<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-Q


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


                For the quarterly period ended November 1, 1998

                                       OR


[_]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

             For the transition period from ________ to ___________

                                ---------------
                        Commission file number: 0-21943
                                ---------------


                              FOUR MEDIA COMPANY
            (Exact name of Registrant as specified in its charter)

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

                  2813 WEST ALAMEDA AVENUE, BURBANK, CA 91505
             (Address of principal executive offices)  (Zip code)

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

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

                                Not applicable
       (Former name, former address, and former fiscal year, if changed 
                              since last report)

     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 
                                -----         -----

             APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                 PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                            Yes            No 
                                -----         -----

                   APPLICABLE ONLY TO CORPORATE REGISTRANTS:

     Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 10,363,256 shares of
Common Stock, $.01 par value, as of December 1, 1998.
<PAGE>
 
                              FOUR MEDIA COMPANY
                                        
                                     INDEX

                        PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>

                                                                                                         Page
Item 1.      Financial Statements                                                                       Number
                                                                                                        ------
<C>          <S>                                                                                       <C>
             Consolidated Balance Sheets as of August 2, 1998
             and November 1, 1998.....................................................................     4

             Consolidated Statements of Operations for the
             Three Months Ended November 2, 1997 and November 1, 1998.................................     5

             Consolidated Statements of Cash Flows for the
             Three Months Ended November 2, 1997 and November 1, 1998.................................     6

             Notes to Consolidated Financial Statements...............................................     7

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

             Overview.................................................................................    11

             Three Months Ended November 1, 1998 Compared to
             Three Months Ended November 2, 1997......................................................    12

             Liquidity and Capital Resources..........................................................    13

                                        PART II - OTHER INFORMATION

Item 1.      Legal Proceedings........................................................................    14

Item 2.      Changes in Securities....................................................................    14

Item 3.      Defaults Upon Senior Securities..........................................................    14

Item 4.      Submission of Matters to a Vote of Security Holders......................................    14

Item 5.      Other Information........................................................................    14

Item 6.      Exhibits and Reports on Form 8-K.........................................................    14

Signatures............................................................................................    15
</TABLE>

                                       2
<PAGE>
 
                        PART I - FINANCIAL INFORMATION


                                    ITEM 1.
                             FINANCIAL STATEMENTS

                                        

                                       3
<PAGE>
 
                              FOUR MEDIA COMPANY
                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                          AUGUST 2,         NOVEMBER 1,
                                                                                            1998               1998
                                                                                          --------          ----------
<S>                                                                                       <C>               <C>
                                     ASSETS

Current assets:
 Cash....................................................................................  $  3,301          $  6,616
 Trade accounts receivable, net of allowance for doubtful accounts of $1,258 and
 $1,784 as of August 2, 1998 and November 1, 1998, respectively..........................    31,657            44,370
 Inventory...............................................................................     1,263             1,426
 Prepaid expenses and other current assets...............................................     5,624             6,379
                                                                                           --------          --------
   Total current assets..................................................................    41,845            58,791

Property, plant and equipment, net.......................................................   124,230           154,613
Deferred taxes...........................................................................     6,572             6,572
Long-term receivable.....................................................................     3,276             2,787
Goodwill, less accumulated amortization of $529 and $919 as of August 2, 1998
 and November 1, 1998, respectively......................................................    37,507            77,053
Other assets.............................................................................     2,914             2,220
                                                                                           --------          --------
   Total assets..........................................................................  $216,344          $302,036
                                                                                           ========          ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Current maturities of long-term debt and capital lease obligations......................  $  6,184          $  7,378
 Accounts payable........................................................................    10,781            13,428
 Accrued and other liabilities...........................................................     5,980             9,772
 Deferred income taxes...................................................................     1,615             1,615
                                                                                           --------          --------
   Total current liabilities.............................................................    24,560            32,193
Long-term debt and capital lease obligations.............................................   124,671           198,109
                                                                                           --------          --------
   Total liabilities.....................................................................   149,231           230,302

