<PAGE>

                                                                    EXHIBIT 10.5
                              EMPLOYMENT AGREEMENT


     This agreement (the "Agreement") shall be deemed dated as of January 1,
1999, and is entered into by and between Four Media Company, a Delaware
corporation (the "Company"), and John H. Donlon ("Executive").


                                  INTRODUCTION

     A.   The Company and its operating subsidiaries ("Affiliates") are engaged
in the business of providing technical and creative services to the
entertainment industry.

     B.   The Company has executed a stock purchase agreement dated January 18,
1999 pursuant to which the Company has agreed to issue and an investor has
agreed to purchase 6,582,607 shares of the Company's common stock (the "Stock
Purchase Agreement").

     C.   The Company and Executive are both parties to that certain employment
contract dated October 1, 1996 (the "Original Agreement" a copy of which is
attached hereto as Exhibit A).

     D.   The Executive and Employee desire to (i) enter into a new employment
agreement upon the terms set forth in this Agreement and to (ii) terminate the
Original Agreement provided that the "Closing Date" (as such term is defined in
the Stock Purchase Agreement) has occurred on or before September 30, 1999.

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


                                   ARTICLE I

                            EMPLOYMENT; TERM; DUTIES

     1.1  Employment.  Upon the terms and conditions hereinafter set forth, the
          ----------
Company hereby employs Executive, and Executive hereby accepts employment, as
President - Broadcast, Syndication and Manufacturing of the Company and as
President of the Company's Foreign Operations Division.

     1.2  Term.  Subject to Article IV below, Executive's employment hereunder
          ----
shall be for a term of five (5) years commencing on the date hereof and expiring
at the close of business on the day prior to the fifth anniversary of the date
hereof (the "Term").
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     1.3  Duties.  During the Term, Executive shall perform such executive
          ------
duties for the Company and/or its Affiliates, consistent with his position
hereunder, as may be assigned to him from time to time by the Board of Directors
of the Company (the "Board").  Executive shall devote his entire productive
business time, attention and energies to the performance of his duties
hereunder.  Executive shall use his best efforts to advance the interests and
business of the Company and its Affiliates.  Executive shall abide by all rules,
regulations and policies of the Company, as may be in effect from time to time.
Notwithstanding the foregoing, Executive may act for his own account in passive-
type investments as provided in Section 5.3, or, with the consent of the Board,
as a member of other boards of directors, where the time allocated for those
activities does not materially interfere with or create a conflict of interest
with the discharge of his duties for the Company.

     1.4  Reporting.  Executive shall report directly to the Chief Executive
          ---------
Officer of the Company.

     1.5  Exclusive Agreement.  Executive represents and warrants to the Company
          -------------------
that there are no agreements or arrangements, whether written or oral, in effect
which would prevent Executive from rendering his exclusive services to the
Company during the Term.

                                   ARTICLE II

                                  COMPENSATION

     2.1  Compensation.  For all services rendered by Executive hereunder and
          ------------
all covenants and conditions undertaken by him pursuant to this Agreement, the
Company shall pay, and Executive shall accept, as full compensation, the amounts
set forth in this Article II.

     2.2  Base Salary.  The base salary shall be an annual salary of $325,000
          -----------
("Base Salary"), payable by the Company in accordance with the Company's normal
payroll practices applicable to senior executives but no less frequently than
monthly.

     2.3  Annual Incentive Bonus.  In addition to the Base Salary, Executive
          ----------------------
shall participate in an incentive bonus plan to be established and administered
by the Compensation Committee of the Board. The criteria on which awards under
such plan are based shall be set by the Board or the Compensation Committee of
the Board.

     2.4  Deductions.  The Company shall deduct from the compensation described
          ----------
in Sections 2.2 and 2.3 any federal, state or local withholding taxes, social
security contributions and any other amounts which may be required to be
deducted or withheld by the Company pursuant to any federal, state or local
laws, rules or regulations.

     2.5  Disability Adjustment.  Any compensation otherwise payable to
          ---------------------
Executive pursuant to Sections 2.2 and 2.3 in respect of any period during which
Executive is disabled (as

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contemplated in Section 4.4) shall be reduced by any amounts payable to
Executive for loss of earnings or the like under any insurance plan or policy
sponsored by the Company.

