FILM ROMAN INC, 424B4, 1996-10-01

FILM ROMAN INC
424B4, 1996-10-01
MOTION PICTURE & VIDEO TAPE PRODUCTION

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FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-03987

PROSPECTUS
SEPTEMBER 30, 1996

[LOGO OF FILM ROMAN, INC.]

3,300,000 SHARES

FILM ROMAN, INC.

COMMON STOCK

Of the 3,300,000 shares of Common Stock offered hereby, 3,275,364 shares are
being sold by Film Roman, Inc. and 24,636 shares are being sold by certain
stockholders of the Company (the "Selling Stockholders"). The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders. See
"Principal and Selling Stockholders."

Prior to this offering, there has been no public market for the Common Stock
of the Company. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "ROMN."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......... $10.00 $0.70 $9.30 $9.30
Total(3)........... $33,000,000 $2,310,000 $30,460,885 $229,115
- ------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of $870,000, which will be paid by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 495,000 additional shares at the Price to the Public less Underwriting
Discounts and Commissions, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions, and Proceeds to the Company will
be $37,950,000, $2,656,500 and $35,064,385, respectively. See
"Underwriting."

The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of shares will be made in New York, New York on or
about October 4, 1996.

DONALDSON, LUFKIN & JENRETTE MONTGOMERY SECURITIES
SECURITIES CORPORATION
<PAGE>

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Film Roman, Inc. ("Film Roman Holdings") was
incorporated in Delaware in May 1996 in order to acquire all of the outstanding
capital stock of Film Roman, Inc., a California corporation ("Film Roman
California") in the Reorganization (as defined below). Unless otherwise
indicated herein and except as otherwise set forth in the financial statements
contained in this Prospectus, (a) the terms the "Company" and "Film Roman"
refer collectively to Film Roman Holdings and Film Roman California, (b) the
term "Offering" refers to the offering of common stock, $.01 par value, of Film
Roman Holdings ("Common Stock") made hereby, and (c) the information in this
Prospectus gives effect to the Reorganization (in which each share of common
stock of Film Roman California will be converted into 1.25 shares of Common
Stock). Unless otherwise stated, all information in this Prospectus assumes
that the Underwriters' over-allotment option is not exercised. Certain
animation and film industry terms used in this Prospectus are defined in a
Glossary beginning on page 59.

THE COMPANY

Film Roman creates, develops, produces and distributes high quality, family-
oriented animated television programming. Since the Company was founded by Phil
Roman in 1984, it has become the leading independent animation studio in North
America by producing more animated series for broadcast on the U.S. television
networks during the 1996-1997 television season than any other independent
animation studio. Film Roman productions include The Simpsons, Garfield &
Friends, Bobby's World, Felix the Cat, Mighty Max, The Critic and The Mask. The
Company is currently producing 10 animated series (totalling 161 episodes, 67
of which are "proprietary" programs) and one special, and recently completed
the production of one additional special, all of which are scheduled to air on
ABC, CBS, FOX or the USA Network, as well as in first-run syndication, during
the 1996-97 television season. The Company has produced at least three series
each season for the television networks since 1990 and, in so doing, has
successfully competed against other independent studios, as well as the major
studios which have financial and other resources greater than the Company.

The Company recently commenced production of 13 episodes of Blues Brothers:
The Animated Series (based on the Dan Aykroyd and John Belushi characters)
currently scheduled to be aired in prime-time on UPN during the 1997-98
broadcast season. The Company has retained certain rights to this animated
series, including distribution and licensing and merchandising rights.

The Company believes that it has a reputation within the entertainment
industry as a reliable producer of high-quality animated programming, making it
one of a select group of suppliers of animated programming to the television
networks. This reputation in the animation industry is critical because
animated series are ordered for production without the benefit of a pilot
episode. As a result, programmers rely to a significant degree on a studio's
track record for producing high quality programming that is delivered on
schedule and within budget. As of June 30, 1996, the Company had produced 470
episodes of animated programming. At the conclusion of the 1996-97 broadcast
season, the Company projects that it will have produced in excess of 600
episodes of animated programming; there is, however, no assurance that all of
the episodes scheduled to be aired will be televised.

Historically, the Company has produced substantially all of its programming
for third parties on a "fee-for-services" basis. Increasingly, the Company is
producing programming for which it controls the "proprietary rights" associated
with such programming (including, for example, international distribution and
licensing and merchandising rights). The Company's strategy is to build a
library of proprietary characters and programs which it can exploit through a
variety of means, including domestic and international television and home
video

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distribution, licensing and merchandising of consumer products (including toys,
apparel, school supplies and books), feature films and interactive software.
The Company has retained proprietary rights to four of the ten series it is
producing for the 1996-97 television season (Felix the Cat (CBS), C-Bear &
Jamal (FOX), BRUNO the Kid (syndication) and Mortal Kombat (USA Network)). The
Company will produce 67 episodes of such proprietary programming for the
upcoming television season compared to 16 episodes produced last season. In
order to implement its strategy, the Company expanded its internal creative
development of characters and program concepts and established an international
distribution division and a licensing and merchandising division to support the
exploitation of its proprietary rights. As a result of these initiatives, the
Company has incurred additional overhead and other costs. The Company reported
net losses of $1.7 million and $0.7 million for the year ended December 31,
1995 and the six months ended June 30, 1996, respectively. The Company believes
that, through the retention and exploitation of proprietary rights, it can over
time earn an attractive return on its investment and, at the same time, build a
library of characters and programs that will have lasting value. There is no
assurance, however, that the Company will be able to achieve this goal.

The Company's principal executive offices are located at 12020 Chandler
Boulevard, Suite 200, North Hollywood, California 91607, and its telephone
number is (818) 761-2544.

THE REORGANIZATION

Film Roman Holdings was incorporated in Delaware in May 1996 in order to hold
all of the outstanding capital stock of Film Roman California. Film Roman
Holdings currently conducts no operations. A reorganization will be effected
immediately prior to the closing of the Offering (the "Reorganization")
pursuant to which (i) a wholly-owned subsidiary of Film Roman Holdings will
merge with and into Film Roman California; (ii) each outstanding share of
common stock, no par value, of Film Roman California ("California Common
Stock") will be converted into 1.25 shares of Common Stock (including shares of
California Common Stock to be issued immediately prior to such merger upon
exercise of certain outstanding warrants to purchase California Common Stock
and upon conversion of all outstanding shares of Class B convertible preferred
stock, $.01 par value, of Film Roman California ("Convertible Preferred
Stock")), (iii) each outstanding share of Class A redeemable preferred stock,
$.01 par value, of Film Roman California ("California Redeemable Preferred
Stock") will be converted into one share of Series A redeemable preferred
stock, $.01 par value, of Film Roman Holdings ("Redeemable Preferred Stock");
and (iv) all outstanding employee options and certain warrants for the purchase
of California Common Stock will, pursuant to the anti-dilution provisions
thereof, become options and warrants to purchase shares of Common Stock. As a
result of the Reorganization, Film Roman California will become a wholly-owned
subsidiary of Film Roman Holdings and the stockholders of Film Roman California
will become the stockholders of Film Roman Holdings. Immediately following the
Reorganization and the closing of the Offering, Film Roman Holdings will redeem
for cash $7.5 million liquidation preference of Redeemable Preferred Stock and,
if the underwriters' over-allotment option is exercised, will redeem for cash
additional Redeemable Preferred Stock to the extent of the net proceeds (less
accrued dividends on such Redeemable Preferred Stock) received by the Company
from the exercise of such over-allotment option (the "Cash Redemption"). In the
event the underwriters' over-allotment option is not exercised in full, any
shares of Redeemable Preferred Stock that have not been redeemed for cash will
be redeemed for Common Stock (at a redemption price of 1.3072 shares of Common
Stock for each share of Redeemable Preferred Stock) (the "Non-Cash
Redemption"). Accrued dividends on the Redeemable Preferred Stock and
Convertible Preferred Stock will be paid to the date of redemption and
conversion, respectively. See "Certain Transactions--Reorganization."

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THE OFFERING

<TABLE>
<C> <S>
Shares offered by the Company.... 3,275,364
Shares offered by the Selling
Stockholders.................... 24,636
Shares outstanding immediately
after the Offering.............. 8,448,236(1)
Use of Proceeds to the To pay accumulated but unpaid dividends on
Company(2)...................... the Redeemable Preferred Stock and the
Convertible Preferred Stock, to redeem for
cash a portion of the Redeemable Preferred
Stock (or all of the Redeemable Preferred
Stock if the Underwriters' over-allotment
option is exercised in full), to repay
short-term borrowings, to fund the
production of animated programming and for
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market
Symbol.......................... ROMN.
</TABLE>
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(1) Pro forma for the Reorganization in which 4,584,636 shares of Common Stock
will be issued as a result of the conversion of (i) 1,713,000 shares of
outstanding California Common Stock, (ii) 1,204,709 shares of California
Common Stock to be issued upon exercise of warrants for shares of
California Common Stock and (iii) 750,000 shares of California Common Stock
to be issued upon conversion of Convertible Preferred Stock and further for
the Non-Cash Redemption in which 588,236 shares of Common Stock will be
issued upon the redemption of $4.5 million liquidation preference of
Redeemable Preferred Stock. In the event the Underwriters' over-allotment
option is exercised in full, all Redeemable Preferred Stock will be
redeemed for cash, the Non-Cash Redemption will not occur and the total
number of shares of Common Stock outstanding immediately after the Offering
will be 8,355,000 (assumes 495,000 shares will be issued upon exercise of
the over-allotment option). Excludes 1,227,695 shares of Common Stock
issuable upon the exercise of options granted or to be granted under the
Company's Stock Option Plan (as defined below), of which 859,375 had been
granted at the date of this Prospectus, and 72,066 shares of Common Stock
issuable upon the exercise of certain warrants (the "New Warrants") issued
pursuant to the 1996 Commitment (as defined herein). See "Management--Stock
Option Plan" and "Certain Transactions--1996 Commitment."
(2) Almost all of the proceeds to be applied to redeem all (or a portion) of
the Redeemable Preferred Stock will be paid to a private equity partnership
managed by BCI Advisors, Inc. (the "BCI Affiliate") and to certain pension
trusts and a pension fund managed by Pecks Management Partners Ltd. (the
"Pecks Affiliate"). Theodore T. Horton, Jr., a managing director of BCI
Advisors, Inc., and Robert Cresci, a managing director of Pecks Management
Partners Ltd., currently serve as directors of the Company. Accordingly,
the entities receiving such proceeds may be deemed "affiliates" (as defined
in the Securities Act) of the Company. See "Management" and "Certain
Transactions."

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SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, 1995 JUNE 30, 1996
----------------------- -----------------------
ACTUAL ACTUAL AS ADJUSTED(4)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 5,176 $ 4,794 $23,771
Film costs, net of
amortization................. 12,379 19,012 19,012
Total assets.................. 18,950 26,975 45,952
Debt.......................... 1,737 1,241 --
Redeemable Preferred Stock.... 6,749 7,232 --
Stockholder's equity
(deficiency)................. 1,832 (175) 28,705
</TABLE>

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(1) The Company operated as an S Corporation until August 4, 1995. As an S
Corporation, the Company was subject to no federal income taxes and only
minimum state taxes. Pro forma amounts reflect adjustments for additional
income taxes that would have been reported if the Company had been a C
Corporation based upon an estimated statutory rate of 40% in 1991, 1992,
1993 and 1994, and 34% in 1995.

(2) For the year ended December 31, 1995, the pro forma net loss attributable
to common stock gives effect to the accretion of the difference between the
carrying value and the liquidation value of the Redeemable Preferred Stock
of $484,829 and to the accrual of dividends of $400,000 on the Redeemable
Preferred Stock. For the six months ended June 30, 1996, the pro forma net
loss attributable to common stock gives effect to the accretion of the
difference between the carrying value and the liquidation value of the
Redeemable Preferred Stock of $484,828 and to the accrual of dividends of
$480,000 on the Redeemable Preferred Stock.

(3) The pro forma net income (loss) per common share and pro forma weighted
average number of shares outstanding give effect to the Reorganization.
Does not give effect to the Cash Redemption or the Non-Cash Redemption.

(4) Adjusted to reflect the sale by the Company of 3,275,364 shares of Common
Stock in the Offering and the application of the net proceeds therefrom and
the Non-Cash Redemption. See "Use of Proceeds."

6
<PAGE>

RISK FACTORS

This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Actual results could
differ materially from those projected in the forward-looking statements as a
result of certain of the risk factors set forth below and elsewhere in this
Prospectus and other factors. Prospective investors should consider carefully
the following factors, in addition to the other information contained in this
Prospectus, in evaluating the Company and its business before purchasing
shares of Common Stock offered hereby.

DEPENDENCE ON A LIMITED NUMBER OF TELEVISION PROGRAMS

The Company's revenue has historically been derived principally from the
production of a relatively small number of television programs. The Simpsons,
Felix the Cat, The Critic and The Mask accounted for approximately 35%, 15%,
13% and 12%, respectively, of the Company's total revenue for the year ended
December 31, 1995. The Simpsons, Mighty Max and The Critic accounted for
approximately 28%, 21% and 17%, respectively, of the Company's total revenue
for the year ended December 31, 1994. As audiences' tastes change frequently,
there can be no assurance that broadcasters will continue to broadcast the
Company's "proprietary" or "fee-for-services" programs or that the Company
will continue to be engaged to produce the programs that it currently produces
on a "fee-for-services" basis. While the Company continually endeavors to
develop new programming, there can be no assurance that revenue from existing
or future programming will replace a possible loss of revenue associated with
the cancellation of any particular program.

LIMITED NUMBER OF TIME SLOTS FOR CHILDREN'S AND ANIMATED TELEVISION
PROGRAMMING; IMPACT OF FCC REGULATIONS REQUIRING EDUCATIONAL CONTENT
PROGRAMMING; VERTICAL INTEGRATION AND STRATEGIC ALLIANCES

Film Roman competes for time slots with a variety of companies which produce
animated or live-action television programming. The number of outlets
available to producers of animated programming has expanded in the last decade
due, in part, to growth in the number of broadcast and cable networks.
However, the number of time slots currently allocated to children's and/or
animated television programming remains limited (a "time slot" being a
broadcast time period for a program that either airs five times per week
(Monday through Friday) or once per week (usually on the weekend)). For the
1995-96 season, children's and/or animated programming occupied (i)
approximately 39 time slots each week on FOX, CBS, ABC, UPN and WB networks
(the "Networks"); (ii) approximately 16 time slots (excluding time slots
primarily occupied by repeat programming) each week on cable networks, such as
USA Network, Nickelodeon and HBO; and (iii) approximately 40 time slots in
syndication, offered by such syndicators as Buena Vista Television
Distribution, Saban Entertainment, New World Entertainment and Bohbot
Entertainment. See "Business--Animation Industry Overview." During the 1995-96
television season, the Company's programming occupied five Network time slots
and one syndication time slot.

Certain rules of the Federal Communications Commission ("FCC") adopted in
August 1996 which become effective in part in January 1997 and in part in
September 1997 may adversely affect the number of time slots available for the
Company's animated productions. These regulations strongly encourage
broadcasters (through license renewal procedures) to offer at least three
hours per week of programming specifically designed to serve the educational
and informational needs of children aged 16 and under, to identify each
program as such, to schedule such programming weekly, and to offer such
programming in 30-minute formats. While studies presented by the broadcast
industry to the FCC in the course of rulemaking suggest that the average
broadcaster already presents more than three hours of educational programming
for children per week, industry critics disputed such claims and the FCC found
the studies inconclusive. In any event, while the precise impact of the new
regulations on aggregate demand for children's programming is unknown, it is
reasonably possible that programming qualifying for the new FCC requirements
will have a competitive advantage over non-qualifying programs, and that this
could diminish the number of time slots available for the Company's existing
programs.

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On the other hand, the Company has three properties in development which it
expects will qualify under the new regulations and which it is seeking to
produce for future seasons; the new regulations may enhance the prospect that
these programs will be produced and broadcast. See "Business--Principal
Elements of the Company's Business--Acquisition, Creation and Development of
Programming;--Government Regulations."

Over the last decade, broadcasters, distributors and producers of television
and motion picture programming have become increasingly integrated vertically
through mergers, acquisitions, partnerships, joint ventures or other
affiliations. Film Roman has not entered into any such relationships. These
relationships, coupled with the recent repeal of certain regulations of the
FCC which had limited the ability of ABC, NBC and CBS to control certain
rights in television programming (see "Business--Government Regulations"), may
result in broadcasters favoring the producers of animated programming with
which they are affiliated, thereby reducing the number of time slots available
for other producers. There can be no assurance that the number of time slots
currently available for children's and/or animated programming and,
specifically, for animated programming supplied by independent animation
studios such as the Company, will not decrease, or that the Company will
compete successfully for available time slots.

DECLINING VALUE OF LICENSE FEE AGREEMENTS AND INCREASING CONTROL OF
PROPRIETARY RIGHTS BY BROADCASTERS

Competition created by the emergence of new broadcasters (such as UPN, WB,
Nickelodeon and the USA Network) has provided television audiences with an
increased number of available "time slots" for programming, thereby generally
reducing the number of viewers watching any one program. As a result, the
market share of, and license fees paid by, FOX, CBS and ABC have decreased.
Even though the license fees paid by FOX, CBS and ABC have decreased, they
continue to be higher than the license fees paid by the newer Networks. As a
result, there continues to be intense competition for the time slots offered
by the Networks, especially FOX, CBS and ABC. Moreover, broadcasters have
recently begun to demand a greater percentage of the revenue generated from
the exploitation of proprietary rights associated with the programs which they
license, and may seek to control and exploit all of the proprietary rights
associated with programs which they license. These industry-wide trends,
should they continue, may have a significant adverse impact on the Company's
business, results of operations and financial condition.

CONCENTRATION OF CUSTOMERS

Since the number of outlets for the Company's productions is limited,
certain customers have historically accounted for a significant portion of the
Company's revenue. The Company derived approximately 35%, 13%, 13%, 12%, and
10% of its total revenue from its top five customers, Twentieth Television (a
division of Twentieth Century Fox), Adelaide Productions, Inc. (an affiliate
of Columbia Tri-Star), Fox Children's Network (an affiliate of Twentieth
Century Fox), Sunbow Productions and CBS, respectively, for the year ended
December 31, 1995. The loss of any one or more of these customers could have a
material adverse effect on the Company's financial position and results of
operations. No assurance can be given that the Company's existing programs
will continue to be broadcast by its current customers or that broadcasters
will be interested in the Company's new programs.

RISKS RELATED TO EXPANSION OF PRODUCTION OF PROPRIETARY PROGRAMMING

Substantially all of the programming produced by the Company has
historically been on a "fee-for-services" basis ("fee-for-services"
programming), in which the Company does not own or control licensing or
distribution rights, but may have profit participation rights based on a
percentage of adjusted gross profits or net profits earned by the owners of
such distribution rights. (For example, the Company has profit participation
rights for The Critic, Garfield & Friends, Mighty Max and Bobby's World.) Fees
paid to the Company for these production services typically cover all direct
production costs plus a profit margin. Increasingly, the Company is producing
programming for which it owns or controls licensing and/or distribution rights
("proprietary"

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programming). Such rights may include domestic and international broadcast
distribution, home video distribution, licensing and merchandising, feature
film and interactive/game development ("proprietary rights"). While the
Company seeks to limit the financial risk associated with its proprietary
programming by obtaining commitments prior to production to cover at least 50%
of its direct production costs, there can be no assurance that the Company
will be able to recover the balance of its production and overhead costs
through the exploitation of its remaining rights. See "Business--Funding
Production--Proprietary Programming." Revenues derived from the Company's
proprietary programming were $5.6 million and $2.7 million for the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively. See
"Business--Principal Elements of the Company's Business--Library." Since the
Company has only recently begun to retain the proprietary rights associated
with its animated programs, it has a limited history of operations and
management experience related to the exploitation of such rights.

POSSIBLE DECLINE IN DEMAND FOR CURRENT PROGRAMS AND UNCERTAINTY OF ACCEPTANCE
OF NEW PROGRAMS; NEILSEN RATINGS

Substantially all of the Company's revenue has been derived from the
production and distribution of animated television programs. Each production
is an individual artistic work, and there can be no assurance that the Company
will be able to continue to create entertaining episodes for its existing
programs or new programs that appeal to broadcasters. Since a program's
existing (or expected) Neilsen rating is one of the most significant factors
that an advertiser considers in determining what it is willing to pay for
commercial time during a program's broadcast, a program's existing (or
expected) Neilsen rating is an important factor which a broadcaster considers
in determining whether or not to license or renew a program. In addition,
since producers of syndicated programs often receive payments from syndicators
based on a share of the revenue derived from advertisers whose commercials air
during a program's broadcast, Neilsen ratings can play an even greater role in
determining what programs will be aired in syndication. As a result, the
Company attempts to create, develop and produce programs that will perform
well in the Neilsen ratings system. The Neilsen ratings associated with the
Company's productions, as well as the ultimate commercial success of its
productions, depend on a variety of factors, including audience reaction,
competing programs, other forms of entertainment, and other factors beyond the
Company's control. There can be no assurance that the Company's programs will
obtain favorable Neilsen ratings or that broadcasters will license the rights
to broadcast any of the Company's programs in development or will renew
licenses to broadcast programs currently produced by the Company. Even if
licenses to broadcast the Company's existing programming are renewed, the
popularity of a particular program and its Neilsen rating may diminish. It is
likely that a decrease in the popularity of the Company's programming will
result in reduced revenue generated by the Company's licensing, merchandising,
distribution and other activities associated with such programs.

OPERATING LOSSES AND FINANCIAL CONDITION

For the year ended December 31, 1995 and the six months ended June 30, 1996,
the Company had net losses of $1.7 million and $0.7 million, respectively, and
at the respective period ends an accumulated retained deficit of $2.9 million
and $4.9 million, respectively. The operating losses primarily resulted from
the Company's strategy to increase production of proprietary programming. In
order to pursue this strategy, the Company has increased its overhead and
other operational costs related to, among other things, the internal creative
development of characters and program concepts and the expanded operations of
its international distribution division and licensing and merchandising
division. Such costs have been incurred prior to the receipt of anticipated
revenue from such increased operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." There can be no
assurance that the Company will achieve net income or positive retained
earnings. If the Company is unable to do so, the Company may have to reduce
overhead, curtail production and development of proprietary programming or
obtain further financing, if available.

BUDGET AND COST OVERRUNS

The Company reviews cost reports and updates its cost projections regularly.
Although the Company has generally completed its productions within its
budget, there can be no assurance that the actual production costs

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for its programming will remain within budget. Risks such as production
delays, higher talent costs, increased subcontractor costs, political
instability overseas, and other unanticipated events may substantially
increase production costs and delay completion of the production of any one or
more of the Company's programs.

RISKS RELATED TO OVERESTIMATION OF REVENUE OR UNDERESTIMATION OF COSTS

The Company follows Financial Accounting Standards Board Statement No. 53,
"Individual Film Forecast" ("FASB 53"), regarding revenue recognition and
amortization of production costs. All costs incurred in connection with an
individual program or film, including acquisition, development, production and
allocable production overhead costs and interest, are capitalized as
television and film costs. These costs are stated at the lower of unamortized
cost or estimated net realizable value. Estimated total production costs for
an individual program or film are amortized in the proportion that revenue
realized relates to management's estimate of the total revenue expected to be
received from such program or film. As a result, if revenue or cost estimates
change with respect to a program or film, the Company may be required to
write-down all or a portion of unamortized costs for such program or film. No
assurance can be given that these write-downs will not have a significant
impact on the Company's results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Accounting Practices."

SEASONALITY

Results of operations in any period depend on the Company's production and
delivery schedule of television programs. Broadcasters typically make most of
their annual programming commitments in the first and second quarters of any
calendar year so that new programs will be ready for delivery in the third
quarter and, to a greater extent, the fourth quarter of that year. Revenues
from license and production agreements are typically recognized when the
finished product has been delivered to and accepted by the customer. As a
result of the production cycle, the Company's revenue is not recognized evenly
throughout the year and a significant portion of such revenue is recognized in
the fourth quarter. The Company's results of operations fluctuate materially
from quarter to quarter and year to year and the results of any one period are
not necessarily indicative of results for future periods. Cash flows also
fluctuate and do not necessarily correlate with revenue recognition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Revenue and Cost Recognition."

COMPETITION

The creation, development, production and distribution of television
programming, together with the exploitation of the proprietary rights related
to such programming, is a highly competitive business. The Company faces
intense competition from producers, distributors, licensors and merchandisers.
While the Company became the leading independent animation studio in North
America by producing more animated series for broadcast on the Networks than
other independent animation studios, the Company also competes with the film
and television animation operations of the major studios, all of which are
larger and have greater financial resources than the Company. In addition to
competing for available time slots offered by the Networks and other
broadcasters (see "--Declining Value of License Fee Agreements and Increasing
Control of Proprietary Rights by Broadcasters"), management believes that it
faces competition in two other principal areas:

CREATIVE PROPERTIES AND CREATIVE PERSONNEL

Film Roman competes with other animation companies in the acquisition of
characters, storylines, plots and ideas created by third parties. Such
competition is generally on the basis of which animation company is perceived
to be best able to create and develop a successful program from the initial
idea or character. Film Roman also competes with other animation companies
(including the film and television animation operations of major studios) for
the animators, writers, producers and other creative personnel needed to
successfully develop and produce animated programming. Management believes
that it competes for creative properties and creative personnel with a variety
of companies including The Walt Disney Company, Warner Bros., Hanna-Barbera,
DIC, Klasky-Csupo, Marvel Entertainment, Saban Entertainment, Cinar Films,
Dreamworks SKG, Nelvana, Universal Cartoon Studios, Sony Cartoon Studios and
Hyperion Productions, many of which have greater financial resources to obtain
creative properties and creative personnel.

10
<PAGE>

LICENSING AND MERCHANDISING

An important element of the Company's strategy is to license the characters
in its proprietary programs to merchandisers that produce and distribute a
variety of products, ranging from toys to apparel, throughout the United
States and internationally. As a result, the Company competes with other
owners of creative content who seek to license their characters and properties
to a limited number of manufacturers and distributors. In connection with the
Company's recent initiatives to exploit the proprietary rights associated with
its programming, it has entered into several licensing and merchandising
agreements. However, for the six months ended June 30, 1996, the Company
derived no significant revenue from its licensing and merchandising
activities. See "Business--Principal Elements of the Company's Business--
Licensing and Merchandising."

RISKS RELATED TO INTERNATIONAL SUB-CONTRACTING AND SALES

OVERSEAS SUBCONTRACTORS

The Company, like other producers of animated programming, subcontracts some
of the less creative and more labor-intensive components of its production
process to animation studios located in low-cost labor countries, primarily in
the Far East. With a growing number of animated feature films and animated
television programs being produced in recent years, the demand for the
services of overseas studios has increased substantially. This increased
demand may lead overseas studios to raise their fees which may result in
increased animated programming production costs incurred by the Company or the
inability of the Company to contract with its preferred overseas studios.

Many of the subcontractors used by the Company are located in South Korea
and, to a lesser extent, Taiwan, the Philippines and China. Each of these
areas has recently experienced some degree of political unrest or unusual
military activity. The exacerbation of such conditions could cause significant
disruptions in the delivery of animation products to the Company. In such
event, the Company may be required to retain new subcontractors. No assurance
can be given that different subcontracting arrangements will be as favorable
to the Company as its current arrangements.

