ 179
  State  .....................       --           --          55
Deferred
  Federal  ...................       --           --        (219)
  State  .....................       --           --         (15)
                                  ------      -------      ------
    Total  ...................    $  --       $   --       $  --
                                  ======      =======      ======
</TABLE>

                                     F-12
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.   Income Taxes, Continued

  The significant components of the deferred tax assets and liabilities
consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                            August 2,       August 1,
                                                              1998            1999
                                                              ----            ----
Deferred tax assets:
<S>                                                          <C>             <C>
  Allowance for doubtful accounts......................        $   377          $  606
  Property, plant and equipment........................          4,679           3,646
  Intangible assets....................................             32             204
  Accrued vacation.....................................            496             781
  Acquisition expenses.................................            694              --
  Other................................................             84              86
  Net operating loss carryforward......................          3,800           3,738
                                                               -------          ------
Total deferred tax assets..............................         10,162           9,061
  Valuation allowance..................................         (2,636)           (479)
                                                               -------          ------
                                                                 7,526           8,582
Deferred tax liabilities:
  Loan origination fees................................          1,268           1,175
  Loss on early extinguishment of debt.................            975              --
  Prepaid assets.......................................            326             998
                                                               -------          ------
Total deferred tax liabilities.........................          2,569           2,173
                                                               -------          ------
    Net deferred tax assets............................        $ 4,957          $6,409
                                                               =======          ======
</TABLE>

     At August 2, 1998 and August 1, 1999 the Company had a net deferred tax
asset before valuation allowance of $7,593,000 and $6,888,000, respectively.
Acquisitions in 1998 and 1999 resulted in an increase in the Company's deferred
tax assets of approximately $2,900,000 and $1,219,000, respectively.  These
increases are attributed to differences between the book and tax bases of the
acquired company's fixed assets.

  The Company has evaluated its past earnings history and trends, budgeted
revenues and expiration dates of net operating loss carryforwards and has
determined that it is more likely than not that $6,409,000 of deferred tax
assets will be realized.  The remaining valuation allowance of $479,000 is
maintained on deferred assets which the Company has not determined to be more
likely than not realizable at August 1, 1999.  The Company will continue to
review this valuation allowance on a quarterly basis and make adjustments, as
appropriate.

     A reconciliation of the statutory federal income tax rate to the
effective tax rate, as a percentage of income before income tax, is as follows:

                                     F-13
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.   Income Taxes, Continued

<TABLE>
<CAPTION>
                                                                     1997            1998            1999
                                                                     ----            ----            ----
<S>                                                                 <C>             <C>             <C>
Federal tax at statutory rate.................................         34%             34%             34%
Non-deductible expenses.......................................          4              13              21
Foreign income not subject to taxes...........................        (76)            (22)            (14)
Change in valuation allowance.................................         38             (22)            (43)
Other.........................................................         --              (3)              2
                                                                      ----            ----            ----
                                                                      -- %            -- %            -- %
                                                                      ====            ====            ====
</TABLE>

     As of August 1, 1999, the Company has net operating loss carryforwards of
approximately $10,265,000 and $2,800,000 for Federal and California tax
purposes, respectively.  The net operating loss carryforwards begin to expire in
2009 and 2001 for Federal and California income tax purposes, respectively.

     At August 1, 1999, foreign earnings of $10,560,000 have been retained
indefinitely by the Company's Singapore subsidiary for reinvestment, on which no
additional U.S. tax has been provided.  The Company has tax holiday status on
its operations in Singapore, which expires in 2002.  Income before income taxes
for the foreign operations was $3,248,000, $2,090,000 and $3,173,000 for fiscal
1997, 1998 and 1999, respectively.