                                  ARTICLE III

                               BENEFITS; EXPENSES

     3.1  Benefits.  During the Term, Executive shall be entitled to participate
          --------
in such group life, health, accident, disability or hospitalization insurance
plans, pension plans and retirement plans as the Company may make available to
its other senior executive employees as a group, subject to the terms and
conditions of any such plans. Executive's participation in all such plans shall
be at a level, and on terms and conditions, that are commensurate with his
positions and responsibilities at the Company. During the Term, no perquisite or
special benefit made available to Executive as a senior executive of the Company
shall be materially reduced without his prior written consent.

     3.2  Expenses.  The Company agrees that Executive is authorized to incur
          --------
reasonable expenses in the performance of his duties hereunder and in promoting
the business of the Company. The Company shall from time to time pay or
reimburse Executive for the reasonable and necessary expenses incurred by
Executive in connection with the performance of his duties hereunder if such
expenses have been previously approved by the Company or if reimbursement is
otherwise appropriate in accordance with the Company's established policies and
if the Company receives such verification thereof as the Company may require in
order to qualify such expenses as deductible business expenses.

     3.3  Vacation.  Executive shall accrue, on a daily basis, a total of four
          --------
(4) work weeks of vacation per year following the date of this Agreement. If
Executive's earned but unused vacation time reaches six (6) work weeks,
Executive will not continue to accrue additional vacation time until he uses
enough vacation to fall below this maximum amount. Thereafter, Executive will
start earning vacation benefits again until the six (6) work week maximum is
again reached. Any accrued but unused vacation time will be paid to Executive on
a pro rata basis at termination of employment.

     3.4  Key Man Insurance.  The Company may secure in its own name or
          -----------------
otherwise, and at its own expense, life, health, accident and other insurance
covering Executive alone or with others, and Executive shall not have any right,
title or interest in or to such insurance other than as expressly provided
herein. Executive agrees to assist the Company in procuring such insurance by
submitting to the usual and customary medical and other examinations to be
conducted by such physicians as the Company or such insurance company may
designate and by signing such applications and other written instruments as may
be required by the insurance companies to which application is made for such
insurance. Executive's failure to submit to such usual and customary medical and
other examinations shall be deemed a material breach of this Agreement.

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     3.5  Initial Stock Option Grant.  Effective as of the date hereof, but
          --------------------------
subject to the approval by the Company's shareholders of an amendment to the
Company's 1997 Stock Plan to increase the number of shares available for
issuance thereunder, the Company shall grant Executive an option (the "Option")
to purchase 200,000 shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), at an exercise price of $8.00 per share. To the
extent not inconsistent with the terms of this Agreement, the Option shall be
subject to the terms of a stock option agreement in substantially the form
attached hereto as Exhibit B (the "Option Agreement").

     The Option shall become exercisable on a cumulative basis as follows,
provided that Executive continues in the employment of the Company through the
applicable vesting date(s):

          (a) twenty percent (20%) of the shares covered by the Option shall
     become exercisable on the first anniversary of the date of grant;

          (b) twenty percent (20%) of the shares covered by the Option shall
     become exercisable on the second anniversary of the date of grant;

          (c) twenty percent (20%) of the shares covered by the Option shall
     become exercisable on the third anniversary of the date of grant;

          (d) twenty percent (20%) of the shares covered by the Option shall
     become exercisable on the fourth anniversary of the date of grant; and

          (e) twenty percent (20%) of the shares covered by the Option shall
     become exercisable on the fifth anniversary of the date of grant.

     Notwithstanding the foregoing, all shares covered by the Option shall vest
and become exercisable upon the occurrence of any of the following events: (i) a
Termination Without Cause (as defined below), or (ii) a Termination With Good
Reason (as defined below).

     In the event that Executive incurs a termination of employment for any
reason other than a Termination With Cause or a resignation without Good Reason
prior to the expiration of the Term, any portion of the Option that has become
vested on or before the date of such termination (including without limitation,
any portion that becomes exercisable due to such termination) shall remain
exercisable for 180 days following the date of such termination.  In the event
that Executive incurs a Termination With Cause or in the event Executive resigns
without Good Reason prior to the expiration of the Term, any portion of the
Option that has become vested on or before the date of such termination
(including without limitation, any portion that becomes exercisable due to such
termination) shall remain exercisable for ninety (90) days following the date of
such termination.  Following the natural expiration of the Term of this
Agreement, Executive shall have 180 days following the last day of employment
with the Company to exercise the Options; provided, however, that
notwithstanding the foregoing, the Options shall terminate on December 31, 2008,
if not already expired.