INTERNATIONAL SALES

Approximately 5% of the Company's revenue for the year ended December 31,
1995 was derived from licensing international distribution rights to the
Company's proprietary programming, and the Company anticipates that revenue
from these activities can grow substantially. The Company's ability to
continue to expand its international business (as well as its ability to
contract upon favorable terms with overseas studios) depends, in part, on the
local economic conditions, currency fluctuations, local changes in regulatory
requirements, compliance with a variety of foreign laws and regulations, and
cultural barriers. In addition, political instability in a foreign nation may
adversely affect the ability of the Company to distribute its product in that
country. As a result of the foregoing, as well as many other factors affecting
domestic businesses, there can be no assurance that the Company's
international operations will be profitable. See "Business--Principal Elements
of the Company's Business--Distribution of Proprietary Programming--
International Distribution."

TECHNOLOGICAL CHANGES; POSSIBLE CHANGES IN PRODUCTION OF COMPANY'S PRODUCTS

The proliferation of new production technologies may change the manner in
which the Company's programming is created and distributed. Recently, certain
animators have begun to use computer-generated animation, including three-
dimensional digital animation, instead of two-dimensional cel animation, to
create their animated programming. Although the Company utilizes computers in
several stages of the animation production process, the Company does not
currently contemplate making any significant expenditures for any new computer
technology. The Company utilizes three-dimensional digital animation in the
production of certain of its video games, and, to the extent that any three-
dimensional digital animation is used in any of its animated programming, the
Company expects that it will contract with third parties to produce such
animation. No assurance can be given that the introduction and proliferation
of three-dimensional digital animation or other technological changes will not
cause the Company's current methods of producing animation to become less cost

11
<PAGE>

competitive or less appealing to its audiences. In addition, there can be no
assurance that the Company will be able to adapt to such changes in a cost-
effective manner.

DEPENDENCE UPON KEY PERSONNEL

The Company's success depends to a significant extent upon the expertise and
services of Phil Roman, the Company's President and Chief Executive Officer,
and other key personnel, including William Schultz, its Executive Vice
President. The loss of the services of Mr. Roman and/or other key management
personnel could have an adverse effect upon the Company's business, results of
operations and financial condition. The Company has entered into employment
agreements with Messrs. Roman and Schultz and certain of its other key
management personnel. For a description of the terms of such agreements, see
"Management--Employment Agreements." In addition, the Company maintains $5.0
million and $2.0 million "key man" life insurance policies on Messrs. Roman
and Schultz, respectively. There can be no assurance that the Company will be
able to retain its existing management personnel. In addition, the Company's
continued success is highly dependent on the artistic and production
capabilities of its creative staff. The Company is currently a signatory to
the Screen Actors Guild collective bargaining agreement and certain of the
Company's voice-over actors are Screen Actors Guild members. The Company
believes that its future success will depend, in part, on its continuing
ability to attract, retain and motivate qualified personnel.

CASUALTY RISKS

Substantially all of the Company's operations and personnel are located in
its North Hollywood headquarters, resulting in vulnerability to fire or other
local conditions, including the risk of seismic activity.

CONTROL BY MANAGEMENT; POTENTIAL ANTI-TAKEOVER EFFECTS

Upon completion of the Offering, the Reorganization and the Non-Cash
Redemption, Phil Roman, the Company's President and Chief Executive Officer,
will beneficially own approximately 36.4% of the outstanding shares of Common
Stock and the Company's executive officers and directors as a group will
beneficially own approximately 61.3% of the outstanding shares of Common Stock
(including shares of Common Stock issuable upon the exercise of stock options
exercisable within 60 days of the date of this Prospectus). Accordingly, the
executive officers and directors of the Company will have the ability to elect
all of the Company's directors and thereby control the management and affairs
of the Company. They also will have the power to control virtually all matters
requiring stockholder approval and, although there is no present intention to
do so, they will collectively be able to authorize a merger, sale of all or
substantially all of the Company's assets, a "going-private" transaction or
any other fundamental corporate transaction. In addition, the Company's Stock
Option Plan and certain of the executive officers' employment agreements
provide for the acceleration of the vesting and exercisability of stock
options and grants of stock thereunder under certain circumstances, including
in the event of certain changes in control of the Company.

Provisions of the Certificate of Incorporation and Bylaws of Film Roman
Holdings, as well as provisions of the Delaware General Corporation Law, may
have the effect of delaying or preventing transactions involving a change of
control of the Company, including transactions in which stockholders might
receive a substantial premium for their shares over then current market
prices, and may limit the ability of stockholders to approve transactions that
they deem to be in their best interest. For example, under the Certificate of
Incorporation, the Board of Directors is authorized to issue one or more
classes of preferred stock having such designations, rights and preferences as
may be determined by the Board. In addition, the directors are divided into
three classes, each having a term of three years, with the term of one class
expiring each year. These provisions could delay the replacement of a majority
of the directors and have the effect of making changes in the Board of
Directors more difficult than if such provisions were not in place. Any
amendment of the Company's Bylaws by the stockholders or of certain provisions
of the Company's Certificate of Incorporation (including provisions regarding
the classification and election of directors) requires the affirmative vote of
at least 66 2/3% of the shares of Common Stock then outstanding. See
"Description of Capital Stock--Delaware Law and Limitations on Change in
Control."

12
<PAGE>

NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active public market will develop or be
sustained after the Offering. The initial public offering price will be
determined by negotiations between the Company and the Representatives (as
defined below), and there can be no assurance that the market price of the
Common Stock after the Offering will equal or exceed the initial public
offering price. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. Following the
consummation of the Offering, the market price of the Common Stock could be
subject to significant fluctuations in response to variations in results of
operations, general economic and market conditions and other factors.

SUBSTANTIAL DILUTION

Purchasers of Common Stock offered hereby will experience substantial
dilution in pro forma net tangible book value per share of Common Stock from
the initial public offering price. See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE

There will be 8,448,236 shares of Common Stock outstanding immediately
following consummation of the Offering, the Reorganization and the Non-Cash
Redemption (8,355,000 shares if the Underwriters' over-allotment option is
exercised in full and the Non-Cash Redemption does not occur). The 3,300,000
shares of Common Stock offered hereby (plus an additional 495,000 shares if
the Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or registration under the Securities Act by
persons other than "affiliates" (as defined in the Securities Act) of the
Company. The remaining 5,148,236 shares of Common Stock will be "restricted
securities" under the Securities Act and may only be sold pursuant to an
effective registration statement under the Securities Act or an applicable
exemption from the registration requirements of the Securities Act, including
Rule 144 thereunder. Holders of 2,069,486 shares of Common Stock (or of
1,481,250 shares of Common Stock if the Non-Cash Redemption does not occur)
and warrants to purchase 72,066 shares of Common Stock have certain
registration rights, and the Company will file an S-8 Registration Statement
to register up to 1,227,695 shares of Common Stock reserved for issuance
pursuant to the Company's Stock Option Plan. See "Management--Stock Option
Plan." All holders of Common Stock and all directors and executive officers
have agreed with the Underwriters (as defined below) not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of their
shares of Common Stock of the Company or any securities convertible into or
exercisable or exchangeable for such Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of such Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. See "Shares Eligible For Future Sale." At the
expiration of such lock-up period, there will be 3,078,750 shares of Common
Stock that will be eligible for sale by "affiliates."

No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares for future sale will have
on the market price of shares of Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock (including shares issuable upon
the exercise of stock options), or the perception that such sales could occur,
could adversely affect prevailing market prices for the Common Stock.

13
<PAGE>

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of Common Stock
offered hereby will be approximately $29.6 million ($34.2 million if the
Underwriters' over-allotment option is exercised in full) after deducting the
estimated underwriting discount and offering expenses payable by the Company.

The Company intends to use the estimated net proceeds of the Offering as
follows: (i) approximately $1.9 million to pay accumulated but unpaid
dividends on the Redeemable Preferred Stock and the Convertible Preferred
Stock; (ii) approximately $7.5 million to pay for the proceeds applied to the
Cash Redemption of the Redeemable Preferred Stock (approximately $12.0 million
to pay for the proceeds applied to the Cash Redemption of all of the
Redeemable Preferred Stock if the Underwriters' over-allotment option is
exercised in full); (iii) approximately $1.2 million to repay short-term debt
under the Company's existing line of credit which is due on demand and has a
variable interest rate (equal to 10.75% at June 30, 1996); and (iv) the
remaining net proceeds to fund the production of animated programming and for
general corporate purposes. See "Capitalization."

Almost all of the proceeds to be applied to the Cash Redemption will be paid
to the BCI Affiliate and to the Pecks Affiliate. Theodore T. Horton, Jr., a
managing director of BCI Advisors, Inc., and Robert Cresci, a managing
director of Pecks Management Partners Ltd., currently serve as directors of
the Company. Accordingly, the entities receiving such Cash Redemption may be
deemed "affiliates" (as defined in the Securities Act) of the Company. See
"Management" and "Certain Transactions."

DIVIDEND POLICY

The Company does not anticipate paying dividends in the foreseeable future.
Management anticipates that all earnings and other cash resources of the
Company, if any, will be retained by the Company for investment in its
business. The Company expects that any future debt agreements would contain
significant restrictions on its ability to pay dividends.

14
<PAGE>

CAPITALIZATION

The following table sets forth the cash and cash equivalents, short-term
debt and capitalization of the Company as of June 30, 1996 and as adjusted to
reflect the Reorganization, the Non-Cash Redemption and the sale of the shares
of Common Stock offered by the Company hereby and the application of the net
proceeds therefrom. See "Use of Proceeds."

<TABLE>
<CAPTION>
AS OF JUNE 30,
1996
--------------------
AS
ACTUAL ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................. $ 4,794 $23,771
======= =======
Short-term debt(1)........................................ $ 1,241 $ --
======= =======
Redeemable Preferred Stock, $.01 par value, 1,200,000
shares authorized, issued, and outstanding (actual); none
authorized, issued and outstanding (as adjusted)(1)...... $ 7,232 $ --
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, none issued and outstanding (as adjusted).. -- --
Convertible Preferred Stock, $.01 par value, 750,000
shares authorized, issued and outstanding (actual);
none authorized, issued and outstanding (as adjusted).. -- (2) --
Common Stock, no par value, 10,000,000 shares
authorized, 1,713,000 shares issued and outstanding
(actual); $.01 par value, 20,000,000 shares authorized,
8,448,236 shares issued and outstanding (as
adjusted)(3)........................................... 1 84
Additional paid-in capital.............................. 4,717 33,514
Deficit................................................. (4,893) (4,893)
------- -------
Total stockholders' (deficiency) equity............... (175) 28,705
------- -------
Total capitalization...................................... $ 7,057 $28,705
======= =======
</TABLE>
- ---------------------
(1) See Notes 4 and 6 of Notes to Financial Statements.

(2) Actual Convertible Preferred Stock balance as of June 30, 1996 rounds to
zero.

(3) The adjusted number of shares issued and outstanding gives effect to the
Reorganization, the Offering, the Cash Redemption and the Non-Cash
Redemption. Excludes 1,227,695 shares of Common Stock issuable upon the
exercise of options granted or to be granted under the Company's Stock
Option Plan and 72,066 shares of Common Stock issuable upon the exercise
of the New Warrants. See "Management--Stock Option Plan" and "Certain
Transactions--1996 Commitment."

15
<PAGE>

DILUTION

At June 30, 1996, the net tangible book value of the Company, adjusted to
reflect the effects of the Reorganization and the Non-Cash Redemption, was
approximately $2,544,000 or $0.49 per share. "Net tangible book value per
share as adjusted" is defined as the book value of tangible assets of the
Company applicable to Common Stock, less all liabilities, divided by the
number of shares of Common Stock outstanding after the Reorganization and the
Non-Cash Redemption. Without taking into account any changes in the net
tangible book value as adjusted after June 30, 1996 (other than to give effect
to the sale of Common Stock by the Company in this Offering and the
application of the net proceeds therefrom), the pro forma net tangible book
value of the Company at June 30, 1996 would have been approximately
$28,705,000 or $3.40 per share. This represents an immediate increase in pro
forma net tangible book value of $2.91 per share to the existing stockholders
and an immediate dilution of $6.60 per share to new investors. The following
table illustrates the dilution per share:

<TABLE>
<S> <C> <C>
Initial public offering price per share(1)..................... $10.00
Net tangible book value per share before offering as
adjusted(2)................................................. $0.49
Increase attributable to purchase by new stockholders in the
Offering.................................................... 2.91
-----
Pro forma net tangible book value as adjusted after the
Offering...................................................... 3.40
------
Dilution of net tangible book value to new stockholders(3)..... $ 6.60
======
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1996,
the differences between existing shareholders and new investors with respect
to the number of shares owned after the Offering, the total consideration
paid, and the average price paid per share in the Offering:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders... 5,148,236 60.9% $ 4,513,000 12.0% $ 0.88
New investors........... 3,300,000 39.1 33,000,000 88.0% $10.00
--------- ----- ----------- -----
Total................. 8,448,236 100.0% $37,513,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------------
(1) Before deduction of underwriting discounts and commissions and expenses
payable by the Company in connection with the Offering.
(2) Share amounts give effect to the Reorganization and Non-Cash Redemption.
(3) Dilution is determined by subtracting pro forma net tangible book value
per share from the initial public offering price paid by a new investor
for one share of Common Stock.

The computations in the table set forth above assume no exercise of stock
options outstanding under the Company's Stock Option Plan or of the New
Warrants. On the date of this Prospectus, after giving effect to the
Reorganization, there were outstanding options to purchase 859,375 shares of
Common Stock at a weighted average exercise price of $7.46 per share and
warrants to purchase 72,066 shares of Common Stock at an exercise price of
$7.00 per share. Assuming the exercise of all such options and warrants, the
per share dilution to new investors would be $6.20 as compared to $6.60
presented above.

16
<PAGE>

SELECTED FINANCIAL INFORMATION

The selected financial data set forth below as of December 31, 1994 and 1995
and for each of the two years in the period ended December 31, 1995 are
derived from the Company's financial statements audited by Ernst & Young LLP,
independent auditors, included elsewhere in this Prospectus. The selected
financial data presented below as of and for the year ended December 31, 1993
have been derived from the financial statements of the Company audited by
Tanner, Mainstain & Hoffer. The selected financial data presented below as of
and for the years ended December 31, 1991 and 1992 and the six months ended
June 30, 1995 and 1996 are derived from the Company's unaudited financial
statements. The unaudited financial statements from which such selected
financial data are derived include all adjustments which management considers
necessary for a fair presentation. Results for the six months ended June 30,
1996 are not necessarily indicative of the results for the year. The selected
financial data presented below and under "Management's Discussion and Analysis
of Financial Condition and Results of Operations" should be read in
conjunction with the Company's financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $9,642 $21,943 $27,867 $36,201 $ 34,341 $13,359 $ 13,716
Expenses:
Cost of revenue........ 9,021 20,716 25,675 33,190 33,156 12,613 12,928
Selling, general and
administrative
expenses.............. 266 699 1,368 1,829 2,963 1,178 1,594
------ ------- ------- ------- --------- ------- ---------
Operating income
(loss)................ 355 528 824 1,182 (1,778) (432) (806)
Interest income
(expense), net........ 1 (16) (21) (28) 89 (26) 64
------ ------- ------- ------- --------- ------- ---------
Income (loss) before
provision for income
taxes................. 356 512 803 1,154 (1,689) (458) (742)
Provision for income
taxes................. -- -- -- -- -- -- --
------ ------- ------- ------- --------- ------- ---------
Net income (loss)...... 356 512 803 1,154 (1,689) (458) (742)
Pro forma provision for
income taxes(1)....... (142) (205) (321) (462) 574 156 --
------ ------- ------- ------- --------- ------- ---------
Pro forma net income
(loss)(1)............. $ 214 $ 307 $ 482 $ 692 $ (1,115) $ (302) $ (742)
====== ======= ======= ======= ========= ======= =========
Pro forma net income
(loss) attributable to
common stock(2)....... $ 214 $ 307 $ 482 $ 692 $ (2,000) $ (302) $ (1,707)
====== ======= ======= ======= ========= ======= =========
Pro forma net income
(loss) per common
share(2)(3)........... $ (0.52) (0.44)
========= =========
Pro forma net income
(loss) per common
share, giving effect
to the
Reorganization(4)..... $ (0.41) $ (0.35)
========= =========
Pro forma weighted
average number of
shares outstanding,
giving effect to the
Reorganization(4)..... 4,824,519 4,824,519
========= =========
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
-------------------------------------------- ------------------
1991 1992 1993 1994 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents........... $ 139 $ 463 $ 448 $ 436 $ 5,176 $ 4,794
Film costs, net of
amortization.......... 7,514 7,660 10,603 12,382 12,379 19,012
Total assets........... 7,958 8,608 11,832 13,694 18,950 26,975
Short-term debt........ 297 356 1,270 1,363 1,737 1,241
Redeemable Preferred
Stock................. -- -- -- -- 6,749 7,232
Stockholder's equity... 622 345 784 1,691 1,832 (175)
</TABLE>

(Footnotes appear on following page.)

17
<PAGE>

(Footnotes to Selected Financial Information on previous page.)
- ---------------------
(1) The Company operated as an S Corporation until August 4, 1995. As an S
Corporation, the Company was subject to no federal income taxes and only
minimum state taxes. Pro forma amounts reflect adjustments for additional
income taxes that would have been reported if the Company had been a C
Corporation based upon an estimated statutory rate of 40% in 1991, 1992,
1993 and 1994, and 34% in 1995.

(2) For the year ended December 31, 1995, the pro forma net loss attributable
to common stock gives effect to the accretion of the difference between
the carrying value and the liquidation value of the Redeemable Preferred
Stock of $484,829 and to the accrual of dividends of $400,000 on the
Redeemable Preferred Stock. For the six months ended June 30, 1996
(unaudited), the pro forma net loss attributable to common stock gives
effect to the accretion of the difference between the carrying value and
the liquidation value of the Redeemable Preferred Stock of $484,828 and to
the accrual of dividends of $480,000 on the Redeemable Preferred Stock.

(3) The pro forma net income (loss) per common share gives effect to the split
of the Company's Common Stock which occurred in July 1995 and is
calculated in accordance with a Staff Accounting Bulletin of the
Securities and Exchange Commission whereby common and common equivalent
shares issued within a 12-month period prior to an initial public offering
are treated as outstanding for all periods presented if the issue price
was less than the proposed initial public offering price. In addition,
shares issuable upon the exercise of options and warrants and Convertible
Preferred Stock within the 12-month period are considered to have been
outstanding since inception of the Company. On this basis, the weighted
average number of shares outstanding for all periods presented is
3,860,792.

(4) The pro forma net income (loss) per common share and weighted average
number of shares outstanding, both giving effect to the Reorganization,
reflect the adjustments as outlined under "Prospectus Summary--The
Reorganization."

SUPPLEMENTAL LOSS PER SHARE CALCULATION

Giving effect, at the beginning of the respective periods, to (i) the
issuance of shares of Common Stock whose proceeds are to be used to repay the
Company's short-term debt and the Cash Redemption of $7.5 million liquidation
preference of the Redeemable Preferred Stock, (ii) such short-term debt
repayment and Redeemable Preferred Stock redemption, and (iii) the reduction
of the interest and dividend accruals resulting from such repayment and
redemption, the supplemental loss per share (not giving effect to the
Reorganization) for the year ended December 31, 1995, and the six months ended
June 30, 1996, would have been $(1.08) and $(0.95), respectively. The
supplemental loss per share, after giving effect to the Reorganization, for
the year ended December 31, 1995, and the six months ended June 30, 1996,
would have been $(0.86) and $(0.76), respectively. The loss attributable to
common stockholders used for this supplemental loss per share calculation has
been increased by $3,579,396 and $3,277,772 for the year ended December 31,
1995 and the six months ended June 30, 1996, respectively, for the excess of
the price to be paid for the redemption of the Redeemable Preferred Stock over
its carrying value. The excess of the price to be paid for the redemption of
the Redeemable Preferred Stock over its carrying value will be charged to
stockholders' equity in the period in which the Offering is consummated, and
reflected in net income (loss) per share applicable to common stock.

1996 COMMITMENT

In September 1996, the Company secured a commitment (the "1996 Commitment")
from certain of its existing stockholders to purchase up to $3.0 million of
Senior Secured Notes due December 20, 1996 of Film Roman California (the
"Senior Notes"). As consideration for the receipt of the 1996 Commitment, Film
Roman California issued New Warrants which, pursuant to the anti-dilution
provisions thereof, will be exercisable for 72,066 shares of Common Stock at
an exercise price of $7.00 per share. No Senior Notes have been or will be
issued pursuant to the 1996 Commitment. The New Warrants and the transaction
costs associated with the 1996 Commitment will be expensed prior to December
31, 1996. The Company estimates that such expenses will be approximately
$300,000. The Company expects to incur a loss for the year ended December 31,
1996, taking into account the expenses associated with the issuance of the New
Warrants. Although the New Warrants are not currently exercisable, if the New
Warrants were exercised in full on the date of the Prospectus, such New
Warrants would provide approximately $216,000 of value to the holders thereof.
Such value was determined by multiplying the number of shares of Common Stock
issuable upon the exercise of such Warrants (72,066) by the difference between
the initial public offering price ($10.00) and the per share exercise price
($7.00). See "Certain Transactions--1996 Commitment."

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Film Roman Holdings was incorporated in Delaware in May 1996 in order to
hold all of the outstanding capital stock of Film Roman California. As a
result of the Reorganization, Film Roman California will become a wholly-owned
subsidiary of Film Roman Holdings immediately prior to the closing of the
Offering. See "Certain Transactions--Reorganization."

In 1995 Film Roman California privately placed the California Redeemable
Preferred Stock and warrants to purchase California Common Stock with certain
investors for an aggregate purchase price of $12 million. See "Certain
Transactions--1995 Private Placement." In 1996 the Company secured a
commitment from certain of its existing stockholders to purchase up to $3.0
million of Senior Notes. As consideration for the receipt of the 1996
Commitment, Film Roman California issued New Warrants. No Senior Notes have
been or will be issued pursuant to the 1996 Commitment. See "Certain
Transactions--1996 Commitment."

Film Roman creates, develops, produces and distributes high quality, family-
oriented animated television programming. Historically, the Company has
produced substantially all of its programming for third parties on a "fee-for-
services" basis. Increasingly, the Company is producing programming for which
it controls the "proprietary rights" associated with such programming
(including, for example, international distribution and licensing and
merchandising rights).

The Company produces a limited number of television series in any year and
is substantially dependent on revenues from licensing these programs to
broadcasters. The Company's future performance will be affected by issues
facing all producers of animated programming, including risks related to the
limited number of time slots allocated to children's and/or animated
television programming, the intense competition for those time slots and the
declining license fees paid to producers of programming by broadcasters. In
addition, the Company has recently begun to expand its internal creative
development of proprietary characters and program concepts by establishing an
international distribution division and a licensing and merchandising division
to support the exploitation of its proprietary rights. As a result of these
new initiatives, the Company has incurred additional overhead and other costs
which has depressed operating results. While the Company seeks to limit its
financial risk associated with its proprietary programming by obtaining
commitments prior to production to cover at least 50% of its direct production
costs, there can be no assurance that the Company will be able to cover the
balance of its production costs and overhead costs relating to production,
licensing and distribution through the exploitation of its proprietary rights.
As a result of the foregoing risks, there can be no assurance that the Company
will be able to generate revenues that exceed its costs. See "Risk Factors."

1996 PRODUCTION

The Company is currently producing 161 episodes of programming to be aired
during the 1996-97 broadcast season. The Company estimates that approximately
120 of such episodes will be produced and delivered to broadcasters in 1996.
The approximately 120 episodes that the Company expects to produce and deliver
in 1996 represent an increase of 47 episodes (or 64%) from the number of
episodes produced and delivered in 1995. See "Business--The Company's
Television Programming." Approximately 42% of these episodes are proprietary
productions for which the Company expects to recognize revenues over a period
of years (unlike fee-for-services productions, for which all or most revenues
are recognized upon delivery). In addition, the Company has commenced
production of 13 episodes of Blues Brothers: The Animated Series which are
scheduled to be aired during the 1997-98 broadcast season. The Company expects
that its losses from operations will continue through the third quarter of
1996 and perhaps beyond, and that including expenses associated with the 1996
Commitment, a loss will be reported for 1996.

19
<PAGE>

REVENUE AND COST RECOGNITION

The Company follows FASB 53 for accounting practices related to revenue
recognition and amortization of production costs for its fee-for-services and
proprietary programming.

Revenues from license and production agreements, which may provide for the
receipt by the Company of nonrefundable guaranteed amounts, are recognized
when the license period begins and the programming is available pursuant to
the terms of the agreement, typically when the finished episode has been
delivered to and accepted by the customer. Amounts in excess of minimum
guarantees under such agreements are recognized when earned. Cash collected in
advance of the time of availability of programming is recorded as deferred
revenue ($14.1 million at June 30, 1996).

Broadcasters typically make most of their annual programming commitments in
the first and second quarters so that programs will be ready for broadcast in
the third and fourth quarters of the same year. As a result, the Company's
revenues are concentrated in the third and fourth quarters.

All costs incurred in connection with an individual program or film,
including acquisition, development, production and allocable production
overhead costs and interest are capitalized as film costs. At June 30, 1996,
the Company's capitalized film costs balance was $19.0 million. These costs
are stated at the lower of unamortized cost or estimated net realizable value.
Estimated total production costs for an individual program or film are
amortized in the proportion that revenue realized relates to management's
estimate of the total revenue expected to be received from such program or
film. Estimated liabilities for third party participations are accrued and
expensed in the same manner as film costs are amortized. Due to the inherent
uncertainties of forecasting both total revenue and total expense, at any time
one or the other can be overstated or understated, resulting in potential
adjustments to the financial statements, including losses. See Note 1 to Notes
to Financial Statements.

The Company's cash flows are not necessarily related to revenue recognition
and amortization of production costs. Cash is received and costs are incurred
(and paid) throughout the year. In the fourth quarter, and to a lesser extent
the third quarter, cash used in operations typically exceeds cash generated by
operations as completed shows are delivered to broadcasters.

OVERHEAD ALLOCATION

Overhead is allocated to particular productions on the basis of the total
allocable overhead times the ratio of direct production costs incurred on a
program to total production costs incurred during the period. Total allocable
overhead is determined on the basis of management's estimates of the
percentage of overhead costs which can be attributed to the productions in
progress during the period.

INCOME TAXES

Prior to August 4, 1995, the Company was an S Corporation subject to
taxation under Subchapter S of the Internal Revenue Code of 1986, as amended
(the "Code"). As a result, the net income of the Company, for federal (and
some state) income tax purposes, was reported by and taxed directly to the
Company's sole stockholder, rather than the Company. The Company's S
Corporation status terminated on August 4, 1995 and the Company became a C
Corporation subject to corporate taxation. No adverse tax consequences to the
persons who become stockholders in the Offering are expected to result from
the Company's change to C Corporation status. Pro forma amounts reflect
adjustments for income taxes that would have been reported if the Company had
been a C Corporation based upon an estimated statutory rate of 40% in 1993 and
1994, and 34% in 1995.

20
<PAGE>

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995

Total revenue for the six months ended June 30, 1996 increased by 2% to
$13.7 million from $13.4 million for the same period in 1995.

Cost of revenue for the six months ended June 30, 1996 increased by 2% to
$12.9 million from $12.6 million for the same period in 1995. Cost of revenue,
as a percentage of revenue, was 94% for both the six months ended June 30,
1996 and 1995.