8.   Long Term Debt

     The following is a summary of long-term debt (in thousands):

<TABLE>
<CAPTION>
                                                   August 2,        August 1,
                                                      1998            1999
                                                      ----            ----
<S>                                               <C>            <C>
CIBC term loans................................     $104,625          $148,875
CIBC revolving credit facility.................        7,000            20,000
CIBC letter of credit..........................          117               117
Real property loan.............................        8,220             8,096
Notes payable..................................        1,121             1,916
Capital lease obligations......................        9,772             5,292
                                                    --------          --------
                                                     130,855           184,296
Less, current maturities.......................        6,184            12,975
                                                    --------          --------
                                                    $124,671          $171,321
                                                    ========          ========
</TABLE>

                                     F-14
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.   Long Term Debt, Continued

     Aggregate capital lease obligations and loan maturities subsequent to
August 1, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Capital Lease        Principal Payments
                                                                Payments           On Loans and Notes        Total
                                                                --------           ------------------        -----
Fiscal years ending
<S>                                                           <C>                   <C>                     <C>
 2000................................................         $   3,865             $  9,725                $ 13,590
 2001................................................             1,529               16,314                  17,843
 2002................................................               643               15,919                  16,562
 2003................................................                 8               35,904                  35,912
 2004................................................                --              101,142                 101,142
                                                              ---------             --------                --------
    Total............................................         $   6,045             $179,004                $185,049

Less: amounts representing interest..................               753                   --                     753
                                                               --------              --------               --------
    Total............................................          $  5,292              $179,004               $184,296
                                                               ========              ========               ========
</TABLE>

     On February 27, 1998, the Company entered into a financing agreement
representing $200,000,000 in credit facilities from a group of banks, including
Canadian Imperial Bank of Commerce ("CIBC").  The facilities include two
$75,000,000 term loans ("Term A" and "Term B") and a $50,000,000 revolver
("Revolver").  At closing, the Company borrowed $104,000,000 (including a
$2,000,000 letter of credit) to refinance most of its then outstanding debt,
fund the POP acquisition (including the refinancing of most of POP's then
outstanding debt) and pay loan fees and other transaction costs.  Both Term A
and the Revolver mature on January 31, 2004 and are reduced by quarterly amounts
beginning April 30, 2000, as specified in the financing agreement.  Term A and
the Revolver bear interest at Libor (5.24% at August 1, 1999) plus a margin
ranging from 1.5% to 2.5%, based upon the Company's leverage ratios.  In
addition, the Company must pay a commitment fee of 0.50% on the unused portions
of the Term A and Revolver commitments.  At August 2, 1998 and August 1, 1999,
$30,000,000 and $75,000,000 were outstanding on Term A and $7,000,000 and
$20,000,000 was outstanding on the Revolver, respectively.  Term B matures July
31, 2004 and is reduced quarterly by amounts specified in the financing
agreement beginning April 30, 1998.  Term B bears interest at Libor plus a
margin ranging from 1.75% to 2.75% based upon the Company's leverage ratios.  At
August 2, 1998 and August 1, 1999, $74,625,000 and $73,875,000 was outstanding
on Term B.  Borrowings under the agreement are collateralized by substantially
all of the assets held by the Company.  The agreement contains certain
restrictive covenants and ratios, as defined, including minimum amounts of
operating cash flow, limitations on capital expenditures, minimum ratios of
interest coverage and fixed charge coverage, and maximum ratios of leverage.  In
addition, the Company's bank line of credit prohibits the payment of cash
dividends on capital stock without the bank's prior written consent.

     The Company also entered into an interest rate swap agreement with a bank
that fixed the interest rate on $75,000,000 of the facilities debt at 5.74% plus
the Company's margin (see above).  The swap agreement terminates in 2001, but is
subject to extension through 2004 at the bank's option.  The Company entered
into a second swap agreement with a bank that fixed the interest rate on
$50,000,000 of the facilities debt at 4.89% plus the Company's margin.  The swap
agreement terminates in October 2000.

     In December 1996, the Company borrowed $8,400,000 under a real property
loan for the purchase of a 90,000 square foot building.  The term loan provides
for monthly principal payments over a period of 84 months and a final payment at
maturity in December 2003.  The term loan is collateralized by the building and
any improvements thereon.  The term loan bears interest at the lender's prime
rate plus 1% or LIBOR plus 2.25%, at the Company's option.

     The Company has entered into various capital leases and equipment notes
related to the purchase of equipment.  These leases and notes are due at various
times through 2004 and bear interest at rates of 8.3% to 13.0%.  The capital
leases and equipment notes are collateralized by the assets acquired under such
leases and notes.

                                     F-15
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.   Commitments and Contingencies

     The Company and certain subsidiaries have employment agreements with
certain members of their management and creative staff to retain their services
for up to five years at amounts approximating their current levels of
compensation.  At August 1, 1999, the Company's remaining aggregate commitment
under such contracts is approximately $32.1 million.

