##### Table of Contents



United States
Securities and Exchange Commission

Washington, D.C. 20549


FORM 10-Q

|    |                                                                   
|--- | ------------------------------------------------------------------
|(X) | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|    | EXCHANGE ACT OF 1934                                              

For the quarterly period ended March 31, 2003

or

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

Commission File Number: 23346



EQUITY MARKETING, INC.

(Exact name of registrant as specified in its charter.)


|                                                                                |  |                                                
|------------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization)         |  | 13-3534145
(I.R.S. Employer
Identification No.)
|                                                                                |  |                                                
|6330 San Vicente Blvd.
Los Angeles, CA
(Address of principal executive offices) |  | 90048
(Zip
Code)                               

(323) 932-4300
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
periods that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]       No [  ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date:

Common Stock, $.001 Par Value, 5,700,453 shares as of May 12, 2003.





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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION   
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|Exhibit Index                
|Exhibit 10.14                
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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##### Table of Contents



EQUITY MARKETING, INC.

Index To Quarterly Report on Form
10-Q Filed with the Securities and
Exchange Commission March 31, 2003

Page

|                              |         |                                                                                       |  |  |  |  |  |  |  |  |  | 
|----------------------------- | ------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. | Financial Statements                                                                  |  |  |  |  |  |  |  |  |  | 
|                              | Item 2. | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |  |  |  |  |  |  |  |  | 
|                              | Item 4. | Controls and Procedures                                                               |  |  |  |  |  |  |  |  |  | 
|Part II. Other Information   
|                              | Item 6. | Exhibits and Reports on Form 8-K                                                      |  |  |  |  |  |  |  |  |  | 

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

|                |                                                                                                                       |                      |   |              |         |           |   |             |         | 
|--------------- | --------------------------------------------------------------------------------------------------------------------- | -------------------- | - | ------------ | ------- | --------- | - | ----------- | ------- | 
|                |                                                                                                                       |                      |   | December 31, |         | March 31,
|                |                                                                                                                       |                      |   | 2002         |         | 2003     
|                |                                                                                                                       |                      |   |              |         |          
|                |                                                                                                                       |                      |   |              |         |           |   | (Unaudited)
|CURRENT ASSETS: |                                                                                                                       |                      |   |              |         |           |   |            
|                | Cash and cash equivalents                                                                                             |                      | $ | 25,833       |         |           | $ | 13,940      |        
|                | Marketable securities                                                                                                 |                      |   | 1,000        |         |           |   | 4,500       |        
|                | Accounts receivable (net of allowances of $2,033 and
$1,703 as of December 31, 2002 and March 31, 2003, respectively) |                      |   | 43,817       |         |           |   | 25,167      |        
|                | Inventories, net (Note 2)                                                                                             |                      |   | 16,363       |         |           |   | 13,517      |        
|                | Prepaid expenses and other current assets                                                                             |                      |   | 4,807        |         |           |   | 5,076       |        
|                |                                                                                                                       |                      |   |              |         |           |   |             |        
|                |                                                                                                                       | Total current assets |   |              | 91,820  |           |   |             | 62,200  | 
|                | Fixed assets, net                                                                                                     |                      |   | 4,185        |         |           |   | 3,941       |        
|                | Goodwill (Notes 2 and 6)                                                                                              |                      |   | 33,730       |         |           |   | 33,420      |        
|                | Other intangibles, net (Notes 2 and 6)                                                                                |                      |   | 769          |         |           |   | 694         |        
|                | Other assets                                                                                                          |                      |   | 2,750        |         |           |   | 3,622       |        
|                |                                                                                                                       |                      |   |              |         |           |   |             |        
|                |                                                                                                                       | Total assets         |   | $            | 133,254 |           |   | $           | 103,877 | 
|                |                                                                                                                       |                      |   |              |         |           |   |             |        

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

3



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EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        |             |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- | --------- | ------ | ----------- | ------- | 
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        | December 31, |         | March 31,
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        | 2002         |         | 2003     
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |          
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        | (Unaudited)
|CURRENT LIABILITIES:                                                                                                                                                                                                                        |                                                                                                                                                                            |                                            |        |              |         |           |        |            
|                                                                                                                                                                                                                                            | Accounts payable                                                                                                                                                           |                                            | $      | 38,334       |         |           | $      | 17,495      |        
|                                                                                                                                                                                                                                            | Accrued liabilities                                                                                                                                                        |                                            |        | 24,329       |         |           |        | 15,562      |        
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        |             |        
|                                                                                                                                                                                                                                            |                                                                                                                                                                            | Total current liabilities                  |        |              | 62,663  |           |        |             | 33,057  | 
|LONG-TERM LIABILITIES                                                                                                                                                                                                                       |                                                                                                                                                                            |                                            | 1,596  |              |         |           | 1,636  |            
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        |             |        
|                                                                                                                                                                                                                                            |                                                                                                                                                                            | Total liabilities                          |        |              | 64,259  |           |        |             | 34,693  | 
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        |             |        
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                               |                                                                                                                                                                            |                                            |        |              |         |           |        |            
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        |             |        
|Mandatory redeemable preferred stock, Series A senior cumulative participating
convertible, $.001 par value per share, 25,000 issued and outstanding, stated at liquidation
preference of $1,000 per share ($25,000), net of issuance costs |                                                                                                                                                                            |                                            | 23,049 |              |         |           | 23,049 |            
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        |             |        
|STOCKHOLDERS EQUITY:                                                                                                                                                                                                                       |                                                                                                                                                                            |                                            |        |              |         |           |        |            
|                                                                                                                                                                                                                                            | Preferred stock, $.001 par value per share, 1,000,000
shares authorized, 25,000 Series A issued and outstanding                                                            |                                            |        |             |         |           |        |            |        
|                                                                                                                                                                                                                                            | Common stock, $.001 par value per share, 50,000,000
shares authorized, 5,716,503 and 5,705,028 shares outstanding
as of December 31, 2002 and March 31, 2003, respectively |                                            |        |             |         |           |        |            |        
|                                                                                                                                                                                                                                            | Additional paid-in capital                                                                                                                                                 |                                            |        | 21,641       |         |           |        | 21,806      |        
|                                                                                                                                                                                                                                            | Retained earnings                                                                                                                                                          |                                            |        | 38,689       |         |           |        | 39,292      |        
|                                                                                                                                                                                                                                            | Accumulated other comprehensive income                                                                                                                                     |                                            |        | 1,710        |         |           |        | 1,423       |        
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        |             |        
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            | 62,040 |              |         |           | 62,521 |            
|Less                                                                                                                                                                                                                                       |                                                                                                                                                                            |                                            |        |              |         |           |        |            
|                                                                                                                                                                                                                                            | Treasury stock, 3,007,108 and 3,033,008 shares, at cost, as of
December 31, 2002 and March 31, 2003, respectively (Note 4)                                                 |                                            |        | (15,506      | )       |           |        | (15,839     | )      
|                                                                                                                                                                                                                                            | Unearned compensation                                                                                                                                                      |                                            |        | (588         | )       |           |        | (547        | )      
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        |             |        
|                                                                                                                                                                                                                                            |                                                                                                                                                                            | Total stockholders equity                 |        |              | 45,946  |           |        |             | 46,135  | 
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        |             |        
|                                                                                                                                                                                                                                            |                                                                                                                                                                            | Total liabilities and stockholders equity |        | $            | 133,254 |           |        | $           | 103,877 | 
|                                                                                                                                                                                                                                            |                                                                                                                                                                            |                                            |        |              |         |           |        |             |        

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

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EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |       |        | 
|---------------------------------------------------------------------------- | ----------------------------------- | ------------------------------------------------------------------------------------------------- | --------- | ------------------ | ------ | ---- | --------- | ----- | ------ | 
|                                                                             |                                     |                                                                                                   |           | Three Months Ended
|                                                                             |                                     |                                                                                                   |           | March 31,         
|                                                                             |                                     |                                                                                                   |           |                   
|                                                                             |                                     |                                                                                                   |           | 2002               |        | 2003
|                                                                             |                                     |                                                                                                   |           |                    |        |     
|REVENUES                                                                     |                                     | $                                                                                                 | 36,115    |                    |        | $    | 47,567    |      
|COST OF SALES                                                                |                                     |                                                                                                   | 26,904    |                    |        |      | 35,287    |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|                                                                             |                                     | Gross profit                                                                                      |           |                    | 9,211  |      |           |       | 12,280 | 
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|OPERATING EXPENSES:                                                          |                                     |                                                                                                   |           |                    |        |      |           |      
|                                                                             | Salaries, wages and benefits        |                                                                                                   |           | 4,277              |        |      |           | 5,861 |       
|                                                                             | Selling, general and administrative |                                                                                                   |           | 4,077              |        |      |           | 5,025 |       
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|                                                                             |                                     | Total operating expenses                                                                          |           |                    | 8,354  |      |           |       | 10,886 | 
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|                                                                             |                                     | Income from operations                                                                            |           |                    | 857    |      |           |       | 1,394  | 
|OTHER INCOME, net                                                            |                                     |                                                                                                   | 48        |                    |        |      | 102       |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|                                                                             |                                     | Income before provision for income taxes and cumulative
effect of change in accounting principles |           |                    | 905    |      |           |       | 1,496  | 
|PROVISION FOR INCOME TAXES                                                   |                                     |                                                                                                   | 235       |                    |        |      | 518       |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES           |                                     |                                                                                                   | 670       |                    |        |      | 978       |      
|Cumulative effect of change in accounting principles, net of tax (Note 2)    |                                     |                                                                                                   | (2,496    | )                  |        |      |          |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|                                                                             |                                     | Net income (loss)                                                                                 |           |                    | (1,826 | )    |           |       | 978    | 
|PREFERRED STOCK DIVIDENDS                                                    |                                     |                                                                                                   | 375       |                    |        |      | 375       |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS                           |                                     | $                                                                                                 | (2,201    | )                  |        | $    | 603       |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|BASIC INCOME (LOSS) PER SHARE:                                               |                                     |                                                                                                   |           |                    |        |      |           |      
|Income per share before cumulative effect of change in
accounting principles |                                     | $                                                                                                 | 0.05      |                    |        | $    | 0.11      |      
|Cumulative effect of change in accounting principles                         |                                     |                                                                                                   | (0.44     | )                  |        |      |          |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|BASIC INCOME (LOSS) PER SHARE                                                |                                     | $                                                                                                 | (0.39     | )                  |        | $    | 0.11      |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|BASIC WEIGHTED AVERAGE SHARES OUTSTANDING                                    |                                     |                                                                                                   | 5,708,343 |                    |        |      | 5,708,279 |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|DILUTED INCOME (LOSS) PER SHARE:                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|Income per share before cumulative effect of change in
accounting principles |                                     | $                                                                                                 | 0.05      |                    |        | $    | 0.10      |      
|Cumulative effect of change in accounting principles                         |                                     |                                                                                                   | (0.42     | )                  |        |      |          |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|DILUTED INCOME (LOSS) PER SHARE                                              |                                     | $                                                                                                 | (0.37     | )                  |        | $    | 0.10      |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      
|DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING                                  |                                     |                                                                                                   | 5,884,044 |                    |        |      | 5,882,609 |      
|                                                                             |                                     |                                                                                                   |           |                    |        |      |           |      