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     3.6  Other Long-Term Incentives.  Executive shall be eligible for other or
          --------------------------
additional long-term incentives in the discretion of the Board, including
without limitation additional stock option grants. Such incentive awards shall
be at a level, and on terms and conditions, that are commensurate with his
positions and responsibilities at the Company and appropriate in light of
corresponding awards to other senior executives of the Company.

     3.7  Perquisites.  During the Term, Executive shall participate in all
          -----------
fringe benefits and perquisites available to senior executives of the Company at
levels, and on terms and conditions, that are commensurate with his positions
and responsibilities at the Company, and shall receive such additional fringe
benefits and perquisites as the Company may, in its discretion, from time-to-
time provide.

                                   ARTICLE IV

                         TERMINATION; DEATH; DISABILITY

     4.1  Termination of Employment With Cause.  In addition to any other
          ------------------------------------
remedies available to the Company at law, in equity or as set forth in this
Agreement, the Company shall have the right, upon written notice to Executive,
to terminate his employment hereunder without any further liability or
obligation to him in respect of his employment (other than its obligation to pay
Base Salary accrued but unpaid as of the date of termination) if Executive: (a)
breaches any material provision of this Agreement; or (b) has committed an act
of gross misconduct in connection with the performance of his duties hereunder,
as determined in good faith by the Board; or (c) demonstrates habitual
negligence in the performance of his duties, as determined by the Board; or (d)
is convicted of or pleads nolo contendere to any misdemeanor involving moral
turpitude or to any felony; or (e) has committed any act of fraud,
misappropriation of funds or embezzlement in connection with his employment
hereunder (a "Termination With Cause").

     Notwithstanding the foregoing, no purported Termination With Cause pursuant
to (a), (b) or (c) of this Section 4.1 shall be effective unless all of the
following provisions shall have been complied with: (i) Executive shall be given
written notice by the Board of the intention to effect a Termination With Cause,
such notice (A) to state in detail the particular circumstances that constitute
the grounds on which the proposed Termination With Cause is based and (B) to be
given no later than 180 days after the Board first learns of such circumstances;
(ii) Executive shall have 15 days after receiving such notice in which to cure
such grounds, to the extent such cure is possible; and (iii) if Executive fails
to cure such grounds, he shall, upon written notice by the Board, incur a
Termination With Cause.

     4.2  Termination of Employment Without Cause.  During the Term, the Company
          ---------------------------------------
may at any time, in its sole discretion, terminate the employment of Executive
hereunder for reasons other than those set forth in Section 4.1 (a "Termination
Without Cause") by written notice to him. In such event, the Company shall pay
Executive an amount equal to the sum of the following:

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          (a) any Base Salary accrued but unpaid as of the date of termination;

          (b) an amount equal to Executive's monthly Base Salary in effect on
     the date of termination for twenty-four (24) months payable as and when
     such amounts would have been due and payable hereunder had such termination
     not occurred (the "Severance Period"); and

          (c) any reimbursement for expenses incurred in accordance with Section
     3.2.

     In addition, the Company shall use its best efforts to arrange for the
continuation, through the Severance Period, of such health and/or medical
benefits or plans as are in effect with respect to Executive as of the date of
termination, if and only if permissible under such plans, such benefits and
plans to be continued on the same terms and conditions as were in effect with
respect to Executive as of the date of termination.  If not so permissible, the
Company shall pay to Executive an amount sufficient to enable Executive to
arrange for substantially equivalent health and/or medical coverage during the
Severance Period.

     Executive acknowledges that the payments and benefits referred to in this
Section 4.2, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.2, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.2, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.

     4.3  Termination of Employment With Good Reason.   In addition to any other
          ------------------------------------------
remedies available to Executive at law, in equity or as set forth in this
Agreement, Executive shall have the right, upon written notice to the Company,
to terminate his employment hereunder upon the occurrence of any of the
following events without the prior written consent of Executive, unless the
Company shall have fully cured all grounds for such termination within 15 days
after Executive gives notice thereof: (a) a material diminution in Executive's
duties or the assignment to Executive of duties that are materially inconsistent
with or materially impair his ability to perform the duties set forth herein; or
(b) a material reduction in Executive's then current Base Salary; or (c) the
relocation by the Company of Executive's principal place of employment to a
location more than 50 miles from such principal place of employment; or (d) a
breach by the Company of any material provision of this Agreement (a
"Termination With Good Reason").