     The Company leases its production and office facilities under non-
cancelable operating leases with initial terms up to ten years through 2009.
Most leases contain renewal options and require additional payments for property
taxes, utilities, insurance and maintenance costs.  Some leases are subject to
periodic escalation charges.  Facilities rent expense amounted to  $3,757,000,
$3,729,000 and $5,736,000 for the fiscal years ended August 3, 1997, August 2,
1998 and August 1, 1999, respectively, and is net of sublease income totaling
$563,000, $1,254,000 and $1,659,000, respectively.  At August 1, 1999 the annual
commitment under these facilities leases is summarized as follows (in
thousands):

<TABLE>
<CAPTION>
                                                      Fiscal years ending in:
                                                       <S>                          <C>
                                                         2000.....................     7,275
                                                         2001.....................     6,027
                                                         2002.....................     5,575
                                                         2003.....................     3,668
                                                         2004.....................     2,134
                                                         Thereafter...............     9,303
                                                                                     -------
                                                         Total....................   $33,982
                                                                                     =======
</TABLE>

     The Company leases approximately 45,000 square feet of one of its buildings
to a third party at approximately $55,000 per month through January 2000.  In
addition, the company subleases approximately 44,000 square feet of a leased
building to a third party at approximately $93,000 per month with initial terms
expiring between February 2003 and March 2005.

          The Company leases certain office equipment under operating leases
which expire through 2002.  Rent expense related to equipment amounted to
$286,000, $1,329,000 and $1,452,000 for the fiscal years ended August 3, 1997,
August 2, 1998 and August 1, 1999, respectively.  At August 1, 1999 the annual
commitment under various leases is summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                      Fiscal years ending in:
                                                       <S>                           <C>
                                                         2000......................      $  997
                                                         2001......................         396
                                                         2002......................          39
                                                         2003......................           9
                                                         2004......................           3
                                                                                         ------
                                                         Total.....................      $1,444
                                                                                         ======
</TABLE>

     The Company is involved in litigation matters arising in the normal course
of business.  Management believes that the disposition of these lawsuits will
not materially affect the financial position or results of operations of the
Company.

                                     F-16
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  Stockholders' Equity

     Preferred Stock.   On February 27, 1998, the Company completed a
$15,000,000 preferred equity private placement of 150,000 share of Series A
Convertible Preferred Stock ("Preferred Stock").  On April 8, 1999, in
connection with the Warburg transaction, the preferred stockholder converted all
of its preferred shares into 2,250,000 shares of common stock.

     Warburg Transaction.   On April 8, 1999, Warburg, Pincus Equity Partners,
L.P. and certain affiliates ("Warburg, Pincus") acquired 10.2 million shares of
the Company's common stock, comprised of both newly issued shares and existing
shares, for approximately $80.0 million.  Under the terms of the Agreement,
Warburg, Pincus acquired approximately 6.6 million common shares from the
Company for $52.7 million and received a seven year warrant to purchase an
additional 1.1 million shares with an exercise price of $15.00 per share.  In
addition, Warburg, Pincus acquired 3.6 million of the outstanding shares held by
certain shareholders for approximately $23.2 million.  Concurrently with the
closing of the transaction, the holder of all outstanding shares of the
Company's preferred stock converted all of its preferred shares into 2,250,000
shares of common stock.

     Stock Options.    The Company has two option plans and a series of
executive option agreements (collectively "Plans") which reserve shares of
common stock for issuance to executives, key employees and directors.  These
Plans provide that shares granted come from the Company's authorized but
unissued or reacquired common stock.  The price of the options granted pursuant
to these Plans will not be less than 100 percent of the fair market value of the
shares on the date of grant.  An option may not be exercised within one year
from the date of grant and no option will be exercisable after ten years from
the date granted.  Options vest over a 3 to 6 year period from date of grant.