Total selling, general and administrative expenses increased for the six
months ended June 30, 1996 by 33% to $1.6 million from $1.2 million for the
same period in 1995. The increase was primarily due to the expansion of the
Company's licensing and merchandising division ($.2 million), international
division ($.1 million) and interactive division ($.1 million). As a percentage
of total revenue, selling, general and administrative expenses increased to
12% for the six months ended June 30, 1996 from 9% for the same period in
1995.

Operating loss increased to $0.8 million for the six months ended June 30,
1996 from $0.4 million for the same period in 1995.

The pro forma income tax benefit was $0.1 million for the six months ended
June 30, 1995. The Company became a C corporation on August 4, 1995 and
therefore there was no pro forma income tax provision for the six months ended
June 30, 1996.

As a result of the above, pro forma net loss increased to $0.7 million for
the six months ended June 30, 1996 from $0.3 million for the same period in
1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994

Total revenue decreased by 5% to $34.3 million in 1995 from $36.2 million in
1994, primarily due to a decrease in the total number of episodes produced and
delivered. For the three series that were produced and delivered in both 1994
and 1995, six fewer episodes were produced and delivered in 1995 than in 1994
($1.3 million). In addition, the Company produced three series in 1994 which
were not renewed ($12.8 million). This was partially offset by three new
series produced and delivered in 1995 ($10.8 million). These three new series
produced in 1995 represented 19 fewer episodes than the three series produced
in 1994. Although 25 fewer episodes were produced and delivered in 1995 than
in 1994, revenues per episode increased 22%. This decrease in total revenue
was partially offset by an increase in 1995 of revenue from profit
participations ($0.9 million) and an increase in other revenue ($0.5 million),
primarily related to an increase in revenue derived from commercials and
specials.

Although 25 fewer episodes were produced and delivered in 1995, cost of
revenue was $33.2 million in 1995 and 1994. Cost of revenue, as a percentage
of revenue, increased to 97% in 1995 from 92% in 1994. This increase was
primarily due to higher direct production costs of new shows produced and
delivered in 1995 and an increase in total allocable overhead.

Total selling, general and administrative expenses increased by 62% to $3.0
million in 1995 from $1.8 million in 1994, primarily due to increased costs
related to the expansion of the Company's licensing and merchandising division
($0.4 million), interactive division ($0.2 million) and international division
($0.2 million) and an increase in rent and salaries ($0.3 million). As a
percentage of total revenue, selling, general and administrative expenses
increased to 8.6% in 1995 from 5.0% in 1994.

Operating income (loss) decreased by $3.0 million to ($1.8 million) in 1995
from $1.2 million in 1994.

The pro forma income tax benefit was $0.6 million in 1995, compared to a
provision of $0.5 million in 1994.

21
<PAGE>

As a result of the above, there was a pro forma net loss of $1.1 million in
1995 compared to pro forma net income of $0.7 million in 1994.

YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993

Total revenue increased by 30% to $36.2 million in 1994 from $27.9 million
in 1993. This increase was primarily due to an increase of 20 episodes
produced and delivered.

Cost of revenue increased by 29% to $33.2 million in 1994 from $25.7 million
in 1993, primarily due to an increase in production costs related to increased
episodes in production. As a percentage of revenue, cost of revenue was 92%
for 1993 and 1994.

Total selling, general and administrative expenses increased by 34% to $1.8
million in 1994 from $1.4 million in 1993, primarily due to the establishment
of the Company's international division ($0.2 million) and the addition of new
personnel ($0.2 million). As a percentage of total revenue, selling, general
and administrative expenses were 5% in 1994 and 1993.

Operating income increased by 43% to $1.2 million in 1994 from $0.8 million
in 1993. As a percentage of total revenue, operating income was 3% in 1993 and
1994.

The pro forma income tax provision was $0.5 million in 1994, an increase
from $0.3 million in 1993 as a result of the increase in pretax income.

As a result of the above, pro forma net income increased to $0.7 million in
1994 from $0.5 million in 1993.

LIQUIDITY AND CAPITAL RESOURCES

As the Company endeavors to develop and produce more proprietary programs,
retain more of the proprietary rights thereto, and increase its presence in
the licensing and merchandising and international distribution markets,
greater capital resources will be required. The Company seeks to limit the
financial risk associated with its proprietary programming by obtaining
commitments prior to production to cover at least 50% of its direct production
costs, but the Company must utilize its own funds to cover remaining
production costs and overhead costs relating to production, licensing and
distribution.

For the year ended December 31, 1995, net cash used in operating and
investing activities was $4.6 million, an increase of $4.9 million from the
same period in 1994, due to a net loss of $1.7 million in 1995, as compared to
a net profit of $1.2 million in 1994, a decrease in deferred revenue, and
fluctuations in other operating assets and liabilities. For the year ended
December 31, 1995, net cash provided by financing activities was $9.4 million,
an increase of $9.5 million from the same period in 1994, due primarily to
$10.7 million in net proceeds from the issuance of Redeemable Preferred Stock
and warrants. For the six months ended June 30, 1996, net cash provided by
operating and investing activities was $0.1 million, an increase of $0.3
million from the same period in 1995, due to an increase in deferred revenue
and fluctuations in other operating assets and liabilities. For the six months
ended June 30, 1996, cash used in financing activities was $0.5 million, an
increase of $0.3 million from the same period in 1995, due primarily to
repayments of debt.

The Company has a $1,230,000 revolving credit facility (the "Revolving
Credit Facility") with a bank. Borrowings under the Revolving Credit Facility
accrue interest at a variable rate. The obligations under the Revolving Credit
Facility are secured by various assets of the Company and are guaranteed by
Phil Roman. At June 30, 1996, $1,230,000 in principal amount was outstanding
under the Revolving Credit Facility; all borrowings outstanding are due and
payable on demand. See Note 4 of Notes to Financial Statements.

Due to the Company's increase in production of proprietary programming and
the number of series in process, the Company has increased its use of cash. In
addition, the third and fourth quarter cash flows are typically negative. In
order to supplement cash resources prior to the Offering, the Company secured
a

22
<PAGE>

commitment from certain of its existing stockholders to purchase up to $3.0
million of Senior Notes. No Senior Notes have been or will be issued pursuant
to the 1996 Commitment. In connection with the 1996 Commitment, the Company
issued New Warrants to such stockholders. Although the New Warrants are not
currently exercisable, if the New Warrants were exercised in full on the date
of the Prospectus, such New Warrants would provide approximately $216,000 of
value to the holders thereof. Such value was determined by multiplying the
number of shares of Common Stock issuable upon the exercise of such Warrants
(72,066) by the difference between the initial public offering price ($10.00)
and the per share exercise price ($7.00). See "Certain Transactions--1996
Commitment."

The Company is seeking to obtain a new bank facility in the principal amount
of approximately $5.0 million. There can be no assurance that it will be able
to obtain a new bank facility on terms that are satisfactory to the Company.
Management believes that, after the consummation of the Offering, the
Company's cash and cash equivalents and anticipated cash flow from operations
will be sufficient to fund the Company's operating requirements for at least
the next year, whether or not the Company enters into a new bank facility.

23
<PAGE>

BUSINESS

OVERVIEW

Film Roman creates, develops, produces and distributes high quality, family-
oriented animated television programming. Since the Company was founded by
Phil Roman in 1984, it has become the leading independent animation studio in
North America by producing more animated series for broadcast on the Networks
during the 1996-97 television season than any other independent animation
studio. The Company is currently producing 10 animated series (Bobby's World,
King of the Hill, The Mask (CBS), The Mask (syndication), Richie Rich, The
Simpsons, BRUNO the Kid, C-Bear & Jamal, Felix the Cat and Mortal Kombat) and
one special (The Story of Santa Claus), and recently completed production of
an additional special (The Magic Pearl), all of which are scheduled to air on
ABC, CBS, FOX or the USA Network, as well as in first-run syndication, during
the 1996-97 television season. Additional previously-produced Film Roman
series that will air during the upcoming television season include Garfield &
Friends, Mighty Max, The Critic and Klutter. The Company has produced at least
three series each season for the Networks since 1990 and, in so doing, has
successfully competed against other independent studios, as well as the major
studios which have financial and other resources greater than the Company.

The Company recently commenced production of 13 episodes of Blues Brothers:
The Animated Series (based on the Dan Aykroyd and John Belushi characters)
currently scheduled to be aired in prime-time on UPN during the 1997-98
broadcast season. The Company has retained certain rights to the animated
series, including distribution and licensing and merchandising rights.

The Company believes that it has a reputation within the entertainment
industry as a reliable producer of high quality animated programming, making
it one of a select group of suppliers of animated programming to the Networks.
This reputation in the animation industry is critical because animated series
are ordered for production without the benefit of a pilot episode. As a
result, programmers rely to a significant degree on a studio's track record
for producing high quality programming that is delivered on schedule and
within budget. As of June 30, 1996, the Company produced 470 episodes of
animated programming. At the conclusion of the 1996-97 broadcast season, the
Company projects that it will have produced in excess of 600 episodes of
animated programming, substantially all of which will have been broadcast at
least once; there is, however, no assurance that all episodes scheduled to air
during the 1996-97 television season will be televised.

HISTORY

Phil Roman began his animation career in 1955 at The Walt Disney Company as
an assistant animator on Sleeping Beauty. Over the next 30 years, Mr. Roman
worked at many of the major studios, including MGM Animation and Warner Bros.
Cartoons, and was an animator on such productions as The Cat in the Hat, How
the Grinch Stole Christmas, George of the Jungle, Popeye, Snoopy Come Home and
Lord of the Rings. Mr. Roman also directed 13 Emmy-nominated Charlie Brown
specials.

From its inception in 1984, the Company quickly developed its reputation for
producing quality animation with the production of the Emmy award-winning
television special, Garfield In The Rough. Based upon the success of that and
subsequent Garfield specials, the Company was engaged to produce a weekly
half-hour Garfield series on CBS which, in its second season, was expanded to
a weekly one-hour block. In 1989, the Company, together with comedian Howie
Mandel, developed the concept for the series Bobby's World, which the Company
produced on a "fee-for-services" basis for Fox Children's Network. Bobby's
World, entering its seventh season, continues to be a highly-rated program. As
a result of the Company's strong record of producing high quality animated
series, Gracie Films and Twentieth Television (a division of Twentieth Century
Fox) approached Film Roman in 1991 to produce on a "fee-for-services" basis
the successful Simpsons series, which had been previously produced by a
competitor of the Company. At June 30, 1996, Film Roman has produced 96
episodes of The Simpsons and has another 26 episodes currently in production.

Historically, the Company has produced substantially all of its programming
for third parties on a "fee-for-services" basis. Increasingly, the Company is
producing programming for which it controls the proprietary rights associated
with such programming (including, for example, international distribution and
licensing and merchandising rights). Through the retention and exploitation of
these proprietary rights, the Company believes

24
<PAGE>

that it can earn an attractive return on its investment and, at the same time,
build a library of characters and programs that will have lasting value. Four
of the 10 series the Company is producing for the 1996-97 television season
are proprietary--Felix the Cat (CBS), C-Bear & Jamal (FOX), BRUNO the Kid
(syndication) and Mortal Kombat (USA Network).

STRATEGY

Film Roman's business strategy is to:

. CREATE AND DEVELOP POPULAR CHARACTERS AND PROGRAMS. The Company seeks
to create and develop popular characters and programs that will form
the foundation of enduring character and program franchises. Because
the Company was founded by an animator and has a corporate culture that
emphasizes artistic integrity, the Company believes that it has
consistently attracted some of the most creative artists and
storytellers in the animation industry. The Company believes that
popular characters and program concepts, when creatively developed and
artistically produced, have substantial value in many areas of
exploitation, such as international distribution, licensing and
merchandising, feature film and interactive rights. Popular characters
and programs also enhance the value of the Company's library and may
provide opportunities for exploitation in the future as other means of
exploitation emerge. With its track record of producing high quality,
popular programs, the Company believes it is well-positioned to create
character and program franchises.

. INCREASE PRODUCTION OF PROPRIETARY PROGRAMMING. The Company intends to
continue increasing the amount of proprietary programming it produces
while maintaining a base of "fee-for-services" programming. The Company
believes that its profits can be enhanced by retaining the proprietary
rights to its characters and programs because the Company can better
exploit these rights due to its superior understanding of its
properties. The Company can also optimize its investment in each of its
character and program franchises by coordinating all licensing,
merchandising, international distribution and other activities in order
to maximize the value of such franchises. Moreover, by controlling
proprietary rights, the Company eliminates third party agency and
distributor fees and, at the same time, may capture the profits such
third parties would otherwise retain. As of June 30, 1996, the
Company had produced 17 half-hour episodes and 12 one-hour episodes of
proprietary programming. See "--Principal Elements of the Company's
Business--Funding Production--Proprietary Programming."

. EXPLOIT LICENSING AND MERCHANDISING RIGHTS. The Company intends to
exploit the licensing and merchandising of its proprietary characters
in order to generate revenue and to increase the popularity of its
characters and programs. By licensing its proprietary characters to
select manufacturers and distributors of consumer products such as
toys, apparel, school supplies, housewares and books, the Company seeks
to capture a portion of the growing licensing and merchandising market
which features entertainment properties, such as animated characters.
In 1995, this segment of the merchandising and licensing market had
retail sales in the United States and Canada in excess of $16 billion.
Through June 30, 1996, the Company derived no significant revenue from
these activities. See "--Principal Elements of the Company's Business--
Licensing and Merchandising."

. CONTROL AND EXPAND INTERNATIONAL DISTRIBUTION. The Company intends to
generate revenue from the distribution of its proprietary programming
to the growing international market. The Company's programs are
currently broadcast in over 50 countries. Due in part to the growth in
the number of international television outlets, the global demand for
animated programming continues to expand. Recently, the Company has
begun to distribute its proprietary programming internationally through
its international division, rather than selling these international
distribution rights to third parties. By retaining these rights, the
Company seeks to earn distribution fees while ensuring that its
international distribution rights are properly managed, thereby
increasing the popularity of its characters and

25
<PAGE>

programming worldwide. For the year ended December 31, 1995 and the six
months ended June 30, 1996, the Company's international distribution
activities generated revenues of $1.8 million and $1.9 million,
respectively (or 5% and 14%, respectively, of total revenues for such
periods). See "--Principal Elements of the Company's Business--
Distribution of Proprietary Programming--International Distribution."

. PURSUE NEW BUSINESS OPPORTUNITIES WHILE MINIMIZING FINANCIAL RISK. The
Company intends to pursue new business opportunities beyond the
production of animated television programming, particularly those which
capitalize on the Company's proprietary rights. The Company intends to
minimize the financial risk associated with such opportunities through
various means, including the receipt by the Company of commitments from
third parties to cover its direct costs of production prior to
commencing production. The Company is currently producing two
interactive projects and is exploring new areas for possible
exploitation, including on-line services. The Company also seeks
strategic alliances with third parties in pursuing feature film
opportunities and currently has one film in development at Universal
Pictures/MCA. Although the Company continuously explores new ideas and
seeks new business opportunities outside animated television
programming, the Company has no material obligations to produce new
projects, except as described herein. See "--Principal Elements of the
Company's Business--Interactive Products; --Feature Films."

. BUILD A LIBRARY. The Company intends to build a library of proprietary
programs which can be licensed and relicensed in the growing television
marketplace. The Company's ownership and control of distribution rights,
coupled with the Company's enduring and popular characters, should
provide permanent and increasing value for the Company's programming.
The Company believes that, as the number of exhibition outlets grows
domestically and internationally, its library will become increasingly
valuable. See "--Principal Elements of the Company's Business--Library."

There can be no assurance given that the Company will be successful in
implementing this strategy. The discussion of the Company's strategy contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Actual results could
differ materially from those projected in these forward-looking statements as
a result of certain risk factors described elsewhere in this Prospectus or
other factors. See "Risk Factors."

ANIMATION INDUSTRY OVERVIEW

Animation has been a major entertainment medium for decades. Since cartoon
characters appear the same dubbed in any language, animation easily crosses
national and language barriers. In addition, animation generally does not
become "dated" as does live-action programming, allowing an animated series to
be enjoyed by each new generation of children.

Children are the primary target market for animated television programming.
Nielsen data indicate that children aged two to eleven are the nation's
heaviest consumers of television, watching an average of almost 22 hours each
week. Growth in advertising spending targeted at children and the expansion in
the number of television channels dedicated to children's programming around
the world have caused an increase in the demand for animated television
programming.

Animated programming has expanded beyond the traditional Saturday morning
line-up. Monday through Friday mornings and afternoons now attract an even
greater number of young viewers than Saturday morning. There are many
programming blocks targeted toward children, including "The Disney Afternoon,"
Fox Children's Network and WB Kids. In addition, UPN and the USA Network, as
well as many first-run syndicators, provide programming blocks of animation on
Sunday mornings. Furthermore, programming successes such as The Simpsons and
Beavis & Butthead demonstrate that animation also appeals to adults.

Increases in cable and satellite channels worldwide and the privatization,
new entry and expansion in the international broadcast, satellite and cable
industry are providing additional opportunities for growth for animation
companies, especially those companies which own and distribute their own
programs.

26
<PAGE>

U.S. TELEVISION

Networks. The United States network television market is the most valuable
market to producers of animated programming. Networks generally reach the
largest audiences and pay the highest license fees, enabling a producer to
finance a more significant portion of its production costs through network
license fees than if a program is licensed to a cable network or first-run
syndicator. Weekend morning children's programming now airs on ABC, CBS, FOX,
UPN and WB. In addition, FOX and WB broadcast animated programming for young
audiences during weekday mornings and afternoons. NBC has not broadcast
children's programming, including animation, since 1992.

Since network programming generally reaches a larger audience than
programming provided by syndicators and/or cable programmers, programming that
airs on network television is often more widely recognized by audiences. As a
result, the Company believes that an initial network license generally
increases the value of the program in other markets, particularly in the
international television market and "runs" subsequent to network broadcast in
the U.S. cable, syndication, and home-video markets, as well as in the market
for toys, apparel and games that feature characters from network programs. For
the 1995-96 season, animated programming occupied 33 of the approximately 39
Network time slots dedicated to animated and/or children's programming each
week.

Syndication. Syndication provides an important first-run, as well as repeat,
broadcast market for animated programs. Traditionally, syndication has been
populated by programs that support merchandise and whose characters are
featured in toy lines, apparel and other consumer products. For the 1995-96
season, animated programming (distributed by such syndicators as Buena Vista
Television Distribution, Saban Entertainment, Bohbot Entertainment and New
World Entertainment) occupied 28 of the approximately 40 syndicated time slots
dedicated to animated and/or children's programming each week.

Cable and Direct Broadcast Satellite ("DBS"). Cable and DBS are increasing
their audience share among children. The growth in the number of cable
channels and the development of DBS provides additional outlets for animated
programming. The cable channels which currently broadcast animated programs
include Nickelodeon, USA Network, The Disney Channel, The Cartoon Network, The
Comedy Channel, The Family Channel, HBO, Showtime and MTV. For the 1995-96
season, animated programs occupied approximately 16 time slots (excluding
slots primarily occupied by repeat programming) each week on United States
cable networks.

INTERNATIONAL TELEVISION

The growth in the number of international television outlets has created
additional global demand for animated programming. The privatization of the
international television industry has encouraged a ratings/revenue-oriented
focus among international broadcasters, thereby increasing the demand for
high-quality television entertainment. Animated programs produced in the
United States have enjoyed wide acceptance internationally. In addition, the
international market has experienced an increase in the number of cable and
satellite programming services. These added programming services have created
an opportunity for distributors, including the Company, to license
simultaneously both traditional broadcast and satellite programming rights
within the same territory. International television, cable, satellite and home
video sales of an animated program produced in the United States can account
for half or more of the revenue for a given program. See "--Principal Elements
of the Company's Business--Distribution of Proprietary Programming--
International Distribution."

LICENSING AND MERCHANDISING

Due to the significant revenue that can be generated from licensing and
merchandising television characters, producers and owners of animated
characters seek to drive sales of toys and other licensed products through the
production and distribution of programs featuring their characters. According
to "The Licensing Letter" (a licensing and merchandising trade periodical that
is published monthly), U.S. and Canadian retail sales of

27
<PAGE>

products derived from licensed entertainment properties were approximately
$16 billion in 1995. Numerous programs (such as The Teenage Mutant Ninja
Turtles, G.I. Joe, Power Rangers, Sonic the Hedgehog and Transformers) were
initially produced in large part to support the sales of merchandise
associated with these programs. See "--Principal Elements of the Company's
Business--Licensing and Merchandising."

THE COMPANY'S TELEVISION PROGRAMMING

During the 1996-97 television season, Film Roman expects that 14 of its
series occupying 15 "time slots" (or approximately 17 hours) of animated
programming (including new and repeat programming) will air each week, as
described below. The Company is in the process of producing the 161 new
episodes listed in the table below that are to be aired during the 1996-97
television season and the 13 episodes of Blues Brothers: The Animated Series
currently scheduled to be aired during the 1997-98 television season.

28
<PAGE>

FILM ROMAN ANIMATED TELEVISION PRODUCTION

<TABLE>
- ---------------------------------------------------------------------------------------------------
<CAPTION>
CURRENT
EPISODES IN BROADCASTER(S)
PRODUCTION YEARS (AND
FOR 1996-97 PROGRAM ON SYNDICATOR,
SERIES SEASON(1) SCHEDULE(2) AIR(3) AS APPLICABLE) PROGRAM DESCRIPTION
- ---------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <S>
"FEE-FOR-SERVICES PROGRAMMING":
- ---------------------------------------------------------------------------------------------------
Bobby's World 3 Mon.-Fri. 7 FOX Emmy nominated series starring
Howie Mandel.
- ---------------------------------------------------------------------------------------------------
King of the 13 Sunday 1 FOX Prime-time series based on
Hill characters created by Mike Judge,
creator of Beavis & Butthead.
- ---------------------------------------------------------------------------------------------------
The Mask 9 Saturday 2 CBS Based on the blockbuster film
starring Jim Carrey.
- ---------------------------------------------------------------------------------------------------
The Mask 30 Mon.-Fri. 1 First-run
Syndication
(Bohbot)
- ---------------------------------------------------------------------------------------------------
Richie Rich 13 Saturday 1 First-run Cartoon shorts based on Harvey
Syndication Comics' classic character.
(Claster)
- ---------------------------------------------------------------------------------------------------
26 Sunday 5(4) FOX Emmy award-winning prime-time
series starring Homer, Marge,
Bart, Lisa and Maggie Simpson.
------------------------------------------------------------------------------
The Simpsons
0 Mon.-Fri. 5(4) Syndication
(Twentieth
Television)
- ---------------------------------------------------------------------------------------------------
The Critic 0 Schedule 2 Comedy Central Highly acclaimed series which
Varies originally aired on ABC in prime-
time featuring the voice of Jon
Lovitz.
- ---------------------------------------------------------------------------------------------------
Garfield & 0 Mon.-Fri. 7 Cartoon Network Emmy award-winning series
Friends and TBS featuring that lazy, lasagna-
eating cat.
- ---------------------------------------------------------------------------------------------------
Mighty Max 0 Mon.-Fri. 3 USA Network Based on Mattel's popular
children's toy line.
- ---------------------------------------------------------------------------------------------------
Klutter 0 Mon.-Fri. 2 FOX Cartoon comedy starring a pile of
clothes that comes to life.

"PROPRIETARY PROGRAMMING":
- --------------------------------------------------------------------------------
BRUNO the Kid 36 Mon.-Fri. 1 First-Run Features voice and persona of
Syndication Bruce Willis as a 12-year-old
(Active spy.
Entertainment)
- ---------------------------------------------------------------------------------------------------
C-Bear & Jamal 10 Saturday 1(5) FOX Features the voice of rap star
Tone Loc as a street-wise teddy
bear.
- ---------------------------------------------------------------------------------------------------
Felix the Cat 8 Saturday 2 CBS Features the wonderful, wonderful
cat popular with children and
adults for decades.
- ---------------------------------------------------------------------------------------------------
Mortal Kombat 13 Sunday 1 USA Network Loosely based on the hit video
game.
- ---------------------------------------------------------------------------------------------------
Blues Brothers: 13(/6/) TBD 0 UPN Prime-time series based on the
The Animated John Belushi and Dan Aykroyd
Series characters as seen on Saturday
Night Live.
</TABLE>
(Footnotes to table appear on following page.)

29
<PAGE>

(Footnotes to table on previous page.)
(1) Each episode runs for a half hour, except for the 13 Richie Rich cartoons
which run for seven minutes each.
(2) Program schedule for the season includes a combination of new and/or
repeat half-hour episodes. "TBD" (i.e., "to be determined") indicates
that, to the Company's knowledge, the broadcaster has not yet determined
the time slot during which the series will air. The program schedule does
not include the Company's two specials The Magic Pearl and The Story of
Santa Claus.
(3) Number of seasons for which new episodes were/are being produced,
including production for the 1996-97 season. The 1996-97 broadcast season
began around the second week of September 1996 and will end around the
second week of September 1997.
(4) The Simpsons has been produced by the Company for five seasons and has run
in syndication for two seasons.
(5) Three additional episodes were produced for broadcast during the 1995-96
season.
(6) Although currently in production, the 13 episodes of Blues Brothers: The
Animated Series are not scheduled to air until the 1997-98 broadcast
season which will begin around the second week of September 1997.

PRINCIPAL ELEMENTS OF THE COMPANY'S BUSINESS

The Company's business of creating, developing, producing and distributing
high quality, family-oriented animated television programming, together with
the exploitation of any proprietary rights controlled by the Company, is
described in the sections below and includes: (i) acquiring, creating and
developing programming properties; (ii) funding the production of proprietary
programming; (iii) producing its programs; (iv) distributing its programming
domestically and internationally; (v) licensing and merchandising the rights
to its proprietary programs; (vi) producing feature films; (vii) developing
and licensing distribution rights to interactive software products; and (viii)
building a library.

ACQUISITION, CREATION AND DEVELOPMENT OF PROGRAMMING

The Company pursues ideas and properties it believes feature unique and
popular characters with broad appeal. These ideas and properties may originate
from a variety of sources. As a result of the Company's reputation and
position in the industry, many creators, rightsholders and even broadcasters
bring new concepts to the Company for development and production. The Company
may enter into an option agreement to acquire rights to an existing character,
such as Felix the Cat, develop internally a new character based on an existing
persona or consumer product, such as C-Bear & Jamal and Mighty Max,
respectively, or create or acquire an entirely new idea or character.

Once the Company has created a new property or acquired the rights to an
existing property, the Company begins development by preparing a presentation
to "pitch" the project to targeted domestic broadcasters (and, on some
occasions, to international broadcasters and product licensees). These
presentations generally consist of artwork featuring character designs and
"set-ups" (characters in a story scene) and may also include a brief written
description of the characters and sample storylines. If a broadcaster is
interested in developing an idea further, it will acquire an exclusive option
to order the production of episodes based upon the idea and will agree to
reimburse the Company for a portion of the further development costs if it
does not ultimately order production of any episodes. A broadcaster generally
collaborates in the further stages of development and will have the right to
approve the selection of writer, director and voice-over actors and the
creation of a pilot script. The creation, acquisition and development of a new
program normally occurs during a period of three to twelve months (usually
averaging approximately six months).

The Company currently has numerous projects in various stages of internal
development, including Shamu and the Crew and Sea Toons (both being developed
with a division of Anheuser-Busch, owner of Sea World) and 21 (a project which
is featured in a popular comic book series and for which the Company has
secured a master toy license with Playmates Toys), which are in the early
stages of development. The Company also has three properties in development
which it expects would qualify as meeting the educational and informational
needs of children aged 16 and under pursuant to the FCC's new regulations
governing children's programming. These

30
<PAGE>

regulations may enhance the prospect that these programs will be produced and
broadcast. See "--Government Regulations." Although the Company has many
projects in development and is continuously considering new ideas, only a
relatively small number of such projects will ultimately be produced.

