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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 June 30, 2002

or

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|(   ) |  | TRANSITION 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                                                       |  | 13-3534145                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

|                                         |  |           
|---------------------------------------- |  | ----------
|6330 San Vicente Blvd.                   |  |           
|Los Angeles, CA                          |  | 90048     
|(Address of principal executive offices) |  | (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, 5,698,603 shares as of August 12, 2002.





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TABLE OF CONTENTS



|                              |                                                                                                |                                                           |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                  
|                              |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS                    
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS          
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                              |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     
|                              | ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                     
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      
|SIGNATURES                   



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EQUITY MARKETING, INC.

Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
June 30, 2002

|         |  |                       |  |                                                                                               |  |      |    | 
|-------- |  | --------------------- |  | --------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                       |  |                                                                                               |  | Page
|         |  |                       |  |                                                                                               |  |     
|Part I.  |  | Financial Information |  |                                                                                               |  |     
|        
|         |  |                       |  | Item 1. Financial Statements                                                                  |  |      | 3  | 
|        
|         |  |                       |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations |  |      | 16 | 
|        
|Part II. |  | Other Information     |  |                                                                                               |  |     
|        
|         |  |                       |  | Item 1.
Legal Proceedings                                                                     |  |      | 22 | 
|        
|         |  |                       |  | Item 4. Submission of Matters to a Vote of Security Holders                                   |  |      | 22 | 
|        
|         |  |                       |  | Item 6. Exhibits and Reports on Form 8-K                                                      |  |      | 22 | 

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PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS

|                       |                                                                                                                      |                      |        |              |         |          |        |             |         | 
|---------------------- | -------------------------------------------------------------------------------------------------------------------- | -------------------- | ------ | ------------ | ------- | -------- | ------ | ----------- | ------- | 
|                       |                                                                                                                      |                      |        | December 31, |         | June 30,
|                       |                                                                                                                      |                      |        | 2001         |         | 2002    
|                       |                                                                                                                      |                      |        |              |         |         
|                       |                                                                                                                      |                      |        |              |         |          |        | (Unaudited)
|CURRENT ASSETS:        |                                                                                                                      |                      |        |              |         |          |        |            
|                       | Cash and cash equivalents                                                                                            |                      | $      | 21,935       |         |          | $      | 26,106      |        
|                       | Marketable securities                                                                                                |                      |        | 7,200        |         |          |        | 2,500       |        
|                       | Accounts receivable (net of allowances of $2,336 and
$2,317 as of December 31, 2001 and June 30, 2002, respectively) |                      |        | 22,695       |         |          |        | 27,246      |        
|                       | Note receivable                                                                                                      |                      |        | 2,183        |         |          |        |            |        
|                       | Inventories                                                                                                          |                      |        | 9,337        |         |          |        | 12,882      |        
|                       | Prepaid expenses and other current assets                                                                            |                      |        | 6,775        |         |          |        | 7,311       |        
|                       |                                                                                                                      |                      |        |              |         |          |        |            
|                       |                                                                                                                      | Total current assets |        |              | 70,125  |          |        |             | 76,045  | 
|Fixed assets, net      |                                                                                                                      |                      | 4,178  |              |         |          | 3,845  |            
|Goodwill               |                                                                                                                      |                      | 24,690 |              |         |          | 21,277 |            
|Other intangibles, net |                                                                                                                      |                      | 749    |              |         |          | 730    |            
|Other assets           |                                                                                                                      |                      | 1,620  |              |         |          | 1,492  |            
|                       |                                                                                                                      |                      |        |              |         |          |        |            
|                       |                                                                                                                      | Total assets         |        | $            | 101,362 |          |        | $           | 103,389 | 
|                       |                                                                                                                      |                      |        |              |         |          |        |            

The accompanying notes are an integral part of these condensed consolidated balance sheets.

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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, |         | June 30,
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            |        | 2001         |         | 2002    
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            |        |              |         |         
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            |        |              |         |          |        | (Unaudited)
|CURRENT LIABILITIES:                                                                                                                                                                                                                        |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                            | Accounts payable                                                                                                                                                          |                                            | $      | 22,114       |         |          | $      | 25,023      |        
|                                                                                                                                                                                                                                            | Accrued liabilities                                                                                                                                                       |                                            |        | 11,391       |         |          |        | 12,217      |        
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                            |                                                                                                                                                                           | Total current liabilities                  |        |              | 33,505  |          |        |             | 37,240  | 
|LONG-TERM LIABILITIES                                                                                                                                                                                                                       |                                                                                                                                                                           |                                            | 2,335  |              |         |          | 2,155  |            
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                            |                                                                                                                                                                           | Total liabilities                          |        |              | 35,840  |          |        |             | 39,395  | 
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|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, 20,000,000
shares authorized, 5,715,293 and 5,696,353 shares outstanding
as of December 31, 2001 and June 30, 2002, respectively |                                            |        |             |         |          |        |            |        
|                                                                                                                                                                                                                                            | Additional paid-in capital                                                                                                                                                |                                            |        | 20,050       |         |          |        | 20,172      |        
|                                                                                                                                                                                                                                            | Retained earnings                                                                                                                                                         |                                            |        | 35,964       |         |          |        | 33,933      |        
|                                                                                                                                                                                                                                            | Accumulated other comprehensive income                                                                                                                                    |                                            |        | 242          |         |          |        | 1,014       |        
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            | 56,256 |              |         |          | 55,119 |            
|Less                                                                                                                                                                                                                                       |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                            | Treasury stock, 2,869,793 and 2,899,608 shares, at cost, as of
December 31, 2001 and June 30, 2002, respectively                                                          |                                            |        | (13,773      | )       |          |        | (14,164     | )      
|                                                                                                                                                                                                                                            | Unearned compensation                                                                                                                                                     |                                            |        | (10          | )       |          |        | (10         | )      
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                            |                                                                                                                                                                           | Total stockholders equity                 |        |              | 42,473  |          |        |             | 40,945  | 
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                            |                                                                                                                                                                           | Total liabilities and stockholders equity |        | $            | 101,362 |          |        | $           | 103,389 | 
|                                                                                                                                                                                                                                            |                                                                                                                                                                           |                                            |        |              |         |          |        |            

| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | The accompanying notes are an integral part of these condensed consolidated balance sheets.

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

|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |       |        |  
|---------------------------------------------------------------------------- | ----------------------------------- | ------------------------------------------------------------------------------------------------- | --------- | ------------------ | ----- | ---------------- | --------- | ----- | ------ | ---- | --------- | ----- | ------ | - | --------- | ----- | ------ | -
|                                                                             |                                     |                                                                                                   |           | Three Months Ended |       | Six Months Ended
|                                                                             |                                     |                                                                                                   |           | June 30,           |       | June
30,        
|                                                                             |                                     |                                                                                                   |           |                    |       |                 
|                                                                             |                                     |                                                                                                   |           | 2001               |       | 2002             |           | 2001  |        | 2002
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |     
|REVENUES                                                                     |                                     | $                                                                                                 | 28,237    |                    |       | $                | 47,151    |       |        | $    | 56,264    |       |        | $ | 83,266    |      
|COST OF SALES                                                                |                                     |                                                                                                   | 20,234    |                    |       |                  | 34,877    |       |        |      | 40,071    |       |        |   | 61,781    |      
|FORGIVENESS OF NOTE RECEIVABLE                                               |                                     |                                                                                                   |          |                    |       |                  | 1,685     |       |        |      |          |       |        |   | 1,685     |      
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|                                                                             |                                     | Gross profit                                                                                      |           |                    | 8,003 |                  |           |       | 10,589 |      |           |       | 16,193 |   |           |       | 19,800 |  
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|OPERATING EXPENSES:                                                          |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|                                                                             | Salaries, wages and benefits        |                                                                                                   |           | 3,547              |       |                  |           | 4,648 |        |      |           | 7,276 |        |   |           | 8,925 |       
|                                                                             | Selling, general and administrative |                                                                                                   |           | 3,561              |       |                  |           | 5,043 |        |      |           | 7,276 |        |   |           | 9,120 |       
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|                                                                             |                                     | Total operating expenses                                                                          |           |                    | 7,108 |                  |           |       | 9,691  |      |           |       | 14,552 |   |           |       | 18,045 |  
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|                                                                             |                                     | Income from operations                                                                            |           |                    | 895   |                  |           |       | 898    |      |           |       | 1,641  |   |           |       | 1,755  |  
|OTHER INCOME, net                                                            |                                     |                                                                                                   | 415       |                    |       |                  | 22        |       |        |      | 1,194     |       |        |   | 70        |      
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|                                                                             |                                     | Income
before provision for income taxes and cumulative effect of change
in accounting principles |           |                    | 1,310 |                  |           |       | 920    |      |           |       | 2,835  |   |           |       | 1,825  |  
|PROVISION FOR INCOME TAXES                                                   |                                     |                                                                                                   | 450       |                    |       |                  | 375       |       |        |      | 1,060     |       |        |   | 610       |      
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES           |                                     | $                                                                                                 | 860       |                    |       | $                | 545       |       |        | $    | 1,775     |       |        | $ | 1,215     |      
|Cumulative effect of change in accounting principles, net of tax             |                                     |                                                                                                   |          |                    |       |                  |          |       |        |      |          |       |        |   | (2,496    | )    
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|                                                                             |                                     | Net
income (loss)                                                                                 |           | $                  | 860   |                  |           | $     | 545    |      |           | $     | 1,775  |   |           | $     | (1,281 | )
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|NET
INCOME (LOSS)                                                            |                                     |                                                                                                   | 860       |                    |       |                  | 545       |       |        |      | 1,775     |       |        |   | (1,281    | )    
|PREFERRED STOCK DIVIDENDS                                                    |                                     |                                                                                                   | 375       |                    |       |                  | 375       |       |        |      | 750       |       |        |   | 750       |      
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|NET
INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS                           |                                     |                                                                                                   | 485       |                    |       |                  | 170       |       |        |      | 1,025     |       |        |   | (2,031    | )    
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|BASIC INCOME (LOSS) PER SHARE                                                |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|Income per share before cumulative effect of change in
accounting principles |                                     | $                                                                                                 | 0.08      |                    |       | $                | 0.03      |       |        | $    | 0.17      |       |        | $ | 0.08      |      
|Cumulative effect of change in accounting principles                         |                                     |                                                                                                   |          |                    |       |                  |          |       |        |      |          |       |        |   | (0.44     | )    
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|INCOME (LOSS) PER SHARE                                                      |                                     | $                                                                                                 | 0.08      |                    |       | $                | 0.03      |       |        | $    | 0.17      |       |        | $ | (0.36     | )    
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|BASIC WEIGHTED AVERAGE SHARES OUTSTANDING                                    |                                     |                                                                                                   | 6,061,811 |                    |       |                  | 5,695,293 |       |        |      | 6,084,228 |       |        |   | 5,701,818 |      
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|DILUTED
INCOME (LOSS) PER SHARE                                              |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|Income per share before cumulative effect of change in
accounting principles |                                     | $                                                                                                 | 0.08      |                    |       | $                | 0.03      |       |        | $    | 0.16      |       |        | $ | 0.08      |      
|Cumulative effect of change in accounting principles                         |                                     |                                                                                                   |          |                    |       |                  |          |       |        |      |          |       |        |   | (0.42     | )    
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|INCOME (LOSS) PER SHARE                                                      |                                     | $                                                                                                 | 0.08      |                    |       | $                | 0.03      |       |        | $    | 0.16      |       |        | $ | (0.34     | )    
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      
|DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING                                  |                                     |                                                                                                   | 6,175,984 |                    |       |                  | 5,928,828 |       |        |      | 6,243,296 |       |        |   | 5,918,665 |      
|                                                                             |                                     |                                                                                                   |           |                    |       |                  |           |       |        |      |           |       |        |   |           |      