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

5



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EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)

|                                   |                                                                       |   |                    |      |      |   |     |      |  
|---------------------------------- | --------------------------------------------------------------------- | - | ------------------ | ---- | ---- | - | --- | ---- | -
|                                   |                                                                       |   | Three Months Ended
|                                   |                                                                       |   | March 31,         
|                                   |                                                                       |   |                   
|                                   |                                                                       |   | 2002               |      | 2003
|                                   |                                                                       |   |                    |      |     
|NET INCOME (LOSS)                  |                                                                       | $ | (1,826             | )    |      | $ | 978 |     
|OTHER COMPREHENSIVE INCOME (LOSS): |                                                                       |   |                    |      |      |   |     |     
|                                   | Foreign currency translation adjustments (Note 2)                     |   |                    | (234 | )    |   |     | (286 | )
|                                   | Unrealized gain (loss) on foreign currency (Note 2)
forward contracts |   |                    | 5    |      |   |     | (1   | )
|                                   |                                                                       |   |                    |      |      |   |     |     
|COMPREHENSIVE INCOME (LOSS)        |                                                                       | $ | (2,055             | )    |      | $ | 691 |     
|                                   |                                                                       |   |                    |      |      |   |     |     

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

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EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |       |        |         |  
|------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------ | ---------------------------------------------------------------- | ------------------------------------------------- | -- | ------------------ | ------ | ---- | ----- | ------ | ------- | -
|                                                              |                                                                                      |              |                                                                  |                                                   |    | Three Months Ended
|                                                              |                                                                                      |              |                                                                  |                                                   |    | March 31,         
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                   
|                                                              |                                                                                      |              |                                                                  |                                                   |    | 2002               |        | 2003
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                         |                                                                                      |              |                                                                  |                                                   |    |                    |        |     
|                                                              | Net income (loss)                                                                    |              |                                                                  | (1,826                                            | )  |                    | $      | 978  |      
|                                                              | Adjustments
to reconcile net income (loss) to net cash
used in operating activities: |              |                                                                  |                                                   |    |                    |        |      |      
|                                                              |                                                                                      |              | Cumulative effect of change in accounting principles, net of tax |                                                   |    | 2,496              |        |      |       |       |        
|                                                              |                                                                                      |              | Depreciation and amortization                                    |                                                   |    | 397                |        |      |       | 472    |        
|                                                              |                                                                                      |              | Provision for doubtful accounts                                  |                                                   |    | 65                 |        |      |       | 89     |        
|                                                              |                                                                                      |              | Loss on disposal of fixed assets                                 |                                                   |    |                   |        |      |       | 3      |        
|                                                              |                                                                                      |              | Tax benefit from exercise of stock options                       |                                                   |    | 8                  |        |      |       | 11     |        
|                                                              |                                                                                      |              | Amortization of restricted stock                                 |                                                   |    |                   |        |      |       | 41     |        
|                                                              |                                                                                      |              | Other                                                            |                                                   |    | (6                 | )      |      |       | (1     | )      
|                                                              |                                                                                      |              | Changes in operating assets and liabilities:                     |                                                   |    |                    |        |      |       |        |        
|                                                              |                                                                                      |              |                                                                  | Increase (decrease) in cash and cash equivalents: |    |                    |        |      |       |        |         |  
|                                                              |                                                                                      |              |                                                                  | Accounts receivable                               |    |                    | (500   | )    |       |        | 18,472  |  
|                                                              |                                                                                      |              |                                                                  | Note receivable                                   |    |                    | 498    |      |       |        |        |  
|                                                              |                                                                                      |              |                                                                  | Inventories                                       |    |                    | (969   | )    |       |        | 2,822   |  
|                                                              |                                                                                      |              |                                                                  | Prepaid expenses and other current assets         |    |                    | 366    |      |       |        | (370    | )
|                                                              |                                                                                      |              |                                                                  | Other assets                                      |    |                    | (9     | )    |       |        | (869    | )
|                                                              |                                                                                      |              |                                                                  | Accounts payable                                  |    |                    | (2,741 | )    |       |        | (20,765 | )
|                                                              |                                                                                      |              |                                                                  | Accrued liabilities                               |    |                    | 1,242  |      |       |        | (8,725  | )
|                                                              |                                                                                      |              |                                                                  | Long-term liabilities                             |    |                    | (58    | )    |       |        | 40      |  
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |      
|                                                              |                                                                                      |              |                                                                  | Net cash used in operating activities             |    |                    | (1,037 | )    |       |        | (7,802  | )
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |      
|CASH FLOWS FROM INVESTING ACTIVITIES:                         |                                                                                      |              |                                                                  |                                                   |    |                    |        |     
|                                                              |                                                                                      |              | Purchases of fixed assets                                        |                                                   |    | (329               | )      |      |       | (117   | )      
|                                                              |                                                                                      |              | Proceeds from sale of fixed assets                               |                                                   |    | 20                 |        |      |       | 16     |        
|                                                              |                                                                                      |              | Purchase of marketable securities                                |                                                   |    |                   |        |      |       | (3,500 | )      
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |      
|                                                              |                                                                                      |              |                                                                  | Net cash used in investing activities             |    |                    | (309   | )    |       |        | (3,601  | )
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |      
|CASH FLOWS FROM FINANCING ACTIVITIES:                         |                                                                                      |              |                                                                  |                                                   |    |                    |        |     
|                                                              |                                                                                      |              | Payment of preferred stock dividends                             |                                                   |    | (375               | )      |      |       | (375   | )      
|                                                              |                                                                                      |              | Purchase of treasury stock                                       |                                                   |    | (267               | )      |      |       | (333   | )      
|                                                              |                                                                                      |              | Proceeds from exercise of stock options                          |                                                   |    | 58                 |        |      |       | 154    |        
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |      
|                                                              |                                                                                      |              |                                                                  | Net cash used in financing activities             |    |                    | (584   | )    |       |        | (554    | )
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |      
|                                                              |                                                                                      |              |                                                                  | Net decrease in cash and cash equivalents         |    |                    | (1,930 | )    |       |        | (11,957 | )
|Effects of exchange rate changes on cash and cash equivalents |                                                                                      |              | (31                                                              | )                                                 |    |                    | 64     |     
|CASH AND CASH EQUIVALENTS, beginning of period                |                                                                                      |              | 21,935                                                           |                                                   |    |                    | 25,833 |     
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |      
|CASH AND CASH EQUIVALENTS, end of period                      |                                                                                      | $            | 19,974                                                           |                                                   |    | $                  | 13,940 |     
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |      
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:             |                                                                                      |              |                                                                  |                                                   |    |                    |        |     
|                                                              | CASH PAID FOR:                                                                       |              |                                                                  |                                                   |    |                    |        |      |      
|                                                              |                                                                                      | Interest     |                                                                  | $                                                 | 82 |                    |        | $    | 57    |       
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |      
|                                                              |                                                                                      | Income taxes |                                                                  | $                                                 |   |                    |        | $    | 1,286 |       
|                                                              |                                                                                      |              |                                                                  |                                                   |    |                    |        |      |      

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

7



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EQUITY MARKETING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

NOTE 1    ORGANIZATION AND BUSINESS

Equity Marketing, Inc., a Delaware corporation and subsidiaries (the
Company), is a leading global marketing services company based in Los
Angeles, with offices in Chicago, New York, London, Paris and Hong Kong. The
Company focuses on the design and execution of strategy-based marketing
programs, with expertise in the areas of: strategic planning and research,
entertainment marketing, design and manufacturing of custom promotional
products, promotion, event marketing, collaborative
marketing and environmental branding. The Companys clients include Burger
King Corporation, CVS/pharmacy, Diageo, Kelloggs, Discover Financial Services,
and Procter & Gamble, among others. The Company complements its core marketing
services and promotions business by developing and marketing distinctive
consumer products, based primarily on classic licensed properties, which are
sold through specialty and mass-market retailers. The Company primarily sells
to customers in the United States and Europe. The Companys functional
currency is United States dollars.

Equity Marketing Hong Kong, Ltd., a Delaware corporation (EMHK), is a
100% owned subsidiary of the Company. EMHK manages production of the Companys
products by third parties in the Far East and currently is responsible for
performing and/or procuring product sourcing, product engineering, quality
control inspections, independent safety testing and export/import
documentation.