FUNDING PRODUCTION--PROPRIETARY PROGRAMMING

Historically, the Company has produced programming almost exclusively on a
"fee-for-services" basis. Fees paid to the Company for these production
services generally range from $300,000 to $500,000 per episode and typically
cover all direct production costs plus a profit margin.

For its proprietary programming, the Company generally does not commence
production unless the Company has obtained commitments to cover at least 50%
of the Company's direct production costs through a combination of one or more
of the following sources: (i) network, cable, syndication, or other license
fees for audiovisual exploitation of the program in the United States, (ii)
licensing of merchandising, home video, and international distribution and
interactive rights, and (iii) strategic partners. For example, production
costs for the Company's first two proprietary programs, Felix the Cat and C-
Bear & Jamal, were covered prior to production by a combination of domestic
licensing commitments from the Networks and international distribution
arrangements. With capital provided by a 1995 equity private placement, the
Company was able to cover the balance of production costs without having to
sell its other proprietary rights, including licensing and merchandising
rights for C-Bear & Jamal. Through the retention and exploitation of these
rights, the Company seeks to earn an attractive return on its investment while
at the same time building a library of programming which will have lasting
value. Although historically the Company produced almost all of its
programming on a "fee-for-services" basis, as of June 30, 1996, the Company
had produced 17 half-hour episodes and 12 one-hour episodes of proprietary
programming and the Company expects that 67 episodes of its proprietary
programming will be produced and aired during the 1996-97 television season.

While the Company seeks to limit its financial risk associated with its
proprietary programming by obtaining commitments prior to production to cover
at least 50% of its direct production, there can be no assurance that the
Company will be able to cover the balance of its production costs and overhead
costs relating to production, licensing and distribution through the
exploitation of its remaining rights. Reasons the Company may not cover its
costs include: (i) a proprietary program may be cancelled; (ii) a proprietary
program and/or its related licensed products may not appeal to the Company's
targeted audience or may not appeal to the same audience targeted by a
licensee; or (iii) a licensee may not effectively market and distribute the
Company's programming domestically or internationally. Moreover, since certain
international distribution arrangements and other domestic and international
licensing activities are conditioned upon the U.S. broadcast of a minimum
number of programming episodes on a network or cable channel, no assurance can
be given that any series will be broadcast in the U.S. for a sufficient period
in order to meet these contractual conditions.

Unlike television production of proprietary programming, the Company does
not intend to commence production of an interactive or feature film projects
unless substantially all of the direct costs of production are funded by a
third party.

ANIMATED TELEVISION PRODUCTION

The Company generally commences production of a program during the first and
second quarters of any year for delivery during the third quarter, and to a
larger extent, the fourth quarter of that same year. The Company typically has
seven to nine months to produce and deliver an order of 13 half-hour episodes
(the number of episodes commonly ordered for the first year of a program). The
first step of the Company's production process is the creation of the script.
The Company selects a story editor to supervise the preparation of each
episode's script by various freelance script writers. The artists depict the
story and action in storyboards which provide a blueprint for the animation
process. Voices and songs are recorded and the recordings are analyzed and
timed so that the animation can be synchronized to the voice track. Based on
the script and

31
<PAGE>

storyboard, the Company's artists create character designs, as well as key
background drawings and paintings. These essential elements are assembled into
a pre-production package for each episode which is then shipped to an overseas
subcontractor. Subcontractors use the pre-production materials to perform most
of the labor-intensive aspects of production. Most of these subcontractors are
located in low-cost labor countries in the Far East, including South Korea,
Taiwan, China and the Philippines. The subcontractor ships the negative and
work print for each episode to Film Roman. The film is then taken through a
post-production process which includes editing the picture and dialogue,
transferring the filmed images to video tape, creating sound effects,
composing and producing the musical score and mixing and synchronizing the
sound to the picture. After the post production process, an episode is ready
for delivery.

DISTRIBUTION OF PROPRIETARY PROGRAMMING

Domestic Television Distribution. Prior to commencing production of its
proprietary programming, the Company generally licenses broadcast rights to a
U.S. broadcaster. See "--Funding Production--Proprietary Programming." License
fees paid by Networks and cable networks for the Company's proprietary
programming generally cover over 50% of the Company's direct production costs.
License fees paid by first-run syndicators for the Company's proprietary
programming generally cover less than 50% of the Company's direct production
costs, and, under certain circumstances, first-run syndicators pay no license
fees. The Company may choose to enter into such a no-license-fee arrangement
when it can share in a portion of the revenues generated from the sale of
advertising aired by a syndicator during the broadcast of the Company's
programming and when the Company has obtained financing to cover a portion of
its direct production costs from sources other than the syndicator. If the
Company's program is highly rated in syndication, the Company may earn more in
revenues from advertisers (since those advertisers will often be willing to
pay higher fees to have their commercials aired during the broadcast of the
Company's program) than the Company would have earned in revenues from a
license fee arrangement with a syndicator that does not require the syndicator
to share advertising revenues with the Company. Conversely, however, if the
Company's program is poorly rated in syndication, the Company will likely earn
less in revenues than if it had negotiated to receive a license fee.

The license agreement typically includes provisions governing the license
fee, the term during which the program will be broadcast, the number of
episodes and the territories in which the episodes will be broadcast. Upon the
expiration of an initial broadcast license, the exhibition rights for the
applicable program revert to the Company and are available for relicensing. In
1995, substantially all of the Company's revenue was generated from the
domestic distribution of its programming to U.S. television broadcasters.

International Distribution. In 1993, the Company began its transition to the
production of proprietary programming with the establishment of its
international division to capture the economic benefits of owning and
controlling the international distribution rights to its proprietary
programming. The Company believes that by owning and controlling the
international distribution rights to its programming, it can not only generate
significant revenue from the licensing of such programming, but also it can
establish an international presence for the Company and its properties which
should support its international licensing and merchandising efforts.
Furthermore, a strong international division provides the Company with direct
access to market information and feedback which will enable it to produce
programs that are even more marketable on a worldwide basis. Since the
establishment of its international distribution division, the Company has
entered into audio-visual license arrangements with international broadcasters
and distributors to exhibit and distribute certain of the Company's
proprietary programming. The Company has also entered into a significant
distribution and co-production agreement with TaurusFilm GmbH ("TaurusFilm"),
a division of Kirch Group, a German media conglomerate. Under the terms of the
agreement, TaurusFilm has an exclusive right to review Film Roman's
proprietary programs in development and to license those programs for
distribution in certain European territories prior to the Company providing
any other entity with such an opportunity. Important features of this
arrangement are: (i) TaurusFilm pays a license fee, ranging from $60,000 to
$100,000 (depending on whether the program was first aired in first-run
syndication or by a Network/cable network and depending on the number of
European territories covered by the license), subject to an annual increase,
during production of each program licensed

32
<PAGE>

under the agreement (which the Company estimates will account for between one-
third and two-thirds of the Company's total international audio-visual revenue
derived from any such program); (ii) once TaurusFilm licenses a program, it is
required to license all episodes of that program for all seasons of
production; (iii) TaurusFilm is required to license at least five of the
Company's proprietary programs produced for the 1995-96 through the 1998-99
broadcast seasons; and (iv) the term of the license for each program is 22.5
years. The Company expects that its international distribution activities will
increase as it produces more proprietary programming. For the year ended
December 31, 1995 and the six months ended June 30, 1996, the Company's
international distribution activities generated revenues of $1.8 million and
$1.9 million, respectively (or 5% and 14%, respectively, of total revenues for
such periods).

Home Video Distribution. The Company may also license to a home video
distributor the rights to manufacture and distribute video cassettes and disks
for a specified term and in a defined territory. The Company generally
receives a non-refundable advance to be applied against royalties which may
range from 8% to 25% of the wholesale selling price of a video cassette or
disk. Although the Company expects that revenue from licensing its home video
distribution rights will increase substantially in the future, the Company
derived less than 1% of its total revenue from such licensing activities in
1995.

LICENSING AND MERCHANDISING

The Company's licensing and merchandising division seeks licensing and
merchandising opportunities for characters and programs to which the Company
retains proprietary rights. Controlling licensing and merchandising rights
provides the Company the opportunity to earn revenue from the sale of products
bearing the likeness of its proprietary characters and other distinctive
features of a program. The Company also evaluates the licensing potential of
characters the Company is considering for development, formulates a licensing
strategy, and creates artwork depicting proposed licensed products and
merchandise featuring its characters for use in soliciting prospective
licensees. Although the Company incurs expenses to develop and establish a
licensing campaign, the Company does not incur the cost or assume the risk
associated with manufacturing, distributing and marketing the merchandise. The
revenue derived from licensing and merchandising depends not only on the
success, recognition and appeal of a character, but also on the quality and
extent of the marketing efforts of the Company and its licensees. Sales of
licensed products in turn promote the programs in which the Company's
characters appear.

Historically, under traditional "fee-for-services" arrangements, after
developing and selling a program for United States broadcast, Film Roman has
had to turn over control of its merchandising rights to those entities which
financed the production of its programming. For example, even though Bobby's
World was created by Film Roman, Twentieth Television acquired most of the
proprietary rights, including the licensing and merchandising rights to such
program. Recently, however, Film Roman was appointed as the agent to
administer the worldwide licensing and merchandising rights to the Bobby's
World property.

The Company expects that it will typically earn royalties between 5% and 12%
of the wholesale revenue derived from the sale of licensed products. The
Company has recently entered into licenses with manufacturers and distributors
of various products related to its proprietary characters C-Bear and Jamal,
including a master toy license. Although the Company believes that these
activities can have a significant impact on future earnings, prior to December
31, 1995, the Company derived no revenue from its licensing and merchandising
activities, and for the six months ended June 30, 1996, the Company derived no
significant revenue from these activities.

FEATURE FILMS

In 1991 and 1992, the Company produced on a "fee-for-services" basis a
feature film, Tom & Jerry: The Movie, which was released theatrically by
Miramax Films. Although the Company has produced no other feature films, it is
pursuing feature film opportunities. The Company, together with Universal
Pictures/MCA and Dustin Hoffman's Punch Productions, is currently developing
(on a fee-for-services basis) the feature film There Goes The Neighborhood,
which is a project featuring a mixture of live-action and animation (similar
to that of Who

33
<PAGE>

Framed Roger Rabbit?). Universal Pictures has agreed to pay for the
development of a screenplay and the artwork for the project. No assurance can
be given that There Goes the Neighborhood will be produced. If the feature
film is produced, the Company will earn a fee for its services and may earn
revenues from financial participations based upon the success of the film and
the exploitation of the Company's rights. The Company currently has a number
of feature film projects in early stages of internal development, primarily
featuring the Company's proprietary characters. Although the Company is not
currently producing any feature films (nor has the Company entered into any
agreements to produce any such films), the Company intends to obtain financing
for its feature films through strategic alliances with third parties, such as
major motion picture studios, prior to the production of any such films. As a
result, the Company may be unable to retain control all or any of the
licensing and merchandising rights associated with its feature films.

INTERACTIVE PRODUCTS

In 1995, Film Roman established an interactive division to produce high-
quality interactive software products for consumer use. Such products may
feature characters from the Company's programs or may introduce new characters
which may become the basis for the development of future television series and
marketed to broadcasters. By combining its creative and production talent with
computer and software technology, the Company is focusing on existing and new
market opportunities created by the popularity of dedicated game machines
(such as those manufactured by Sony, Nintendo and Sega) and by wide-spread
computer use by children and adults. The Company may be able to apply
technology developed in connection with interactive products to the production
of animated programming. The Company intends to license distribution rights
for its interactive products to strategic partners who in turn will fund
substantially all of the Company's direct costs of production. For example,
the interactive division is producing two videogames, one based upon Felix the
Cat and the other based upon the BRUNO the Kid. Both projects are being
financed by International Business Machines Corporation ("IBM"). For the year
ended December 31, 1995, the Company earned no revenues from its interactive
division. For the six months ended June 30, 1996, the Company earned $0.9
million in revenues from its interactive division.

LIBRARY

A library of proprietary programming can provide a future revenue stream as
such programs are re-licensed for broadcast after the expiration of the
initial broadcast license. Programs in the Company's library can also be
licensed to new channels and outlets in emerging markets around the world. The
Company began building its library in 1993 with the production of Animated
Classic Showcase, a restoration of existing classic Russian animation. The
Company added to its library the proprietary programming it produced during
the 1995-96 season, including three episodes of C-Bear & Jamal and 13 episodes
of Felix the Cat. In addition, during the 1996-97 season, the Company expects
to add to its library 10 episodes of C-Bear & Jamal, 8 episodes of Felix the
Cat, 36 episodes of BRUNO the Kid and 13 episodes of Mortal Kombat, and will
add to its library 13 episodes of Blues Brothers: The Animated Series
scheduled for the 1997-98 season. Revenues generated from the proprietary
programs in the Company's library were $5.6 million (including $3.6 million
from domestic television distribution) and $2.7 million (including $.8 million
from domestic television distribution) for the year ended December 31, 1995
and the six months ended June 30, 1996, respectively.

34
<PAGE>

The Company has retained the proprietary rights set forth below associated
with the programs in its library. The Company holds the proprietary rights
associated with the Animated Classic Showcase for fifteen years and holds
certain of the merchandising rights for Blues Brothers: The Animated Series
for a period ending one to three years (depending on the number of programs
produced for such series) after the date of the broadcast of the last program
produced. Certain of the interactive rights for Blues Brothers: The Animated
Series terminate upon the expiration of the other proprietary rights
associated with such series. The Company holds most of the other proprietary
rights for the programs listed in the table below in perpetuity, subject to
the rights granted to its licensees.

<TABLE>
<CAPTION>
NUMBER OF LICENSING
SERIES EPISODES DOMESTIC INTERNATIONAL AND
TITLE PRODUCED* DISTRIBUTION DISTRIBUTION MERCHANDISING INTERACTIVE
---------- -------------- -------------- ---------------------------- -----------
HOME HOME
TV VIDEO TV VIDEO
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Animated
Classic
Showcase 12 (X 1 hr.) X X X X X X
- ------------------------------------------------------------------------------------
Felix the
Cat 21 (X 1/2 hr.) X X X X X
- ------------------------------------------------------------------------------------
C-Bear &
Jamal 13 (X 1/2 hr.) X X X X X X
- ------------------------------------------------------------------------------------
BRUNO the
Kid 36 (X 1/2 hr.) X X X X X X
- ------------------------------------------------------------------------------------
Mortal
Kombat 13 (X 1/2 hr.) X X X X
- ------------------------------------------------------------------------------------
Blues
Brothers:
The
Animated
Series 13 (X 1/2 hr.) X X X X X X
</TABLE>

* Includes episodes currently in production for the 1996-97 season for all
series except Blues Brothers: The Animated Series (which is currently in
production for the 1997-98 season).

COMPETITION

The creation, development, production and distribution of television
programming, together with the exploitation of the proprietary rights related
to such programming, is a highly competitive business. The Company faces
intense competition from producers, distributors, licensors and merchandisers,
many of whom are larger and have greater financial resources than the Company.
Management believes that it faces competition with a variety of companies in
three principal areas: (i) for the time slots for animated programming offered
by broadcasters, (ii) for the acquisition of characters, story lines, plots
and ideas and (iii) for the right to license and distribute its products
throughout the United States and internationally. See "Risk Factors--
Competition."

GOVERNMENT REGULATIONS

The FCC repealed its financial interest and syndication rules, effective as
of September 21, 1995. Those FCC rules, which were adopted in 1970 to limit
television network control over television programming and thereby foster the
development of diverse programming sources, had restricted the ability of the
three established, major U.S. television networks (ABC, CBS and NBC) to own
(or to be owned by) a syndicated television programmer and to own financial
interests in programming aired on their networks. The impact of the repeal of
the FCC's financial interest and syndication rules on the Company's operations
cannot be predicted at the present time, although it is expected that there
will be an increase in in-house productions of television programming for the
networks' own use and in the network programs in which a network holds a
financial interest. It is possible that this change will have a negative
impact on the Company's business to the extent that the networks target
children's programming.

Broadcast customers of the Company are subject to the provisions of the
Children's Television Act of 1990 and the implementing rules issued by the
FCC. These rules, which were amended in August 1996 and become effective in
part in January 1997 and in part in September 1997, strongly encourage
broadcasters (through license renewal procedures) to offer at least three
hours per week of regularly-scheduled programming specifically

35
<PAGE>

designed to serve the educational and informational needs of children aged 16
and under and identified as such. As a result, while the Company is not
subject to the direct jurisdiction of the FCC, the content of the Company's
programming may be affected by these rules in order for the Company to place
programs on FCC-licensed stations. See "Risk Factors--Limited Number of Time
Slots for Children's and Animated Television Programming; Impact of New FCC
Regulations Requiring Educational Content Programming; Vertical Integration
and Strategic Alliances."

Broadcast customers of the Company are subject to the provisions of the
Children's Television Advertising Act of 1990 and the follow-up rules issued
by the FCC which require broadcasters to offer educational and informational
programs to their viewers. As a result, while the Company is not subject to
the direct jurisdiction of the FCC, the content of the Company's programming
may be affected by these rules in order for the Company to place programs on
FCC-licensed television stations. The Company may be subject to local content
and quota requirements in the international markets, which effectively
prohibit or limit access to particular markets. The Company also seeks to
comply with self-regulatory rules relating to children's programming of the
Children's Advertising Review Unit of The Council of Better Business Bureaus
and of the national television networks by reviewing the proposed content of
each property prior to acquisition and acquiring rights to and distributing
only those properties for which there will be no material restrictions on
exhibition to children.

TRADEMARKS

The Company has applications pending with the United States Patent and
Trademark Office to register several trademarks, including Film Roman, C-Bear
& Jamal, King of the Hill and BRUNO the Kid. Pursuant to arrangements with the
owners of the programs it produces, the Company utilizes certain trademarks
and copyrighted materials, including The Simpsons, Garfield, Bobby's World,
Felix the Cat, The Mask, Richie Rich, Mortal Kombat and Mighty Max.

FACILITIES

The Company conducts its operations through its 65,000 square foot studio
and headquarters located in North Hollywood, California. These facilities are
occupied pursuant to a lease that expires in August 1999 (and contains renewal
options).

EMPLOYEES

As of June 30, 1996, the Company had approximately 278 full-time employees
and 3 part-time employees. The Company also regularly engages numerous
freelance creative staff and other independent contractors on a project-by-
project basis. The Company is subject to the terms in effect from time to time
of various industry-wide collective bargaining agreements, including the
Screen Actors Guild. The Company believes that its relations with its
employees are good.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings and is not
aware of any pending or threatened litigation that, if decided adversely to
the Company, would have a material adverse effect upon the Company's business,
results of operations or financial condition.

36
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The directors and executive officers of the Company are identified below:

<TABLE>
<CAPTION>
NAME AGE POSITION(1)
<C> <C> <S>
Phil Roman.......................... 65 President, Chief Executive Officer
and Chairman of the Board of
Directors (Class III Director)
William Schultz..................... 36 Executive Vice President
Jon F. Vein......................... 32 Senior Vice President
Jacqueline Blum..................... 34 Senior Vice President--Worldwide
Licensing and Marketing
Gregory Arsenault................... 39 Senior Vice President--Finance and
Administration
Robert Cresci(3).................... 52 Class I Director
Dixon Q. Dern(2).................... 67 Class III Director
Dennis W. Draper(2)................. 48 Class II Director
Theodore T. Horton, Jr.(2).......... 45 Class I Director
Peter Mainstain(3).................. 48 Class II Director
</TABLE>
- ---------------------
(1) Each director holds office until his resignation or removal and until his
successor shall have been duly elected and qualified. Elections with
respect to the Class I Directors, Class II Directors and Class III
Directors will be held at the annual meeting of stockholders in 1997,
1998, and 1999, respectively.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.

The principal occupations and positions for the past five years and in
certain cases prior years, of the directors and executive officers named above
are as follows.

Phil Roman, President, Chief Executive Officer and Director. Mr. Roman has
been the Company's Chief Executive Officer since the Company was founded in
1984. Phil Roman began his animation career in 1955 at The Walt Disney Company
as an assistant animator on Sleeping Beauty. Over the next 30 years, Mr. Roman
worked at many of the major studios, including MGM Animation and Warner Bros.
Cartoons, and was an animator on such productions as The Cat in the Hat, How
the Grinch Stole Christmas, George of the Jungle, Popeye, Snoopy Come Home and
Lord of the Rings. Mr. Roman also directed 13 Emmy-nominated Charlie Brown
specials.

William Schultz, Executive Vice President. In 1989, Mr. Schultz joined the
Company as a Vice President and in 1993 was promoted to Executive Vice
President. Mr. Schultz currently oversees production and development, as well
as the Company's international division, and coordinates new business
opportunities. Prior to joining the Company, Mr. Schultz was employed by New
World Entertainment, where he served in a variety of positions including
Production Controller and Director of Development at the animation studio
Marvel Productions, a subsidiary of New World Entertainment. Mr. Schultz
received his Bachelor of Science degree from the University of Illinois at
Champaign--Urbana in 1982.

Jon F. Vein, Senior Vice President. In February 1995, Mr. Vein joined Film
Roman as a Senior Vice President where he oversees business and legal affairs
for the Company. Mr. Vein also established and oversees the Company's feature
film and interactive divisions. Prior to joining the Company, Mr. Vein
practiced entertainment law at Dern & Donaldson from 1990 to 1993 and at Dern
& Vein from 1993 to 1995. Mr. Vein received his Bachelor of Science degree in
electrical engineering-computer science and material sciences engineering from
University of California at Berkeley in 1986 and his Juris Doctor degree from
The Harvard Law School in 1989.

37
<PAGE>

Jacqueline Blum, Senior Vice President--Worldwide Licensing and
Marketing. Ms. Blum joined the Company in 1993 as a Vice President to
establish and oversee the Company's licensing and merchandising division. In
1996, she was promoted to Senior Vice President. Mr. Blum also oversees the
Company's publicity and creative services departments. Prior to joining the
Company, Ms. Blum co-founded Imagination Factory, a licensing and
merchandising agency, in 1991. Previously, Ms. Blum was a principal of
Brentwood Licensing Properties, handling television packaging and
merchandising of the multi-million dollar property Kliban's Cat.

Gregory Arsenault, Senior Vice President--Finance and Administration. Mr.
Arsenault joined the Company in 1991 as Accounting Manager, served as
Controller for two years, served as Vice President of Finance for two years
and was promoted to Senior Vice President--Finance and Administration in 1996.
Mr. Arsenault oversees the Company's accounting department. Prior to joining
Film Roman, Mr. Arsenault served as an accounting systems consultant for LIVE
Entertainment. Mr. Arsenault received his Bachelor of Science degree in
accounting from the University of Southern California in 1980.

Robert Cresci--Director. Mr. Cresci has been a Director of Film Roman since
August 1995 and has been a Managing Director of Pecks Management Partners
Ltd., an investment management firm, since September 1990. Mr. Cresci
currently serves on the board of directors of Bridgeport Machines, Inc., Serv-
Tech, Inc., EIS International, Inc., Sepracor, Inc., Vestro Natural Foods,
Inc., Olympic Financial, Ltd., GeoWaste, Inc., Hitox, Inc., Natures Elements,
Inc., Garnet Resources Corporation, HarCor Energy, Inc. and Meris
Laboratories, Inc.

Dixon Q. Dern--Director. Mr. Dern has been a Director of Film Roman since
August 1995. Mr. Dern has practiced entertainment law for over 40 years and
currently owns and operates his own private practice which specializes in
entertainment, copyright and communications law.

Dennis W. Draper--Director. Mr. Draper has been a Director of Film Roman
since August 1995 and has been an Associate Professor of Finance at the
University of Southern California's School of Business since 1977. Mr. Draper
serves as trustee of the Pacifica Funds.

Theodore T. Horton, Jr.--Director. Mr. Horton has been a Director of Film
Roman since August 1995 and has been a Managing Director of BCI Advisors,
Inc., an investment management firm, since January 1990. Mr. Horton also
serves as a director of People's Choice TV.

Peter Mainstain--Director. Mr. Mainstain has been a Director of Film Roman
since August 1995 and has been a partner of Tanner, Mainstain & Hoffer, an
accountancy corporation, since 1976.

BOARD OF DIRECTORS

The Company's Bylaws provide that directors are divided into three classes,
each having a term of three years, with the term of one class expiring each
year. The directors shall be elected by a plurality vote, with no cumulative
voting, at the annual meeting of stockholders. Each elected director holds
office until his resignation or removal and until his successor shall have
been duly elected and qualified.

In the event of the Non-Cash Redemption, Common Stock will be issued to the
BCI Affiliate and the Pecks Affiliate (each, an "Affiliate"). The Company and
the Affiliates have agreed, in the event of a Non-Cash Redemption, that each
Affiliate will have the right to designate one director to the Board, and the
Company has agreed to nominate such designated director to the Board and to
use all reasonable efforts to cause the Board to recommend to the stockholders
that such stockholders vote in favor of such designated director. If an
Affiliate transfers beneficial ownership of that number of shares of Common
Stock equal to or greater than the number of shares of Common Stock issued to
such Affiliate pursuant to the Non-Cash Redemption, the Company and such
Affiliate have agreed that: (i) in the event the annual meeting of
stockholders at which such Affiliate's designated director is to be placed on
the ballot for election has not yet been held, such Affiliate will not have
the right to designate a director (and the Company shall not be required to
nominate such director); and (ii) in the event such annual meeting of
stockholders has been held, the Affiliate will, if requested by the Company,
use all reasonable efforts to cause such director to resign from the Board.

38
<PAGE>

The BCI Affiliate and the Pecks Affiliate have agreed that they will not
offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of their shares of Common Stock or any securities convertible into or
exercisable or exchangeable for such Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with such
Common Stock for a period of 180 days following the date of this Prospectus,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. See "Underwriting."

Compensation Committee and Audit Committee; Interlocks and Insider
Participation. The Board of Directors has a Compensation Committee and an
Audit Committee. The Compensation Committee, comprised of Messrs. Dern, Draper
and Horton, makes recommendations to the Board concerning salaries and
incentive compensation for officers and employees of the Company and
administers the Stock Option Plan. See "--Stock Option Plan." The Audit
Committee, comprised of Messrs. Cresci and Mainstain, reviews the results and
scope of the audit and other accounting related services. Each of the members
of the Compensation Committee and the Audit Committee is an independent
director who has no significant relationship with the Company or its officers
or directors.

Director Compensation. Directors receive $6,000 per year as compensation for
serving on the Board of Directors, $500 for attendance at each meeting of the
Board of Directors and $250 for attendance at each meeting of a committee of
the Board of Directors. In January 1996, Film Roman California granted to each
of Messrs. Dern, Draper and Mainstain options to purchase 20,000 shares of
California Common Stock at an exercise price of $10.00 per share. Upon the
effectiveness of the Reorganization and pursuant to the antidilution
provisions of such options, the options granted to each such director will
become options to purchase 25,000 shares of Common Stock at an exercise price
of $8.00 per share.