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

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EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)

|                                   |                                                       |   |                    |   |                  |   |       |       |      |   |       |   |  |   |        |      |  
|---------------------------------- | ----------------------------------------------------- | - | ------------------ | - | ---------------- | - | ----- | ----- | ---- | - | ----- | - |  | - | ------ | ---- | -
|                                   |                                                       |   | Three Months Ended |   | Six Months Ended
|                                   |                                                       |   | June 30,           |   | June 30,        
|                                   |                                                       |   |                    |   |                 
|                                   |                                                       |   | 2001               |   | 2002             |   | 2001  |       | 2002
|                                   |                                                       |   |                    |   |                  |   |       |       |     
|NET
INCOME (LOSS)                  |                                                       | $ | 860                |   |                  | $ | 545   |       |      | $ | 1,775 |   |  | $ | (1,281 | )   
|OTHER
COMPREHENSIVE INCOME (LOSS): |                                                       |   |                    |   |                  |   |       |       |      |   |       |   |  |   |        |     
|                                   | Foreign currency translation adjustments              |   |                    |  |                  |   |       | 1,176 |      |   |       |  |  |   |        | 942  |  
|                                   | Unrealized loss on foreign currency
forward contracts |   |                    |  |                  |   |       | (175  | )    |   |       |  |  |   |        | (170 | )
|                                   |                                                       |   |                    |   |                  |   |       |       |      |   |       |   |  |   |        |     
|COMPREHENSIVE
INCOME (LOSS)        |                                                       | $ | 860                |   |                  | $ | 1,546 |       |      | $ | 1,775 |   |  | $ | (509   | )   
|                                   |                                                       |   |                    |   |                  |   |       |       |      |   |       |   |  |   |        |     