     The following table sets forth stock option information relative to all
plans:

<TABLE>
<CAPTION>
                                             August 3, 1997                  August 2, 1998                  August 1, 1999
                                             --------------                  --------------                  --------------
                                                     Weighted-                        Weighted-                     Weighted-
                                       Number        Average                          Average                       Average
                                         of          Exercise        Number           Exercise          Number      Exercise
                                         --          -------        Of Options        --------         Of Options   --------
                                      Options         Price         ----------          Price          ----------      Price
                                      -------         ------                            -----                          -----
<S>                                   <C>             <C>           <C>               <C>              <C>           <C>
Outstanding at beginning of year         615,125       $0.34        1,615,125         $5.70            2,125,125      $6.47
Granted                                1,000,000        9.00          510,000          8.92            4,491,667       8.14
Expired or cancelled                                     --                              --             (100,000)      7.00
Exercised                                     --         --              --              --             (497,766)      0.34
                                       ---------       -----        ---------          -----            ---------      -----
Outstanding at end of year             1,615,125       $5.70        2,125,125          $6.47            6,019,026     $7.99
                                       =========                    =========                           =========
Options exercisable at end of year       410,082                       826,035                            900,501
                                       =========                     =========                          =========
</TABLE>

    The following table summarizes information on fixed stock options
outstanding at August 1, 1999:

<TABLE>
<CAPTION>
                                              Options Outstanding                                  Options Exercisable
                       ------------------------------------------------------------------   ---------------------------------
                                               Weighted-average
Ranges of               Number            remaining contractual life     Weighted-average        Number       Weighted-average
exercise prices       Outstanding                 (in years)              exercise price        exercisable     exercise price
---------------       -----------         --------------------------     ----------------       -----------   -----------------
<S>                    <C>                <C>                            <C>                    <C>            <C>
    $0.34                   117,359             7.2                           $0.34                97,799            $0.34
$6.50-$10.00              5,901,667             9.1                            8.14               802,702             8.06
                          ---------             ---                            -----              -------             -----
                          6,019,026             9.1                           $7.99               900,501            $7.22
                          =========                                                               =======
</TABLE>

     As permitted under current accounting standards, no compensation cost was
recognized for the Plans.  Had compensation cost for the Company's Plans been
recognized ratably over the options' vesting periods, the Company's pro forma
net income (loss) and net income (loss) per common share would have been
$858,000 and $0.11, respectively for 1997, ($1,074,000) and ($0.11),
respectively for 1998 and $1,690,000 and $0.13, respectively for 1999.  Net
income (loss) per share, assuming dilution, would have been $0.10, ($0.11) and
$0.11 for 1997, 1998, and 1999, respectively.

                                     F-17
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The weighted-average fair value of options granted during 1997, 1998 and
1999 were $4.77, $4.05, and $4.47, respectively. Option grant date fair values
were determined using a Black-Scholes option pricing value. The underlying
assumptions used were as follows:

<TABLE>
<CAPTION>
                                               August 3, 1997           August 2, 1998           August 1, 1999
                                               --------------           --------------           --------------
<S>                                           <C>                      <C>                      <C>
Risk-free interest rate                              6.16%                    5.49%                     6.00%
Expected stock price volatility                     53.89%                   56.20%                    65.00%
Expected dividend yield                              0.00%                    0.00%                     0.00%
Expected life (in years)                                5                        4                         5
</TABLE>

11.      Earnings Per Share

     The Company adopted the earnings per share calculation and disclosure
requirements of Financial Accounting Standards Statement 128.  The tables below
demonstrate the earnings per share calculations for the periods presented.

<TABLE>
<CAPTION>
                                               (in thousands, except per share data)
                       ---------------------------------------------------------------------------------------------------------
                                            August 3, 1997                   August 2, 1998                   August 1, 1999
                       ---------------------------------------------------------------------------------------------------------
                                                           Per                               Per                              Per
                                  Income     Shares       Share    Income       Shares      Share    Income     Shares       Share
                                (Numerator) (Denominator)         (Numerator) (Denominator)        (Numerator) (Denominator) Amount
<S>                             <C>          <C>          <C>     <C>         <C>           <C>    <C>          <C>         <C>
Net income before
 extraordinary item..........    $1,382         --                 $3,190      --                  $4,938           --
Basic EPS....................     1,382       7,971       $0.17     3,190      9,634       $0.33    4,938          13,271    $0.37
                                                          =====                            =====                             =====
Effects of Dilutive Securities:
Options and convertible
 preferred stock.............      --           592                    --       1,264                  --           1,458
                                 ------       -----                  ------    ------                ------         ------
Diluted EPS..................    $1,382       8,563       $0.16      $3,190    10,898      $0.29     $4,938        14,729     $0.34
                                 ======       =====       =====      ======    ======       =====    ======        ======     =====
Options omitted..............                   700                             1,035                               5,902
                                              =====                            ======                              ======
</TABLE>

     The Company incurred an extraordinary loss on early extinguishment of debt
of $2,449,000 for the year ended August 2, 1998 resulting in a net income for
the year of $741,000.  Basic EPS and diluted EPS after the extraordinary loss
was $0.08 and $0.07, respectively, for the year ended August 2, 1998.