Logistix
Limited, a United Kingdom corporation (Logistix), is a
100% owned subsidiary of the Company. Logistix is a marketing
services agency which focuses primarily on assisting consumer packaged goods
companies in their efforts to market to children between the ages of seven and
fourteen by developing and executing premium-based promotions and by providing
marketing consulting services. Logistix also derives a portion of its revenues
from a consumer products business which holds the license for the Robot Wars®
entertainment property, among others.

On July 17, 2002, the Company acquired the principal assets of Promotional
Marketing, L.L.C. d/b/a UPSHOT, an Illinois limited liability company
(UPSHOT). UPSHOT is a marketing agency, specializing in
promotion, event marketing,
collaborative marketing and environmental branding. UPSHOT has a reputation for
creating highly successful integrated marketing programs for world class brands
such as Diageo, Discover Financial Services, and Procter & Gamble.

NOTE 2    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In the opinion of management and subject to year-end audit, the accompanying
unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments considered necessary for fair presentation have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for a full year. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2002.

Net Income Per Share

Basic net income per share (EPS) is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during each period. Net income available to common stockholders
represents reported net income (loss) less preferred stock dividend
requirements.

Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Diluted EPS includes in-the-money options and warrants using the
treasury stock method and also includes the dilutive effect of the assumed
conversion of preferred stock using the if-converted method. Options and
warrants to purchase 1,529,166 and 1,694,166 shares of common stock, $.001 par
value per share (the Common Stock), as of March 31, 2002
and 2003, respectively, were excluded from the computation of diluted EPS as
they would have been anti-dilutive. For the three months ended March 31, 2002
and 2003, preferred stock convertible into 1,694,915 shares of common stock was
excluded from the computation of diluted EPS as it would have been
anti-dilutive.

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The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for income available to common shareholders
and other disclosures required by Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share:

|                                                                      |                      |  |                                      |  |               |   |           |   |             |  |               |         |           |   |       |   |  |   |     |   |  |  |           |         |  |   |      |  | 
|--------------------------------------------------------------------- | -------------------- |  | ------------------------------------ |  | ------------- | - | --------- | - | ----------- |  | ------------- | ------- | --------- | - | ----- | - |  | - | --- | - |  |  | --------- | ------- |  | - | ---- |  | 
|                                                                      |                      |  | For the Three Months Ended March 31,
|                                                                      |                      |  |                                     
|                                                                      |                      |  | 2002                                 |  | 2003         
|                                                                      |                      |  |                                      |  |              
|                                                                      |                      |  | (Loss)                               |  | Shares        |   | Per Share |   | Income      |  | Shares        |         | Per Share
|                                                                      |                      |  | (Numerator)                          |  | (Denominator) |   | Amount    |   | (Numerator) |  | (Denominator) |         | Amount   
|                                                                      |                      |  |                                      |  |               |   |           |   |             |  |               |         |          
|Basic EPS:                                                            |                      |  |                                      |  |               |   |           |   |             |  |               |         |           |   |       |   |  |   |     |   |  |  |           |         |  |   |      | 
|Income (loss) available to
common stockholders                        |                      |  |                                      |  |               | $ | (2,201    | ) |             |  | 5,708,343     |         |           | $ | (0.39 | ) |  | $ | 603 |   |  |  | 5,708,279 |         |  | $ | 0.11 | 
|                                                                      |                      |  |                                      |  |               |   |           |   |             |  |               |         |           |   |       |   |  |   |     |   |  |  |           |         |  |   |      | 
|Effect of dilutive securities:                                        |                      |  |                                      |  |               |   |           |   |             |  |               |         |           |   |       |   |  |   |     |   |  |  |           |         |  |   |      | 
|                                                                      | Options and warrants |  |                                      |  |               |   |           |  |             |  |               | 175,701 |           |   |       |   |  |   |     |  |  |  |           | 174,330 |  |   |      |  | 
|                                                                      |                      |  |                                      |  |               |   |           |   |             |  |               |         |           |   |       |   |  |   |     |   |  |  |           |         |  |   |      | 
|Dilutive EPS:                                                         |                      |  |                                      |  |               |   |           |   |             |  |               |         |           |   |       |   |  |   |     |   |  |  |           |         |  |   |      | 
|Income (loss) available to common
stockholders and assumed conversion |                      |  |                                      |  |               | $ | (2,201    | ) |             |  | 5,884,044     |         |           | $ | (0.37 | ) |  | $ | 603 |   |  |  | 5,882,609 |         |  | $ | 0.10 | 
|                                                                      |                      |  |                                      |  |               |   |           |   |             |  |               |         |           |   |       |   |  |   |     |   |  |  |           |         |  |   |      | 

Inventories

Inventories consist of (a) production-in-process which primarily represents
tooling costs which are deferred and amortized over the life of the products
and deferred costs on service contracts and (b) purchased finished goods held
for sale to customers and purchased finished goods in transit to customers
distribution centers. Inventories are stated at the lower of average cost or
market. As of December 31, 2002 and March 31, 2003, inventories consisted of
the following:

|                      |  |              |        |           |  |   |        | 
|--------------------- |  | ------------ | ------ | --------- |  | - | ------ | 
|                      |  | December 31, |        | March 31,
|                      |  | 2002         |        | 2003     
|                      |  |              |        |          
|Production-in-process |  | $            | 5,062  |           |  | $ | 3,039  | 
|Finished goods        |  |              | 11,301 |           |  |   | 10,478 | 
|                      |  |              |        |           |  |   |        | 
|                      |  | $            | 16,363 |           |  | $ | 13,517 | 
|                      |  |              |        |           |  |   |        | 

Foreign Currency Translation

Net foreign exchange gains or losses resulting from the translation of foreign
subsidiaries accounts whose functional currency is not the United States
dollar are recognized as a component of accumulated other comprehensive income
in stockholders equity. For such subsidiaries, accounts are translated into
United States dollars at the following rates of exchange: assets and
liabilities at period-end exchange rates, equity accounts at historical rates,
and income and expense accounts at average exchange rates during the period.

For subsidiaries with transactions denominated in currencies other than their
functional currency, net foreign exchange transaction gains or losses are
included in determining net income. Transaction gains or (losses) included in
net income for the quarters ended March 31, 2002 and 2003 were $(2) and $114,
respectively.

Derivative Instruments

The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS No. 133 requires that
an entity recognize derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation.

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The Company designates its derivatives based upon criteria established by SFAS
No. 133. For a derivative designated as a fair value hedge, the gain or loss is
recognized in earnings in the period of change together with the offsetting
loss or gain on the hedged item attributed to the risk being hedged. For a
derivative designated as a cash flow hedge, the effective portion of the
derivatives gain or loss is initially reported as a component of accumulated
other comprehensive income and subsequently reclassified into earnings when the
hedged exposure affects earnings. The ineffective portion of the gain or loss
is reported in earnings immediately.

The Company uses derivatives to manage exposures to foreign currency. The
Companys objective for holding derivatives is to decrease the volatility of
earnings and cash flows associated with changes in foreign currency. The
Company enters into foreign exchange forward contracts to minimize the
short-term impact of foreign currency fluctuations on foreign currency
receivables, investments, and payables. The gains and losses on the foreign
exchange forward contracts offset the transaction gains and losses on the
foreign currency receivables, investments, and payables recognized in earnings.
The Company does not enter into foreign exchange forward contracts for trading
purposes. Gains and losses on the contracts are included in other income
(expense) in the consolidated statement of operations and offset foreign
exchange gains or losses from the revaluation of intercompany balances or other
current assets, investments, and liabilities denominated in currencies other
than the functional currency of the reporting entity. The Companys foreign
exchange forward contracts related to current assets and liabilities generally
range from one to nine months in original maturity.

The Companys Logistix subsidiary entered into a foreign currency forward
contract to sell Euros in exchange for pound sterling aggregating GBP 386 at an
average rate of 1.5072. The contract will expire on May 30, 2003. At March
31, 2003, the foreign currency forward contract had an estimated fair value of
$(26). The fair value of the foreign currency forward contract is recorded in
accrued liabilities in the accompanying condensed consolidated balance sheet as
of March 31, 2003. The unrealized loss on the contracts is reflected in
accumulated other comprehensive income.

Revenue Recognition

For product related sales, the Company records revenues when title and risk of
loss pass to the customer. When a right of return exists, the Companys
practice is to estimate and provide for any future returns at the time of sale,
in accordance with SFAS No. 48, Revenue Recognition When Right of Return
Exists. Accruals for customer discounts and rebates and defective returns are
recorded as the related revenues are recognized.

Service revenues include all amounts that are billable to clients under service
contracts. Service related revenues are recognized on a time and materials
basis, or on a straight-line basis, depending on the contract. In the case of
fee and production arrangements, the revenues are recognized as the services
are performed, which is generally ratably over the period of the client
contract. Revenues from time and materials service contracts are recognized as
the services are rendered. Revenues from fixed price retainer contracts are
recognized on a straight-line basis over the contract term. Losses on
contracts are recognized during the period in which the loss first becomes
probable and reasonably estimable. Reimbursements, including those relating to
travel and other out-of-pocket expenses, and other similar third-party costs,
such as printing costs, are included in revenues, and an equivalent amount of
reimbursable expenses are included in cost of sales. Service revenues for the
three months ended March 31, 2002 and 2003 totaled $175 and $6,015,
respectively. Unbilled revenues represent revenues recognized in advance of
billings rendered based on work performed to date on certain service contracts.
Unbilled revenues as of December 31, 2002
and March 31, 2003 totaled $230 and $193, respectively. Unbilled revenues are
recorded in accounts receivable in the accompanying condensed consolidated
balance sheet. Unbilled revenues are expected to be billed and collected
within the next six months.