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

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EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |        |       |        |        |  
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | ------ | ---------------- | ------- | ------ | ----- | ------ | ------ | -
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        | Six Months Ended
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        | June 30,        
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                 
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        | 2001             |         | 2002  
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                         |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|                                                              | Net income (loss)                                                                        |                                                                                    | $                                                 | 1,775                                     |        |                  | $       | (1,281 | )    
|                                                              | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                                                                    |                                                   |                                           |        |                  |         |        |      
|                                                              |                                                                                          | Cumulative effect of change in accounting principles, net of tax                   |                                                   |                                           |       |                  |         |        | 2,496 |       
|                                                              |                                                                                          | Depreciation and amortization                                                      |                                                   |                                           | 1,102  |                  |         |        | 803   |       
|                                                              |                                                                                          | Provision for doubtful accounts                                                    |                                                   |                                           | 35     |                  |         |        | 185   |       
|                                                              |                                                                                          | (Gain) loss on disposal of fixed assets                                            |                                                   |                                           | 3      |                  |         |        | (13   | )     
|                                                              |                                                                                          | Tax benefit from exercise of stock options                                         |                                                   |                                           | 230    |                  |         |        | 12    |       
|                                                              |                                                                                          | Forgiveness of note receivable                                                     |                                                   |                                           |       |                  |         |        | 1,685 |       
|                                                              |                                                                                          | Changes in operating assets and liabilities:                                       |                                                   |                                           |        |                  |         |        |       |       
|                                                              |                                                                                          |                                                                                    | Increase (decrease) in cash and cash equivalents: |                                           |        |                  |         |        |       |        |       
|                                                              |                                                                                          |                                                                                    |                                                   | Accounts receivable                       |        |                  | 11,863  |        |       |        | (4,584 | )
|                                                              |                                                                                          |                                                                                    |                                                   | Note receivable                           |        |                  | 4,068   |        |       |        | 498    |  
|                                                              |                                                                                          |                                                                                    |                                                   | Inventories                               |        |                  | 3,337   |        |       |        | (3,401 | )
|                                                              |                                                                                          |                                                                                    |                                                   | Prepaid expenses and other current assets |        |                  | (1,100  | )      |       |        | 969    |  
|                                                              |                                                                                          |                                                                                    |                                                   | Other assets                              |        |                  | (613    | )      |       |        | 130    |  
|                                                              |                                                                                          |                                                                                    |                                                   | Accounts payable                          |        |                  | (3,195  | )      |       |        | 2,723  |  
|                                                              |                                                                                          |                                                                                    |                                                   | Accrued liabilities                       |        |                  | (11,105 | )      |       |        | 611    |  
|                                                              |                                                                                          |                                                                                    |                                                   | Long-term liabilities                     |        |                  | (40     | )      |       |        | (75    | )
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|                                                              |                                                                                          |                                                                                    | Net cash provided by operating activities         |                                           |        | 6,360            |         |        |       | 758    |       
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                         |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|                                                              |                                                                                          | Purchases of fixed assets                                                          |                                                   |                                           | (583   | )                |         |        | (457  | )     
|                                                              |                                                                                          | Proceeds from sale of fixed assets                                                 |                                                   |                                           |       |                  |         |        | 79    |       
|                                                              |                                                                                          | Proceeds from sale of marketable securities                                        |                                                   |                                           | 5,100  |                  |         |        | 4,700 |       
|                                                              |                                                                                          | Payment for purchase of Contract Marketing, Inc. and U.S. Import and Promotion Co. |                                                   |                                           | (556   | )                |         |        |      |       
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|                                                              |                                                                                          | Net cash provided by investing activities                                          |                                                   |                                           | 3,961  |                  |         |        | 4,322 |       
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                         |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|                                                              |                                                                                          | Payment of preferred stock dividends                                               |                                                   |                                           | (750   | )                |         |        | (750  | )     
|                                                              |                                                                                          | Purchase of treasury stock                                                         |                                                   |                                           | (2,783 | )                |         |        | (391  | )     
|                                                              |                                                                                          | Proceeds from exercise of stock options                                            |                                                   |                                           | 1,111  |                  |         |        | 110   |       
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|                                                              |                                                                                          |                                                                                    | Net cash used in financing activities             |                                           |        | (2,422           | )       |        |       | (1,031 | )     
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|                                                              |                                                                                          |                                                                                    | Net increase in cash and cash equivalents         |                                           |        | 7,899            |         |        |       | 4,049  |       
|Effects of exchange rate changes on cash and cash equivalents |                                                                                          |                                                                                    |                                                  |                                           |        |                  | 122     |       
|CASH AND CASH EQUIVALENTS, beginning of period                |                                                                                          |                                                                                    | 32,405                                            |                                           |        |                  | 21,935  |       
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|CASH AND CASH EQUIVALENTS, end of period                      |                                                                                          | $                                                                                  | 40,304                                            |                                           |        | $                | 26,106  |       
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:             |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|                                                              | CASH PAID FOR:                                                                           |                                                                                    |                                                   |                                           |        |                  |         |        |      
|                                                              |                                                                                          | Interest                                                                           |                                                   | $                                         | 80     |                  |         | $      | 133   |       
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       
|                                                              |                                                                                          | Income taxes                                                                       |                                                   | $                                         | 2,397  |                  |         | $      | 255   |       
|                                                              |                                                                                          |                                                                                    |                                                   |                                           |        |                  |         |       

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

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EQUITY MARKETING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(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, Richmond, London, Paris and Hong
Kong. The Company focuses on the design and execution of strategy-based
marketing programs, with particular 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, The Coca-Cola Company, CVS/pharmacy, Hallmark Cards, Kelloggs, Morgan Stanley, Procter & Gamble and
J.E. Seagram & Sons, among others. The Company complements its core promotions
business by developing and marketing distinctive consumer products, based on
trademarks it owns or classic licensed properties, which are sold through
specialty and mass-market retailers. The Company primarily sells to customers
in the United States and Europe.

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.

On July 31, 2001, the Company acquired 100% of the common stock of Logistix
Limited, a United Kingdom corporation, (Logistix) (see Note 7  Acquisition).
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) (see Note 8  Subsequent Event). UPSHOT is a marketing agency,
specializing in promotion, event, collaborative and environmental
marketing. UPSHOT has a reputation for creating highly successful integrated marketing
programs for world class brands such as The Coca-Cola Company, Hallmark Cards, The Minute Maid Company, Morgan
Stanley, Proctor & Gamble and J.E. Seagram & Sons.

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 (consisting of normal recurring accruals)
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, 2001.

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 1,846,166 and 1,226,166 shares of common stock, $.001 par
value per share (the Common Stock), as of June 30, 2001 and 2002,
respectively, were excluded from the computation of diluted EPS as they would
have been anti-dilutive. For the three months

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ended June 30, 2001 and 2002,
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.