     Certain options were omitted in 1997, 1998 and 1999 because the exercise
prices exceeded the average traded price during the periods.

12.  Employee Benefit Plans

     The Company's savings and investment plan covers substantially all of the
employees of the Company.  The participants may contribute up to 15% of their
annual compensation (subject to the annual IRS limitation) to the plan and the
Company will match the participant's contribution up to a maximum of 2% of the
participant's compensation.  In addition, the Company's POP and Encore
subsidiaries had their own plans.  Effective January 1, 1999, these plans were
discontinued.  The Company expensed $219,000, $265,000 and $712,000 related to
the plans for the years ended August 3, 1997, August 2, 1998 and August 1, 1999,
respectively.

13.  Related Parties

     The Company paid professional fees to a partnership that a member of the
Board of Directors of the Company is a partner of approximately $27,000 $54,000
and $349,000 for fiscal years 1997, 1998 and 1999, respectively.

     On April 8, 1999 the Company loaned its chief executive officer, on an
unsecured basis, $2,000,000 at an interest rate of 4.59% per annum, compounded
semi-annually. The loan, plus interest, is due within 30 days of April 8, 2004,
or becomes immediately due and payable in the event he incurs a Termination With
Cause. The loan will automatically be fully forgiven and he will have no payment
obligation if (i) he incurs a Termination Without Cause or a Termination With
Good Reason during his employment term, (ii) a change in control of the Company
occurs during his employment term, (iii) the Company achieves $327 million or
more in Gross Operating Revenues (as defined) during the period beginning on the
fourth anniversary of his employment agreement and ending on the fifth
anniversary of his employment agreement (the "Measurement Period"), (iv) the
Company achieves $87 million or more in Consolidated EBITDA (as defined) during
the Measurement Period, or (v) following the Measurement Period, the Board
determines the loan will be forgiven.

                                     F-18
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  Segment and Geographic Information

The Company has organized its activities into four divisions; television,
mastering and distribution, broadcast and syndication, and film and animation.
The television division, located in Burbank, Hollywood, Universal City, Culver
City, Santa Monica and San Francisco, California, assembles film or video
principal photography into a form suitable for network, syndicated, cable or
foreign television.  The mastering and distribution division located in Burbank
and Universal City, California and London, England, manages, formats and
distributes content worldwide.  The broadcast and syndication division, located
in Burbank and the Republic of Singapore, assembles and distributes television
networks and programming via satellite to viewers in the United States, Canada
and Asia.  The film and animation division, located in Santa Monica, digitally
creates and manipulates images in high-resolution formats for use in feature
films.  The Company evaluates performance and allocates resources based on
several factors, of which the primary financial measure is EBITDA, or earnings
before interest, taxes, depreciation and amortization.  The Company excludes
unusual charges from EBITDA.  Accounting policies of the operating segments are
the same as those described in the summary of significant accounting policies in
Note 1.  Assets of the operating segments are the owned assets used in the
operations of each division.  The corporate components of EBITDA include general
and administrative expenses.  Corporate assets primarily consist of corporate
cash, fixed assets and investments in subsidiaries.

                                     F-19
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Financial data for the Company's operating segments is as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                           1997                 1998               1999
                                                                           ----                 ----               ----
REVENUES
<S>                                                                     <C>                 <C>                  <C>
     Television                                                            $30,768            $ 60,405           $125,491
  Mastering and distribution                                                26,658              35,633             41,571
     Broadcast and syndication                                              23,694              22,701             22,609
     Film and Animation                                                      3,407              10,429              7,313
                                                                           -------            --------           --------
     Total reportable segments                                             $84,527            $129,168           $196,984
                                                                           =======            ========           ========