     In the event that a Termination With Good Reason occurs, Executive shall
have the same entitlements to the amounts and benefits as provided under Section
4.2 for a Termination Without Cause.

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<PAGE>

     Executive acknowledges that the payments and benefits referred to in this
Section 4.3, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.3, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.3, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.

     4.4  Death; Disability.  In the event that Executive dies or becomes
          -----------------
Disabled (as defined herein), Executive's employment shall terminate when such
death or Disability occurs and the Company shall pay Executive (or his legal
representative, as the case may be) as follows:

          (a) any Base Salary accrued but unpaid as of the date of death or
     termination for Disability;

          (b) any reimbursement for expenses incurred in accordance with Section
     3.2.; and

          (c) an amount equal to Executive's monthly Base Salary in effect on
     such termination date for the lesser of (i) six (6) months or (ii) the
     remainder of the Term, payable as and when such amounts would have been due
     and payable hereunder had such termination not occurred.  The monthly Base
     Salary with respect to any period during which Executive is Disabled shall
     be reduced by amounts payable to him under any insurance plan sponsored by
     the Company, provided that Executive's aggregate compensation during the
     period of Disability shall be equal to 100% of his monthly Base Salary then
     in effect.

     For the purposes of this Agreement, Executive shall be deemed to be
"Disabled" or have a "Disability" if, because of Executive's physical or mental
disability, (a) he has been substantially unable to perform his duties hereunder
for 180 consecutive days, and (b) he has utilized any and all benefits available
to him under state and federal laws and is either (i) unable to reasonably and
effectively carry out his duties with reasonable accommodations by the Company
or (ii) unable to reasonably and effectively carry out his duties because any
reasonable accommodation which may be required would cause the Company undue
hardship. In the event of a disagreement concerning Executive's perceived
Disability, Executive shall submit to such examinations as are deemed
appropriate by three practicing physicians specializing in the area of
Executive's Disability, one selected by Executive, one selected by the Company,
and one selected by both such physicians. The majority decision of such three
physicians shall be final and binding on the parties. Nothing in this paragraph
is intended to limit the Company's right to invoke the provisions of this
paragraph with respect to any perceived Disability of Executive.

     Executive acknowledges that the payments referred to in this Section 4.4,
together with any rights or benefits under any written plan or agreement which
have vested on or prior to the termination date of Executive's employment under
this Section 4.4, constitute the only payments

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<PAGE>

to which Executive (or his legal representative, as the case may be) shall be
entitled to receive from the Company hereunder in the event of a termination of
his employment for death or Disability, and that except for such payments the
Company shall have no further liability or obligation to him (or his legal
representatives, as the case may be) hereunder or otherwise in respect of his
employment.

     4.5  No Mitigation by Executive; No Offset by Company.  Except as
          ------------------------------------------------
otherwise expressly provided herein, Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for herein
be reduced by any compensation earned by Executive as the result of employment
by another employer; provided, however, that if Executive becomes employed with
another employer and is eligible to receive health and/or medical benefits under
such other employer's plans, Executive's continued benefits and/or plan coverage
as set forth in Section 4.2 or 4.3, as the case may be, shall be reduced to the
extent that comparable benefits and/or coverage is provided under such other
employer's plans.

     The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against Executive or others, provided that
nothing herein shall preclude the Company from separately pursuing recovery from
Executive based on any such claim.

     4.6  Continued Compliance.  Executive and the Company hereby acknowledge
          --------------------
that the amounts or benefits payable by the Company under Sections 4.2(b), 4.3,
and 4.4(c) [and 4.__(b)] are part of the consideration for Executive's
undertakings under Article V below. Such amounts and benefits are subject to
Executive's continued compliance with the provisions of Article V. If Executive
violates the provisions of Article V, then the Company will have no obligation
to make any of the payments that remain payable by the Company under Sections
4.2(b), 4.3, and 4.4(c) on or after the date of such violation.