The Companys revenue recognition policies are in compliance with the
Securities and Exchange Commissions Staff Accounting Bulletin No. 101:
Revenue Recognition in Financial Statements.

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Goodwill and Other Intangibles

SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets were approved by the
Financial Accounting Standards Board (FASB) effective June 30, 2001 for
business combinations consummated after June 30,
2001. SFAS No. 141 eliminates the pooling-of-interests method for business
combinations and requires use of the purchase method.
SFAS No. 142 changes the accounting for goodwill and certain other intangible
assets from an amortization approach to a non-
amortization (impairment) approach. The statement requires amortization of
goodwill recorded in connection with previous business
combinations to cease upon adoption of the statement by calendar year companies
on January 1, 2002. The statement required the
Company to perform a transitional goodwill impairment test, using values as of
the beginning of the fiscal year that SFAS No. 142 is
adopted. The Company completed the goodwill transitional impairment test in
the second quarter of 2002. As a result, the Company
determined that a non-cash charge in the amount of $2,496, net of tax, was
required relating to the goodwill resulting from the 1998
acquisition of Contract Marketing, Inc. and U.S. Import and Promotions Co.,
collectively referred to as USI. The transition charge
is reflected as a cumulative effect of change in accounting principles
effective January 1, 2002, and therefore, results for the quarter
ended March 31, 2002 have been adjusted retroactively. Subsequent to the
transition charge, the balance of the USI goodwill was
$8,198. The Company has adopted the provisions of these statements for the
acquisition of Logistix effective July 1, 2001 and for all
other acquisitions effective January 1, 2002. Accordingly, beginning on
January 1, 2002, the Company has foregone all related
goodwill amortization expense.

The change in the carrying amount of goodwill from $33,730 as of December 31,
2002 to $33,420 as of March 31, 2003 reflects: a
foreign currency translation adjustment of $(254) and an adjustment to reflect
the net reduction to goodwill for the Upshot acquisition of
$(56) (see Note 6). Of the goodwill balance, $8,317 relates to the consumer
products segment and $25,103 relates to the marketing
services segment.

Identifiable intangibles of $694 as of March 31, 2003 and $769 as of December
31, 2002, a portion of which are subject to amortization,
are included in other intangibles in the condensed consolidated balance sheets.

Under the provisions of SFAS No. 142, the carrying value of assets acquired,
including goodwill, are reviewed annually.
During such a review the Company will estimate the fair value of the reporting
unit to which the assets were assigned by
discounting the reporting units estimated future cash flows before interest.
The Company will compare the discounted flows to
the carrying value of the acquired net assets to determine if an impairment
loss has occurred. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying value of the assets exceeds their
estimated fair values. In the fourth quarter of 2002, the Company performed
the annual impairment test required by SFAS No.
142 and determined that its goodwill was not impaired as of December 31, 2002.

Royalties

The Company enters into agreements to license intellectual properties such as
trademarks, copyrights, and patents. The
agreements may call for minimum amounts of royalties to be paid in advance and
throughout the term of the agreement, which
are non-refundable in the event that product sales fail to meet certain minimum
levels. Advance royalties resulting from such
transactions are stated at the lower of the amounts paid or the amounts
estimated to be recoverable from future sales of the
related products. Furthermore, minimum guaranteed royalty commitments are
reviewed on a periodic basis to ensure that
amounts are recoverable based on estimates of future sales of the products
under license. A loss provision will be recorded in
the consolidated statements of operations to the extent that future minimum
royalty guarantee commitments are not recoverable.
Estimated future sales are projected based on historical experience,
including that of similar products, and anticipated
advertising and marketing support by the licensor.

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Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of
transition for a voluntary change to the fair-value for stock-based employee
compensation. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
SFAS No. 148 is effective for fiscal years beginning after December 15, 2002.
The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002.

As of March 31, 2003, the Company
has two stock option plans; the 2000 Equity Marketing, Inc. Stock
Option Plan (the 2000 Employee Plan) and the Non-Employee
Director Stock Option Plan. In accordance
with provisions of SFAS No. 123, the Company
applies Accounting Principles Board (APB) Opinion No. 25 and related
interpretations in accounting for its stock option plans
and, accordingly, does not recognize compensation cost for grants whose
exercise price equals the market price of the stock on
the date of grant. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123, net income and earnings per share
would have been reduced to the pro forma
amounts indicated in the table below:

|                                                                          |  |                    |        |      |  |   |      | 
|------------------------------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ---- | 
|                                                                          |  | Three Months Ended
|                                                                          |  | March 31,         
|                                                                          |  |                   
|                                                                          |  | 2002               |        | 2003
|                                                                          |  |                    |        |     
|Net income (loss) available to common stockholders -  as reported         |  | $                  | (2,201 | )    |  | $ | 603  | 
|Less:                                                                     |  |                    |        |      |  |   |      | 
|Compensation expense (a)                                                  |  |                    | 418    |      |  |   | 481  | 
|                                                                          |  |                    |        |      |  |   |      | 
|Net income (loss) available to common stockholders - pro forma            |  | $                  | (2,619 | )    |  | $ | 122  | 
|                                                                          |  |                    |        |      |  |   |      | 
|Earnings (loss) per share:                                                |  |                    |        |      |  |   |      | 
|Basic earnings (loss) per share, as reported                              |  | $                  | (0.39  | )    |  | $ | 0.11 | 
|Pro forma basic earnings (loss) per share                                 |  | $                  | (0.46  | )    |  | $ | 0.02 | 
|Diluted earnings (loss) per share, as reported                            |  | $                  | (0.37  | )    |  | $ | 0.10 | 
|Pro forma diluted earnings (loss) per share                               |  | $                  | (0.45  | )    |  | $ | 0.02 | 
|                                                                         
|(a) 
Determined under fair value based method for all awards, net of
tax.

Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting
pro forma compensation cost may not be representative of the cost to be
expected in future years.

During the first quarter of 2003, the
Companys Board of Directors approved an amendment to the 2000
Employee Plan to permit the grant of restricted stock units in
addition to the stock options and restricted stock grants previously
provided for under the 2000 Employee Plan.

Recent Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which the obligation is incurred. When the
liability is initially recorded, the entity capitalizes the cost by increasing
the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related
asset. SFAS No. 143 is effective for 2003. The impact of such adoption did not
have a material effect on the Companys financial
statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. SFAS No. 145 requires that gains and losses
from extinguishment of debt be classified as
extraordinary items only if they meet the criteria in APB Opinion No. 30
(Opinion No. 30). Applying the provisions of Opinion No.
30 will distinguish transactions that are part of an entitys recurring
operations from those that are unusual and infrequent and meet the
criteria for classification as an extraordinary item. SFAS No. 145 is effective
for the Company beginning January 1, 2003. The impact
of such adoption did not have a material effect on the Companys financial
statements.

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In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which supercedes
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other
Costs to Exit an Activity. SFAS No. 146 requires that a liability for a cost
associated with an exit activity or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. EITF Issue No. 94-3 requires recognition of a
liability at the date an entity commits to an exit plan. All provisions of SFAS
No. 146 will be effective for exit or disposal activities
initiated after December 31, 2002. Consistent with the provisions of SFAS No.
146, the Companys previously issued financial
statements will not be restated. The Company implemented SFAS No. 146 on
January 1, 2003. The impact of such adoption did not
have a material effect on the Companys financial statements.

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that upon issuance of a
guarantee, a guarantor must recognize a liability for the fair value of an
obligation assumed under a guarantee. FIN 45 also
requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN 45 are effective for any
guarantees issued or modified after December 31,
2002. The disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15,
2002. The impact of such adoption did not have a material effect on the
Companys financial statements.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. FIN 46 will be the guidance that
determines (1) whether consolidation is required under the controlling
financial interest model of Accounting Research
Bulletin No. 51 (ARB 51), Consolidated Financial Statements or,
alternatively, (2) whether the variable interest model
under FIN 46 should be used to account for existing and new entities. The
variable interest model of FIN 46 looks to identify
the primary beneficiary of a variable interest entity. The primarily
beneficiary is the party that is exposed to the majority of the
risk or stands to benefit the most from the variable interest entitys
activities. A variable interest entity would be required to be
consolidated if certain conditions are met. FIN 46 effective dates and
transition provisions will be required to preexisting
entities as of the beginning of the first interim period beginning after June
15, 2003. Management does not believe that the
adoption of this statement will have a material impact on the Companys
financial statements.

NOTE 3  LINE OF CREDIT

On April 24, 2001, the Company signed a credit facility (the Facility) with
Bank of America. The Facility is secured by
substantially all of the Companys assets and provides for a line of credit of
up to $35,000 for three years from the date of closing
with borrowing availability determined by a formula based on qualified assets.
Interest on outstanding borrowings will be based on
either a fixed rate equivalent to LIBOR plus an applicable spread of between
1.50 and 2.25 percent or a variable rate equivalent to the
banks reference rate plus an applicable spread of between zero and 0.50
percent. The Company is also required to pay an unused line
fee of between zero and 0.60 percent per annum and certain letter of credit
fees. The applicable spread is based on the achievement of
certain financial ratios. The Facility also requires the Company to comply
with certain restrictions and covenants as amended from
time to time. On November 14, 2001, February 8, 2002 and September 30, 2002,
certain covenants under the facility were amended.
As of March 31, 2003, the Company was in compliance with the amended
restrictions and covenants. The Facility may be used for
working capital and acquisition financing purposes. As of March 31, 2003,
there were no amounts outstanding under the Facility.

Letters of credit outstanding as of December 31, 2002 and March 31, 2003
totaled $823 and $1,001, respectively.