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 June 30,
|                                        |                                                                |                      |     |                                    
|                                        |                                                                |                      |     | 2001                                |   | 2002         
|                                        |                                                                |                      |     |                                     |   |              
|                                        |                                                                |                      |     | Income                              |   | Shares        |           | Per Share |         | Income      |      | Share         |  | Per Share
|                                        |                                                                |                      |     | (Numerator)                         |   | (Denominator) |           | Amount    |         | (Numerator) |      | (Denominator) |  | Amount   
|                                        |                                                                |                      |     |                                     |   |               |           |           |         |             |      |               |  |          
|Basic EPS:                              |                                                                |                      |     |                                     |   |               |           |           |         |             |      |               |  |           |     |     |   |  |           |           |         |   |      |     
|Income available to common stockholders |                                                                | $                    | 485 |                                     |   |               | 6,061,811 |           |         | $           | 0.08 |               |  | $         | 170 |     |   |  | 5,695,293 |           |         | $ | 0.03 |     
|                                        |                                                                |                      |     |                                     |   |               |           |           |         |             |      |               |  |           |     |     |   |  |           |           |         |   |      |     
|Effect of Dilutive Securities:          |                                                                |                      |     |                                     |   |               |           |           |         |             |      |               |  |           |     |     |   |  |           |           |         |   |      |     
|                                        |                                                                | Options and warrants |     |                                     |  |               |           |           | 114,173 |             |      |               |  |           |     |     |  |  |           |           | 233,535 |   |      |      |  | 
|                                        |                                                                |                      |     |                                     |   |               |           |           |         |             |      |               |  |           |     |     |   |  |           |           |         |   |      |     
|Dilutive EPS:                           |                                                                |                      |     |                                     |   |               |           |           |         |             |      |               |  |           |     |     |   |  |           |           |         |   |      |     
|                                        | Income available to common
stockholders and assumed conversion |                      | $   | 485                                 |   |               |           | 6,175,984 |         |             | $    | 0.08          |  |           | $   | 170 |   |  |           | 5,928,828 |         |   | $    | 0.03 | 
|                                        |                                                                |                      |     |                                     |   |               |           |           |         |             |      |               |  |           |     |     |   |  |           |           |         |   |      |     

|                                               |                                                                       |                      |       |                                   |   |               |           |           |         |             |      |               |  |           |        |        |   |  |           |           |         |   |       |       |   | 
|---------------------------------------------- | --------------------------------------------------------------------- | -------------------- | ----- | --------------------------------- | - | ------------- | --------- | --------- | ------- | ----------- | ---- | ------------- |  | --------- | ------ | ------ | - |  | --------- | --------- | ------- | - | ----- | ----- | - | 
|                                               |                                                                       |                      |       | For the Six Months Ended June 30,
|                                               |                                                                       |                      |       |                                  
|                                               |                                                                       |                      |       | 2001                              |   | 2002         
|                                               |                                                                       |                      |       |                                   |   |              
|                                               |                                                                       |                      |       | Income                            |   | Shares        |           | Per Share |         | Income      |      | Share         |  | Per Share
|                                               |                                                                       |                      |       | (Numerator)                       |   | (Denominator) |           | Amount    |         | (Numerator) |      | (Denominator) |  | Amount   
|                                               |                                                                       |                      |       |                                   |   |               |           |           |         |             |      |               |  |          
|Basic EPS:                                     |                                                                       |                      |       |                                   |   |               |           |           |         |             |      |               |  |           |        |        |   |  |           |           |         |   |       |      
|Income (loss) available to common stockholders |                                                                       | $                    | 1,025 |                                   |   |               | 6,084,228 |           |         | $           | 0.17 |               |  | $         | (2,031 | )      |   |  | 5,701,818 |           |         | $ | (0.36 | )    
|                                               |                                                                       |                      |       |                                   |   |               |           |           |         |             |      |               |  |           |        |        |   |  |           |           |         |   |       |      
|Effect of Dilutive Securities:                 |                                                                       |                      |       |                                   |   |               |           |           |         |             |      |               |  |           |        |        |   |  |           |           |         |   |       |      
|                                               |                                                                       | Options and warrants |       |                                   |  |               |           |           | 159,068 |             |      |               |  |           |        |        |  |  |           |           | 216,847 |   |       |       |   | 
|                                               |                                                                       |                      |       |                                   |   |               |           |           |         |             |      |               |  |           |        |        |   |  |           |           |         |   |       |      
|Dilutive EPS:                                  |                                                                       |                      |       |                                   |   |               |           |           |         |             |      |               |  |           |        |        |   |  |           |           |         |   |       |      
|                                               | Income (loss) available to common
stockholders and assumed conversion |                      | $     | 1,025                             |   |               |           | 6,243,296 |         |             | $    | 0.16          |  |           | $      | (2,031 | ) |  |           | 5,918,665 |         |   | $     | (0.34 | )
|                                               |                                                                       |                      |       |                                   |   |               |           |           |         |             |      |               |  |           |        |        |   |  |           |           |         |   |       |      

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 (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, 2001 and
June 30, 2002, inventories consisted of the following:

|                      |  |              |       |          |  |   |        | 
|--------------------- |  | ------------ | ----- | -------- |  | - | ------ | 
|                      |  | December 31, |       | June 30,
|                      |  | 2001         |       | 2002    
|                      |  |              |       |         
|Production-in-process |  | $            | 3,991 |          |  | $ | 2,904  | 
|Finished goods        |  |              | 5,346 |          |  |   | 9,978  | 
|                      |  |              |       |          |  |   |        | 
|                      |  | $            | 9,337 |          |  | $ | 12,882 | 
|                      |  |              |       |          |  |   |        | 

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 their 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 quarter ended June 30, 2002 were not significant.