                                   ARTICLE V

                      OWNERSHIP OF PROCEEDS OF EMPLOYMENT;
                        NON-DISCLOSURE; NON-COMPETITION

     5.1  Ownership of Proceeds of Employment.  The Company shall be the sole
          -----------------------------------
and exclusive owner throughout the universe in perpetuity of all of the results
and proceeds of Executive's services, work and labor during the Term in
connection with Executive's employment by the Company, free and clear of any and
all claims, liens or encumbrances. All results and proceeds of Executive's
services, work and labor during the Term shall be deemed to be works-made-for-
hire for the Company within the meaning of the copyright laws of the United
States and the Company shall be deemed to be the sole author thereof in all
territories and for all purposes.

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<PAGE>

     5.2  Non-Disclosure of Confidential Information.  As used herein,
          ------------------------------------------
Information" means any and all information affecting or relating to the business
of the Company and its Affiliates, including without limitation, financial data,
customer lists and data, licensing arrangements, business strategies, pricing
information, product development, intellectual, artistic, literary, dramatic or
musical rights, works, or other materials of any kind or nature (whether or not
entitled to protection under applicable copyright laws, or reduced to or
embodied in any medium or tangible form), including without limitation, all
copyrights, patents, trademarks, service marks, trade secrets, contract rights,
titles, themes, stories, treatments, ideas, concepts, technologies, art work,
logos, hardware, software, and may be embodied in any and all computer programs,
tapes, diskettes, disks, mailing lists, lists of actual or prospective customers
and/or suppliers, notebooks, documents, memoranda, reports, files,
correspondence, charts, lists and all other written, printed or otherwise
recorded material of any kind whatsoever and any other information, whether or
not reduced to writing, including "know-how", ideas, concepts, research,
processes, and plans. "Confidential Information" does not include information
that is in the public domain, information that is generally known in the trade,
or information that Executive can prove he acquired wholly independently of his
employment with the Company. Executive shall not, at any time during the Term or
thereafter, directly or indirectly, disclose or furnish to any other person,
firm or corporation any Confidential Information, except in the course of the
proper performance of his duties hereunder or as required by law (in which event
Executive shall give prior written notice to Company and shall cooperate with
Company and Company's counsel in complying with such legal requirements).
Promptly upon the expiration or termination of Executive's employment hereunder
for any reason or whenever the Company so requests, Executive shall surrender to
the Company all documents, drawings, work papers, lists, memoranda, records and
other data (including all copies) constituting or pertaining in any way to any
of the Confidential Information.

     5.3  Non-Competition.  For so long as he is entitled to compensation under
          ---------------
or pursuant to this Agreement (whether or not he is actively employed by the
Company hereunder), Executive shall not, except with the prior written consent
of the Company, directly or indirectly: (a) compete with the Company; or (b) be
interested in, employed by, engaged in or participate in the ownership,
management, operation or control of, or act in any advisory or other capacity
for, any Competing Entity which conducts its business within the Territory (as
such terms are hereinafter defined); provided, however, that notwithstanding the
foregoing, Executive may make solely passive investments in any Competing Entity
the common stock of which is "publicly held," and of which Executive shall not
own or control, directly or indirectly, in the aggregate securities which
constitute more than one (1%) percent of the voting rights or equity ownership
of such Competing Entity; or (c) solicit or divert any business or any customer
from the Company or assist any person, firm or corporation in doing so or
attempting to do so; or (d) cause or seek to cause any person, firm or
corporation to refrain from dealing or doing business with the Company or assist
any person, firm or corporation in doing so or attempting to do so.

     For purposes of this Section 5.3, (i) the term "Competing Entity" shall
mean any entity which presently or during the period referred to above engages
in any business activity the

                                       9
<PAGE>

Company is then engaged in or proposes to be engaged in; and (ii) the term
"Territory" shall mean any geographic area in which the Company conducts
business during such period.

     5.4  Non-Solicitation.  Executive shall not, for a period of two (2) years
          ----------------
from the date of any termination or expiration of his employment hereunder,
directly or indirectly: (a) solicit or hire, or attempt to solicit or hire, any
employee of the Company, or assist any person, firm or corporation in doing so
or attempting to do so; or (b) plan for, acquire any financial interest in or
perform any services for himself or any other entity in connection with a
business in which Executive's interest, duties or activities would inherently
require Executive to reveal any Confidential Information; or (c) solicit or
cause to be solicited the disclosure of or disclose any Confidential Information
for any purpose whatsoever or for any other party.