EBITDA
     Television                                                           $  2,136            $  9,491           $ 23,898
     Mastering and distribution                                              5,188               9,230             10,142
     Broadcast and syndication                                               8,363               7,383              8,524
     Film and Animation                                                       (951)               (792)              (842)
                                                                          --------            --------           --------
     Total reportable segments                                              14,736              25,312             41,722
     Corporate and other                                                     3,708               4,208              4,378
                                                                          --------            --------           --------
                                                                          $ 18,444            $ 29,520           $ 46,100
                                                                          ========            ========           ========
DEPRECIATION AND AMORTIZATION
     Television                                                           $  4,266            $  9,171           $ 15,898
     Mastering and distribution                                              3,262               3,824              4,629
     Broadcast and syndication                                               3,739               3,402              3,621
     Film and Animation                                                        518               1,178              1,028
                                                                          --------            --------           --------
     Total reportable segments                                              11,785              17,575             25,176
     Corporate and other                                                     1,390                 616              2,300
                                                                          --------            --------           --------
                                                                          $ 13,175            $ 18,191           $ 27,476
                                                                          ========            ========           ========
CAPITAL EXPENDITURES (1)
     Television                                                           $ 24,745            $ 28,690           $ 45,995
     Mastering and distribution                                              7,812               5,025              7,572
     Broadcast and syndication                                               2,215               1,814              9,504
     Film and Animation                                                        774               4,627                693
                                                                          --------            --------           --------
     Total reportable segments                                              35,546              40,156             63,764
     Corporate and other                                                    12,633              12,244             20,596
                                                                          --------            --------           --------
                                                                          $ 48,179            $ 52,400           $ 84,360
                                                                          ========            ========           ========
TOTAL ASSETS
     Television                                                           $ 66,010            $130,957           $189,076
     Mastering and distribution                                             20,056              26,519             34,363
     Broadcast and syndication                                              28,801              23,425             61,239
     Film and Animation                                                      3,000               9,675             11,141
                                                                          --------            --------           --------
     Total reportable segments                                             117,867             190,576            295,819
     Corporate and other                                                    14,370              25,768             46,933
                                                                          --------            --------           --------
                                                                          $132,237            $216,344           $342,752
                                                                          ========            ========           ========
</TABLE>

(1)  Includes assets acquired from the acquisition of Anderson Video ($5.6
     million) in 1997, POP ($11.7 million), and VSI ($2.0 million) in 1998 and
     Encore ($28.5 million), TVP ($1.0 million), TVi ($2.8 million), and DSP
     ($2.1 million) in 1999.

                                     F-20
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Geographic Information

The Company operates in the United States, Asia, and the UK.  Information about
the Company's operations in the different geographic areas is as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                  1997             1998             1999
                                                                  ----             ----             ----
REVENUES
<S>                                                              <C>              <C>             <C>
     United States                                               $70,702          $118,635        $181,590
     Asia                                                         13,825            10,533          11,237
     UK                                                               --                --           4,157
                                                                 -------          --------        --------
                                                                 $84,527          $129,168        $196,984
                                                                 =======          ========        ========
LONG-LIVED ASSETS
     United States                                               $81,361          $115,771        $161,631
     Asia                                                         12,311             8,459           7,813
     UK                                                               --                --           3,822
                                                                 -------          --------        --------
                                                                 $93,672          $124,230        $173,266
                                                                 =======          ========        ========
</TABLE>

                                     F-21
<PAGE>

                              Four Media Company

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.  Quarterly Financial Data (Unaudited)

     Summarized unaudited quarterly financial data (in thousands, except per
share data) for fiscal 1998 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                                      Quarter (1)
                                                    ------------------------------------------------      Fiscal
                                                      First        Second        Third        Fourth       Year
                                                      -----        ------        -----        ------      ------
1998
-----------------------------------------------------
<S>                                                   <C>          <C>           <C>          <C>          <C>
Revenues............................................. $27,267      $28,649       $39,101      $34,151      $129,168
Income before extraordinary item.....................     225          693         1,127        1,145         3,190
Extraordinary loss on early extinguishment of debt...     --           --         (2,449)        --          (2,449)
  Net Income (loss)..................................     225          693        (1,322)       1,145           741

Earnings per common share - Basic:
  Income before extraordinary item....................   0.02         0.07          0.12         0.12          0.33
  Extraordinary item..................................    --           --          (0.26)         --          (0.25)
  Net Income (loss)...................................   0.02         0.07         (0.14)        0.12          0.08