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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.

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 five foreign currency
forward contracts to sell Euros in exchange for pound sterling aggregating
GBP 2,412 at an average rate of 1.615. These contracts expire on various
dates between July 2002 and March 2003. At June 30, 2002, these foreign
currency forward contracts had a balance of GBP 2,135 and an estimated fair
value of $(140). The fair value of the foreign currency forward contract
is recorded in accrued liabilities in the accompanying condensed
consolidated balance sheet as of June 30, 2002. The unrealized loss on
these contracts is reflected in accumulated other comprehensive income.

RECENT ACCOUNTING PRONOUNCEMENTS

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 which are
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 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, is required 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, and therefore, results for the quarter
ended March 31, 2002 have been adjusted retroactively. The Company has adopted
the provisions of these statements for the acquisition of Logistix (see Note 7)
effective July 1, 2001 and for all other acquisitions effective January 1,
2002. Accordingly, beginning on January 1, 2002, the Company has foregone all
goodwill related amortization expense, which totaled $112 and $222, net of tax effect,
for the three and six months ended June 30, 2001, respectively.

Prior to implementing
SFAS No. 142, the Company reviewed all goodwill assets for
impairment under the methodology of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. The undiscounted cash
flows associated with all goodwill assets were in excess of the book
value of the related goodwill assets, including USI goodwill.
Therefore, no goodwill assets, including USI goodwill, were
considered impaired under SFAS No. 121.

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For the three and six months ended June 30, 2001, the reconciliation of
reported net income and diluted net income per share to adjusted net income and
adjusted diluted net income per share reflecting the elimination of goodwill
amortization is as follows:

|                                                                   |  |  |                    |      |                  |  |  |   |       |  | 
|------------------------------------------------------------------ |  |  | ------------------ | ---- | ---------------- |  |  | - | ----- |  | 
|                                                                   |  |  | Three Months Ended |      | Six Months Ended
|                                                                   |  |  |                    |      |                 
|                                                                   |  |  | June
30, 2001      |      | June
30, 2001   
|                                                                   |  |  |                    |      |                 
|Net income available to common stockholders, as reported           |  |  | $                  | 485  |                  |  |  | $ | 1,025 | 
|Add back: Elimination of goodwill amortization (net of tax effect) |  |  |                    | 112  |                  |  |  |   | 222   | 
|                                                                   |  |  |                    |      |                  |  |  |   |       | 
|Net
income available to common stockholders, as adjusted           |  |  | $                  | 597  |                  |  |  | $ | 1,247 | 
|                                                                   |  |  |                    |      |                  |  |  |   |       | 
|Diluted net income per share                                       |  |  |                    |      |                  |  |  |  
|Net income per share, as reported                                  |  |  | $                  | 0.08 |                  |  |  | $ | 0.16  | 
|Add
back: Elimination of goodwill amortization (net of tax effect) |  |  |                    | 0.02 |                  |  |  |   | 0.04  | 
|                                                                   |  |  |                    |      |                  |  |  |   |       | 
|Net income available to common stockholders, as adjusted           |  |  | $                  | 0.10 |                  |  |  | $ | 0.20  | 
|                                                                   |  |  |                    |      |                  |  |  |   |       | 

The change in the carrying amount of goodwill from
$24,690 as of December 31, 2001 to $21,277 as of June 30,
2002 reflects: the USI goodwill impairment charge of $(4,000), a foreign
currency translation adjustment of $681 and the adjustment to reflect
the net reduction to goodwill for the Logistix acquisition of $(94)
(see Note 7). The entire balance of the goodwill relates to the
promotions segment.

Identifiable intangibles of $730 as of
June 30, 2002, and $749 as of December 31, 2001, a portion
of which are subject to
amortization are included in other intangibles in the condensed
consolidated balance sheets.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 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 143 is effective for 2003. The impact of such adoption
is not anticipated to have a material effect on the Companys financial position
and results of operations.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets
be measured at the lower of the carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. SFAS
144 is effective for 2002 and generally is to be applied prospectively. The
Company adopted SFAS No. 144 beginning January 1, 2002. 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 Accounting Principles Board 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 beginning January 1, 2003. The
Company does not expect a material impact on the consolidated financial
statements as a result of the adoption of SFAS No. 145.

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 that
are 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 is in the
process of determining the impact SFAS No. 146 may have on its
financial position and results of operations when it becomes
effective.

RECLASSIFICATIONS

Certain reclassifications have been made to the 2001 condensed consolidated
financial statements to conform with the 2002 presentation.

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NOTE 3    SHORT-TERM DEBT

On April 24, 2001, the Company signed a credit facility (the Facility) with
Bank of America. The credit 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 and February 8, 2002 certain
covenants under the facility were amended. As of June 30, 2002, 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 June
30, 2002, there were no amounts outstanding under the Facility.

Letters of credit outstanding as of December 31, 2001 and June 30, 2002 totaled
$551 and $675, respectively.