     5.5  Breach of Provisions.  In the event that Executive shall breach any of
          --------------------
the provisions of this Article V, or in the event that any such breach is
threatened by Executive, in addition to and without limiting or waiving any
other remedies available to the Company at law or in equity, the Company shall
be entitled to immediate injunctive relief in any court, domestic or foreign,
having the capacity to grant such relief, without the necessity of posting a
bond, to restrain any such breach or threatened breach and to enforce the
provisions of this Article V. Executive acknowledges and agrees that there is no
adequate remedy at law for any such breach or threatened breach and, in the
event that any action or proceeding is brought seeking injunctive relief,
Executive shall not use as a defense thereto that there is an adequate remedy at
law.

     5.6  Reasonable Restrictions.  The parties acknowledge that the
          -----------------------
foregoing restrictions, the duration and the territorial scope thereof as set
forth in this Article V, are under all of the circumstances reasonable and
necessary for the protection of the Company and its business.

     5.7  Definition.  For purposes of this Article V, the term "Company" shall
          ----------
be deemed to include any subsidiary of, affiliate of, predecessor to, or
successor of the Company.

                                   ARTICLE VI

                                 MISCELLANEOUS

     6.1  Binding Effect.  This Agreement shall be binding upon and inure to
          --------------
the benefit of the parties hereto and their respective legal representatives,
heirs, distributees, successors and assigns; provided that the rights and
obligations of Executive hereunder shall not be assignable by him.

     6.2  Notices.  Any notice provided for herein shall be in writing and
          -------
shall be deemed to have been given or made when personally delivered or three
(3) days following deposit for mailing by first class registered or certified
mail, return receipt requested, or if delivered by facsimile transmission, upon
confirmation of receipt of the transmission, to the address of the other party
set forth below or to such other address as may be specified by notice given in
accordance with this Section 6.2:

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<PAGE>

          (a)  If to the Company:

               Four Media Company
               _______________________________
               _______________________________
               _______________________________
               Fax No.:  (818) 846-5197

               With a copy to:

               Latham & Watkins
               633 West Fifth Street, Suite 4000
               Los Angeles, CA  90071
               Attention:  Michael W. Sturrock
               Fax No.:  (213) 891-8763

          (b)  If to Executive:

               Mr. John H. Donlon
               _______________________________
               _______________________________

               With a copy to:

               _______________________________
               _______________________________
               _______________________________
               _______________________________
               Fax No.:

     6.3  Severability.  If any provision of this Agreement, or portion
          ------------
thereof, shall be held invalid or unenforceable by a court of competent
jurisdiction, such invalidity or unenforceability shall attach only to such
provision or portion thereof, and shall not in any manner affect or render
invalid or unenforceable any other provision of this Agreement or portion
thereof, and this Agreement shall be carried out as if any such invalid or
unenforceable provision or portion thereof were not contained herein.  In
addition, any such invalid or unenforceable provision or portion thereof shall
be deemed, without further action on the part of the parties hereto, modified,
amended or limited to the extent necessary to render the same valid and
enforceable.

     6.4  Confidentiality.  The parties hereto agree that they will not,
          ---------------
during the Term or thereafter, disclose to any other person or entity the terms
or conditions of this Agreement (excluding the financial terms hereof) without
the prior written consent of the other party or as required by law, regulatory
authority or as necessary for either party to obtain personal loans or

                                       11
<PAGE>

financing.  Approval of the Company and of Executive shall be required with
respect to any press releases regarding this Agreement and the activities of
Executive contemplated hereunder.