Earnings per common share - Diluted:
  Income before extraordinary item....................   0.02         0.07          0.10         0.10          0.29
  Extraordinary item..................................    --           --          (0.22)         --          (0.22)
  Net Income..........................................   0.02         0.07         (0.12)        0.10          0.07

1999
Revenues..............................................$49,596      $47,880       $51,508      $48,000      $196,984
Net Income (loss).....................................  1,984        2,313         2,685       (2,044)        4,938
Earnings per common share:
  Basic...............................................   0.19         0.22          0.21        (0.10)         0.37
  Diluted.............................................   0.16         0.19          0.19        (0.10)         0.34
</TABLE>

(1)  Based upon the fiscal year followed by the Company, each quarter presented
     above includes 13 weeks.

16.  Event Subsequent to the Date of Auditors' Report (Unaudited)

     On November 1, 1999 the Company announced that it has entered into a letter
of intent to sell 100% of its issued and outstanding common stock to Liberty
Media Corporation (NYSE: LMG,A). As contemplated by the letter of intent, one
hundred percent (100%) of the Company's issued and outstanding stock will be
acquired in exchange for approximately 6.35 million shares of Class A Liberty
Media Group stock, par value $1.00 (LMG.A shares(s)"). One LMG.A share will be
issued for each 3.1 shares of the Company's common stock outstanding.

Warburg, Pincus Equity Partners, L.P., Fleming Asset Management USA and Robert
T. Walston, collectively holders of approximately 70% of the issued and
outstanding shares of the Company, are expected to enter into agreements with
Liberty Media to vote in favor of the transaction. The transaction is subject to
execution of definitive documentation, expiration of applicable waiting periods
under pre-notification regulations, Company stockholder and Board of Director
approval, and other customary closing conditions, including other appropriate
corporate approvals. The parties contemplate that a definitive agreement will be
signed in mid-November 1999 and closing is anticipated to occur in first quarter
of 2000.

                                     F-22
<PAGE>

                               FOUR MEDIA COMPANY
                                  SCHEDULE II

                       Valuation and Qualifying Accounts

                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                               Additions Charged    Additions Charged
                                              Balance at              to                   to                         Balance at End
Year Ended            Description          Beginning of year    Costs and Expenses  Other Accounts  (1) Deductions (2)    of Year
----------            -----------          -----------------   -------------------- ------------------- -------------  -------------
<S>             <C>                              <C>            <C>                 <C>                  <C>           <C>
August 3, 1997  Allowance for doubtful accounts  $  823         $871                $179                 $  --          $1,873
August 2, 1998  Allowance for doubtful accounts   1,873          794                 218                (1,627)          1,258
August 1, 1999  Allowance for doubtful accounts   1,258          954                 264                  (858)          1,618

</TABLE>


(1)  Amounts assumed in connection with the acquisitions of Anderson, POP, VSI,
     Encore, TVP, TVi and DSP.
(2)  Uncollectable accounts written off.

                                     F-23
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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 on the 29th day of
October 1999.

                               FOUR MEDIA COMPANY

               By:    /s/ Robert T. Walston
                   --------------------------------------------
               Robert T. Walston, Chairman of the Board and Chief Executive
               Officer

               By:    /s/ Christopher M. R. Phillips
                   --------------------------------------------
               Christopher M.R. Phillips, Executive Vice President and Chief
               Financial Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities indicated on this 29th day of October 1999.

                                      S-1
<PAGE>

By:  /s/ Robert T. Walston
     ----------------------------
     Robert T. Walston,
     Chairman of the Board and
     Chief Executive Officer

By:  /s/ Jeffrey J. Marcketta
     ----------------------------
     Jeffrey J. Marcketta
     President and Chief Operating Officer

By:  /s/Sidney Lapidus
     ----------------------------
     Sidney Lapidus
     Director

By:  /s/David E. Libowitz
     ----------------------------
     David E. Libowitz
     Director

By:  /s/ William C. Scott
     ----------------------------
     William C. Scott
     Director

By:  /s/ William Amon
     ----------------------------
     William Amon
     Director

By:  /s/ Eytan Shapiro
     ----------------------------
     Eytan Shapiro
     Director

                                      S-2