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                 2
 Common stock, $.01 par value; 50,000,000 shares authorized, 9,876,770 shares
  issued and outstanding as of August 2, 1998 and 10,363,256 as of November 1,
  1998...................................................................................        99               104
 Additional paid-in capital..............................................................    59,577            61,702
 Foreign currency translation adjustment.................................................    (1,567)           (1,060)
 Retained earnings.......................................................................     9,002            10,986
                                                                                           --------          --------
   Total stockholders' equity............................................................    67,113            71,734
                                                                                           --------          --------
   Total liabilities and stockholders' equity............................................  $216,344          $302,036
                                                                                           ========          ========
</TABLE>
                                                                                
  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       4
<PAGE>
 
                               FOUR MEDIA COMPANY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED
                                                              NOVEMBER 2,        NOVEMBER 1,
                                                                 1997               1998
                                                              -----------        -----------
<S>                                                           <C>                <C> 
Revenues:                                                
 Manufacturing and distribution............................     $ 8,129            $11,322
 Broadcast and syndication.................................       5,582              5,331
 Television................................................      12,654             31,631
 Film and animation........................................         901              1,312
                                                                -------            -------
  Total revenues...........................................      27,266             49,596
                                                                -------            -------
Cost of services:                                                        
 Personnel.................................................      11,157             18,557
 Material..................................................       2,254              3,086
 Facilities................................................       1,416              2,466
 Other.....................................................       2,913              5,275
                                                                -------            -------
  Total cost of services...................................      17,740             29,384
                                                                -------            -------
   Gross profit............................................       9,526             20,212
                                                                -------            -------
Operating expenses:                                                      
 Sales, general and administrative.........................       3,937              8,351
 Depreciation and amortization.............................       4,016              6,356
                                                                -------            -------
  Total operating expenses.................................       7,953             14,707
                                                                -------            -------
   Income from operations..................................       1,573              5,505
Interest expense, net......................................       1,348              3,521
                                                                -------            -------
   Income before income tax................................         225              1,984
Provision for income tax                                            --                 --
                                                                -------            -------
   Net income..............................................     $   225            $ 1,984
                                                                =======            =======
                                                         
Earnings per common share:                                               
 Basic.....................................................     $  0.02            $  0.19
                                                                =======            =======
 Diluted...................................................        0.02               0.16
                                                                =======            =======
Weighted average common and common equivalent                            
 shares outstanding:                                                     
 Basic.....................................................       9,553             10,203
                                                                =======            =======
 Diluted...................................................      10,169             12,275
                                                                =======            =======
</TABLE>
                                        
  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       5
<PAGE>
 
                               FOUR MEDIA COMPANY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                     NOVEMBER 2,      NOVEMBER 1,
                                                                                        1997             1998
                                                                                     ----------       -----------
<S>                                                                                  <C>              <C>
Cash flows from operating activities:
 Net income.........................................................................  $   225           $  1,984
Adjustments to reconcile net income to net cash provided by operating
 activities:
  Depreciation and amortization.....................................................    4,016              6,356
  Provision for doubtful accounts...................................................      141                284
Changes in operating assets and liabilities:
    (Increase) in trade and long term receivables...................................   (5,304)            (6,129)
    (Increase) decrease in inventory................................................      (78)                90
    (Increase) decrease in prepaid expenses and other current assets................   (1,236)               241
    (Decrease) in accounts payable..................................................   (1,430)              (350)
    Increase (decrease) in accrued and other liabilities............................      974               (695)
                                                                                      -------           --------
     Net cash provided by (used in) operating activities............................   (2,692)             1,781

Cash flows from investing activities:
 Purchases of property, plant and equipment.........................................   (4,784)           (10,708)
 Acquisition of business, net of cash acquired......................................      --             (42,991)
                                                                                      -------           --------
     Net cash used in investing activities..........................................   (4,784)           (53,699)

Cash flows from financing activities:
 Repayments of mortgage loans.......................................................      --                 (28)
 Proceeds from term loans...........................................................      --              45,000
 Repayments of term loans...........................................................      --                (188)
 Proceeds from revolving credit facility............................................    3,328             29,000
 Proceeds from equipment notes......................................................    1,799                --
 Repayment of equipment notes and capital lease obligations.........................   (2,612)           (18,701)
                                                                                      -------           --------
     Net cash provided by financing activities......................................    2,515             55,083
Effect of exchange rate changes on cash.............................................     (249)               150
                                                                                      -------           --------
Net increase (decrease) in cash.....................................................   (5,210)             3,315
Cash at beginning of period.........................................................    6,089              3,301
                                                                                      -------           --------
Cash at end of period...............................................................  $   879           $  6,616
                                                                                      =======           ========