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 $6,448 to
purchase an aggregate of 525,094 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 June 30, 2002, the Company spent $5,587 to purchase 453,215 shares at
an average price of $12.33 per share including commissions. Since initiating
the overall buyback program on July 20, 2000, the Company has spent $12,035 to
purchase a total of 978,309 shares at an average price of $12.30 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 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. 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: promotions 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 promotions
segment provides various services involving the design and execution
of strategy-based marketing programs and produces promotional products used as
free premiums or sold in conjunction with the purchase of other items.
Promotional 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 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, restructuring, 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 inventories, receivables, goodwill and other
intangibles. Corporate assets consist of cash, certain corporate receivables,
fixed assets, and certain trademarks.

12



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##### Table of Contents



Industry Segments

|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|--------------------------------------------------------- |  | -------------------------------------------------- | ------ | -------- |  | --------- | ----- | ----- |  | - | ------ | - |  | - | ------ | 
|                                                          |  | As of and For the Three Months Ended June 30, 2001
|                                                          |  |                                                   
|                                                          |  |                                                    |        |          |  | Consumer  |       |       |  |   |        |   |  |  
|                                                          |  | Promotions                                         |        | Products |  | Corporate |       | Total
|                                                          |  |                                                    |        |          |  |           |       |      
|Total revenues                                            |  | $                                                  | 24,442 |          |  | $         | 3,795 |       |  | $ |       |   |  | $ | 28,237 | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Income (loss) before provision (benefit)
for income taxes |  | $                                                  | 4,080  |          |  | $         | 658   |       |  | $ | (3,428 | ) |  | $ | 1,310  | 
|Provision (benefit) for income taxes                      |  |                                                    | 1,402  |          |  |           | 226   |       |  |   | (1,178 | ) |  |   | 450    | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Net income (loss)                                         |  | $                                                  | 2,678  |          |  | $         | 432   |       |  | $ | (2,250 | ) |  | $ | 860    | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Fixed asset additions                                     |  | $                                                  |       |          |  | $         |      |       |  | $ | 335    |   |  | $ | 335    | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Depreciation and amortization                             |  | $                                                  | 185    |          |  | $         |      |       |  | $ | 364    |   |  | $ | 549    | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Total assets                                              |  | $                                                  | 38,941 |          |  | $         | 4,577 |       |  | $ | 52,267 |   |  | $ | 95,785 | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 

|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |         | 
|--------------------------------------------------------- |  | -------------------------------------------------- | ------ | -------- |  | --------- | ----- | ----- |  | - | ------ | - |  | - | ------- | 
|                                                          |  | As of and For the Three Months Ended June 30, 2002
|                                                          |  |                                                   
|                                                          |  |                                                    |        |          |  | Consumer  |       |       |  |   |        |   |  |  
|                                                          |  | Promotions                                         |        | Products |  | Corporate |       | Total
|                                                          |  |                                                    |        |          |  |           |       |      
|Total revenues                                            |  | $                                                  | 39,971 |          |  | $         | 7,180 |       |  | $ |       |   |  | $ | 47,151  | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |         | 
|Income (loss) before provision (benefit)
for income taxes |  | $                                                  | 4,574  |          |  | $         | 431   |       |  | $ | (4,085 | ) |  | $ | 920     | 
|Provision (benefit) for income taxes                      |  |                                                    | 1,745  |          |  |           | 166   |       |  |   | (1,536 | ) |  |   | 375     | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |         | 
|Net income (loss)                                         |  | $                                                  | 2,829  |          |  | $         | 265   |       |  | $ | (2,549 | ) |  | $ | 545     | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |         | 
|Fixed asset additions                                     |  | $                                                  |       |          |  | $         |      |       |  | $ | 128    |   |  | $ | 128     | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |         | 
|Depreciation and amortization                             |  | $                                                  | 10     |          |  | $         | 16    |       |  | $ | 380    |   |  | $ | 406     | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |         | 
|Total assets                                              |  | $                                                  | 55,519 |          |  | $         | 5,713 |       |  | $ | 42,157 |   |  | $ | 103,389 | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |         | 

|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|--------------------------------------------------------- |  | ------------------------------------------------ | ------ | -------- |  | --------- | ----- | ----- |  | - | ------ | - |  | - | ------ | 
|                                                          |  | As of and For the Six Months Ended June 30, 2001
|                                                          |  |                                                 
|                                                          |  |                                                  |        |          |  | Consumer  |       |       |  |   |        |   |  |  
|                                                          |  | Promotions                                       |        | Products |  | Corporate |       | Total
|                                                          |  |                                                  |        |          |  |           |       |      
|Total revenues                                            |  | $                                                | 47,591 |          |  | $         | 8,673 |       |  | $ |       |   |  | $ | 56,264 | 
|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Income (loss) before provision (benefit)
for income taxes |  | $                                                | 8,203  |          |  | $         | 1,110 |       |  | $ | (6,478 | ) |  | $ | 2,835  | 
|Provision (benefit) for income taxes                      |  |                                                  | 3,051  |          |  |           | 407   |       |  |   | (2,398 | ) |  |   | 1,060  | 
|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Net income (loss)                                         |  | $                                                | 5,152  |          |  | $         | 703   |       |  | $ | (4,080 | ) |  | $ | 1,775  | 
|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Fixed asset additions                                     |  | $                                                |       |          |  | $         |      |       |  | $ | 583    |   |  | $ | 583    | 
|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Depreciation and amortization                             |  | $                                                | 367    |          |  | $         |      |       |  | $ | 735    |   |  | $ | 1,102  | 
|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Total assets                                              |  | $                                                | 38,941 |          |  | $         | 4,577 |       |  | $ | 52,267 |   |  | $ | 95,785 | 
|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 