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NOTE 4  STOCK REPURCHASE

On July 21, 2000, the Companys Board of Directors authorized up to $10,000 for
the repurchase of the Companys common
stock over a twelve month period. In the period from July 21, 2000 to July 21,
2001, the Company spent $6,430 to purchase an
aggregate of 523,594 shares at an average price of $12.28 per share including
commissions. On July 24, 2001, the Companys
Board of Directors authorized up to an additional $10,000 for the repurchase of
the Companys common stock over a twelve
month period. In the period from August 2, 2001 through July 11, 2002, the
Company spent $5,605 to purchase 454,715 shares
at an average price of $12.33 per share including commissions. On July 12,
2002, the Companys Board of Directors authorized
up to an additional $10,000 for the repurchase of the Companys common stock.
The Company spent $1,675 to repurchase
133,400 shares at an average price of $12.56 per share including commissions
under this authorization through March 31, 2003.
The duration of the current buyback program is indefinite; provided,
however, that the Companys Board of Directors intends
to review the program quarterly. Purchases are conducted in the open market at
prevailing prices, based on market conditions
when the Company is not in a quiet period. The Company may also transact
purchases effected as block trades, as well as
certain negotiated, off-exchange purchases not in the open market. Since
initiating the overall buyback program on July 20,
2000, the Company has spent $13,710 to purchase a total of 1,111,709 shares at
an average price of $12.33 per share including
commissions through March 31, 2003. This repurchase program is being funded
through working capital.

NOTE 5  SEGMENTS

Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise
and Related Information. The Company has identified two reportable segments
through which it conducts its continuing
operations: Marketing Services and Consumer Products. The factors for
determining the reportable segments were based on the
distinct nature of their operations. They are managed as separate business
units because each requires and is responsible for
executing a unique business strategy. The Marketing Services segment provides
various services and produces promotional
products used as free premiums or sold in conjunction with the purchase of
other items at a retailer or quick service restaurant.
Marketing Services programs are used for marketing purposes by both the
companies sponsoring the promotions and the
licensors of the entertainment properties on which the promotional programs are
often based. The Consumer Products segment
designs and contracts for the manufacture of toys and other consumer products
for sale to major mass market and specialty
retailers, who in turn sell the products to consumers.

Earnings of industry segments and geographic areas exclude interest income,
interest expense, depreciation expense, asset
impairment charges, restructuring gains, integration costs, and other
unallocated corporate expenses. Income taxes are allocated
to segments on the basis of operating results. Identified assets are those
assets used in the operations of the segments and include
inventory, receivables, goodwill and other intangibles. Corporate assets
consist of cash, certain corporate receivables, fixed
assets, and certain trademarks.

Certain information presented in the tables below has been restated to conform
to the current management structure as of
January 1, 2003. Specifically, the results and assets of the USI division,
which had previously been reported as part of
Marketing Services, are now being reported as part of Consumer Products, which
is consistent with management responsibility
for this business. The majority of the revenues for the USI division
represent sales of made-to-order custom product to Oil
& Gas and other retailers who in turn sell the products to consumers. As a
result of the similarities between the USI business
and the Consumer Products business, the USI division was merged into the
Consumer Products division in connection with the
Companys restructuring in 2002 (see Note  7 Restructuring below).

14



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Industry Segments

|                                                                                                                   |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------- | ------ | -------- |  | --------- | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                   |  | As of and For the Three Months Ended March 31, 2002
|                                                                                                                   |  |                                                    
|                                                                                                                   |  | Marketing                                           |        | Consumer |  |           |        |       |  |   |        |  
|                                                                                                                   |  | Services                                            |        | Products |  | Corporate |        | Total
|                                                                                                                   |  |                                                     |        |          |  |           |        |      
|Total revenues                                                                                                     |  | $                                                   | 28,717 |          |  | $         | 7,398  |       |  | $ |       |   |  | $ | 36,115 |  
|                                                                                                                   |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |        |  
|Income (loss) before provision (benefit) for
income taxes and cumulative effect of change
in accounting principles |  | $                                                   | 4,033  |          |  | $         | 404    |       |  | $ | (3,532 | ) |  | $ | 905    |  
|Provision (benefit) for income taxes                                                                               |  |                                                     | 1,084  |          |  |           | 69     |       |  |   | (918   | ) |  |   | 235    |  
|                                                                                                                   |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |        |  
|Income (loss) before cumulative effect of change
in accounting principles                                          |  |                                                     | 2,949  |          |  |           | 335    |       |  |   | (2,614 | ) |  |   | 670    |  
|Cumulative effect of change in
accounting principles, net of tax                                                   |  |                                                     |       |          |  |           | 2,496  |       |  |   |       |   |  |   | 2,496  |  
|                                                                                                                   |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |        |  
|Net income (loss)                                                                                                  |  | $                                                   | 2,949  |          |  | $         | (2,161 | )     |  | $ | (2,614 | ) |  | $ | (1,826 | )
|                                                                                                                   |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |        |  
|Fixed asset additions                                                                                              |  | $                                                   |       |          |  | $         |       |       |  | $ | 329    |   |  | $ | 329    |  
|                                                                                                                   |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |        |  
|Depreciation and amortization                                                                                      |  | $                                                   | 59     |          |  | $         | 16     |       |  | $ | 322    |   |  | $ | 397    |  
|                                                                                                                   |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |        |  
|Total assets                                                                                                       |  | $                                                   | 41,162 |          |  | $         | 14,961 |       |  | $ | 40,834 |   |  | $ | 96,957 |  
|                                                                                                                   |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |        |  

|                                                          |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |         | 
|--------------------------------------------------------- |  | --------------------------------------------------- | ------ | -------- |  | --------- | ------ | ----- |  | - | ------ | - |  | - | ------- | 
|                                                          |  | As of and For the Three Months Ended March 31, 2003
|                                                          |  |                                                    
|                                                          |  | Marketing                                           |        | Consumer |  |           |        |       |  |   |        |  
|                                                          |  | Services                                            |        | Products |  | Corporate |        | Total
|                                                          |  |                                                     |        |          |  |           |        |      
|Total revenues                                            |  | $                                                   | 43,446 |          |  | $         | 4,121  |       |  | $ |       |   |  | $ | 47,567  | 
|                                                          |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |         | 
|Income (loss) before provision (benefit)
for income taxes |  | $                                                   | 5,642  |          |  | $         | 39     |       |  | $ | (4,185 | ) |  | $ | 1,496   | 
|Provision (benefit) for income taxes                      |  |                                                     | 2,096  |          |  |           | 12     |       |  |   | (1,590 | ) |  |   | 518     | 
|                                                          |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |         | 
|Net income (loss)                                         |  | $                                                   | 3,546  |          |  | $         | 27     |       |  | $ | (2,595 | ) |  | $ | 978     | 
|                                                          |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |         | 
|Fixed asset additions                                     |  | $                                                   |       |          |  | $         |       |       |  | $ | 117    |   |  | $ | 117     | 
|                                                          |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |         | 
|Depreciation and amortization                             |  | $                                                   | 44     |          |  | $         | 17     |       |  | $ | 411    |   |  | $ | 472     | 
|                                                          |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |         | 
|Total assets                                              |  | $                                                   | 60,111 |          |  | $         | 12,687 |       |  | $ | 31,079 |   |  | $ | 103,877 | 
|                                                          |  |                                                     |        |          |  |           |        |       |  |   |        |   |  |   |         | 

NOTE 6  ACQUISITIONS

On July 17, 2002, the Company consummated the acquisition of UPSHOT, a
marketing agency with expertise in promotion,
event marketing, collaborative marketing and environmental branding. The Company financed the
acquisition through its existing cash reserves.
The acquisition was consummated pursuant to an Asset Purchase Agreement, dated
May 22, 2002, by and among the Company,
Promotional Marketing, LLC (Promotional Marketing) and HA-LO Industries, Inc.
(HA-LO) (the Purchase Agreement).
Under the terms of the Purchase Agreement, the Company acquired the principal
assets of Promotional Marketing (consisting of
the principal assets used in connection with the operation of the UPSHOT
business) for $9,206 in cash plus related transaction
costs of $685. The Company assumed the principal current liabilities of the
UPSHOT business in connection with the
acquisition. In addition to the cash purchase price paid at the closing, the
Company may be obligated to pay additional
consideration to Promotional Marketing contingent upon the results of certain
performance targets attained in the twelve month
period ending July 31, 2003. The additional consideration, if any, will be
recorded as goodwill. HA-LO, which is the parent
company of Promotional Marketing, was in Chapter 11 bankruptcy proceedings as
of the acquisition date, and the Companys
acquisition of the UPSHOT business was approved by the United States bankruptcy
court.

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The UPSHOT acquisition has been accounted for under the purchase method of
accounting. The financial statements reflect the
preliminary allocation of the purchase price to the acquired net assets based
on their estimated fair values as of the acquisition
date. The Company is in the process of finalizing valuations of the individual
assets and liabilities, which could result in
adjustments to goodwill and other intangibles. The allocation of the purchase
price may change based upon these valuations.
During the three months ended March 31, 2003, the preliminary allocation of the
purchase price was adjusted to revise the
estimated value of prepaid expenses. These adjustments resulted in a net
reduction to goodwill of $56. The Companys
preliminary allocation of purchase price for the acquisition, based upon
estimated fair values is as follows:

|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Net current assets                            |  | $ | 5,161  |  
|Property, plant and equipment                 |  |   | 700    |  
|Other non-current assets                      |  |   | 1      |  
|Net current liabilities                       |  |   | (7,951 | )
|Non-current liabilities                       |  |   |       |  
|                                              |  |   |        |  
|Estimated fair value, net liabilities assumed |  |   | (2,089 | )
|Goodwill                                      |  |   | 11,793 |  
|Other intangible assets                       |  |   | 187    |  
|                                              |  |   |        |  
|Total purchase price                          |  | $ | 9,891  |  
|                                              |  |   |        |  

The intangible assets of $187 are comprised of customer contracts and related
customer relationships and sales order backlog, and are being amortized over
estimated useful lives ranging from 6 to 12 months. Intangible assets
associated with the UPSHOT acquisition are accounted for in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill has an
indefinite life and is not amortized.