39
<PAGE>

EXECUTIVE COMPENSATION

The following table provides for the periods shown certain summary
information concerning compensation paid or accrued by the Company to or on
behalf of (i) the Company's Chief Executive Officer and each of the four
highest paid executive officers of the Company (collectively, the "Named
Executive Officers") and (ii) the Company's two highest paid employees other
than the Named Executive Officers:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL OTHER ANNUAL OPTIONS/SAR#
POSITION YEAR SALARY BONUS COMPENSATION(1) (2)
<S> <C> <C> <C> <C> <C>
Phil Roman.................. 1995 $306,500 -- $41,974 --
President and Chief 1994 247,500 -- 36,413 --
Executive Officer 1993 208,000 -- 41,493 --
William Schultz............. 1995 $221,912 $71,839 -- 75,000
Executive Vice President 1994 188,827 47,185 -- --
1993 189,462 -- -- --
Jon F. Vein(3).............. 1995 $128,800 -- -- --
Senior Vice President
Jacqueline Blum............. 1995 $123,962 -- -- --
Senior Vice President-- 1994 109,346 -- -- --
Worldwide Licensing and 1993 93,846 -- -- --
Marketing
Gregory Arsenault........... 1995 $144,160 -- -- --
Senior Vice President-- 1994 103,680 -- -- --
Finance and Administration 1993 92,900 -- -- --
Guy Vasilovich.............. 1995 $156,000 -- -- --
Creative Director of 1994 157,850 -- -- --
Development
1993 137,750 -- -- --
Gary Hartle................. 1995 $157,480 $25,000 -- --
Producer of The Mask 1994 142,000 -- -- --
1993 102,610 -- -- --
</TABLE>
- ---------------------
(1) Each individual in the table, other than Mr. Roman, received annually (i)
a contribution pursuant to the Company's 401(k) profit sharing plan
amounting to less than $2,000 and (ii) perquisites and other persoanl
benefits, securities or property aggregating less than $50,000 or 10% of
the total annual salary and bonus reported for such individual. Mr. Roman
received annually (i) approximately $30,000 in automobile insurance,
service and lease payments, (ii) approximately $2,300 in contributions
pursuant to the Company's 401(k) profit sharing plan and (iii) payments
for personal travel and accounting services which accounted for the
remainder of Mr. Roman's other annual compensation.
(2) The securities underlying the options are shares of the Company's Common
Stock. For a description of terms pertaining to such options and other
information relating thereto, see "--Stock Option Plan."
(3) Mr. Vein began employment with the Company in February 1995 and his annual
base salary for his first year of employment was $145,600.

During the periods indicated above, none of the individuals listed above
received any awards under any long-term incentive plan, and the Company does
not have a pension plan.

40
<PAGE>

EMPLOYMENT AGREEMENTS

The Company has entered into the following employment agreements with the
Named Executive Officers:

Mr. Roman. On August 7, 1995, Mr. Roman and the Company entered into an
employment agreement that expires on August 7, 2000. Pursuant to the terms of
the agreement, Mr. Roman shall serve as the Company's President and Chief
Executive Officer, and the Company will pay Mr. Roman a base salary equal to
$325,000 per year. In the event the Company attains certain earnings goals,
Mr. Roman is entitled to receive an additional $25,000 as base salary during
the fourth year of employment and an additional $50,000 per year as base
salary during the fifth year of employment.

Mr. Roman is also entitled to an incentive bonus for each calendar year
based on the relationship of earnings to earnings goals for such calendar
year. Upon the adoption of the Company's management bonus plan (see "--
Management Bonus Plan"), Mr. Roman's employment agreement is expected to be
amended to remove such incentive bonus provisions and Mr. Roman will become
eligible to receive a bonus under the Company's management bonus plan. The
Company is entitled to terminate Mr. Roman's agreement upon his death or
disability or "for cause" (e.g., commission of a felony, gross negligence or
material breach of his employment agreement).

Mr. Schultz. On August 7, 1995, Mr. Schultz and the Company entered into an
employment agreement that expires on August 7, 1998, and may be extended, at
the Company's option, for up to two additional one-year periods. Pursuant to
the terms of the agreement, Mr. Schultz shall serve as the Company's Executive
Vice President, and the Company will pay Mr. Schultz a base salary equal to
(i) $250,000 per year for each of the first three years of employment, (ii)
$275,000 during the fourth year of employment, if his contract is extended to
a fourth year and, (iii) $300,000 during the fifth year of employment, if his
contract is extended to a fifth year. In the event the Company meets or
exceeds certain earnings goals, Mr. Schultz is entitled to receive an
additional $25,000 per year as base salary during each of the fourth and fifth
years of employment. Mr. Schultz is also entitled to an incentive bonus for
each calendar year based on the relationship of earnings to earnings goals for
such calendar year. Upon the adoption of the Company's management bonus plan
(see "--Management Bonus Plan"), Mr. Schultz's employment agreement is
expected to be amended to remove such incentive bonus provisions and Mr.
Schultz will become eligible to receive a bonus under the Company's management
bonus plan. The Company is entitled to terminate Mr. Schultz's agreement upon
his death or disability, "for cause" (e.g., commission of a felony, gross
negligence or material breach of his employment agreement) or "without cause"
(reasons other than for his death or disability or for cause). Mr. Schultz is
entitled to terminate the agreement if Mr. Roman ceases to be President of the
Company and Mr. Schultz is not selected to replace him or if Mr. Schultz is
required to report to any other person other than Mr. Roman at any time.
Pursuant to the terms of Mr. Schultz's agreement, the Company granted Mr.
Schultz options for the purchase of 60,000 shares of California Common Stock
at an exercise price of $.01 per share and options for the purchase of 124,000
shares of California Common Stock at an exercise price of $10.00 per share.
See "--Stock Option Plan."

Mr. Vein. On February 14, 1995, Mr. Vein and the Company entered into an
employment agreement that expires on February 12, 1997. Pursuant to the terms
of the agreement, Mr. Vein shall serve as a Senior Vice President of the
Company, and the Company will pay Mr. Vein a base salary equal to $145,600
during the first year of employment and $160,160 during the second year of
employment. The Company is entitled to terminate Mr. Vein's agreement upon his
death or disability, "for cause" (e.g., commission of a felony, gross
negligence or material breach of his employment agreement) or "without cause"
(reasons other than for his death or disability or for cause). Mr. Vein is
entitled to terminate the agreement if Mr. Roman ceases to be the President of
the Company.

41
<PAGE>

Ms. Blum. On December 15, 1995, Ms. Blum and the Company entered into an
employment agreement that expires on January 1, 1998, and may be extended, at
the Company's option, for an additional year. Pursuant to the terms of the
agreement, Ms. Blum shall serve as the Company's Senior Vice President--
Worldwide Licensing and Marketing, and the Company will pay Ms. Blum a base
salary equal to $150,000 during the first year of employment, $157,500 during
the second year of employment, and, if such employment is extended by the
Company, $165,375 during the third year of employment. At the end of each
calendar year, Ms. Blum is eligible to receive a bonus in an amount determined
by the Board of Directors. The Company is entitled to terminate Ms. Blum's
agreement upon her death or disability, "for cause" (e.g., commission of a
felony, gross negligence or material breach of her employment agreement) or
"without cause" (reasons other than for her death or disability or for cause).
Pursuant to the terms of Ms. Blum's agreement, the Company granted Ms. Blum
options for the purchase of 35,000 shares of California Common Stock at an
exercise price of $10.00 per share. See "--Stock Option Plan."

Mr. Arsenault. On January 2, 1996, Mr. Arsenault and the Company entered
into an employment agreement that expires on January 2, 1999, and may be
extended at the Company's option for one additional year. Pursuant to the
terms of the agreement, Mr. Arsenault shall serve as the Company's Senior Vice
President--Finance and Administration and the Company will pay Mr. Arsenault a
base salary equal to $160,160 during the first year of employment, $168,168
during the second year of employment and $176,576 during the third year of
employment. If Mr. Arsenault's agreement is extended to include a fourth year
of employment, Mr. Arsenault's base salary during such year will be $194,234.
At the end of each calendar year, Mr. Arsenault is eligible to receive a bonus
in an amount determined by the Board of Directors. The Company is entitled to
terminate Mr. Arsenault's agreement upon his death or disability, "for cause"
(e.g., commission of a felony, gross negligence or material breach of his
employment agreement) or "without cause" (reasons other than for his death or
disability or for cause). Mr. Arsenault is entitled to terminate the agreement
if Mr. Roman ceases to be President of the Company. Pursuant to the terms of
Mr. Arsenault's agreement, the Company granted Mr. Arsenault options for the
purchase of 35,000 shares of California Common Stock at an exercise price of
$10.00 per share.

401(K) PROFIT SHARING PLAN

The Company has a defined contribution 401(k) Profit Sharing Plan which
covers substantially all of its employees. The plan became effective on
January 1, 1991 and was amended effective January 1, 1992. Under the terms of
the plan, employees can elect to defer up to 15% of their wages, subject to
certain Internal Revenue Service limitations, by making voluntary
contributions to the plan. Additionally, the Company, at the discretion of
management, can elect to match up to 100% of the voluntary contributions made
by its employees. For the years ended December 31, 1993, 1994 and 1995, the
Company contributed $42,398, $73,103, and $93,081, respectively, to the plan
on behalf of its employees.

42
<PAGE>

STOCK OPTION PLAN

In January 1996, Film Roman California granted to certain directors,
officers and employees of the Company options to purchase 493,000 shares of
California Common Stock (having a per share exercise price of $10.00). In May
1996, Film Roman California granted to Phil Roman, a consultant and certain
other employees of the Company options to purchase 134,500 shares of
California Common Stock (having a per share exercise price of $10.65). Upon
the effectiveness of the Reorganization and pursuant to the antidilution
provisions of the options, (i) the January 1996 options will become options
for 616,250 shares of Film Roman Holdings at $8.00 per share, and (ii) the May
1996 options will become options for 168,125 shares of Film Roman Holdings at
$8.52 per share. See "Certain Transactions--Reorganization."

Set forth below is a table describing the options granted by the Company to
each of the Named Executive Officers during the year ended December 31, 1995.

STOCK OPTION PLAN
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL OPTION GRANTS(1) FOR OPTION TERM(2)
-------------------------------------------------------------- ------------------------------
NUMBER OF PERCENT OF TOTAL MARKET
SHARES OPTIONS GRANTED EXERCISE PRICE AT
NAME AND UNDERLYING TO EMPLOYEES IN PRICE GRANT EXPIRATION
PRINCIPAL POSITION(3) OPTIONS GRANTED PERIOD PER SHARE DATE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C> <C>
Phil Roman.............. -- -- -- -- -- -- --
President and Chief
Executive Officer
William Schultz......... 75,000 100% $0.01 $3.20 2005 $378,716 $620,552
Executive Vice
President
Jon F. Vein............. -- -- -- -- -- -- --
Senior Vice President
Jacqueline Blum......... -- -- -- -- -- -- --
Senior Vice President
Gregory Arsenault....... -- -- -- -- -- -- --
Senior Vice President
</TABLE>
- ---------------------
(1) After giving effect to the Reorganization (i.e., options for the purchase
of one share of California Common Stock will be exchanged for options for
the purchase of 1.25 shares of Holdings Common Stock, and the per share
exercise price for Film Roman Holdings options will be equal to 80% of the
per share exercise price of Film Roman California options).
(2) The potential realizable value assumes a rate of annual compound stock
price appreciation of 5% and 10% from the date the option was granted over
the full option term. These assumed annual compound rates of stock price
appreciation are mandated by the rules of the Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
(3) In addition, Messrs. Roman, Schultz, Vein and Arsenault and Ms. Blum were
granted options in 1996 as follows (and giving effect to the
Reorganization): 125,000 at $8.52; 155,000 at $8.00; 62,500 at $8.00;
43,750 at $8.00; and 43,750 at $8.00, respectively.

43
<PAGE>

The following table sets forth the number and value as of December 31, 1995
of shares underlying unexercised options held by each of the Named Executive
Officers. Prior to the Offering, no stock options will be exercised by any
Named Executive Officers.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE-MONEY"
OPTIONS AS OF OPTIONS AS OF
DECEMBER 31, 1995 DECEMBER 31, 1995
NAME AND ------------------------- -------------------------
PRINCIPAL POSITION EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Phil Roman................. -- -- -- --
President and Chief
Executive Officer
William Schultz............ 75,000 -- $599,250 --
Executive Vice President
Jon F. Vein................ -- -- -- --
Senior Vice President
Jacqueline Blum............ -- -- -- --
Senior Vice President--
Worldwide Licensing and
Marketing
Gregory Arsenault.......... -- -- -- --
Vice President--Finance
</TABLE>

Administration of the Plan. The Plan is administered by the Board of
Directors and/or the Compensation Committee. No person is eligible to serve on
the Compensation Committee unless such person is then a "disinterested person"
within the meaning of paragraph (c)(2) of Rule 16b-3 and an "outside director"
within the meaning of Section 162(m)(4)(C)(ii) of the Code. The Committee has
complete discretion to determine which eligible individuals are to receive
option grants, the number of shares subject to each such grant, the status of
any granted option as either an incentive option or a non-qualified stock
option under the Federal tax laws, the exercise schedule to be in effect for
the option grant and the maximum term for which any granted option is to
remain outstanding.

Eligibility. All regular salaried employees of the Company may, at the
discretion of the Compensation Committee, be granted incentive and non-
qualified stock options to purchase shares of Common Stock at an exercise
price not less than 100% of the fair market value of such shares on the grant
date. Directors of the Company, consultants and other persons who are not
regular salaried employees of the Company are not eligible to receive
incentive stock options, but are eligible to receive non-qualified stock
options.

Number of Shares Subject to Plan. The Company has reserved up to 1,227,695
shares of Common Stock for issuance pursuant to the Plan, 859,375 of which
have been granted under the Stock Option Plan as of the date of this
Prospectus.

Purchase Price of Shares Subject to Options. The price of the shares of
Common Stock subject to each option shall be set by the Committee; provided,
however, that the price per share of an option shall be not less than 100% of
the fair market value of such shares on the date such option is granted;
provided, further, that, in the case of an incentive stock option, the price
per share shall not be less than 110% of the fair market value of such shares
on the date such option is granted in the case of an individual then owning
(within the meaning of Section 424(d) of the Code) more than ten percent of
the total combined voting power of all classes of stock of the Company, any
subsidiary or any parent corporation ("greater than 10% stockholders").

Non-Assignability. Options may be transferred only by will or by the laws of
descent and distribution. During a participant's lifetime, options are
exercisable only by the participant.

Terms and Exercisability of Options. Unless otherwise determined by the
Board of Directors or the Compensation Committee, all options granted under
the Plan are subject to the following conditions: (i) options

44
<PAGE>

exercisable in installments, on a cumulative basis, at the rate of twenty
(20%) each year beginning on the first anniversary of the date of the grant of
the option, until the options expire or are terminated, and (ii) following an
optionee's termination of employment, the Company has the right to repurchase
any outstanding vested options or any shares of Common Stock issued to an
optionee upon exercise of an option by notifying the optionee of the Company's
decision to so purchase the shares or options within 60 days of such
termination of employment. The purchase price for the shares of Common Stock
is the difference between the fair market value of the shares of Common Stock
at the date of notification and the exercise price of such options.

Options are not assignable or transferable by the optionee except by will or
the laws of inheritance following the optionee's death. The optionee has no
stockholder rights with respect to the shares subject to his or her
outstanding options until such options are exercised and the purchase price is
paid for the shares.

To the extent that the aggregate fair market value of stock with respect to
which "incentive stock options" (within the meaning of Section 422 of the
Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company, any subsidiary and any
parent corporation) exceeds $100,000, such options shall be taxed as non-
qualified stock options. The rule set forth in the preceding sentence shall be
applied by taking options into account in the order in which they were
granted. For this purpose, the fair market value of stock shall be determined
as of the time that the option with respect to such stock is granted.

Options are exercisable in whole or in part by written notice to the
Company, specifying the number of shares being purchased and accompanied by
payment of the purchase price for such shares. The option price may be paid:
(i) in cash or by certified or cashier's check payable to the order of the
Company, (ii) by cancellation of indebtedness owed by the Company to the
optionee, (iii) by delivery of shares of Common Stock of the Company already
owned by, and in the possession of the optionee, (iv) if authorized by the
Board of Directors or the Committee or if specified in the option agreement
for the option being exercised, by a recourse promissory note made by the
optionee in favor of the Company or through installment payments to the
Company, or (v) in such other manner as the Board of Directors or the
Committee may specify in order to facilitate the exercise of options by the
holders thereof, including but not limited to a guarantee by the Company of a
third party loan to the optionee.

On the date the option price is to be paid, the optionee (or his or her
successor) must make full payment to the Company of all amounts that must be
withheld by the Company for federal, state or local tax purposes.

Termination of Employment; Death or Permanent Disability. If a holder of an
option ceases to be employed by the Company for any reason other than for
cause or the optionee's death or permanent disability, such optionee's stock
option shall expire three months after the date of such cessation of
employment unless by its terms it expires sooner; provided, however, that
during such period after cessation of employment, such stock option may be
exercised only to the extent it was exercisable according to such option's
terms on the date of cessation of employment. If an optionee dies or becomes
permanently disabled while the optionee is employed by the Company, such
optionee's option shall expire three months (or such other period as specified
in such optionee's option agreement) after the date of such optionee's death
or permanent disability unless by its terms it expires sooner. During such
period after death, such stock option may, to the extent it remains
unexercised upon the date of such death, be exercised by the person or
person's to whom the optionee's rights under such stock option are transferred
under the laws of descent and distribution.

Acceleration of Exercisability. In the event the Company is acquired by
merger, consolidation or asset sale, each outstanding option which is not to
be assumed by the successor corporation or replaced with a comparable option
to purchase shares of the capital stock of the successor corporation will, at
the election of the Board of Directors (or if so provided in an option or
other agreement with an optionee), automatically accelerate in full.

45
<PAGE>

Adjustments. In the event any change is made to the Common Stock issuable
under the Plan by reason of any recapitalization, stock dividend, stock split,
combination of shares, exchange of shares or other change in corporate
structure effected without the Company's receipt of consideration, appropriate
adjustments will be made to (i) the maximum number and class of shares
issuable under the Plan and (ii) the number and/or class of shares and price
per share in effect under each outstanding option.

Amendments to the Plan. The Board of Directors may at any time suspend or
terminate the Plan. The Board of Directors or Committee may also at any time
amend or revise the terms of the Plan, provided that no such amendment or
revision shall, unless appropriate stockholder approval of such amendment or
revision is obtained, (i) increase the maximum number of shares which may be
acquired pursuant to options granted under the Plan (except for adjustments as
described in the foregoing paragraph), (ii) change the minimum purchase price
required under the Plan, (iii) increase the maximum term of options provided
under the Plan or (iv) change the classes of persons eligible to receive
options under the Plan.

Termination. The Plan will terminate on August 7, 2005, unless sooner
terminated by the Board of Directors.

Registration Statement on Form S-8. Approximately 90 days after the
consummation of the Offering, the Company expects to cause to be filed with
the Securities and Exchange Commission a Registration Statement on Form S-8
covering the shares of Common Stock underlying options granted under the Plan.

FEDERAL INCOME TAX CONSEQUENCES TO PARTICIPANTS IN THE PLAN

The following summary of the material federal income tax consequences to
participants in the Plan is based on current law, is for general information
only and is not tax advice. The summary does not purport to discuss all
aspects of federal income taxation that may be relevant to a particular
participant in light of such participant's personal investment circumstances.

A participant may be subject to state or local taxation in various state or
local jurisdictions in which he or she works or resides. State and local tax
treatment of the participants are not discussed in this summary, and such
state and local tax treatment may not conform to the federal income tax
consequences discussed in this summary.

Non-Qualified Stock Options. A participant who is granted non-qualified
stock options does not realize income as a result of the grant of such
options. However, the participant normally realizes compensation income at the
time the options are exercised, in the amount by which the fair market value
of the Common Stock on the date the options are exercised exceeds the option
exercise price paid. This compensation income is taxable at ordinary income
rates, and the Company is required to withhold taxes on the amount treated as
ordinary income to the participant.

The participant's tax basis for Common Stock acquired upon the exercise of a
non-qualified stock option is the price paid to exercise the option plus the
amount of ordinary income realized by the participant as a result of the
exercise of the option. Any appreciation in the value of such Common Stock may
qualify for capital gains treatment, provided that applicable holding period
requirements are satisfied.

The tax consequences resulting from a participant's exercise of non-
qualified options by surrendering Common Stock already owned by the
participant are not completely certain. In published rulings, the Internal
Revenue Service (the "IRS") has taken the position that, to the extent that
the number of shares acquired is equivalent to the number of shares
surrendered, the participant recognizes no gain and the participant's basis in
the shares acquired upon such exercise is equal to the participant's basis in
the surrendered shares, that any additional shares acquired upon such exercise
is compensation to the participant taxable under the rules described above,
and that the participant's basis in any such additional shares will be their
fair market value.

46
<PAGE>

Incentive Stock Options. A participant who is granted incentive stock
options is not treated as having received taxable income upon either the grant
or the exercise of the options. Instead, such participant is taxed at the time
of the sale or other taxable disposition of the Common Stock acquired pursuant
to the exercise of the option. Generally, such participants pay taxes at long
term capital gains rates on the difference between the amount realized on the
sale or other disposition of the shares and the option exercise price. To
qualify for such capital gains treatment, the participant (i) must not sell or
dispose of the shares earlier than either two years from the date of grant of
the incentive stock option or one year from the date of transfer of the shares
to the participant upon exercise, and (ii) must be an employee of the Company
at all times during the period beginning with the date of the grant of the
option and ending three months before the date of exercise. If the shares of
stock are sold or otherwise disposed of before the end of the one-year period
or the two-year period, a portion of the gain, if any, may be treated as
compensation taxable as ordinary income rather than as capital gain.

The tax consequences resulting from a participant's exercise of incentive
stock options by surrendering shares of Common Stock already owned by the
participant are not completely certain. In published rulings and proposed
regulations, the IRS has taken the position that generally the participant
recognizes no income upon such stock-for-stock exercise, that to the extent
that the number of shares acquired is equivalent to the number of shares
surrendered, the participant's basis in the shares acquired upon such exercise
is equal to the participant's basis in the surrendered shares increased by any
compensation income recognized by the participant, that the participant's
basis in any additional shares acquired by such exercise is zero, and that any
sale or other disposition of the acquired shares within the one-year period or
the two-year period described above is viewed as a disposition of the shares
with the lowest basis first.

Alternative minimum tax must be paid when it exceeds a taxpayer's regular
federal income tax. Alternative minimum tax is calculated based on alternative
minimum taxable income, which is taxable income for federal income tax
purposes, modified by certain adjustments and increased by tax preference
items. For purposes of the foregoing, the difference between the exercise
price and the fair market value of shares of Common Stock acquired pursuant to
the exercise of an incentive stock option is classified as alternative minimum
taxable income for the year of exercise. For alternative minimum tax purposes
(but not for regular income tax purposes), the participant's basis in the
acquired shares is the fair market value of the shares at the time the
incentive stock option is exercised. A disqualifying disposition of the
acquired shares during the same year in which the incentive stock option was
exercised will cancel the alternative minimum taxable income generated upon
exercise of the incentive stock option. Should there be a disqualifying
disposition in a year other than the year of exercise, the income on the
disqualifying disposition will not be considered income for alternative
minimum tax purposes.

FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY

The following summary of the material federal income tax consequences to the
Company is based on current law, is for general information only and is not
tax advice.

Section 162(m) Limitation. Subject to a limited number of exceptions,
Section 162(m) of the Code denies a deduction to a publicly held corporation
for payments of remuneration to certain employees to the extent the employee's
remuneration for the taxable year exceeds $1,000,000. For this purpose,
remuneration attributable to stock options is included within the $1,000,000
limitation. However, to the extent that the remuneration is payable solely on
account of the attainment of one or more performance goals and certain other
procedural requirements are met, then such remuneration is not subject to the
$1,000,000 limitation.

The Company has attempted to structure the Plan in such a manner that the
remuneration attributable to the stock options will not be subject to the
$1,000,000 limitation. The Company has not, however, requested a ruling from
the IRS or an opinion of counsel regarding this issue.

47
<PAGE>

Non-Qualified Stock Options. Subject to the limitations set forth in Code
Section 162(m) and discussed above, the Company is entitled to deduct from its
taxable income the amount that the participant is required to include in
ordinary income at the time of such inclusion.

Qualified Stock Options. The Company is not entitled to any deduction on
account of the grant of the incentive stock options or the participant's
exercise of the option to acquire Common Stock. However, in the event of a
subsequent disqualifying disposition of such shares under circumstances
resulting in taxable compensation to the participant, subject to the
limitations set forth in Code Section 162(m) and discussed above, the Company
is entitled to a tax deduction equal to the amount treated as taxable
compensation to the participant.

MANAGEMENT BONUS PLAN

Following the consummation of the Offering, the Company expects to adopt a
management bonus plan covering the Named Executive Officers and other officers
and employees of the Company. Although the provisions of the plan have not yet
been determined by the Company, the Company anticipates that bonuses under the
plan would be awarded to an employee based on the performance of that
employee, on the Company's earnings performance and on other factors that the
Board of Directors and/or the Compensation Committee deem relevant. The
Company intends to retain a consultant to advise the Company with regard to
the terms and provisions of such a plan.