     6.5   Arbitration.  Any controversy, claim or dispute arising out of or in
           -----------
any way relating to this Agreement, the alleged breach thereof, and/or
Executive's employment with the Company or termination therefrom, including
without limitation, any and all claims for employment discrimination or
harassment, shall be determined by binding arbitration administered by the
American Arbitration Association under its National Rules for Resolution of
Employment Disputes ("Rules") which are in effect at the time of the arbitration
or the demand therefor.  The Rules are hereby incorporated by reference.
California Code of Civil Procedure (S)1283.05, which provides for certain
discovery rights, shall apply to any such arbitration, and said code section is
also hereby incorporated by reference.  In reaching a decision, the arbitrator
shall have no authority to change, extend, modify or suspend any of the terms of
this Agreement.  The arbitration shall be commenced and heard in Los Angeles
County, California.  The arbitrator(s) shall apply the substantive law (and the
law of remedies, if applicable) of California or federal law, or both, as
applicable to the claim(s) asserted.  Judgment on the award may be entered in
any court of competent jurisdiction, even if a party who received notice under
the Rules fails to appear at the arbitration hearing(s).  The parties may seek,
from a court of competent jurisdiction, provisional remedies or injunctive
relief in support of their respective rights and remedies hereunder without
waiving any right to arbitration.  However, the merits of any action that
involves such provisional remedies or injunctive relief, including, without
limitation, the terms of any permanent injunction, shall be determined by
arbitration under this paragraph.

     6.6   Waiver.  No waiver by a party hereto of a breach or default
           ------
hereunder by the other party shall be considered valid unless in writing signed
by such first party, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or any other nature.

     6.7   Controlling Nature of Agreement.  To the extent any terms of this
           -------------------------------
Agreement are inconsistent with the terms or provisions of the Company's
Employee Manual or any other personnel policy statements or documents, the terms
of this Agreement shall control.  To the extent that any terms and conditions of
Executive's employment are not covered in this Agreement, the terms and
conditions set forth in the Employee Manual or any similar document shall
control such terms.

     6.8   Entire Agreement.  This Agreement sets forth the entire agreement
           ----------------
between the parties with respect to the subject matter hereof, and supersedes
any and all prior agreements or understanding between the Company and Executive,
whether written or oral, fully or partially performed relating to any or all
matters covered by and contained or otherwise dealt with in this Agreement. This
Agreement does not constitute a commitment of the Company with regard to
Executive's employment, express or implied, other than to the extent expressly
provided for herein.

                                       12
<PAGE>

     6.9   Amendment.  No modification, change or amendment of this Agreement
           ---------
or any of its provisions shall be valid unless in writing and signed by the
party against whom such claimed modification, change or amendment is sought to
be enforced.

     6.10  Authority.  The parties each represent and warrant that they
           ---------
have the power, authority and right to enter into this Agreement and to carry
out and perform the terms, covenants and conditions hereof.

     6.11  Applicable Law.  This Agreement, and all of the rights and
           --------------
obligations of the parties in connection with the employment relationship
established hereby, shall be governed by and construed in accordance with the
substantive laws of the State of California without giving effect to principles
relating to conflicts of law.

     6.12  Counterparts.  This Agreement may be executed in counterparts, each
           ------------
of which shall be deemed an original, and all of which together shall constitute
one and the same instrument.

     6.13  Effective Date. Until the Closing Date (as such term is defined
           --------------
under the Stock Purchase Agreement) has occurred, Executive and the Company's
obligations (including by way of illustration and not as a limitation the
payment of compensation) shall, except as modified by Section 6.14 below, be
governed by the terms of the Original Agreement.  Upon the Closing Date the
Original Agreement shall be deemed terminated and of no further force or effect
(except for obligations which are intended to survive termination) and this
Agreement shall be deemed effective as of the date of this Agreement.
Notwithstanding the foregoing, upon the Closing Date Executive shall be paid an
amount equal to the difference between base compensation due to Executive under
the Original Agreement and the base compensation due to Executive under this
Agreement for the period between the date of this Agreement and the actual
Closing Date.  If the Closing Date does not occur on or before September 30,
1999 then this Agreement shall automatically, and without notice, terminate
without any obligation due to the other party (i.e., there shall be no
compensation or options due Executive as provided for in this Agreement).  In
such event, the parties respective obligations shall be governed by the terms of
the Original Agreement.

     6.14  Amendment.  Section 1.2 of the Original Agreement is hereby amended
           ---------
and restated in its entirety to provide that

               "subject to Section 4.1, Executives Employment hereunder shall
               terminate on September 30, 1999."


                           [Signature Page to Follow]

                                       13
<PAGE>

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

                              "COMPANY"

                              FOUR MEDIA COMPANY


                              By: /s/ Robert T. Walston
                                 ------------------------------------
                              Name:   Robert T. Walston
                              Title:  CEO


                              "EXECUTIVE"

                              /s/ John H. Donlon
                              ---------------------------------------
                              John H. Donlon


                                      S-1