The following selected unaudited pro forma consolidated results of operations
are presented as if the UPSHOT acquisition had occurred as of the beginning of
the period immediately preceding the period of acquisition after giving effect
to certain adjustments for the amortization of intangibles, reduced interest
income and related income tax effects. The pro forma data is for informational
purposes only and does not necessarily reflect the results of operations had
the businesses operated as one during the period. No effect has been given for
synergies, if any, that may have been realized through the acquisitions.

|                                          |  |                    |        |  
|----------------------------------------- |  | ------------------ | ------ | -
|                                          |  | Three Months Ended
|                                          |  | March 31, 2002    
|                                          |  |                   
|Pro forma revenues                        |  | $                  | 42,837 |  
|Pro forma net income (loss)               |  | $                  | (1,789 | )
|Pro forma basic income (loss) per share   |  | $                  | (0.38  | )
|Pro
forma diluted income (loss) per share |  | $                  | (0.37  | )

Refer to Note 2 for further discussion of the method of computation of earnings
per share.

NOTE 7  RESTRUCTURING

During 2002, the Company formulated and implemented a restructuring plan in
connection with the UPSHOT acquisition in order to
combine and streamline the operations of the Company and UPSHOT. The Company
evaluated the current cost structure of both
businesses. In connection with this plan the Company recorded a restructuring
charge of $178. This charge represents severance for a
workforce reduction of seven employees in the Companys Los Angeles office, who
were terminated, and is reflected as a
restructuring charge in the accompanying consolidated statement of operations.
The workforce reduction included employees from
the Companys marketing services division as well as other support services.
$177 of the restructuring charge was paid as of March
31, 2003.

In connection with the restructuring plan, the Company also decided to close
UPSHOTs Richmond, Virginia office and
eliminate certain positions at UPSHOTs Chicago, Illinois office. The
liabilities assumed in connection with this plan totaled
$1,731 and are included as part of goodwill in accordance with EITF Issue No.
95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination. $983 of these liabilities was paid as
of March 31, 2003. As part of this restructuring
plan, the Company is currently finalizing an exit plan with respect to a
portion of its leased space at UPSHOTs Chicago, Illinois
office. This will result in an adjustment to the liabilities assumed and an
increase to goodwill.

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##### Table of Contents



NOTE 8  SUBSEQUENT EVENTS

On April 3, 2003, the Company
entered into agreements (which are effective October 1, 2002)
with Burger King Corporation, the
Companys largest client, which provide that the Company will retain
its role as the primary creative agency of record and designate the
Company as an approved manufacturing agency of record for Burger
Kings worldwide premiums program. The Company is also in the process
of completing negotiations for the renewal of its long-term supply contract with
Restaurant Services, Inc. (RSI), the exclusive domestic purchasing
cooperative for the Burger King system, as well as an international supply
agreement with Burger King pertaining to the supply of premiums outside of the
United States. These agreements are expected to be finalized during the second
quarter of 2003. The
Companys guaranteed share of the Burger King premiums business
(both creative and manufacturing) will be
negotiated by the parties every two years.

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##### Table of Contents






ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

Certain expectations and projections regarding the future performance of Equity
Marketing, Inc. (the Company) discussed in this
quarterly report are forward-looking and are made under the safe harbor
provisions of the Private Securities Litigation Reform Act
of 1995. These expectations and projections are based on currently available
competitive, financial and economic data along with the
Companys operating plans and are subject to future events and uncertainties.
Forward-looking statements can be identified by the
use of forward looking terminology, such as may, will, should, expect,
anticipate, estimate, continue, plans, intends or other similar
terminology. Management cautions that the following factors, among others,
could cause the Companys actual consolidated results
of operations and financial position in 2003 and thereafter to differ
significantly from those expressed in forward-looking statements:

Marketplace Risks



| |  | Dependence on a single customer, Burger King, which may adversely affect
the Companys financial condition and results of operations.                                                  
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Increased competitive pressure, which may affect the sales of the
Companys products and services.                                                                                     
| 
| |  | Dependence on nonrenewable product orders by Burger King, which promotions
are in effect for a limited period of time.                                                                 
| 
| |  | Dependence on the popularity of licensed entertainment properties, which
may adversely affect the Companys financial
condition and results of operations.                             
| 
| |  | Concentration risk associated with accounts receivable. The Company
regularly extends credit to several distribution companies
in connection with its business with Burger King.       
| 
| |  | Significant quarter-to-quarter variability in the Companys revenues and
net income, which may result in operating results below
the expectations of securities analysts and investors.
| 
| |  | Dependence on foreign manufacturers, which may increase the costs of the
Companys products and affect the demand for such
products.                                                   

Financing Risks



| |  | Currency fluctuations, which may affect the Companys suppliers and the
Companys reportable income.
|- |  | ----------------------------------------------------------------------------------------------------

Other Risks



| |  | Products that we develop or sell may expose us to liability from claims by
users of such products for damages including, but not
limited to, bodily injury or property damage. We currently maintain
product liability insurance coverage in amounts that we
believe are adequate. There can be no assurance that we will be able to
maintain such coverage or obtain additional coverage on
acceptable terms in the future, or that such insurance will provide
adequate coverage against all potential claims.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Exposure to liability for the costs related to product recalls. These
costs can include legal expenses, advertising, collection and
destruction of product, and free goods. The Companys product liability
insurance coverage generally excludes such costs and
damages resulting from product recall.                                                                                                                                                                                                         
| 
| |  | Potential negative impact of past or future acquisitions, which may
disrupt the Companys ongoing business, distract senior
management and increase expenses (including risks associated with the
financial condition and integration of UPSHOT which
was recently acquired by the Company).                                                                                                                                                                                                                    
| 
| |  | Adverse results of litigation, governmental proceedings or environmental
matters, which may lead to increased costs or
interruption in normal business operations of the Company.                                                                                                                                                                                                                                                                                                                               
| 
| |  | Changes in laws or regulations, both domestically and internationally,
including those affecting consumer products or
environmental activities or trade restrictions, which may lead to
increased costs.                                                                                                                                                                                                                                                                                                        
| 
| |  | Strike and other labor disputes which may negatively impact the
distribution channels for the Companys products.                                                                                                                                                                                                                                                                                                                                                                                               
| 
| |  | Exposure to liabilities for minimum royalty commitments in connection with
license agreements for entertainment properties. The
Company enters into significant minimum royalty commitments from time to
time in connection with its consumer products business.                                                                                                                                                                                                                                                
| 
| |  | Potential negative impact of
Severe Acute Respiratory Syndrome (SARS),
which could adversely affect the Companys vendors in
the Far East.                                                                                                                                                                                                                                                                                                                                                                    

The Company undertakes no obligation to publicly release the results of any
revisions to forward-looking statements, which may be
made to reflect events or circumstance after the date hereof or to reflect the
occurrence of unanticipated events. The risks highlighted
herein should not be assumed to be the only items that could affect future
performance of the Company. In addition to the information
contained in this document, readers are advised to review the Companys Form
10-K for the year ended December 31, 2002, under the
heading Managements Discussion and Analysis of Financial Condition and
Results of Operations - Cautionary Statements and Risk
Factors.

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Organization and Business

Equity Marketing, Inc., a Delaware corporation and subsidiaries (the
Company), is a leading global marketing services company based in Los
Angeles, with offices in Chicago, New York, London, Paris and Hong Kong. The
Company focuses on the design and execution of strategy-based marketing
programs, with expertise in the areas of: strategic planning and research,
entertainment marketing, design and manufacturing of custom promotional
products, promotion, event marketing, collaborative marketing and environmental
marketing. The Companys clients include Burger King Corporation,
CVS/pharmacy, Diageo, Kelloggs, Discover Financial Services, and Procter &
Gamble, among others. The Company complements its core marketing services and
promotions business by developing and marketing distinctive consumer products,
based primarily on classic licensed properties, which are sold through
specialty and mass-market retailers. The Company primarily sells to customers
in the United States and Europe. The Companys functional currency is United
States dollars.

Equity Marketing Hong Kong, Ltd., a Delaware corporation
(EMHK), is a 100% owned subsidiary of the Company. EMHK manages production
of the Companys products by third parties in the Far East and currently is
responsible for performing and/or procuring product sourcing, product
engineering, quality control inspections, independent safety testing and
export/import documentation.

Logistix Limited, a United Kingdom corporation
(Logistix), is a 100% owned subsidiary of the Company. Logistix is a marketing services agency which focuses primarily
on assisting consumer packaged goods companies in their efforts to market to
children between the ages of seven and fourteen by developing and executing
premium-based promotions and by providing marketing consulting services.
Logistix also derives a portion of its revenues from a consumer products
business which holds the license for the Robot Wars® entertainment property,
among others.

On July 17, 2002, the Company acquired the principal assets of
Promotional Marketing, L.L.C. d/b/a UPSHOT, an Illinois limited liability
company (UPSHOT). UPSHOT is a marketing agency, specializing in promotion,
event marketing, collaborative marketing and environmental branding. UPSHOT has a reputation for
creating highly successful integrated marketing programs for world class brands
such as Diageo, Discover Financial Services, and Procter & Gamble.