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<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Film Roman Holdings' Common Stock immediately following the
Reorganization, the Cash Redemption of $7.5 million liquidation preference of
Redeemable Preferred Stock and the Non-Cash Redemption of $4.5 million
liquidation preference of Redeemable Preferred Stock and as adjusted to give
effect to the Offering by: (i) each Selling Stockholder (i.e., Oppenheimer &
Co., Inc. and a partnership managed by Oppenheimer & Co., Inc.), (ii) each
person known by Film Roman Holdings to own beneficially 5% or more of the
outstanding Common Stock of Film Roman Holdings, (iii) each director and Named
Executive Officer of Film Roman Holdings, and (iv) all directors and executive
officers as a group. The Company has been advised that no director or Named
Executive Officer will purchase more than 5,000 shares of Common Stock in the
Offering.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(1)
-------------------- --------------------
NUMBER OF
NAME NUMBER OF SHARES NUMBER OF
---- SHARES PERCENT(2) BEING OFFERED SHARES PERCENT(3)
<S> <C> <C> <C> <C> <C>
Phil Roman(3)........... 3,078,750 59.6% 0 3,078,750 36.4%
BCI Growth III, L.P.(4). 1,034,743 20.0 0 1,034,743 12.3
Pecks Management
Partners Ltd.(5)....... 1,034,743 20.0 0 1,034,743 12.3
Oppenheimer & Co.,
Inc.(6)................ 24,636 * 24,636 0 0
William Schultz(2)(3)... 87,500 1.7 0 87,500 *
Jon F. Vein(2)(3)....... 12,500 * 0 12,500 *
Jacqueline Blum(2)(3)... 8,750 * 0 8,750 *
Gregory Arsenault(2)(3). 8,750 * 0 8,750 *
Robert J. Cresci(5)(7).. 1,034,743 20.0 0 1,034,743 12.3
Dixon Q. Dern(2)(8)..... 5,000 * 0 5,000 *
Dennis W. Draper(2)(9).. 5,000 * 0 5,000 *
Theodore T. Horton,
Jr.(4)(10)............. 1,034,743 20.0 0 1,034,743 12.3
Peter Mainstain(2)(11).. 5,000 * 0 5,000 *
All Directors and
executive officers as a
Group(10 persons)(2)... 5,280,736 99.5% 0 5,280,736 61.3%
</TABLE>

- -------------------
*Less than 1%.
(1) Assumes that the persons in the table do not purchase shares in the
Offering and that the Underwriters' over-allotment option is not
exercised. Adjusted to reflect the Reorganization, the Cash Redemption
and the Non-Cash Redemption. See "Certain Transactions--Reorganization."
Excludes 726,875 shares of Common Stock issuable upon the exercise of
options which have been granted as of the date of this Prospectus (but
which are not exercisable within 60 days of the date of this Prospectus)
and 72,066 shares of Common Stock issuable upon the exercise of the New
Warrants (which are not exercisable within 60 days of the date of this
Prospectus). See "Management--Stock Option Plan" and "Certain
Transactions--1996 Commitment."
(2) Shares which each identified stockholder has the right to acquire within
60 days of the date of this Prospectus are deemed to be outstanding in
calculating the percentage ownership of such stockholder, but are not
deemed to be outstanding as to any other person.
(3) The mailing address for such person is: c/o Film Roman, Inc., 12020
Chandler Boulevard, Suite 200, North Hollywood, California 91607.
(4) Teaneck Associates L.P. is the sole general partner of BCI Growth III,
L.P. BCI Advisors, Inc., the investment advisor to BCI Growth III, L.P.,
has sole investment and voting power with respect to the shares
beneficially owned by BCI Growth III, L.P. Mr. Horton, a director of the
Company, is a general partner of Teaneck Associates L.P., and a Managing
Director of BCI Advisors, Inc. The mailing address for BCI Growth III,
L.P. is c/o BCI Advisors, Inc., Glenpointe Centre West, Teaneck, New
Jersey, 07666. Teaneck Associates L.P. and BCI Advisors, Inc. disclaim
beneficial ownership of such shares.
(5) 698,500, 197,675 and 138,478 of such shares are beneficially owned by
Delaware State Employees' Retirement Fund, Declaration of Trust for
Defined Benefit Plans of ICI American Holding Inc. and Declaration of
Trust for Defined Benefit Plans of Zeneca Holding Inc., respectively.
Pecks Management Partners Ltd., as investment manager for these
beneficial owners, has sole investment and voting power with respect to
such shares. Mr. Cresci, a director of the Company, is a managing partner
of Pecks Management Partners Ltd. The mailing address for Pecks
Management Partners Ltd. is One Rockefeller Plaza, New York, New York
10020. Pecks Management Partners Ltd. disclaims beneficial ownership of
such shares.
(6) 18,750 and 5,886 of such shares are beneficially owned by OPCO Senior
Executive Investment Partnership, L.P. and Oppenheimer & Co., Inc.,
respectively. Oppenheimer & Co., Inc. and OPCO Senior Executive
Investment Partnership, L.P. are affiliates. The mailing address for
Oppenheimer & Co., Inc. is One World Financial Center, 200 Liberty
Street, New York, New York 10281.
(7) Includes 1,034,743 shares held by pension trusts and a pension fund which
are managed by Pecks Management Partners Ltd. and for which Mr. Cresci
disclaims any beneficial ownership. The mailing address for Mr. Cresci is
c/o Pecks Management Partners Ltd., One Rockefeller Plaza, New York, New
York 10020.
(8) The mailing address for Mr. Dern is 1901 Avenue of the Stars, Suite 400,
Los Angeles, California 90067.
(9) The mailing address for Mr. Draper is c/o The University of Southern
California Business School, University Park, Los Angeles, California.
(10) Includes 1,034,743 shares held by BCI Growth III, L.P. which is managed
by BCI Advisors, Inc. and for which Mr. Horton disclaims any beneficial
ownership. The mailing address for Mr. Horton is c/o BCI Advisors, Inc.,
Glenpointe Centre West, Teaneck, New Jersey 07666.
(11) The mailing address for Mr. Mainstain is c/o Tanner, Mainstain & Hoffer,
10866 Wilshire Boulevard, 10th Floor, Los Angeles, California 90024.

49
<PAGE>

CERTAIN TRANSACTIONS

1995 PRIVATE PLACEMENT

In 1995, Film Roman California entered into a Securities Purchase Agreement
pursuant to which Film Roman California issued 1,200,000 shares of California
Redeemable Preferred Stock and warrants (the "Investor Warrants") to purchase
an aggregate of 1,200,000 shares of California Common Stock to certain
investors (the "Investors") for an aggregate purchase price of $12 million
(collectively, the "1995 Private Placement"). Of the securities issued in the
1995 Private Placement, (i) 592,500 shares of California Redeemable Preferred
Stock and Investor Warrants to purchase 592,500 shares of California Common
Stock were issued to the BCI Affiliate for an aggregate purchase price of
$5.925 million; (ii) 592,500 shares of California Redeemable Preferred Stock
and Investor Warrants to purchase 592,500 shares of California Common Stock
were issued to the Pecks Affiliate for an aggregate purchase price of $5.925
million; and (iii) 15,000 shares of California Redeemable Preferred Stock and
Investor Warrants to purchase 15,000 shares of California Common Stock were
issued to a partnership managed by Oppenheimer & Co., Inc. ("Oppenheimer") for
an aggregate purchase price of $150,000.

Concurrently with the 1995 Private Placement, Film Roman California also (a)
issued to Oppenheimer a warrant (the "Oppenheimer Warrant") for the purchase
of 37,000 shares of California Common Stock and (b) effected a
recapitalization pursuant to which Mr. Roman received in exchange for his
1,000 shares of capital stock of Film Roman California, (i) 750,000 shares of
Convertible Preferred Stock, (ii) 1,713,000 shares of California Common Stock,
and (iii) a warrant (the "Roman Warrant") for the purchase of 185,000 shares
of California Common Stock of Film Roman California.

REORGANIZATION

Film Roman Holdings was incorporated in Delaware in May 1996 in order to
hold all of the outstanding capital stock of Film Roman California. Film Roman
Holdings currently conducts no operations. In the Reorganization, which will
be effected immediately prior to the Offering, (i) a wholly-owned subsidiary
of Film Roman Holdings will merge with and into Film Roman California; (ii)
each outstanding share of California Common Stock will be converted into 1.25
shares of Common Stock (including shares of California Common Stock to be
issued immediately prior to such merger upon exercise of the Investor Warrants
and the Oppenheimer Warrant and upon conversion of all outstanding shares of
Convertible Preferred Stock); (iii) each outstanding share of California
Redeemable Preferred Stock will be converted into one share of Redeemable
Preferred Stock; (iv) all outstanding employee options and the New Warrants
(as defined herein) for the purchase of California Common Stock will, pursuant
to the anti-dilution provisions thereof, become options and warrants to
purchase Common Stock; (v) the Shareholders Agreement will terminate; and (vi)
the Roman Warrant will be cancelled. As a result of the foregoing, Film Roman
California will become a wholly-owned subsidiary of Film Roman Holdings and
the stockholders of Film Roman California will become stockholders of Film
Roman Holdings. The Reorganization will be effected pursuant to a Plan of
Reorganization Agreement dated as of May 15, 1996, as amended, by and among
Film Roman Holdings, Film Roman California, the Investors, Oppenheimer and
Phil Roman. Immediately following the Reorganization and the closing of the
Offering, Film Roman Holdings will redeem for cash $7.5 million liquidation
preference of Redeemable Preferred Stock and, if the underwriters' over-
allotment option is exercised, will redeem for cash additional Redeemable
Preferred Stock to the extent of the net proceeds (less accrued dividends on
such Redeemable Preferred Stock) received by the Company from the exercise of
such over-allotment option. In the event the underwriters' over-allotment
option is not exercised in full, any shares of Redeemable Preferred Stock that
have not been redeemed for cash will be redeemed for Common Stock (at a
redemption price of 1.3072 shares of Common Stock for each share of Redeemable
Preferred Stock). Accrued dividends on the Redeemable Preferred Stock and
Convertible Preferred Stock will be paid to the date of redemption and
conversion, respectively.

In the event of the Non-Cash Redemption, each of the BCI Affiliate and the
Pecks Affiliate have the right to designate one director to the Board. See
"Management--Board of Directors."

50
<PAGE>

1996 COMMITMENT

Due to the Company's increase in production of proprietary programming and
the number of series in process, the Company has increased its use of cash. In
addition, the Company's third and fourth quarter cash flows are typically
negative. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General; --Revenue and Cost Recognition; --Liquidity
and Capital Resources." In order to supplement cash resources prior to the
Offering, in September 1996, the Company secured a commitment from certain of
its existing stockholders to purchase up to $3.0 million of 12% Senior Secured
Notes of Film Roman California due December 20, 1996. No Senior Notes have
been or will be issued pursuant to the 1996 Commitment. As consideration for
the receipt of the 1996 Commitment, Film Roman California issued New Warrants
which, pursuant to the anti-dilution provisions thereof, will be exercisable
for 72,066 shares of Common Stock at an exercise price of $7.00 per share.
Such New Warrants were issued to Mr. Roman (for the purchase of 12,014 shares
of Common Stock), to the BCI Affiliate (for the purchase of 30,030 shares of
Common Stock) and to the Pecks Affiliate (for the purchase of 30,022 shares of
Common Stock). The New Warrants are exercisable beginning September 1997 and
expire in September 2001. The New Warrants will be immediately exercisable
upon a merger or consolidation involving the Company (other than the
Reorganization) or in the event of a sale of all or substantially all of the
assets of the Company. Although the New Warrants are not currently
exercisable, if the New Warrants were exercised in full on the date of the
consummation of the Offering, such New Warrants would provide approximately
$216,000 of value to the holders thereof. Such value was determined by
multiplying the number of shares of Common Stock issuable upon the exercise of
such Warrants (72,066) by the difference between the initial public offering
price ($10.00) and the per share exercise price ($7.00).

OTHER TRANSACTIONS

Mr. Roman guarantees all of the Company's obligations under its existing
debt agreements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." Mr.
Dern provides legal services to the Company on a regular basis and receives
customary fees for such services. In 1995, Mr. Dern was paid approximately
$84,000 for such services. Mr. Dern and Mr. Vein, a Senior Vice President of
the Company, were partners at the law firm of Dern & Vein from 1993 to 1995.
Mr. Draper provides independent financial consulting services to the Company
on an ongoing basis and receives customary fees for such services. Mr.
Mainstain is a shareholder of Tanner, Mainstain & Hoffer, an accountancy
corporation that provides accounting services to the Company on a regular
basis, and such firm receives customary fees for such services.

51
<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

Film Roman Holdings was incorporated in May 1996 in order to hold all of the
outstanding capital stock of Film Roman California upon completion of the
Offering and the Reorganization. See "Certain Transactions--Reorganization."
Film Roman Holdings currently conducts no operations. Film Roman Holdings'
certificate of incorporation (the "Certificate of Incorporation") authorizes
20,000,000 shares of a single class of Common Stock, par value $0.01 per
share, and 5,000,000 shares of preferred stock, par value $.01 per share, none
of which shares of preferred stock will be issued and outstanding immediately
after completion of the Offering and the redemption of the Redeemable
Preferred Stock. All outstanding shares of Common Stock are, and the shares
offered hereby will be, when issued and sold, fully paid and nonassessable.

The discussion below describes the capital stock of Film Roman Holdings,
unless otherwise noted.

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share of Common
Stock on all matters submitted to a vote of stockholders. There are no
cumulative voting rights. The rights, privileges and preferences of the
holders of Common Stock are subject to the rights of the holders of any shares
of preferred stock that may be designated and issued by the Company in the
future. Subject to any restrictions contained in preferred stock issued by the
Company, if any, and to restrictions imposed by certain debt agreements of the
Company, holders of Common Stock are entitled to receive dividends when and if
declared by the Board of Directors out of legally available funds. Upon any
liquidation, dissolution or winding up of the Company, subject to the rights
of holders of shares of preferred stock, if any, holders of Common Stock are
entitled to share pro rata in any distribution to the stockholders. Holders of
Common Stock do not have preemptive or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock.

Pursuant to Section 2115 of the California Corporations Code (the
"California Law"), a corporation incorporated in a State other than California
(such as the Company, which is incorporated in Delaware) may nevertheless be
subject to certain of the provisions of the California Law (as specified in
Section 2115 of the California Law) applicable to California corporations
(commonly designated a "Quasi-California Corporation") if more than one-half
of its outstanding voting securities are owned of record by persons having
addresses in California and more than half of its business is conducted in
California (generally, the average of its property factor, payroll factor and
sales factor (as defined in Sections 25129, 25132 and 25134 of the California
Revenue and Taxation Code) is more than 50 percent during its latest full
income year). Such a foreign corporation will not be treated as a Quasi-
California Corporation, however, if it has outstanding securities trading on
the Nasdaq National Market and has at least 800 holders of its equity
securities as of the record date of its most recent annual shareholders'
meeting. Prior to this Offering, all of the Company's outstanding voting
securities were owned of record by persons having addresses in California. It
is expected that such percentage will be reduced significantly as a result of
this Offering. To the extent, however, that the Company meets the requirements
set forth in Section 2115 of the California Law, the Company could become a
Quasi-California Corporation subject to the California Law which, among other
things, requires cumulative voting and is more restrictive than Delaware law
concerning dividends and other distributions to stockholders.

PREFERRED STOCK

The Company's Board of Directors, without the approval of the holders of the
Common Stock, is authorized to designate for issuance up to 5,000,000 shares
of preferred stock, par value $0.01 per share, in such series and with such
rights, privileges and preferences as the Board of Directors may from time to
time determine. Issuance of preferred stock may adversely affect the rights,
privileges and preferences afforded the holders of Common Stock, including a
decrease in the amount available for distribution to holders of the Common
Stock in the event of a liquidation or payment of preferred dividends.
Issuance of shares of preferred stock may also have the effect

52
<PAGE>

of preventing or delaying a change in control of the Company without further
action by the stockholders and could make removal of present management of the
Company more difficult. The Company currently has no plans to designate and/or
issue any shares of preferred stock.

NEW WARRANTS

For a description of the Company's New Warrants, see "Certain Transactions--
1996 Commitment."

OPTIONS

For a description of the Company's Stock Option Plan, see "Management--Stock
Option Plan."

DELAWARE LAW AND LIMITATIONS ON CHANGES IN CONTROL

Section 203 of the Delaware General Corporation Law (the "DGCL") prevents an
"interested stockholder" (defined in Section 203, generally, as a person
owning 15% or more of a corporation's outstanding voting stock) from engaging
in a "business combination" (as defined in Section 203) with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder unless (i) before such person became an interested
stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested
stockholder or approved the business combination; (ii) upon consummation of
the transaction that resulted in the interested stockholder's becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of 66 2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder.

The Company's Bylaws generally require 60 days advance notice of any action
to be proposed at any meeting of stockholders and set forth other specific
procedures that a stockholder must follow. There are also specific procedures,
including advance notice, for the nomination of a person to the Board of
Directors when such person is nominated other than at the direction of the
Board. In addition, the Certificate of Incorporation provides that a special
meeting of the Company's stockholders may only be called by certain officers
of the Company or by the Board of Directors; no such meeting may be called by
the stockholders. Further, the Certificate of Incorporation eliminates the
ability of stockholders to act by written consent and consequently
stockholders may only act at meetings thereof. Any amendment of the Bylaws or
certain provisions of the Certificate of Incorporation by stockholders will
require the affirmative vote of at least 66 2/3% of the shares of Common Stock
then outstanding.

In addition, the Directors are divided into three classes, each having a
term of three years, with the term of one class expiring each year. Directors
may be removed only with cause. These provisions could delay the replacement
of a majority of the Directors and have the effect of making changes in the
Board of Directors more difficult than if such provisions were not in place.

53
<PAGE>

These provisions of the Bylaws and the Certificate of Incorporation,
including the provisions authorizing the Board of Directors to issue preferred
stock without stockholder approval, and the provisions of Section 203 of the
DGCL could have the effect of delaying, deferring or preventing a change in
control of the Company or the removal of existing management. See "Risk
Factors--Control by Management; Potential Anti-Takeover Effects."

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Certificate of Incorporation provides that a director of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except in certain
cases where liability is mandated by the DGCL. The provision has no effect on
any non-monetary remedies that may be available to the Company or its
stockholders, nor does it relieve the Company or its directors from compliance
with federal or state securities laws. The Bylaws of the Company generally
provide that the Company shall indemnify, to the fullest extent permitted by
law, any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit, investigation,
administrative hearing or any other proceeding (each, a "Proceeding") by
reason of the fact that he is or was a director or officer of the Company, or
is or was serving at the request of the Company as a director, officer,
employee or agent of another entity, against expenses (including attorneys'
fees) and losses, claims liabilities, judgments, fines and amounts paid in
settlement actually incurred by him in connection with such Proceeding. The
Company has entered into, or intends to enter into, agreements to provide
indemnification for the Company's directors and executive officers in addition
to the indemnification provided for in the Bylaws. These agreements, among
other things, will indemnify the Company's directors and executive officers
for certain expenses (including attorney's fees), and all losses, claims,
liabilities, judgments, fines and settlement amounts incurred by such person
arising out of or in connection with such person's service as a director or
officer of the Company to the fullest extent permitted by applicable law.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.

54
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Reorganization and the Non-Cash
Redemption, the Company will have outstanding 8,448,236 shares of Common Stock
(8,355,000 shares if the Underwriters' over-allotment option is exercised in
full and the Automatic Conversion does not occur). All of the 3,300,000 shares
(assuming the Underwriters' over-allotment option is not exercised) sold in
this Offering will be freely tradeable by persons other than affiliates of the
Company.

RULE 144

In general, Rule 144, as currently in effect, provides that a person (or
persons whose sales are aggregated) who is an affiliate of the Company or who
has beneficially owned shares which are issued and sold in reliance upon
certain exemptions from registration under the Securities Act ("Restricted
Shares") for at least two years is entitled to sell within any three-month
period a number of shares that does not exceed the greater of one percent (1%)
of the then outstanding shares of Common Stock (beginning on the 91st day
immediately after this Offering) or the average weekly trading volume in the
Common Stock during the four calendar weeks preceding the filing of a notice
of intent to sell. Sales under Rule 144 are also subject to certain manner-of-
sale provisions, notice requirements and the availability of current public
information about the Company. However, a person who is not deemed to have
been an "affiliate" of the Company at any time during the three months
preceding a sale, and who has beneficially owned Restricted Shares for at
least three years, would be entitled to sell such shares under Rule 144
without regard to volume limitations, manner-of-sale provisions, notice
requirements or the availability of current public information about the
Company. The Company and each of the Company's present stockholders, executive
officers and directors have agreed, subject to certain exceptions relating to
the Company, that they will not, directly or indirectly, offer, sell, contract
to sell or otherwise dispose of or transfer any shares of Common Stock for a
period of 180 days after the date of this Prospectus, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation. See
"Underwriting."

After the expiration of the lock-up period, (a) Mr. Roman's 3,078,750 shares
of Common Stock will be eligible for sale pursuant to Rule 144, subject to
certain volume limitation and other requirements, and (b) the Investors'
2,069,486 shares of Common Stock (or 1,481,250 shares of Common Stock if the
Non-Cash Redemption does not occur) will be eligible for sale pursuant to Rule
144 following satisfaction of the Rule's holding period and other
requirements. The Company expects to file with the Commission a Registration
Statement on Form S-8 covering the 1,227,695 shares of Common Stock issuable
upon exercise of options granted or to be granted under the Company's Stock
Option Plan. After the expiration of the lock-up period, a maximum of 213,250
shares issuable upon exercise of currently outstanding employee stock options
will become freely tradeable, except that persons deemed "affiliates" of the
Company will be required to comply with the terms and conditions of Rule 144
under the Securities Act when selling such shares.

Prior to the Offering, there has been no public market for the shares of
Common Stock, and no predictions can be made as to the effect that sales of
Common Stock under Rule 144, pursuant to a registration statement or
otherwise, or the availability of shares of Common Stock for sale, will have
on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect prevailing market prices
and could impair the Company's future ability to raise capital through an
Offering of its equity securities.

REGISTRATION RIGHTS

Pursuant to a Registration Rights Agreement entered into in connection with
the 1995 Private Placement (the "Registration Rights Agreement"), the
Investors (and Oppenheimer) were granted two demand and unlimited piggyback
registration rights with respect to Common Stock. Upon the closing of this
Offering, there will be 2,069,486 shares of Common Stock (or 1,481,250 shares
of Common Stock if the Non-Cash Redemption does not occur) and 72,066 shares
of Common Stock issuable upon the exercise of the New Warrants owned by the
Investors subject to the Registration Rights Agreement. Demand registration
rights can be exercised at any time after the date of this Prospectus subject
to the 180-day lock-up period described under "Underwriting."

55
<PAGE>

UNDERWRITING

Subject to certain terms and conditions contained in the Underwriting
Agreement, the syndicate of Underwriters named below, for whom Donaldson,
Lufkin & Jenrette Securities Corporation and Montgomery Securities are acting
as representatives (the "Representatives"), have severally agreed to purchase
from the Company and the Selling Stockholders an aggregate of 3,300,000 shares
of Common Stock. The number of shares of Common Stock that each Underwriter
has agreed to purchase is set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................... 1,320,000
Montgomery Securities................................................. 1,320,000
Allen & Company Incorporated.......................................... 40,000
Alex. Brown & Sons Incorporated....................................... 40,000
Cowen & Company....................................................... 40,000
A.G. Edwards & Sons, Inc. ............................................ 40,000
Hambrecht & Quist LLC................................................. 40,000
Morgan Stanley & Co. Incorporated..................................... 40,000
Robertson, Stephens & Company LLC..................................... 40,000
Smith Barney Inc. .................................................... 40,000
Wasserstein Perella Securities Inc. .................................. 40,000
Advest, Inc. ......................................................... 20,000
Arnhold and S. Bleichroeder, Inc. .................................... 20,000
Boston Group, L.P. (The).............................................. 20,000
Crowell, Weedon & Co. ................................................ 20,000
EVEREN Securities Inc. ............................................... 20,000
Furman Selz LLC....................................................... 20,000
Gerard Klauer Mattison & Co., LLC..................................... 20,000
Hoak Securities Corporation........................................... 20,000
Josephthal, Lyon & Ross, Inc. ........................................ 20,000
Ormes Capital Markets, Inc. .......................................... 20,000
Pennsylvania Merchant Group Ltd....................................... 20,000
Roney & Co., L.L.C. .................................................. 20,000
Ryan, Beck & Co. ..................................................... 20,000
Southcoast Capital Corporation........................................ 20,000
Sutro & Co. Incorporated.............................................. 20,000
---------
Total............................................................. 3,300,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of
the shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of Common Stock (other than the shares
of Common Stock covered by the over-allotment option described below) must be
so purchased.

Prior to the Offering, there has been no established trading market for the
Common Stock. The initial price to the public for the Common Stock offered
hereby has been determined by negotiation between the Company and the
Representatives. The factors considered in determining the initial price to
the public include the history of and the prospects for the industry in which
the Company competes, the ability of the Company's management, the past and
present operations of the Company, the historical results of operations of the
Company, the prospects for future earnings of the Company, the present state
of the Company's development, the general condition of the securities markets
at the time of the Offering and the recent market prices of and the demand for
publicly traded common stock of generally comparable companies.

56
<PAGE>

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the Common Stock to the
public initially at the price set forth on the cover page of this Prospectus
and to certain dealers (who may include the Underwriters) at such price less a
concession not to exceed $0.42 per share. The Underwriters may allow, and such
dealers may reallow, discounts not in excess of $0.10 per share to any other
Underwriter and certain other dealers.

The Underwriters have reserved approximately 165,000 shares of the Common
Stock for sale, at the initial public offering price, to directors, officers
and employees of the Company, their business affiliates and related parties,
in each case as such persons have expressed an interest in purchasing such
shares of Common Stock in the Offering. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares of Common Stock. Any reserved shares of
the Common Stock not so purchased will be offered by the Underwriters to the
general public on the same basis as the shares of the Common Stock offered
pursuant to the Offering. The Company has been advised that no director or
Named Executive Officer will purchase more than 5,000 shares of Common Stock
in the Offering.

The Company has granted to the Underwriters an option to purchase up to
495,000 additional shares of Common Stock, at the initial public offering
price less underwriting discounts and commissions, solely to cover over-
allotments. Such option may be exercised at any time until 30 days after the
effective date of the Registration Statement of which this Prospectus is part.
To the extent that the Underwriters exercise such option each of the
Underwriters will be committed, subject to certain conditions, to purchase a
number of option shares proportionate to such Underwriter's initial commitment
as indicated in the preceding table.

The Company's directors, executive officers and all other stockholders of
the Company have agreed that they will not directly or indirectly offer, sell,
contract to sell, or otherwise dispose or transfer any shares of Common Stock
of the Company owned by them without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation, for a period of 180 days after the
date of this Prospectus. In addition, the Company has agreed that for a period
of 180 days after the date of this Prospectus it will not, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation, offer,
sell, contract to sell, grant any option to purchase or otherwise dispose of
any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for such Common Stock or in any other manner transfer all or a
portion of the economic consequences associated with such Common Stock, except
for (i) shares of Common Stock offered hereby, (ii) issuances necessary to
consummate the transactions contemplated by the Reorganization and the Non-
Cash Redemption, (iii) shares of Common Stock issued pursuant to the exercise
of options outstanding on the date of this Prospectus and (iv) options granted
after the date of this Prospectus pursuant to the Stock Option Plan. "See
Shares Available for Future Sale."

Donaldson, Lufkin & Jenrette Securities Corporation is engaged to act as the
Company's exclusive financial advisor until March 1998, for which it will
receive customary compensation.

The Representatives have informed the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales of shares of Common Stock
offered hereby to accounts over which they exercise discretionary authority.

57
<PAGE>

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Latham & Watkins, Los Angeles, California. Certain legal matters in
connection with this Offering will be passed upon for the Underwriters by
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York. Latham & Watkins provides legal services to
the Representatives.

EXPERTS

The financial statements of Film Roman, Inc. at December 31, 1994 and 1995,
and for each of the two years in the period ended December 31, 1995 and the
Balance Sheet of Film Roman, Inc. (Delaware) at May 16, 1996, appearing in
this Prospectus and Registration Statement, have been audited by Ernst &
Young, LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.

The financial statements of Film Roman, Inc. for the year ended December 31,
1993, appearing in this Prospectus and Registration Statement, have been
audited by Tanner, Mainstain & Hoffer, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.

In 1994, Tanner, Mainstain & Hoffer agreed to resign at the request of the
Company's Board of Directors. At such time, the Company was contemplating the
1995 Private Placement (see "Certain Transactions") and determined that it
would be advisable to retain a "big six" accounting firm to audit the
Company's financial statements in the future. Tanner, Mainstain & Hoffer's
reports on the Company's financial statements did not contain (nor did such
firm advise the Company that any future opinion would contain) an adverse
opinion or a disclaimer of opinion nor was any such opinion qualified or
modified as to uncertainty, audit scope or accounting principles. At no time
during the prior two fiscal years or any subsequent interim period preceding
the resignation of such accounting firm did the Company have any disagreement
with such firm regarding any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. In 1995, the
Company engaged Ernst & Young LLP to be the Company's independent auditors.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain items
of which are omitted in accordance with the rules and regulations of the
Commission. The Registration Statement may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549; at its Chicago Regional Office, 500 W. Madison
Street, 14th Floor, Chicago, Illinois 60661; and at its New York Regional
Office, Seven World Trade Center, 13th Floor, New York, New York 10048. Copies
of such material can be obtained from the public reference section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20459, at prescribed
rates. For further information pertaining to the Company and the Common Stock
offered hereby, reference is made to the Registration Statement, including the
exhibits thereto and the financial statements, notes and schedules filed as a
part thereof.

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors and with
quarterly reports for each of the first three quarters of each year containing
unaudited, condensed financial statements.

58
<PAGE>

GLOSSARY

"Cable network" is a "network" (as defined below) that transmits its
programming by way of fibre-optic or coaxial cable and amplifiers (as opposed
to transmitting programming through the use of antennae and over-the-air
transmissions). USA Network, Nickelodeon and HBO are examples of cable
networks.