Supplemental disclosure of cash flow information:
Cash paid during the period for:
  Interest..........................................................................  $ 1,348           $  3,245
Non cash investing and financing activities:
  Capital lease obligations incurred................................................  $ 9,050           $    --
  Stock issued in connection with Encore acquisition................................  $   --            $  2,131
</TABLE>

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

                                       6
<PAGE>
 
                              FOUR MEDIA COMPANY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION

    Four Media Company (the "Company") is a provider of technical and creative
services to owners, producers and distributors of television programming,
feature films and other entertainment content. The Company's services integrate
and apply a variety of systems and processes to enhance the creation and
distribution of entertainment content.

    While the Company believes that it operates in one business segment, which
is providing services to the entertainment industry, the Company has organized
its activities into four divisions: manufacturing and distribution, broadcast
and syndication, television, and film and animation services. The manufacturing
and distribution division, located in Burbank and Universal City, California,
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 television division, located
in Burbank, Hollywood, Universal City and Santa Monica, California, assembles
film or video principal photography into a form suitable for network,
syndicated, cable or foreign television. The film and animation division,
located in Santa Monica, digitally creates and manipulates images in high-
resolution formats for use in feature films.

    Organization. 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 $30.1 million, of which $25.4 million was
paid in cash, $1.2 million was represented by promissory notes, and $3.5 million
represented transaction costs.

    On May 4, 1998, the Company, through its wholly owned subsidiary VSDD
Acquisition Corp., acquired all of the outstanding ownership interests in
Symphonic Video LLC and Digital Doctors LLC from their parent companies Video
Symphony, Inc. and Digital Doctors, Inc. (collectively "VSI").  In this
transaction, the Company effectively acquired all of the operations of VSI.  The
purchase price of the transaction was $3.3 million, of which $3.1 million was
paid in the Company's common stock and $0.2 million represented transaction
costs.

    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 $46.0 million.  This
amount includes $41.9 million paid in cash to the Encore shareholders (including
$11.2 million for the purchase of real estate), $2.0 million in estimated
transaction costs, and the issuance of 486,486 shares of Company common stock
valued at $4.38 per share.

    The following unaudited pro forma summary combines the consolidated results
of operations of the Company, POP, VSI and Encore as if the acquisitions had
occurred at the beginning of fiscal 1998 after giving effect to certain
adjustments, including amortization of goodwill, revised depreciation based on
estimated fair market values, utilization of net operating losses, revised
interest expense based on the terms of the acquisition debt and elimination of
certain acquisition related costs.  The pro forma summary does not necessarily
reflect the results of operations as they would have been if the Company and
POP, VSI and Encore had constituted a single entity during such periods:

<TABLE>
<CAPTION>
                                                                                       (in thousands)
                                                                           THREE MONTHS             THREE MONTHS 
                                                                               ENDED                    ENDED
                                                                         NOVEMBER 2, 1997         NOVEMBER 1, 1998
<S>                                                                      <C>                      <C>
 
Revenues........................................................              $58,258                  $53,672
Net income......................................................                5,035                    2,189

Earnings per common share
 Basic..........................................................              $  0.49                  $  0.21
 Diluted........................................................                 0.46                     0.18
</TABLE>

                                       7
<PAGE>
 
                                FOUR MEDIA COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        

1.   BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

     Basis of Presentation.  The accompanying consolidated financial statements
of Four Media Company and its subsidiaries as of August 2, 1998 and November 1,
1998 and for the three month periods ended November 2, 1997 and November 1, 1998
have been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The
balance sheet at August 2, 1998 was derived from audited financial statements
included in the Company's Form 10-K. The financial statements at November 1,
1998 and for the three month periods ended November 2, 1997 and November 1, 1998
have not been audited by independent accountants, but include all adjustments
(consisting of normal recurring adjustments) which are, in management's opinion,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for such periods. However, these results are not
necessarily indicative of results for any other interim period or for the full
year.

     Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have been
omitted pursuant to requirements of the Securities and Exchange Commission.
Management believes that the disclosures included in the accompanying interim
financial statements and footnotes are adequate to make the information not
misleading, but should be read in conjunction with the consolidated financial
statements and notes thereto included in the Form 10-K dated August 2, 1998.

     The accompanying financial statements as of August 2, 1998 and for the
three months ended November 2, 1997 and November 1, 1998 are presented on a
consolidated basis and include the accounts of Four Media Company and its wholly
owned subsidiaries 4MC-Burbank, Inc., Digital Magic Company, Four Media Company
Asia PTE Ltd, Anderson Video Company, Co3, Visualize (dba POP), POP Animation,
VSDD Acquisition Corp. and MSCL, Inc. (dba Encore). All material inter-company
accounts and transactions have been eliminated in consolidation.

2.   EARNINGS PER SHARE

     Effective with the period ended February 1, 1998, the Company adopted the
earnings per share calculation and disclosure requirements of SFAS No. 128,
"Earnings per Share".  The table below demonstrates the earnings per share
calculations for the periods presented:

<TABLE>
<CAPTION>
                                                                   (in thousands except per share data)
                                                  THREE MONTHS ENDED                                  THREE MONTHS ENDED
                                                   NOVEMBER 2, 1997                                    NOVEMBER 1, 1998
                                     Income           Shares          Per Share            Income           Shares         Per Share
                                   (Numerator)     (Denominator)        Amount           (Numerator)     (Denominator)       Amount
<S>                                <C>             <C>                <C>                <C>             <C>               <C>
Net income.........................   $225               --                                $1,984              --
Basic EPS..........................    225             9,553            $0.02               1,984           10,203           $0.19
                                                                        =====                                                =====
Effects of Dilutive Securities:
Options and convertible preferred
 stock.............................    --                616                                  --             2,072
                                      ----            ------                               ------           ------
Diluted EPS........................   $225            10,169            $0.02              $1,984           12,275           $0.16
                                      ====            ======            =====              ======           ======           =====
Options omitted....................                      700                                                 1,510
                                                      ======                                                ======
</TABLE>

     Certain options were omitted in 1997 and 1998 because the exercise prices
(between $7 and $10) exceeded the average price during the periods.

                                       8
<PAGE>
 
                               FOUR MEDIA COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   COMPREHENSIVE INCOME

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income
(SFAS No. 130").  The Company adopted SFAS No. 130 beginning in the first
quarter of fiscal 1999.  Comprehensive income is defined as all changes in
shareholders' equity, except those resulting from investments by or
distributions to shareholders.  The Company's comprehensive income is as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED
                                                            NOVEMBER 2, 1997          NOVEMBER 1, 1998
        <S>                                                 <C>                       <C>
        Net income........................................       $ 225                    $1,984
        Foreign currency translation                              (485)                      507
         adjustments......................................       -----                    ------
                                                                              
        Comprehensive income (loss).......................       $(260)                   $2,491
                                                                 =====                    ======
</TABLE>
                                                                                

                                       9
<PAGE>
 
                         PART I - FINANCIAL INFORMATION
                                        
                                    ITEM 2.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                       10
<PAGE>
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following should be read in conjunction with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Form 10-Q and within
the Company's Form 10-K dated August 2, 1998. When used in the following
discussion, the words "believes", "anticipates", "intends", "expects" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on forward-looking statements, which speak only as
of the date hereof.

OVERVIEW

     The Company is a leading provider of technical and creative services to
owners, producers and distributors of television programming, feature films and
other entertainment content. The Company's services integrate and apply a
variety of systems and processes to enhance the creation and distribution of
entertainment content. The Company seeks 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.

     While the Company believes that it operates in one business segment, which
is providing services to the entertainment industry, the Company has organized
its activities into four divisions: manufacturing and distribution, broadcast
and syndication, television and film and animation services. The manufacturing
and distribution division, located in Burbank and Universal City, California,
manages, formats and distributes content worldwide. 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 television
division, located in Burbank, Hollywood, Universal City and Santa Monica,
California, assembles film or video principal photography into a form suitable
for network, syndicated, cable or foreign television. 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 believes that EBITDA is an important measure of its financial
performance. "EBITDA" is defined as earnings before interest, taxes,
depreciation and amortization, excluding gains and losses on asset sales and
nonrecurring charges. The Company's investments in new infrastructure, machine
capacity and technology have produced a relatively high depreciation expense and
will remain a significant non-cash charge to earnings. It is the Company's
policy to depreciate equipment and other capitalized items over a period of
three to seven years. 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, the Company
intends 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 the Company's
capital expenditures which may be required to maintain the Company's market
share, revenues and leadership position in its industry. Moreover, not all
EBITDA will be available to pay interest or repay debt. The Company's
presentation of EBITDA may not be comparable to similarly titled measures
reported by other companies.