Results of Operations

The following table sets forth, for the periods indicated, the Companys
operating results as a percentage of total revenues:

|                                                                 |                                                                    |  |                 |      |      |  |       |      |  
|---------------------------------------------------------------- | ------------------------------------------------------------------ |  | --------------- | ---- | ---- |  | ----- | ---- | -
|                                                                 |                                                                    |  | Three Months   
|                                                                 |                                                                    |  | Ended March 31,
|                                                                 |                                                                    |  |                
|                                                                 |                                                                    |  | 2002            |      | 2003
|                                                                 |                                                                    |  |                 |      |     
|Revenues                                                         |                                                                    |  | 100.0           | %    |      |  | 100.0 | %   
|Cost of sales                                                    |                                                                    |  | 74.5            |      |      |  | 74.2  |     
|                                                                 |                                                                    |  |                 |      |      |  |       |     
|                                                                 | Gross profit                                                       |  |                 | 25.5 |      |  |       | 25.8 |  
|                                                                 |                                                                    |  |                 |      |      |  |       |     
|Operating expenses:                                              |                                                                    |  |                 |      |      |  |       |     
|Salaries, wages and benefits                                     |                                                                    |  | 11.8            |      |      |  | 12.3  |     
|Selling, general and administrative                              |                                                                    |  | 11.3            |      |      |  | 10.6  |     
|                                                                 |                                                                    |  |                 |      |      |  |       |     
|                                                                 | Total operating expenses                                           |  |                 | 23.1 |      |  |       | 22.9 |  
|                                                                 |                                                                    |  |                 |      |      |  |       |     
|                                                                 | Income from operations                                             |  |                 | 2.4  |      |  |       | 2.9  |  
|Other income, net                                                |                                                                    |  | 0.1             |      |      |  | 0.2   |     
|                                                                 |                                                                    |  |                 |      |      |  |       |     
|                                                                 | Income before provision for income taxes                           |  |                 | 2.5  |      |  |       | 3.1  |  
|Provision for income taxes                                       |                                                                    |  | 0.7             |      |      |  | 1.1   |     
|                                                                 |                                                                    |  |                 |      |      |  |       |     
|                                                                 | Income before cumulative effect of change
in accounting principles |  |                 | 1.8  |      |  |       | 2.0  |  
|                                                                 |                                                                    |  |                 |      |      |  |       |     
|Cumulative effect of change in accounting principles, net of tax |                                                                    |  | (6.9            | )    |      |  |      |     
|                                                                 |                                                                    |  |                 |      |      |  |       |     
|                                                                 | Net income (loss)                                                  |  |                 | (5.1 | )%   |  |       | 2.0  | %
|                                                                 |                                                                    |  |                 |      |      |  |       |     

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Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
(In Thousands):

Revenues for the three months ended March 31, 2003 increased $11,452, or 31.7%,
to $47,567 from $36,115 in the comparable period in
2002. Marketing Services revenues increased $14,729, or 51.3%, to $43,446
primarily as a result of increased revenues associated with
Burger King and Logistix programs in 2003 compared to the same period in 2002.
Revenues for the three months ended March 31, 2003
included two large Burger King promotional programs compared to only one
program during the same period in 2002. The increase in
Marketing Services revenues was also attributable to additional revenues
generated by UPSHOT following its acquisition by the
Company in July 2002. The results for 2002 exclude UPSHOT (acquired July 17,
2002). Excluding the impact of the UPSHOT
acquisition, revenues increased 17.3% for the three months ended March 31, 2003
compared to the same period in 2002. Consumer
Product revenues decreased $3,277, or 44.3%, to $4,121 primarily due to
decreased sales of Scooby-Dooand Tub Tints®, partially
offset by increased sales of Crayola® product. Revenues for Scooby-Doo
product in 2002 were higher primarily due to increased
shipments in anticipation of the Scooby-Doofeature film, which was released
in the Summer of 2002. In 2002, the Company
ceased marketing products under the Tub Tints® brand, but did incorporate effervescent coloring tablets into the Companys new
Crayola® branded line.

Cost of sales increased $8,383 to $35,287 (74.2% of revenues) for the three
months ended March 31, 2003 from $26,904 (74.5% of
revenues) in the comparable period in 2002 due to the higher sales volume in
2003. The gross margin percentage increased to 25.8% for
the three months ended March 31, 2003 from 25.5% in the comparable period for
2002. This increase is primarily the result of higher

Marketing Services margins as a result of improved program lead times and other
manufacturing efficiencies and by higher margin
revenues from Consumer Products.

Salaries, wages and benefits increased $1,584, or 37.0%, to $5,861 (12.3% of
revenues) for the three months ended March 31, 2003 from
$4,277 (11.8% of revenues) in the comparable period for 2002. This increase
was primarily attributable to the addition of employees
from the acquisition of UPSHOT.

Selling, general and administrative expenses increased $948, or 23.3%, to
$5,025 (10.6% of revenues) for the three months ended
March 31, 2003 from $4,077 (11.3% of revenues) in the comparable period for
2003. The increase is primarily the result of additional
operating expenses resulting from the acquisition of UPSHOT.

Net other income increased $54 to $102 for the three months ended March 31,
2003 from $48 in the comparable period for 2002. This
increase was attributable to foreign exchange gains, partially
offset by reduced net interest income attributable to a reduced
level of cash, cash equivalents and marketable securities as a result of cash
utilized for the acquisition of UPSHOT.

The effective tax rate for the three months ended March 31, 2003 was 34.6 %
compared to 26.0% for the same period in 2002. The
increase in the effective tax rate is the result of a decrease in the relative
mix of earnings being generated internationally in territories
which have more favorable tax rates.

The cumulative effect of change in accounting principles for the three months
ended March 31, 2002 is due to the adoption of
SFAS No. 142, which requires that companies no longer amortize goodwill and
indefinite life intangible assets, such as
trademarks. SFAS No. 142 also requires that companies evaluate goodwill and
indefinite life intangible assets for impairment.
As a result of this evaluation, the Company recorded a charge of $2,496, net of
tax, in connection with the goodwill resulting
from the 1998 acquisition of Contract Marketing, Inc. and U.S. Import and
Promotions Co., collectively referred to as USI.
The transition charge is reflected as a cumulative effect of change in
accounting principles effective January 1, 2002. See
Critical Accouting PoliciesGoodwill and Other Intangibles below.

Net income increased $2,804 to $978 (2.1% of revenues) in 2003 from $(1,826)
((5.1)% of revenues) in 2002 primarily due to the
cumulative effect of change in accounting principles of $2,496, net of tax in
2002 and the increase in gross profit earned on higher
revenues in 2003. The increase was partially offset by the increased salaries,
wages and benefits partially offset by increased net other
income in 2003.

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Financial Condition and Liquidity

The Companys financial position remained strong in the first quarter of 2003.
At March 31, 2003, the Company had no debt and its
cash, cash equivalents and marketable securities were $18,440, compared to
$26,833 as of December 31, 2002. The decrease in cash,
cash equivalents and marketable securities was attributable to the payment of
current liabilities offset by collection of receivables. As
discussed below, the Companys current assets and liabilities, excluding cash,
were impacted by the West Coast port dispute which
caused shipment delays. These shipment delays resulted in higher than normal
receivable and payable balances as of December 31,
2002.

As of March 31, 2003, the Companys net accounts receivable decreased $18,650
to $25,167 from $43,817 at December 31, 2002.
Accounts receivable as of December 31, 2002 were at higher than normal levels
as a result of shipment delays attributable to the West
Coast port dispute. As of March 31, 2003, inventories decreased $2,846 to
$13,517 from $16,363 at December 31, 2002. This
decrease in inventories is primarily the result of the timing of promotional
programs expected to be delivered later in the second
quarter of 2003 relative to the first quarter of 2003. Marketing Services
inventories represent 84% and 88% of total inventories as of
March 31, 2003 and December 31, 2002, respectively. Promotional product
inventory used in Marketing Services generally has
lower risk than Consumer Product inventory, as it usually represents product
made to order.

As of March 31, 2003, accounts payable decreased $20,839 to $17,495 from
$38,334 at December 31, 2002. This decrease is
associated with the payment of liabilities related to fourth quarter 2002
promotional programs. Accounts payable as of December 31,
2002 were at higher than normal levels as a result of shipment delays
attributable to the West Coast port dispute.

As of March 31, 2003, accrued liabilities decreased $8,767 to $15,562 from
$24,329 at December 31, 2002. This decrease is
primarily attributable to the payment of administrative fees collected from
distribution companies during the fourth quarter of 2002 on
behalf of promotional customers, employee performance bonuses and income taxes.

As of March 31, 2003, working capital was $29,143 compared to $29,157 at
December 31, 2002. Cash flows used in operations for
the three months ended March 31, 2003 were $7,802 compared to $1,037 in the
prior year. This increase is the result of the reduction
of current assets and liabilities to more normalized levels as discussed above.
Cash flows used in investing activities for the three
months ended March 31, 2003 were $3,601 compared to $309 in the prior year.
This increase is the result of purchases of marketable
securities partially offset by reduced purchases of fixed assets. Cash flows
used in financing activities for the three months ended
March 31, 2003 were $554 compared to $584 in the prior year. As of the date
hereof, the Company believes that its cash from
operations, cash, cash equivalents and marketable securities at March 31, 2003
and its credit facility will be sufficient to fund its
working capital needs for at least the next twelve months. The statements set
forth herein are forward-looking and actual results may
differ materially.

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Credit Facilities

On April 24, 2001, the Company signed a credit facility (the Facility) with
Bank of America. The Facility is secured by
substantially all of the Companys assets and provides for a line of credit of
up to $35,000 for three years from the date of closing
with borrowing availability determined by a formula based on qualified assets.
Interest on outstanding borrowings will be based on
either a fixed rate equivalent to LIBOR plus an applicable spread of between
1.50 and 2.25 percent or a variable rate equivalent to the
banks reference rate plus an applicable spread of between zero and 0.50
percent. The Company is also required to pay an unused line
fee of between zero and 0.60 percent per annum and certain letter of credit
fees. The applicable spread is based on the achievement of
certain financial ratios. The Facility also requires the Company to comply
with certain restrictions and covenants as amended from
time to time. On November 14, 2001, February 8, 2002 and September 30, 2002
certain covenants under the facility were amended.
As of March 31, 2003, the Company was in compliance with the amended
restrictions and covenants. The Facility may be used for
working capital and acquisition financing purposes. As of March 31, 2003,
there were no amounts outstanding under the Facility.