"Character or program franchise" is a character (or a program based on a set
of characters) which because of its popularity, becomes or may become the
foundation for related activities in a number of businesses, including
television production, international television distribution, home video
distribution, licensing and merchandising, and interactive products.

"Direct production costs" are the costs incurred by the Company that relate
solely to the production of a particular series (i.e., excluding overhead
expenses and other general and administrative expenses not attributable to
production). Overhead expenses and other general and administrative expenses
are not included in direct production costs since these items would have been
incurred regardless of the production of a particular series.

"Exploitation" is the process of generating revenue from licensing
proprietary rights.

"Fee-for-services programming" is programming whose entire cost of
production is funded by a person or entity other than the producer of such
programming. The producer receives a "fee" for producing fee-for-services
programming, and the person or entity paying such fee expects to generate
revenue in excess of such fee by retaining and exploiting the proprietary
rights to such programming. As a result, the producer does not usually retain
any of the proprietary rights associated with the programming it produces on a
fee-for-services basis.

"First-run syndication" means the initial broadcast of new episodes of a
series in syndication (as opposed to the second broadcast or "re-run" of
previously aired episodes).

"Independent animation studio" is a studio that produces animation and is
not affiliated with any of the major studios. Film Roman is an independent
animation studio.

"Interactive products/rights" includes the development or production of
video games, multimedia software products, on-line service content or other
software products or the right to create such products.

"Library" refers to a catalogue of films, series, program episodes or
proprietary rights. To the extent that a series or episodes continue to appeal
to audiences, a library is considered to have value such that an owner of the
series or episodes (or the proprietary rights associated with such series or
episodes) can generate future revenues by exploiting the contents of the
library.

"Major studio" is an established movie studio such as Universal
Pictures/MCA, 20th Century Fox, Paramount Studios, Warner Bros. or The Walt
Disney Company.

"Nielsen ratings" refers to a television audience rating system measured and
compiled by The Nielsen Ratings Service. Through a series of systems of
diaries and set-top devices, known as "people meters," The Nielsen Ratings
Service collects data, analyzes it, and publishes its analyses in the form of
ratings. A program's Nielsen rating is one of the factors that an advertiser
considers in determining whether to air a commercial during such program's
broadcast (and in determining what it is willing to pay for such commercial
time). Therefore, broadcasters and producers monitor Nielsen ratings carefully
to determine success in attracting an audience.

"Network" is a programming entity which broadcasts or exhibits programs
through a group of affiliates. Generally, this programming entity buys
programming from suppliers for distribution across the group. For purposes of
this Prospectus, the Company has used the capitalized term "Networks" to refer
to FOX, CBS, ABC, UPN and WB networks since these networks are generally
considered by the television industry to be the "major networks." NBC is also
considered by the television industry to be a major network; however, since
NBC does not currently reserve slots of its programming for animation, the
term "Networks," as used in this Prospectus, excludes NBC. See also "Cable
network" above.

59
<PAGE>

"Proprietary programming" is programming produced by the Company with
respect to which the Company owns or controls a significant portion or all of
the proprietary rights associated with the programming.

"Proprietary rights" are the intellectual property rights associated with a
program or property. Such rights include domestic and international broadcast
distribution, home video distribution, licensing and merchandising, feature
film and interactive/game development.

"Storyboard" is an illustrated depiction of a television script that
includes an artist's drawing of every scene including the characters in the
scene, as well as the location, the camera angle and camera movement. The
storyboard also indicates the dialogue and sometimes any sound effects needed.
The storyboard acts as a blueprint for the remaining production.

"Syndication" means the sale of a program to syndicators (as opposed to
networks or cable networks), such as Buena Vista Television Distribution,
Saban Entertainment, New World Entertainment and Bohbot Entertainment.

"Television season or broadcast season" generally begins during the second
week of September and ends during the same time in the following year.

"Time Slot" is a broadcast time period for a program that either airs five
times per week (Monday through Friday) or once per week (usually on the
weekend).

"Workprint" is the positive film print that is obtained from the developed
camera negative and used by an editor for cutting or editing the length of a
television episode. A workprint is not meant to be viewed by the audience.

60
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index to Financial Statements............................................. F-1
FILM ROMAN, INC.
Report of Independent Auditors.......................................... F-2
Report of Independent Auditors (Ernst & Young LLP)...................... F-3
Balance Sheets as of December 31, 1994 and 1995 and as of the Six Months
Ended June 30, 1996 (unaudited)........................................ F-4
Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995, and for the Six Months Ended June 30, 1995 and 1996 (unaudited).. F-5
Statements of Stockholder's Equity at December 31, 1993, 1994 and 1995,
and at June 30, 1996 (unaudited)....................................... F-6
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995, and for the Six Months Ended June 30, 1995 and 1996 (unaudited).. F-7
Notes to Financial Statements........................................... F-8
FILM ROMAN, INC. (a Delaware corporation)
Report of Independent Auditors.......................................... F-19
Balance Sheet as of May 16, 1996........................................ F-20
Notes to Financial Statements........................................... F-21
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
Film Roman, Inc.

We have audited the accompanying statement of operations, stockholder's
equity and cash flows of Film Roman, Inc. for the year ended December 31,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 financial position of Film Roman, Inc. as of
December 31, 1993 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

TANNER, MAINSTAIN & HOFFER
AN ACCOUNTANCY CORPORATION

Los Angeles, California
May 13, 1994

F-2
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Film Roman, Inc.

We have audited the accompanying balance sheets of Film Roman, Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
stockholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits 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 audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Film Roman, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.

Ernst & Young LLP

Los Angeles, California
May 16, 1996, except for Note 1--
Reorganization, as to which the
date is September 27, 1996

F-3
<PAGE>

FILM ROMAN, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- -----------
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................. $ 435,580 $ 5,176,090 $ 4,793,676
Accounts receivable....................... 383,121 430,184 1,637,855
Film costs, net of accumulated
amortization of $85,160,597 (1994),
$118,316,120 (1995) and $131,243,172
(1996)
(Notes 1 and 2).......................... 12,382,019 12,379,146 19,012,062
Property and equipment, net of accumulated
depreciation and amortization of $418,719
(1994), $549,028 (1995) and $659,510
(1996) (Notes 1 and 3)................... 263,747 336,875 819,429
Refundable income taxes................... -- 487,500 155,000
Deposits and other assets................. 229,768 140,583 556,863
----------- ----------- -----------
Total assets.......................... $13,694,235 $18,950,378 $26,974,885
=========== =========== ===========
LIABILITIES AND
STOCKHOLDER'S EQUITY
Accounts payable.......................... $ 205,835 $ 508,433 $1,137,273
Accrued expenses.......................... 724,508 682,183 2,056,541
Dividends payable (Notes 6 and 7)......... -- 650,000 1,430,000
Debt (Note 4)............................. 1,362,576 1,737,145 1,240,896
Deferred revenue (Note 1)................. 9,710,417 6,791,779 14,053,135
----------- ----------- -----------
Total liabilities..................... 12,003,336 10,369,540 19,917,845
Commitments (Note 8)
Class A Redeemable Preferred Stock, $.01
par value, 1,200,000 shares authorized,
issued and outstanding, $12,000,000
liquidation preference (Notes 1 and 6)... -- 6,748,788 7,231,988
Stockholder's equity (deficiency) (Note
7):
Class B Convertible Preferred stock,
$.01 par value, 750,000 shares
authorized, issued and outstanding,
$7,500,000 liquidation preference...... -- 300 300
Common stock, no par value, 10,000,000
shares authorized, 2,463,000 shares
issued and outstanding in 1994 and
1,713,000 shares issued and outstanding
in 1995 and 1996 1,000 700 700
Additional paid-in capital.............. -- 4,716,656 4,716,656
Retained earnings (deficit)............. 1,689,899 (2,885,606) (4,892,604)
----------- ----------- -----------
Total stockholder's equity
(deficiency)......................... 1,690,899 1,832,050 (174,948)
----------- ----------- -----------
Total liabilities and stockholder's
equity (deficiency)................ $13,694,235 $18,950,378 $26,974,885
=========== =========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE>

FILM ROMAN, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue (Note 1)........ $27,867,300 $36,201,103 $34,340,620 $13,358,753 $13,715,698
Cost of revenue......... 25,675,371 33,190,002 33,155,523 12,612,912 12,927,052
Selling, general and
administrative
expenses............... 1,367,601 1,829,126 2,963,211 1,178,330 1,594,473
----------- ----------- ----------- ----------- -----------
Operating income (loss). 824,328 1,181,975 (1,778,114) (432,489) (805,827)
Interest income......... 4,472 5,470 151,534 98 96,423
Interest expense........ (26,004) (32,559) (62,596) (26,485) (32,766)
----------- ----------- ----------- ----------- -----------
Income (loss) before
provision for
income taxes........... 802,796 1,154,886 (1,689,176) (458,876) (742,170)
Provision for income
taxes.................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 802,796 $ 1,154,886 $(1,689,176) $ (458,876) $ (742,170)
=========== =========== =========== =========== ===========
Pro forma data (Note 12,
unaudited):
Historical net income
(loss)............... $ 802,796 $ 1,154,886 $(1,689,176) $ (458,876) $ (742,170)
Pro forma provision
(benefit) for income
taxes................ 321,118 461,954 (574,319) (156,018) --
----------- ----------- ----------- ----------- -----------
Pro forma net income
(loss)............... $ 481,678 $ 692,932 $(1,114,857) $ (302,858) $ (742,170)
=========== =========== =========== =========== ===========
Net income (loss)
attributable to
common stock......... $ 481,678 $ 692,932 $(2,000,000) $ (302,858) $(1,706,998)
=========== =========== =========== =========== ===========
Pro forma net income
(loss) per share..... $ (0.52) $ (0.44)
=========== ===========
Pro forma weighted
average number of
shares outstanding... 3,860,792 3,860,792
=========== ===========
</TABLE>

See accompanying notes.

F-5
<PAGE>

FILM ROMAN, INC.

STATEMENTS OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
CLASS B
CONVERTIBLE
PREFERRED
COMMON STOCK STOCK ADDITIONAL RETAINED TOTAL
----------------- -------------- PAID-IN EARNINGS STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December
31, 1992............... 2,463,000 $1,000 -- $ -- $ -- $ 344,242 $ 345,242
Dividends paid to
common stockholder.... -- -- -- -- -- (364,172) (364,172)
Net income............. -- -- -- -- -- 802,796 802,796
--------- ------ ------- ----- ---------- ----------- -----------
Balance as of December
31, 1993............... 2,463,000 1,000 -- -- -- 782,866 783,866
Dividends paid to
common stockholder.... -- -- -- -- -- (247,853) (247,853)
Net income............. -- -- -- -- -- 1,154,886 1,154,886
--------- ------ ------- ----- ---------- ----------- -----------
Balance as of December
31, 1994............... 2,463,000 1,000 -- -- -- 1,689,899 1,690,899
Exchange of 750,000
shares of common stock
to Class B Convertible
Preferred Stock, $.01
par value.............. (750,000) (300) 750,000 300 -- -- --
Issuance of the Class A
Stock Warrants......... -- -- -- -- 4,474,256 -- 4,474,256
Dividends paid to common
stockholder............ -- -- -- -- -- (1,751,500) (1,751,500)
Dividends accrued to
Class A Preferred
Stockholder............ -- -- -- -- -- (400,000) (400,000)
Dividends accrued to
Class B Convertible
Preferred Stockholder.. -- -- -- -- -- (250,000) (250,000)
Accretion of Class A
Preferred Stock........ -- -- -- -- -- (484,829) (484,829)
Issuance of common stock
options to an employee. -- -- -- -- 242,400 -- 242,400
Net loss................ -- -- -- -- -- (1,689,176) (1,689,176)
--------- ------ ------- ----- ---------- ----------- -----------
Balance as of December
31, 1995............... 1,713,000 700 750,000 300 4,716,656 (2,885,606) 1,832,050
Dividends accrued to
Class A Preferred
Stockholder............ -- -- -- -- -- (480,000) (480,000)
Dividends accrued to
Class B Convertible
Preferred Stockholder.. -- -- -- -- -- (300,000) (300,000)
Accretion of Class A
Preferred Stock........ -- -- -- -- -- (484,828) (484,828)
Net loss................ -- -- -- -- -- (742,170) (742,170)
--------- ------ ------- ----- ---------- ----------- -----------
Balance as of June 30,
1996 (unaudited)....... 1,713,000 $ 700 750,000 $ 300 $4,716,656 $(4,892,604) $ (174,948)
========= ====== ======= ===== ========== =========== ===========
</TABLE>

See accompanying notes.

F-6
<PAGE>

FILM ROMAN, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..... $ 802,796 $ 1,154,886 $ (1,689,176) $ (458,876) $ (742,170)
Adjustments to
reconcile net income
(loss) to net cash
(used in) provided by
operating activities:
Depreciation and
amortization......... 92,211 106,800 130,309 53,400 110,482
Amortization of film
costs................ 25,675,371 33,190,002 33,155,523 12,612,912 12,927,052
Compensation expense
in connection with
the issuance of
common stock options
to an employee....... -- -- 242,400 -- --
Changes in operating
assets and
liabilities:
Accounts receivable.. (93,894) (165,179) (47,063) 173,373 (1,207,671)
Film costs........... (28,618,639) (34,969,106) (33,152,650) (15,051,459) (19,559,968)
Refundable income
taxes............... -- -- (487,500) -- 332,500
Deposits and other
assets.............. (146,606) 25,538 89,185 (86,851) (416,280)
Accounts payable..... 553,748 (885,174) 302,598 635,837 628,840
Accrued expenses..... 366,174 28,577 (42,325) 82,997 1,374,358
Deferred revenue..... 951,131 1,719,514 (2,918,638) 1,909,542 7,261,356
------------ ------------ ------------ ------------ ------------
Net cash (used in)
provided by
operating
activities......... (417,708) 205,858 (4,417,337) (129,125) 708,499
INVESTING ACTIVITIES:
Additions to property
and equipment........ (147,380) (62,881) (203,437) (95,754) (593,036)
------------ ------------ ------------ ------------ ------------
Net cash used in
investing
activities......... (147,380) (62,881) (203,437) (95,754) (593,036)
FINANCING ACTIVITIES:
Proceeds from issuance
of Class A Preferred
Stock and Warrants,
net of issuance
costs................ -- -- 10,738,215 -- (1,628)
Borrowings under debt. 6,165,000 6,350,000 12,350,000 3,450,000 1,780,000
Repayments on debt.... (5,250,859) (6,257,639) (11,975,431) (3,349,539) (2,276,249)
Dividends declared and
paid to common
stockholder.......... (364,172) (247,853) (1,751,500) (301,500) --
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities......... 549,969 (155,492) 9,361,284 (201,039) (497,877)
------------ ------------ ------------ ------------ ------------
Net (decrease)
increase in cash..... (15,119) (12,515) 4,740,510 (425,918) (382,414)
Cash and cash
equivalents at
beginning of period.. 463,214 448,095 435,580 435,580 5,176,090
------------ ------------ ------------ ------------ ------------
Cash and cash
equivalents at end of
period............... $ 448,095 $ 435,580 $ 5,176,090 $ 9,662 $ 4,793,676
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
period for:
Interest.............. $ 48,210 $ 65,118 $ 112,355 $ 52,970 $ 64,107
============ ============ ============ ============ ============
Income taxes.......... $ 16,500 $ 19,950 $ 487,500 $ -- $ --
============ ============ ============ ============ ============
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:

In 1995, the Company accrued dividends of $400,000 due to the Redeemable
Preferred stockholders and $250,000 due to the Convertible Preferred
stockholder. In addition, the Company recorded accretion of the difference
between the carrying value and the Liquidation Value of $484,829 on the
Redeemable Preferred Stock. See Note 6.

For the six months ended June 30, 1996, the Company accrued dividends of
$480,000 due to the Redeemable Preferred stockholders and $300,000 due to the
Convertible Preferred stockholder. In addition, the Company recorded accretion
of the difference between the carrying value and the Liquidation Value of
$484,828 on the Redeemable Preferred Stock. See Note 6.

See accompanying notes.

F-7
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND ORGANIZATION

Film Roman, Inc. (the "Company") was incorporated under the laws of the
State of California on October 17, 1989. The Company is the successor company
to Film Roman, a sole proprietorship, which was established by Phil Roman. The
Company's primary business is the production of animated series and specials,
and the distribution of such animation product throughout the world.

In July 1995, the Company amended its Articles of Incorporation to authorize
the issuance of three classes of capital stock--Common Stock, Class A
Preferred Stock ("Redeemable Preferred Stock"), and Class B Convertible
Preferred Stock ("Convertible Preferred Stock"). Pursuant to the amendment,
the sole stockholder exchanged each share of common stock, no par value, of
the Company ("Common Stock") then outstanding into 2,463 shares of Common
Stock, resulting in the number of shares of Common Stock outstanding to
increase from 1,000 to 2,463,000. The financial statements have been adjusted
to give retroactive treatment for this split. Also pursuant to the amendment,
the sole stockholder exchanged 750,000 shares of Common Stock for 750,000
shares of Convertible Preferred Stock (see Note 6). The total number of shares
of authorized capital stock is 11,950,000, consisting of 10,000,000 shares of
Common Stock, 1,200,000 shares of Redeemable Preferred Stock, and 750,000
shares of Convertible Preferred Stock.

Further, in July 1995, pursuant to a Securities Purchase Agreement entered
into among the Company, BCI Growth III, L.P., and several other purchasers,
such entities purchased 1,200,000 shares of Redeemable Preferred Stock and
1,200,000 stock purchase warrants (the "Warrants") from the Company for
$12,000,000.

REORGANIZATION

In May 1996, Film Roman, Inc., a Delaware corporation ("Film Roman
Holdings"), was incorporated in order to hold all of the outstanding capital
stock of the Company. Film Roman Holdings currently conducts no operations. A
reorganization (the "Reorganization") will be effected immediately prior to
the offering (the "Offering") of 3,600,000 shares of Common Stock, $.01 par
value ("Holdings Common Stock"), of Film Roman Holdings, pursuant to which (i)
a wholly-owned subsidiary of Film Roman Holdings will merge with and into the
Company; (ii) each outstanding share of Common Stock will be converted into
1.25 shares of Holdings Common Stock (including shares of Common Stock to be
issued immediately prior to such merger upon the "cashless" exercise of the
Warrants and a warrant for the purchase of 37,000 shares of Common Stock and
upon conversion of all outstanding shares of Convertible Preferred Stock);
(iii) each outstanding share of Redeemable Preferred Stock will be converted
into one share of redeemable preferred stock of Film Roman Holdings, $.01 par
value, of Film Roman Holdings ("Holdings Redeemable Preferred Stock"); (iv)
all outstanding employee options and certain warrants for the purchase of
Common Stock will, pursuant to the anti-dilution provisions thereof, become
options and warrants to purchase Holdings Common Stock (with options and
warrants to purchase each share of Common Stock becoming options and warrants
to purchase 1.25 shares of Holdings Common Stock at 80% of the exercise price
theretofore applicable); and (v) a warrant issued to the President of the
Company for the purchase of 185,000 shares of Common Stock will be cancelled.
As a result of the foregoing, the Company will become a wholly-owned
subsidiary of Film Roman Holdings and the stockholders of the Company will
become stockholders of Film Roman Holdings. The Reorganization will be
effected pursuant to an Plan of Reorganization Agreement dated as of May 15,
1996, as amended, by and among Film Roman Holdings, the Company, and the
Company's stockholders. Immediately following the

F-8
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)
Reorganization and the closing of the Offering, Film Roman Holdings will
redeem for cash $7.5 million liquidation preference of Holdings Redeemable
Preferred Stock and, if the underwriters' over-allotment option is exercised,
will redeem for cash additional Holdings Redeemable Preferred Stock to the
extent of the net proceeds (less accrued dividends on such Holdings Redeemable
Preferred Stock) received by Holdings from the exercise of such over-allotment
option (the "Cash Redemption"). In the event the underwriters' over-allotment
option is not exercised in full, any shares of Holdings Redeemable Preferred
Stock that have not been redeemed for cash will be redeemed for Holdings
Common Stock (at a redemption price of 1.3072 shares of Holdings Common Stock
for each share of Holdings Redeemable Preferred Stock) (the "Non-Cash
Redemption"). Accrued dividends on the Holdings Redeemable Preferred Stock and
Convertible Preferred Stock will be paid to the date of redemption and
conversion, respectively.

INTERIM FINANCIAL INFORMATION

The unaudited consolidated financial statements as of June 30, 1996, and for
the six months ended June 30, 1995 and 1996, include, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position,
results of operations and cash flows. Operating results for the six months
ended June 30, 1996, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.

CASH AND CASH EQUIVALENTS AND CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high
credit, quality financial institutions with original maturities when purchased
of three months or less and therefore are subject to little risk. The Company
has not incurred any losses relating to these investments.

The Company performs production services for various companies within the
entertainment industry and licenses various rights in its animation product to
distributors throughout the world. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. At December 31, 1995, substantially all of the Company's
trade receivables were from customers in the entertainment industry.
Receivables generally are due within 30 days. Credit losses relating to
customers in the entertainment industry consistently have been within
management's expectations.

FINANCIAL INSTRUMENTS

Financial instruments are carried at historical cost which approximates fair
value.

REVENUE RECOGNITION

The Company recognizes revenues in accordance with the provisions of
Financial Accounting Standards Board Statement No. 53 (FAS 53). Revenues from
license and production agreements, which may provide for the receipt by the
Company of nonrefundable guaranteed amounts, are recognized when the license
period begins and the programming is available pursuant to the terms of the
agreement, typically when the finished product has been delivered to and
accepted by the customer. Amounts in excess of minimum guarantees under such

F-9
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)
agreements are recognized when earned. Cash collected in advance of the time
of availability of programming is recorded as deferred revenue.

FILM COSTS

Costs incurred in connection with the acquisition of story rights, the
development of stories, production and allocable production overhead and
interest are capitalized as film costs. Film costs are stated at the lower of
unamortized cost or estimated net realizable value. In accordance with FAS 53,
the individual film forecast method is used to amortize film costs. Costs
accumulated in the production of a film are amortized in the proportion that
gross revenues realized bear to management's estimate of the total gross
revenues expected to be received. Estimated liabilities for third party
participations are accrued and expensed in the same manner as film costs are
amortized.

Revenue estimates on a film-by-film basis are reviewed periodically by
management and are revised, if warranted, based upon management's appraisal of
current market conditions. Based on this review, if estimated future gross
revenues from a film are not sufficient to recover the unamortized costs, the
unamortized film cost shall be written down to net realizable value. In
unusual cases, such as a change in public acceptance of certain types of films
or actual costs substantially in excess of budgeted costs, a write-down to net
realizable value may be required before the film is released.

DEPRECIATION AND AMORTIZATION

Property and equipment are recorded at cost. Depreciation on furniture and
equipment is computed by the double-declining balance method over their
estimated useful lives, ranging from five to seven years. Leasehold
improvements are amortized over their estimated useful lives, or the remaining
term of the related lease, whichever is shorter, using the straight-line
method.

INCOME TAXES

Effective January 1, 1994, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes." As permitted under the new rules, prior years' financial statements
have not been restated. Adoption of the new statement did not have an effect
on the Company's financial position or results of operations.

Prior to August 4, 1995 (the "Termination Date"), the Company was treated as
a Subchapter S Corporation for federal and state income tax purposes. Upon the
Termination Date, the Company is subject to federal and state corporate income
taxes.

STOCK-BASED COMPENSATION

The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board (APB) No. 25, "Accounting for Stock
Issued to Employees" and intends to continue to do so.

F-10
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

FINANCIAL STATEMENT PRESENTATION

Certain amounts shown in the 1993 and 1994 financial statements have been
reclassified to conform to the 1995 presentation.

PRO FORMA NET INCOME (LOSS) PER COMMON SHARE

The per share data is based on the weighted average number of common and
common equivalent shares outstanding during the period and are calculated in
accordance with a Staff Accounting Bulletin of the Securities and Exchange
Commission whereby common and common share equivalents issued within a 12-
month period prior to an initial public offering are treated as outstanding
for all periods presented if the issue price was less than the proposed
initial public offering price. In addition, shares issuable upon the exercise
of options and warrants and convertible preferred stock within the 12-month
period are considered to have been outstanding since inception of the Company.
For the year ended December 31, 1995, the net loss per Common Share gives
effect to the accretion of the difference between the carrying value and the
Liquidation Value of the Redeemable Preferred Stock of $484,829 and to the
accrual of dividends of $400,000 on the Redeemable Preferred Stock.

For the six months ended June 30, 1996 (unaudited), the net loss per Common
Share gives effect to the accretion of the difference between the carrying
value and the Liquidation Value of the Redeemable Preferred Stock of $484,828
and to dividends of $480,000 on the Redeemable Preferred Stock.

The supplemental loss per share for the year ended December 31, 1995 and the
six months ended June 30, 1996 would be $(1.08) and $(0.95), respectively.
This calculation gives effect to (i) the reduction of the interest and
dividend accruals resulting from the repayment of the outstanding debt and the
redemption of all but $4,500,000 Liquidation Preference of the Redeemable
Preferred Stock, and (ii) the offering of additional shares of common stock
whose proceeds are to be used to repay the debt and redeem all but $4,500,000
Liquidation Preference of the Redeemable Preferred Stock. In addition, the
loss attributable to common stockholders used for the supplemental loss per
share calculation has been increased by $3,579,396 and $3,277,772,
respectively, for the year ended December 31, 1995 and the six months ended
June 30, 1996, which represents the excess of the price to be paid for the
redemption of the Redeemable Preferred Stock over its carrying value.

F-11
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)

2. FILM COSTS

The components of unamortized film costs consist of the following:

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------- --------------
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
Animated film productions released,
less amortization.................. $ 4,427,443 $ 5,391,275 $ 5,550,900
Animated film productions in
process............................ 7,355,012 6,253,597 12,220,860
Animated film productions in
development........................ 599,564 734,274 1,240,302
----------- ----------- -----------
$12,382,019 $12,379,146 $19,012,062
=========== =========== ===========
</TABLE>

Based on management's estimates of future gross revenues as of December 31,
1995, approximately 78% of unamortized film costs applicable to released films
will be amortized during the three years ending December 31, 1998.

Interest capitalized to film costs in 1993, 1994, and 1995 was, $26,004,
$32,559, and $62,596, respectively.

Interest capitalized to film costs for the six months ended June 30, 1995
and 1996 was $26,485 and $32,766, respectively.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1994 1995
<S> <C> <C>
Leasehold improvements................................. $ 117,937 $ 137,373
Furniture and fixtures................................. 205,176 213,138
Office equipment....................................... 359,353 535,392
--------- ---------
682,466 885,903
Less accumulated depreciation and amortization......... (418,719) (549,028)
--------- ---------
$ 263,747 $ 336,875
========= =========
</TABLE>

4. DEBT

At December 31, 1995, the Company had a revolving line of credit of
$2,250,000 which was subsequently reduced to $1,230,000. The line of credit
bears interest at 1% over the commercial base rate (11% at December 31, 1995)
which is paid monthly, is secured by the assets of the Company and personally
guaranteed by the President of the Company, and is due on demand. The line of
credit agreement restricts the payment of dividends as long as the line of
credit is outstanding. At December 31, 1994 and 1995 and June 30, 1996,
$1,200,000, $1,675,000 and $1,230,000, respectively, of the line had been
drawn upon.