                                       11
<PAGE>
 
THREE MONTHS ENDED NOVEMBER 1, 1998 COMPARED TO THREE MONTHS ENDED NOVEMBER 2,
1997.


     Revenues.  Total revenues for the three months ended November 1, 1998
increased 81.7% to $49.6 million compared to $27.3 million for the three months
ended November 2, 1997. The revenue increase was attributable primarily to the
factors set forth below.

     Manufacturing and distribution revenues for the three months ended November
1, 1998 increased 39.5% to $11.3 million compared to $8.1 million for the three
months ended November 2, 1997.  The major components of this increase include
increased professional duplication revenues ($2.9 million), and laboratory
revenues ($0.3 million).  Of this increase, $1.5 million relates to Encore,
which was acquired in September 1998.

     Broadcast and syndication revenues for the three months ended November 1,
1998 decreased 5.4% to $5.3 million compared to $5.6 million for the three
months ended November 2, 1997. This decrease is attributable to an 11% decrease
in revenues from the Company's Singapore operations resulting from translation
losses caused by the devaluation of the Singapore dollar.

     Television revenues for the three months ended November 1, 1998 increased
148.8% to $31.6 million compared to $12.7 million for the three months ended
November 2, 1997.  The major components of this increase include increased sound
revenues ($2.9 million), telecine revenues ($5.1 million), editorial revenues
($4.9 million), visual effects revenues ($4.4 million), and duplication revenues
($1.6 million).  These revenue increases are primarily attributable to the
addition of the sound editorial department ($0.5 million), Co3, which started up
in September 1997 ($1.4 million), POP acquired in February 1998 ($6.6 million),
VSI acquired in May 1998 ($1.8 million), and Encore acquired in September 1998
($8.4 million).

     Film and animation revenues for the three months ended November 1, 1998
increased 44.4% to $1.3 million compared to $0.9 million for the three months
ended November 2, 1997.  This increase is attributable to new film projects
obtained during the period, which were contributed by the addition of POP.

     Gross Profit.  Gross profit for the three months ended November 1, 1998
increased 112.6% to $20.2 million (40.8% of revenues) compared to $9.5 million
(34.9% of revenues) for the three months ended November 2, 1997.  The increase
of 5.9% in the Company's gross profit as a percent of revenues was attributable
to a 3.6% reduction in personnel costs, a 2.1% reduction in material costs, and
a 0.2% reduction in facility costs as a percentage of revenues.

     Sales, General, and Administrative Expenses.  Sales, general, and
administrative expenses for the three months ended November 1, 1998 increased
115.4%  to $8.4  million (16.8% of revenues) compared to $3.9 million (14.5% of
revenues) for the three months ended November 2, 1997.  The increase of 2.3% as
a percent of revenues was attributable to increased overhead costs associated
with the recent Encore acquisition.

     Depreciation and Amortization Expenses.  Depreciation and amortization
expenses for the three months ended November 1, 1998 increased 60.0%  to $6.4
million compared to $4.0 million for the three months ended November 2, 1997.
This increase was primarily the result of capital expenditures added during
fiscal 1998, the acquisition of the equipment of POP, VSI, and Encore in
February 1998, May 1998, and September 1998, respectively, and the amortization
of goodwill recorded from the POP, VSI, and Encore acquisitions.

     Interest Expense.  Interest expense for the three months ended November 1,
1998 increased 169.2% to $3.5 million compared to $1.3 million for the three
months ended November 2, 1997. This increase was attributable to additional long
term borrowings incurred by the Company to fund the POP and Encore acquisitions
in February 1998 and September 1998, respectively, pay loan fees and other costs
associated with the Company's debt refinancing, which occurred in February 1998,
and to fund capital expenditures in fiscal 1998 and fiscal 1999.