Acquisition

On July 17, 2002, the Company consummated the acquisition of UPSHOT, a
marketing agency with expertise in promotion, event,
collaborative and environmental marketing. The Company financed the
acquisition through its existing cash reserves.
The acquisition was consummated pursuant to an Asset Purchase Agreement, dated
May 22, 2002, by and among the Company,
Promotional Marketing, LLC (Promotional Marketing) and HA-LO Industries, Inc.
(HA-LO) (the Purchase Agreement). Under
the terms of the Purchase Agreement, the Company acquired the principal assets
of Promotional Marketing (consisting of the
principal assets used in connection with the operation of the UPSHOT business)
for $9,206 in cash plus related transaction costs of
$685. The Company assumed the principal current liabilities of the UPSHOT
business in connection with the acquisition. In addition
to the cash purchase price paid at the closing, the Company may be obligated to
pay additional consideration to Promotional
Marketing contingent upon the results of certain performance targets attained
in the twelve month period ending July 31, 2003. The
additional consideration, if any, will be recorded as goodwill. HA-LO, which
is the parent company of Promotional Marketing, was
in Chapter 11 bankruptcy proceedings as of the acquisition date, and the
Companys acquisition of the UPSHOT business was
approved by the United States bankruptcy court.

Stock Repurchase

On July 21, 2000, the Companys Board of Directors authorized up to $10,000 for
the repurchase of the Companys common
stock over a twelve month period. In the period from July 21, 2000 to July 21,
2001, the Company spent $6,430 to purchase an
aggregate of 523,594 shares at an average price of $12.28 per share including
commissions. On July 24, 2001, the Companys
Board of Directors authorized up to an additional $10,000 for the repurchase of
the Companys common stock over a twelve
month period. In the period from August 2, 2001 through July 11, 2002, the
Company spent $5,605 to purchase 454,715 shares
at an average price of $12.33 per share including commissions. On July 12,
2002, the Companys Board of Directors authorized
up to an additional $10,000 for the repurchase of the Companys common stock.
The Company spent $1,675 to repurchase
133,400 shares at an average price of $12.56 per share including commissions
under this authorization through March 31, 2003.
The duration of the current buyback program is indefinite; provided,
however, that the Companys Board of Directors intends
to review the program quarterly. Purchases are conducted in the open market at
prevailing prices, based on market conditions
when the Company is not in a quiet period. The Company may also transact
purchases effected as block trades, as well as
certain negotiated, off-exchange purchases not in the open market. Since
initiating the overall buyback program on July 20,
2000, the Company has spent $13,710 to purchase a total of 1,111,709 shares at
an average price of $12.33 per share including
commissions through March 31, 2003. This repurchase program is being funded
through working capital.

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Recent Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value
each period, and the capitalized cost is depreciated over the useful life of
the related asset. SFAS No. 143 is effective for 2003. The impact of such
adoption did not have a material effect on the Companys financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 requires that gains and losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria in APB Opinion
No. 30 (Opinion No. 30). Applying the provisions of Opinion No. 30 will
distinguish transactions that are part of an entitys recurring operations from
those that are unusual and infrequent and meet the criteria for classification
as an extraordinary item. SFAS No. 145 is effective for the Company beginning
January 1, 2003. The impact of such adoption did not have a material effect on
the Companys financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which supercedes Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146
requires that a liability for a cost associated with an exit activity or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. EITF Issue No. 94-3 requires recognition of a
liability at the date an entity commits to an exit plan. All provisions of SFAS
No. 146 will be effective for exit or disposal activities initiated after
December 31, 2002. Consistent with the provisions of SFAS No. 146, the
Companys previously issued financial statements will not be restated. The
Company implemented SFAS No. 146 on January 1, 2003. The impact of such
adoption did not have a material effect on the Companys financial statements.

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed under a
guarantee. FIN 45 also requires additional disclosures by a guarantor in its
interim and annual financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN 45 are effective for any
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002. The impact of such adoption did not
have a material effect on the Companys financial statements.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. FIN 46 will be the guidance that determines (1) whether
consolidation is required under the controlling financial interest model of
Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial
Statements or, alternatively, (2) whether the variable interest model under
FIN 46 should be used to account for existing and new entities. The variable
interest model of FIN 46 looks to identify the primary beneficiary of a
variable interest entity. The primarily beneficiary is the party that is
exposed to the majority of the risk or stands to benefit the most from the
variable interest entitys activities. A variable interest entity would be
required to be consolidated if certain conditions are met. FIN 46 effective
dates and transition provisions will be required to preexisting entities as of
the beginning of the first interim period beginning after June 15, 2003.
Management does not believe that the adoption of this statement will have a
material impact on the Companys financial statements.

Restructuring

During 2002, the Company formulated and implemented a restructuring plan in
connection with the UPSHOT acquisition in order to
combine and streamline the operations of the Company and UPSHOT. The Company
evaluated the current cost structure of both
businesses. In connection with this plan the Company recorded a restructuring
charge of $178. This charge represents severance for a
workforce reduction of seven employees in the Companys Los Angeles office, who
were terminated, and is reflected as a
restructuring charge in the accompanying consolidated statement of operations.
The workforce reduction included employees from
the Companys marketing services division as well as other support services.
$177 of the restructuring charge was paid as of March
31, 2003.

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In connection with the restructuring plan, the Company also decided to close
UPSHOTs Richmond, Virginia office and
eliminate certain positions at UPSHOTs Chicago, Illinois office. The
liabilities assumed in connection with this plan totaled
$1,731 and are included as part of goodwill in accordance with EITF Issue No.
95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination. $983 of these liabilities was paid as
of March 31, 2003. As part of this restructuring
plan, the Company is currently finalizing an exit plan with respect to a
portion of its leased space at UPSHOTs Chicago, Illinois
office. This will result in an adjustment to the liabilities assumed and an
increase to goodwill.

Subsequent Events

On April 3, 2003, the Company entered into agreements (which are effective October 1, 2002) with
Burger King Corporation, the Companys largest client, which
provide that the Company will retain its role as the primary creative
agency of record and designate the Company as an approved
manufacturing agency of record for Burger Kings worldwide
premiums program. The Company is also in the process
of completing negotiations for the renewal of its
long-term supply contract with Restaurant Services, Inc. (RSI), the exclusive
domestic purchasing cooperative for the Burger King
system, as well as an international supply agreement with Burger King
pertaining to the supply of premiums outside of the
United States. These agreements are expected to be finalized during the second
quarter of 2003. The Companys guaranteed share of
the Burger King premiums business (both creative and manufacturing) will be
negotiated by the parties every two years.




ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation, as of a date within 90 days of the filing of this
Form 10-Q, the Companys Chief Executive Officer and Chief
Financial Officer have concluded the Companys disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934) are effective. There have been no significant
changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

24



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##### Table of Contents






PART II. OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits:
| | --- |  | ---------

|              |  |                                                                                                                                                                     
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.14 |  | Employment agreement dated as of January 1, 2003 between Equity
Marketing, Inc. and Donald A. Kurz.                                                                 
|              |  |                                                                                                                                                                     
|Exhibit 99.1  |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Donald A. Kurz,
Chief Executive Officer.   
|              |  |                                                                                                                                                                     
|Exhibit 99.2  |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Lawrence J. Madden,
Chief Financial Officer



| | (b) |  | Reports on Form 8-K:                                                                                  
| | --- |  | ------------------------------------------------------------------------------------------------------
|
| |     |  | Report on Form 8-K filed with the Securities and Exchange Commission on
March 3, 2003 (Items 7 and 9).

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##### Table of Contents






SIGNATURES

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

|                  |  |                                                                                                                     
|----------------- |  | --------------------------------------------------------------------------------------------------------------------
|                  |  | EQUITY MARKETING, INC.                                                                                              
|                  |  |                                                                                                                     
|Date May 15, 2003 |  | /s/ LAWRENCE J. MADDEN                                                                                              
|                  |  |                                                                                                                     
|                  |  | Lawrence J. Madden
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

26



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##### Table of Contents



CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Donald A. Kurz, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Equity Marketing,
Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading
with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented
in this quarterly report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and procedures to ensure that
material information related to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
quarterly report is being prepared;
|
| | b. evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date); and                                                                                                 
|
| | c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                       

5.     The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and
the audit committee of the registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in
internal controls; and
|
| | b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

| |  |                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------
| |  | /s/ Donald A.
Kurz
Donald A. Kurz,
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)

Dated:May 15, 2003

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##### Table of Contents



CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Lawrence J. Madden, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Equity Marketing,
Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading
with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented
in this quarterly report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and procedures to ensure that
material information related to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
quarterly report is being prepared;
|
| | b. evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date); and                                                                                                 
|
| | c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                       

5.     The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and
the audit committee of the registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in
internal controls; and
|
| | b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

| |  |                                                                                                                                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | /s/ Lawrence J.
Madden
Lawrence J. Madden,
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

Dated: May 15, 2003

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##### Table of Contents






Exhibit Index

|               |  |                                                                                                                                                                     
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                         
|               |  |                                                                                                                                                                     
|Exhibit 10.14  |  | Employment agreement dated as of January 1, 2003 between Equity
Marketing, Inc. and Donald A. Kurz.                                                                 
|               |  |                                                                                                                                                                     
|Exhibit 99.1   |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Donald A. Kurz,
Chief Executive Officer.   
|               |  |                                                                                                                                                                     
|Exhibit 99.2   |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Lawrence J. Madden,
Chief Financial Officer

29