The Company has a demand note with a bank with a balance of $143,826,
$55,066 and $10,210 outstanding as of December 31, 1994 and 1995 and June 30,
1996, respectively. The note requires payments of $7,476 per month, including
interest at 1% over the commercial base rate (11% at December 31, 1995), is
secured by a life

F-12
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)
insurance policy on the President of the Company, and is personally guaranteed
by the President of the Company. The note matures on August 9, 1996.

The Company believes that the bank intends to extend the terms of both of
these notes when they mature.

Additionally, the Company has a term loan with a bank with a balance of
$18,750, $7,079 and $686 outstanding as of December 31, 1994 and 1995 and June
30, 1996, respectively. The note is secured by equipment and is personally
guaranteed by the President of the Company. The loan calls for payments,
including interest at 12% per annum, of approximately $1,100 per month and
matures on July 15, 1996.

5. INCOME TAXES

Prior to the Termination Date, the Company was treated as a Subchapter S
Corporation under the Internal Revenue Code ("IRC") and, consequently, was not
subject to federal income tax prior to that date; the sole shareholder of the
Company included the income (loss) of the Company through the Termination Date
in his own income tax return for federal income tax purposes. Accordingly, the
Company has not recognized any deferred taxes and has no available federal net
operating loss carryforwards prior to the Termination Date. S Corporations pay
tax to the State of California on their taxable incomes at a rate of 2.5% in
1993 and 1.5% in 1994 and 1995. The state tax provision recorded by the S
Corporation prior to the Termination Date is immaterial to the financial
statements.

As of December 31, 1995, significant components of the Company's net
deferred tax assets, for which a 100% valuation allowance has been provided
and which have not been recognized in the Company's financial statements, are
as follows:

<TABLE>
<S> <C>
Film costs..................................................... $ 97,000
Fixed assets................................................... 9,000
Nondeductible accrual.......................................... 21,000
Net operating loss carryforwards............................... 262,000
---------
389,000
Valuation allowance............................................ (389,000)
---------
$ --
=========
</TABLE>

A reconciliation of income tax computed at the statutory federal income tax
rate to the effective tax rate for the Company for the year ended December 31,
1995 is as follows:

<TABLE>
<S> <C>
Provision for income taxes at statutory rate of 35%........... $(551,000)
Taxable loss incurred prior to the Termination Date........... 154,000
Benefit of deferred tax assets not currently recognized....... 397,000
---------
$ --
=========
</TABLE>

At December 31, 1995, the Company had available federal and state tax net
operating loss carryforwards of approximately $689,000 and $345,000,
respectively, expiring through 2010.

F-13
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)

6. REDEEMABLE PREFERRED STOCK

The Redeemable Preferred Stock has a par value of $0.01 per share. The
holders of such stock are entitled to an annual dividend of $0.80 per share,
as declared by the Board of Directors. Dividends of $400,000 and $480,000 were
declared and accrued on the Redeemable Preferred Stock as of December 31, 1995
and June 30, 1996, respectively. The Redeemable Preferred Stock ranks senior
to the Convertible Preferred Stock and common stock. The terms of the
Redeemable Preferred Stock contained in the Company's Articles of
Incorporation restrict the declaration or payment of dividends as long as the
Redeemable Preferred Stock remains outstanding. The liquidation value of each
share of Redeemable Preferred Stock is $10 ("Liquidation Value"). The net
proceeds from the issuance of the Redeemable Preferred Stock and Warrants were
$10,738,000. The Company determined the fair value of the Warrants to be
approximately $4,474,000, net of issuance costs, and, as such, allocated
$4,474,000 of the net proceeds to the Warrants and $6,264,000 to the
Redeemable Preferred Stock. The difference between the carrying value and the
Liquidation Value of the Redeemable Preferred Stock is being amortized to
retained deficit on a straight-line basis from the issuance date to the
mandatory redemption dates. Accretion recorded for the year ended December 31,
1995 and for the six months ended June 30, 1996 was $484,829 and $484,828,
respectively. The Redeemable Preferred Stock is subject to mandatory
redemption beginning July 31, 2000, or upon the occurrence of a liquidation,
dissolution, or winding up of the Company, or a Liquidity Event, as defined
(which includes a public offering in which the aggregate price paid by the
public for such shares is at least $20,000,000) ("Liquidity Event"). In
addition, the Company may redeem the Redeemable Preferred Stock at any time.
The liquidation preference is equal to the Liquidation Value of their shares
plus any accrued and unpaid dividends. If after July 2000, a Liquidity Event
does not occur, any holder of more than 20% of the Redeemable Preferred Stock
may exercise a put option. The purchase price for any put security to be
purchased by the Company will be equal to the fair market value. The holders
of the Redeemable Preferred Stock are not entitled to any voting rights unless
the Company defaults on its redemption requirements or dividend payments; if
such a default occurs, the Redeemable Preferred Stockholders shall be entitled
to elect a majority of the directors of the Company. In connection with the
Reorganization, the Cash Redemption and the Non-Cash Redemption, as described
in Note 1, all of the outstanding shares of the Redeemable Preferred Stock
will be redeemed.

7. STOCKHOLDER'S EQUITY

The Convertible Preferred Stock has a par value of $0.01 per share. The
holder of such stock, who is the sole common shareholder of the Company, is
entitled to an annual dividend of $0.80 per share, as declared by the Board of
Directors. Dividends of $250,000 and $300,000 were declared and accrued on the
Convertible Preferred Stock as of December 31, 1995 and June 30, 1996,
respectively. Dividends are payable (i) upon redemption of the Redeemable
Preferred Stock, (ii) upon the occurrence of a liquidation, dissolution, or
winding up of the Company, or (iii) upon a Liquidity Event. The liquidation
value of each share of Convertible Preferred Stock is $10 (Liquidation Value).
The Convertible Preferred Stock is junior to the Redeemable Preferred stock
but senior to the common stock. The Convertible Preferred Stock is convertible
at any time into an equal number of common stock shares, subject to
adjustment. The Convertible Preferred Stock is subject to mandatory redemption
upon the occurrence of a public offering in which the aggregate price paid by
the public for such shares is at least $20,000,000 ("Public Offering"). In
connection with the Reorganization as described in Note 1, the holder has
agreed to convert the Convertible Preferred Stock into common stock. The
liquidation preference is equal to the Liquidation Value of such shares plus
any accrued and unpaid dividends. The holder of the

F-14
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)
Convertible Preferred Stock is entitled to vote along with the common stock
with each share entitled to as many votes as the number of shares of common
stock into which it may be converted.

The Company issued 1,200,000 Warrants to purchase shares of the Company's
common stock as part of the Redeemable Preferred Stock financing. The Warrants
are exercisable at $0.01 per share after the earlier of July 2000 or the
occurrence of the Liquidity Event. The holders of the Warrants are entitled to
vote along with the common stock and Convertible Preferred Stock stockholder
with each Warrant entitled to as many votes as the number of shares of common
stock into which it may be converted. In connection with the Reorganization as
described in Note 1, the Warrants will be exercised.

In August 1995, the Company issued a warrant to purchase 37,000 shares of
the Company's common stock at an exercise price of $12.00. In connection with
the Reorganization as described in Note 1, such warrant will be exercised. In
addition, the Company issued a warrant to the President of the Company to
purchase 185,000 shares of the Company's common stock at an exercise price of
$32.43. However, upon the occurrence of a Public Offering, such warrant
expires 60 days from the Public Offering date. In connection with the
Reorganization as described in Note 1, such warrant will be cancelled.

In August 1995, an officer was granted options to purchase 60,000 shares of
common stock at an exercise price of $0.01 per share in accordance with his
employment agreement. Such options are exercisable immediately and will remain
exercisable during such officer's employment with the Company and for a period
of one year following the expiration of his employment with the Company or
until a Liquidity Event, if later. The Company recorded compensation expense
of $242,400 associated with the granting of these options as such options were
granted at an exercise price less than the deemed fair value of the common
stock at the date of grant.

In 1996 the Company adopted a stock option plan ("Plan"). All regular
salaried employees of the Company may, at the discretion of the compensation
committee of the Board of Directors, be granted incentive and non-qualified
stock options to purchase shares of Common Stock at an exercise price not less
than 100% of the fair market value of such shares on the grant date. Directors
of the Company, consultants and other persons who are not regular salaried
employees of the Company are not eligible to receive incentive stock options,
but are eligible to receive non-qualified stock options.

The maximum number of shares subject to the Plan is 982,156 and the Plan
will terminate on August 7, 2005, unless sooner terminated by the Board of
Directors. The options vest over a five-year period.

Pursuant to the Plan, in January 1996, the Company granted options to
certain employees and directors of the Company to purchase 419,000 shares of
the Company's common stock at an exercise price of $10.00 per share, which was
deemed to be the fair market value at that time. In May 1996, the Company
granted options to an officer to purchase 100,000 shares and options to
certain employees and directors of the Company to purchase 34,500 shares of
the Company's common stock at $10.65 per share, which was deemed to be the
fair market value at that time. Further pursuant to the plan, in May 1996, the
Company granted options to an officer to purchase 74,000 shares of the
Company's common stock at $10.65 per share, which was deemed to be the fair
market value at that time. These options vest (i) upon reaching certain
performance goals, (ii) upon certain extensions of the officer's employment
agreement, or (iii) upon the sixth anniversary of the grant, whichever occurs
earlier.

F-15
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)

As of December 31, 1995, 2,674,500 shares of common stock are reserved for
future issuances related to the Convertible Preferred Stock, Redeemable
Preferred Stock and warrants and options.

8. COMMITMENTS

The Company leases facilities for office space and its animation studios
under an operating lease that was amended in April 1994. Under the terms of
the lease agreement, as amended, the Company is required to pay a pro-rata
share of the building's operating expenses, maintenance and property taxes.
The lease is for a five year period expiring August 31, 1999 with an option
for an additional five year term. The lease agreement includes certain free
rent periods and an escalation in the monthly rental amount, as defined. The
accompanying statement of operations for the year ended December 31, 1995
reflects rent expense on a straight-line basis over the term of the lease. The
Company also has various lease agreements for equipment which expire through
1999, certain of which are personally guaranteed by the President of the
Company. The following is a schedule of the future minimum lease payments
under all noncancelable operating lease agreements:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
<S> <C>
1996....................................................... $1,296,393
1997....................................................... 1,298,585
1998....................................................... 1,243,540
1999....................................................... 829,911
----------
Total minimum lease payments............................... $4,668,429
==========
</TABLE>

Rent expense for the years ended December 31, 1993, 1994 and 1995, prior to
any allocation of rent to capitalized film costs, was $776,449, $875,935, and
$1,109,006, respectively.

At December 31, 1995, the Company had outstanding employment agreements with
various employees with initial terms ranging from two to five years. Under the
terms of the agreements, the Company is obligated to pay the following
amounts:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
<S> <C>
1996........................................................ $2,547,296
1997........................................................ 1,219,221
1998........................................................ 942,488
1999........................................................ 840,068
2000........................................................ 393,750
----------
$5,942,823
==========
</TABLE>

Collectively, these employment agreements provide for minimum annual
compensation that can be increased for incentives based on the Company
obtaining certain earning levels, the relationship of earnings to projected
earnings, and/or discretionary incentives to be determined by the Board of
Directors. Such incentives shall not exceed 100% of the employees' base
salary.

F-16
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)

9. 401(K) PROFIT SHARING PLAN

The Company has a defined contribution Profit Sharing 401(k) Savings Plan
which covers substantially all of its employees. The plan became effective on
January 1, 1991 and was amended effective January 1, 1992. Under the terms of
the plan, employees can elect to defer up to 15% of their wages, subject to
certain Internal Revenue Service (IRS) limitations, by making voluntary
contributions to the plan. Additionally, the Company, at the discretion of
management, can elect to match up to 100% of the voluntary contributions made
by its employees. The Company has received determination letters from the IRS
indicating that the above plan is qualified within the terms of the applicable
provisions of the Employee Retirement Income Security Act of 1974.

For the years ended December 31, 1993, 1994 and 1995, the Company
contributed $42,398, $73,103, and $93,081, respectively, to the plan on behalf
of its employees.

10. SIGNIFICANT CUSTOMERS

In 1993, the Company earned revenues from four significant customers of
$9,377,000 (34%), $4,550,000 (16%), $4,225,000 (15%) and $3,892,000 (14%). In
1994, the Company earned revenues from four significant customers of
$10,025,000 (28%), $7,695,000 (21%), $5,743,000 (16%), and $4,485,000 (12%).
In 1995, the Company earned revenues from five significant customers of
approximately $11,967,000 (35%), $4,516,000 (13%), $4,400,000 (13%),
$4,229,000 (12%), and $3,575,000 (10%). For the six months ended June 30,
1996, the Company earned revenues from two significant customers of
approximately $7,303,000 (53%) and $1,600,000 (12%).

11. SUBSEQUENT EVENT

On May 9, 1996, the Company's Board of Directors authorized management of
the Company to file a Registration Statement with the Securities and Exchange
Commission to sell 3,600,000 shares of its common stock.

12. PRO FORMA DATA (UNAUDITED)

The Company operated as an S Corporation through the Termination Date. Pro
forma amounts reflect adjustments for additional income taxes that would have
been reported if the Company had been a C Corporation based upon an estimated
effective tax rate of 40% in 1993 and 1994 and 34% in 1995.

13. RELATED PARTY TRANSACTIONS

A firm in which an outside director of the Company is a partner acts as a
financial consultant to the Company and fees paid to that firm during 1995
amounted to $66,000. A firm in which an outside director of the Company is a
partner acts as a legal consultant to the Company and fees paid to that firm
during 1995 amounted to $84,000. An outside director of the Company acts as a
financial consultant to the Company and fees paid to this director during 1995
amounted to $22,000.

14. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S
REPORT

In September 1996, the Company secured a commitment from certain of its
existing stockholders to purchase up to $3.0 million of its 12% Senior Secured
Notes due December 20, 1996 ("Senior Notes"). No

F-17
<PAGE>

FILM ROMAN, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND TO THE SIX MONTH PERIODS ENDED

JUNE 30, 1995 AND 1996 IS UNAUDITED)
Senior Notes have been or will be issued. As consideration for the receipt of
the 1996 Commitment, the Company issued certain warrants (the "New Warrants")
to purchase 57,653 shares of Common Stock at an exercise price of $8.75 per
share. Such New Warrants were issued to Mr. Roman (for the purchase of 9,618
shares of Common Stock) and to certain other existing stockholders of the
Company (for the purchase of 48,035 shares of Common Stock). The New Warrants
are exercisable beginning September 1997 and expire in September 2001. The New
Warrants will be immediately exercisable upon a merger or consolidation
involving the Company (other than the Reorganization) or in the event of a
sale of all or substantially all of the assets of the Company.

F-18
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Film Roman, Inc. (a Delaware corporation)

We have audited the accompanying balance sheet of Film Roman, Inc. (a
Delaware corporation) as of May 16, 1996. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement 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 statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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 statement referred to above presents fairly,
in all material respects, the financial position of Film Roman, Inc. (a
Delaware corporation) as of May 16, 1996, in conformity with generally
accepted accounting principles.

Ernst & Young LLP

Los Angeles, California
May 16, 1996, except for Note 1--
Description of Business, as to which the
date is September 27, 1996

F-19
<PAGE>

FILM ROMAN, INC. (A DELAWARE CORPORATION)

BALANCE SHEET

MAY 16, 1996

<TABLE>
<S> <C>
ASSETS
Cash................................................................... $10,000
-------
Total assets..................................................... $10,000
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities
Stockholders' equity:
Common stock, $.01 par value: 20,000,000 shares authorized, 100
shares issued and outstanding....................................... $ 1
Preferred stock, $.01 par value: 5,000,000 shares authorized,
no shares issued
and outstanding..................................................... --
Additional paid-in capital........................................... 9,999
-------
Total stockholders' equity....................................... $10,000
=======
</TABLE>

See accompanying notes.

F-20
<PAGE>

FILM ROMAN, INC. (A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

MAY 16, 1996

1. DESCRIPTION OF BUSINESS

In May 1996, the Company was incorporated in Delaware in order to hold all
of the outstanding capital stock of Film Roman, Inc., a California corporation
("Film Roman California"). The Company currently conducts no operations. A
reorganization (the "Reorganization") will be effected immediately prior to
the offering (the "Offering") of 3,600,000 shares of common stock, $.01 par
value ("Common Stock"), of the Company, pursuant to which (i) a wholly-owned
subsidiary of the Company will merge with and into Film Roman California;
(ii) each outstanding share of common stock, no par value ("California Common
Stock") of Film Roman California will be converted into 1.25 shares of Common
Stock (including shares of California Common Stock to be issued immediately
prior to such merger upon the "cashless" exercise of certain warrants for the
purchase of California Common Stock and upon conversion of all outstanding
shares of convertible preferred stock, $.01 par value (the "Convertible
Preferred Stock") of Film Roman California); (iii) each outstanding share of
redeemable preferred stock of Film Roman California will be converted into one
share of redeemable preferred stock of the Company, $.01 par value
("Redeemable Preferred Stock"); (iv) all outstanding employee options and
certain warrants for the purchase of California Common Stock will, pursuant to
the anti-dilution provisions thereof, become options and warrants to purchase
Common Stock (with options and warrants to purchase each share of California
Common Stock becoming options to purchase 1.25 shares of Common Stock at 80%
of the exercise price theretofore applicable); and (v) a warrant issued to the
President of the Company for the purchase of 185,000 shares of California
Common Stock will be cancelled. As a result of the foregoing, Film Roman
California will become a wholly-owned subsidiary of the Company and the
stockholders of Film Roman California will become stockholders of the Company.
The Reorganization will be effected pursuant to a Plan of Reorganization
Agreement dated as of May 15, 1996, as amended, by and among Film Roman
California, the Company, and Film Roman California's stockholders. Immediately
following the Reorganization and the closing of the Offering, the Company will
redeem for cash $7.5 million liquidation preference of Redeemable Preferred
Stock and, if the underwriters' over-allotment option is exercised, will
redeem for cash additional Redeemable Preferred Stock to the extent of the net
proceeds (less accrued dividends on such Redeemable Preferred Stock) received
by the Company from the exercise of such over-allotment option. In the event
the underwriters' over-allotment option is not exercised in full, any shares
of Redeemable Preferred Stock that have not been redeemed for cash will be
redeemed for Common Stock (at a redemption price of 1.3072 shares of Common
Stock for each share of Redeemable Preferred Stock). Accrued dividends on the
Redeemable Preferred Stock and Convertible Preferred Stock will be paid to the
date of redemption and conversion, respectively.

PREFERRED STOCK

STOCK OPTION PLAN

On May 9, 1996, the Company adopted a stock option plan, substantially
similar to the stock option plan of Film Roman California. Pursuant to the
Reorganization, holders of options to purchase stock of Film Roman

F-21
<PAGE>

California will contribute such options to the Company and the Company will
issue options with substantially the same rights, conditions and restrictions
as the options contributed (except that each option for the purchase of one
share of California Common Stock will be exchanged for an option to purchase
1.25 shares of Common Stock, and the per share exercise price for Company
options will be equal to 80% of the per share exercise price of the Film Roman
California options).

F-22
<PAGE>

PROGRAM HIGHLIGHTS

GARFIELD AND FRIENDS. Garfield and Friends is an
example of how the Company develops a program based
on an existing character. Although the Company
produced the program on a "fee-for-services" basis,
the Company was able to participate in the profits
of the program. One of the first programs produced
by the Company was a Garfield production special
entitled Garfield: In the Rough. Based upon the
success of that Emmy-award winning special and
subsequent Garfield specials produced by the [PICTURE APPEARS
Company, the Company was engaged to produce a HERE]
weekly half hour series entitled Garfield and
Friends which, in its second season, was expanded
to a one-hour block. Repeat episodes of the program
ran in syndication for the two years and the show
is currently broadcast on the Cartoon Network.
Garfield and Friends has also enjoyed significant
success in the international television market.
During the 1995-96 television season, the show was
broadcast in over 50 countries. Film Roman, through
its international distribution division, has
assisted in securing significant international
distribution sales.

BOBBY'S WORLD. Bobby's World is an example of how
the Company created, developed and produced a
program based on an existing popular character,
but, at the time (1989), did not have the financial
resources or organizational infrastructure to
retain and exploit the proprietary rights to the
program. Film Roman proposed to Howie Mandel the
creation of an animated series based upon "Bobby,"
a child-like character created by Mandel for his
stand-up comedy act. Film Roman and Howie Mandel
developed the appearance of Bobby and together with [PICTURE APPEARS
a writing team developed the world in which "Bobby" HERE]
lives. The "Bobby's World" concept was pitched to
several Networks and was licensed in 1989 to FOX.
FOX paid the Company on a "fee-for-services" basis,
funded the entire production cost and acquired
substantially all of the proprietary rights to the
series. Subsequently, the Company's merchandising
and licensing division was established and recently
negotiated with FOX to license back to the Company
the worldwide merchandising rights to Bobby's
World.

MIGHTY MAX. Mighty Max is another example of how
the Company acquires the rights to a concept with
potential broad appeal and then develops and
produces a program based on that concept. Film
Roman was presented with an exciting prototype for
a toy which the Company believed provided a basis
for a promising animated series for the U.S. market
because of the uniqueness of the toy and Mattel's
commitment to distribute it. Since the Company did [PICTURE APPEARS
not have the financial resources or organizational HERE]
infrastructure at the time to retain and exploit
proprietary rights, associated with this program,
it formed a partnership with Canal Plus, a French
cable company, and negotiated to participate in the
program's profits. Film Roman assembled a creative
team of writers and artists and designed characters
and story lines to be presented to potential
broadcasters. Since its original broadcast, Mighty
Max has continued to rank among the top animated
syndicated programs.

<PAGE>

C-BEAR & JAMAL. C-Bear and Jamal is an example of
how the Company creates, develops and produces
proprietary programming based on a well-known
personality. After rap star Tone Loc approached
Film Roman with an interest in developing an
animated series, Film Roman's creative team
explored a number of concepts for the show.
Ultimately, Tone Loc's husky voice and street-wise [PICTURE APPEARS
persona were captured by Film Roman in the urban HERE]
character, C-Bear. The Company further developed
the concept with a team of writers and artists and
presented the program idea to a number of the
Networks. FOX agreed to develop the show with Film
Roman and ordered production of three episodes for
the 1995-1996 season. Based upon the success of
these episodes, FOX ordered ten more episodes for
the 1996-1997 season. Through its international
and merchandising and licensing divisions, the
Company has secured a number of commitments,
including international television license
arrangements and a master toy license.

FELIX THE CAT. Felix the Cat is an example of how
the Company acquires the rights to an existing
character, develops and produces programming based
on the character, controls and exploits the
distribution rights and participates in the
revenue generated from the licensing and
merchandising activities. Recognizing the equity
in the 75 year old character "Felix the Cat," the
Company acquired certain rights from Felix's
owners, and after completing preliminary
development for a series, presented the program [PICTURE APPEARS
idea to CBS which decided to develop the project HERE]
with Film Roman. The Company's writers and artists
developed the concept, "look" and sample
storylines for the series utilizing the visual
style "Felix" had in the 1920's and 1930's. Based
upon the development work, CBS ordered 13 episodes
for the 1995-1996 television season. Film Roman's
international distribution division licensed the
project to several territories throughout the
world during the development period. CBS has
renewed the series for the 1996-1997 season,
ordering 8 new episodes. The Company is also
currently developing a video game based upon
"Felix" for IBM.

THE SIMPSONS. The Simpsons is an example of how
the Company produces programming on a "fee-for-
services" basis when the proprietary rights to the
programming are not available for acquisition. In
1991, Twentieth Television (a division of
Twentieth Century Fox) and Jim Brooks' Gracie
Films decided to move animation production of the
series from the animation studio then producing [PICTURE APPEARS
the series. Film Roman was selected to produce the HERE]
series due to the Company's strong reputation for
producing quality animation on time and on budget.
Film Roman's 80 person production team is now
entering its fifth year producing The Simpsons on
a "fee-for-services" basis and anticipates
delivering the 122nd episode of the series in
1997.

<PAGE>

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OF-
FER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THE PROSPECTUS.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 16
Selected Financial Information............................................ 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 24
Management................................................................ 37
Principal and Selling Stockholders........................................ 49
Certain Transactions...................................................... 50
Description of Capital Stock.............................................. 52
Shares Eligible for Future Sale........................................... 55
Underwriting.............................................................. 56
Legal Matters............................................................. 58
Experts................................................................... 58
Additional Information.................................................... 58
Glossary.................................................................. 59
Index to Financial Statements............................................. F-1
</TABLE>

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

UNTIL OCTOBER 25, 1996 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

3,300,000 SHARES

FILM ROMAN, INC.

COMMON STOCK

[LOGO OF FILM ROMAN, INC.]

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

PROSPECTUS

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

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

MONTGOMERY SECURITIES

SEPTEMBER 30, 1996

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

[Brief Narrative Description of Cartoon Pictures on page 2: Includes cartoon
Pictures of 7 television sets featuring the Company's characters (The Simpsons,
Felix the Cat, The Critic, The Mask, Garfield and Friends, Mighty Max and
Bobby's World).]

["The Twisted Tales of Felix the Cat" (C) 1996 Film Roman, Inc./Felix the Cat
Creations, Inc. The character "Felix the Cat" is (C) and (TM) Felix the Cat
Productions, Inc. All Rights Reserved. "The Mask" (C) 1996 New Line Television,
Inc./Sunbow Productions. All Rights Reserved. "The Simpsons" (C) & (TM)
Twentieth Century Fox Film Corp. All Rights Reserved. "Garfield and Friends" (C)
PAWS, Inc. "Mighty Max" (C) 1996 Film Roman, Inc., Bluebird (UK) and Canal+ D.A.
"Bobby's World" (C) 1996 Fox Children's Network, Inc. "Bobby" character is (TM)
Alevy Productions. All Rights Reserved. "The Critic" (C) 1996 Columbia Pictures
Television, Inc. All Rights Reserved. All other characters (C) 1996 Film Roman,
Inc.]

[Brief Narrative Description of Cartoon Pictures on the fold-out page behind
page 2: Caption stating, "Film Roman offers a bright and colorful future... with
five new shows for the 1996-97 season." Includes cartoon pictures of 12
television sets featuring the Company's characters (Mortal Kombat, C-Bear &
Jamal, The Simpsons, King of the Hill, Bobby's World, Felix the Cat, Garfield
and Friends, The Critic, The Mask, Richie Rich, BRUNO the Kid and Mighty Max).]

[Brief Narrative Description of Cartoon Pictures on the inside back cover pages:
Includes cartoon drawings of the following characters: Garfield, Bobby, Mighty
Max, C-Bear, Felix the Cat and Bart Simpson.]

["The Twisted Tales of Felix the Cat" (C) 1996 Film Roman, Inc./Felix the Cat
Creations, Inc. The character Felix the Cat" is (C) and (TM) Felix the Cat
Productions, Inc. All Rights Reserved. "The Mask" (C) 1996 New Line Television,
Inc./Sunbow Productions. All Rights Reserved. "The Simpsons" (C) & (TM)
Twentieth Century Fox Film Corp. All Rights Reserved. "Garfield and Friends" (C)
PAWS, Inc. "Mighty Max" (C) 1996 Film Roman, Inc., Bluebird (UK) and Canal+ D.A.
"Bobby's World" (C) 1996 Fox Children's Network, Inc. "Bobby" character is (TM)
Alevy Productions. All Rights Reserved. "The Critic" (C) 1996 Columbia Pictures
Television, Inc. All Rights Reserved. All other characters (C) 1996 Film Roman,
Inc.]