     Earnings Before Interest, Taxes, Depreciation, and Amortization.  EBITDA
for the three months ended November 1, 1998 increased 112.5% to $11.9 million
compared to $5.6 million for the three months ended November 2, 1997. The
increase in EBITDA results from an increase in revenues and gross profit offset
by an increase in selling, general, and administrative expenses. The increase in
EBITDA includes EBITDA contributed by POP ($0.4 million), VSI ($0.8 million),
and Encore ($3.3 million).

                                       12
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

     Net Cash Provided by (Used in) Operating Activities.  The Company's net
cash provided by (used in) operating activities was $1.8 million for the three
months ended November 1, 1998 compared to $(2.7) million for the three months
ended November 2, 1997.  The increase was primarily attributable to the increase
in income before depreciation and amortization for the three months ended
November 1, 1998.

     Net Cash Provided by Financing Activities. The Company's net cash provided
by financing activities was $55.1 million for the for the three months ended
November 1, 1998 compared to $2.5 million for the three months ended November 2,
1997.  During the three month period ended November 1, 1998, the Company
borrowed an additional $74.0 million under its existing credit facility.  These
funds were used to fund the Encore acquisition (including the repayment of most
of Encore's outstanding debt), and for working capital purposes.

     The Company believes that the cash flow from operations, combined with the
Company's borrowing capabilities, will be sufficient to meet its anticipated
working capital and capital expenditure requirements through the end of 1999.
The Company would have to obtain other financing, either debt or equity, if it
were to acquire additional businesses for cash.


YEAR 2000 COMPLIANCE ISSUE

     The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Compliance Issue
(as defined) and has developed an implementation plan.  The "Year 2000
Compliance Issue" is whether the Company's computer systems will properly
recognize date sensitive information when the year changes to 2000, or "00".
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail.  The Company uses purchased software programs
for a variety of functions, including general ledger, accounts payable and
account receivable accounting packages.  These software programs are generally
Year 2000 compliant, and any software and/or computer systems not currently Year
2000 compliant will be upgraded in fiscal 1999 under existing maintenance
agreements and through normal replacement of certain systems.  The Company's
Year 2000 implementation plan also includes ensuring that all individual work
stations are year 2000 compliant.  Costs associated with ensuring the Company's
systems are Year 2000 compliant are expected to be minimal.  The Company
believes that the Year 2000 Compliance Issue will not pose significant
operational problems for the Company's computer systems and, therefore, will not
have an impact on the operations of the Company.


FOREIGN EXCHANGE

     Substantially all of 4MC Asia's transactions are denominated in Singapore
dollars, including its liabilities.  Although 4MC Asia is not subject to foreign
exchange transaction gains or losses, its financial statements are translated
into United States dollars as part of the Company's consolidated financial
reporting.  Fluctuations in the exchange rate therefore will affect the
Company's consolidated balance sheets and statements of operations.  Until the
recent Asian economic difficulties the Singapore dollar had been stable relative
to the United States dollar.  However, during fiscal 1998 the Singapore dollar
lost approximately 20% of its value relative to the U.S. dollar.

                                       13
<PAGE>
 
                                    PART II.

                               OTHER INFORMATION
                                        
Item 1.      Legal Proceedings......................................   No change
                                                               
             Previously reported in the Company's Annual Report
             on Form 10-K (File No. [0-21943]).                
                                                               
Item 2.      Changes in Securities..................................        None
                                                               
Item 3.      Defaults Upon Senior Securities........................        None
                                                               
Item 4.      Submission of Matters to a Vote of Security Holders....        None
                                                               
Item 5.      Other Information......................................        None

Item 6.      Exhibits and Reports on Form 8-K

             a.  Exhibits

                 27.  Financial Data Schedule

             b.  Reports on Form 8-K

                 1.   Form 8-K-A filed December 2, 1998 relating to the
                      acquisition of Encore.

                                       14
<PAGE>
 
                                  SIGNATURES



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

                                        FOUR MEDIA COMPANY



Date: December 15, 1998                 By:  /s/ Robert T. Walston
                                            ------------------------------------
                                             Robert T. Walston,
                                             Chief Executive Officer,
                                             Chairman of the Board, and
                                             Interim Chief Financial Officer

                                       15