|                                                                                                                   |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------ | ------ | -------- |  | --------- | ------ | ----- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                   |  | As of and For the Six Months Ended June 30, 2002
|                                                                                                                   |  |                                                 
|                                                                                                                   |  |                                                  |        |          |  | Consumer  |        |       |  |   |        |   |  |  
|                                                                                                                   |  | Promotions                                       |        | Products |  | Corporate |        | Total
|                                                                                                                   |  |                                                  |        |          |  |           |        |      
|Total revenues                                                                                                     |  | $                                                | 69,897 |          |  | $         | 13,369 |       |  | $ |       |   |  | $ | 83,266  |  
|                                                                                                                   |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |         |  
|Income (loss) before provision (benefit) for
income taxes and cumulative effect of change
in accounting principles |  | $                                                | 8,295  |          |  | $         | 1,147  |       |  | $ | (7,617 | ) |  | $ | 1,825   |  
|Provision (benefit) for income taxes                                                                               |  |                                                  | 2,712  |          |  |           | 352    |       |  |   | (2,454 | ) |  |   | 610     |  
|                                                                                                                   |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |         |  
|Income (loss) before cumulative effect of change
in accounting principles                                          |  |                                                  | 5,583  |          |  |           | 795    |       |  |   | (5,163 | ) |  |   | 1,215   |  
|Cumulative effect of change in
accounting principles, net of tax                                                   |  |                                                  | 2,496  |          |  |           |       |       |  |   |       |   |  |   | 2,496   |  
|                                                                                                                   |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |         |  
|Net income (loss)                                                                                                  |  | $                                                | 3,087  |          |  | $         | 795    |       |  | $ | (5,163 | ) |  | $ | (1,281  | )
|                                                                                                                   |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |         |  
|Fixed asset additions                                                                                              |  | $                                                |       |          |  | $         |       |       |  | $ | 457    |   |  | $ | 457     |  
|                                                                                                                   |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |         |  
|Depreciation and amortization                                                                                      |  | $                                                | 69     |          |  | $         | 32     |       |  | $ | 702    |   |  | $ | 803     |  
|                                                                                                                   |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |         |  
|Total assets                                                                                                       |  | $                                                | 55,519 |          |  | $         | 5,713  |       |  | $ | 42,157 |   |  | $ | 103,389 |  
|                                                                                                                   |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |         |  

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NOTE 6  NOTE RECEIVABLE

The Company regularly extends credit to several distribution companies in
connection with its business with Burger King. One of these distribution
companies, AmeriServe, accounted for more than 50 percent of the products
purchased from the Company by the Burger King system in 1999. AmeriServe
filed a voluntary petition under Chapter 11 of the United States Bankruptcy
Code on January 31, 2000. As of January 31, 2000, AmeriServe owed the
Company $28,774 in trade receivables.

Restaurant Services, Inc. (RSI), a not-for-profit purchasing cooperative
that has as its members Burger King franchisees and Burger King
Corporation, is the
exclusive purchasing agent for the Burger King system of franchisee-owned
and company-owned restaurants located in the United States. Subsequent to
January 31, 2000, the Company reached an agreement with RSI in which RSI
purchased all pre-petition trade receivables owed to the Company by
AmeriServe in exchange for a two-year non-interest-bearing note valued at
$15,970 and satisfaction of certain contractual obligations owed by the
Company to RSI. This agreement resulted in a net pre-tax charge of $1,014
for the quarter ended December 31, 1999. A note receivable of $10,515 was
recorded on the consolidated balance sheet as of December 31, 1999. $6,642
of the $28,774 pre-petition trade receivables related to sales made in
January 2000. Accordingly, the remaining $5,455 portion of the note
receivable was recorded in January 2000, and resulted in a net pre-tax
charge of $482 for the year ended December 31, 2000. This charge was
offset by $1,084 of imputed interest income, at 9% per annum, recorded on
the note receivable for 2000. In December 2001, the due date for the final
payment on the note was extended from December 1, 2001 to September 30,
2002 due to ongoing discussions between the Company and RSI. On May 15,
2002, the Company agreed to forgive the remaining balance of $1,685 as
consideration for a new interim Master Supply Agreement with RSI. The Company
recorded the forgiveness in the condensed consolidated statement of
operations for the quarter ended June 30, 2002. Simultaneously with the
execution of the new interim Master Supply Agreement, the Company and RSI also
executed a Release and Settlement Agreement pursuant to which the parties
resolved certain outstanding issues that have arisen between the two
organizations over the last three years. In connection with the Release
and Settlement Agreement, the Company is released from any liability incurred by RSI and associated with the
December 1999 recall of Pokémon balls included with Burger King kids
meals. The Company expects to negotiate a revised longer-term
contract with RSI before the end of the year.

As of July 2000, the Burger King system completed a transition to
alternative distributors. The largest distribution company accounted for
approximately 23% and 21% of the products purchased from the Company by the
Burger King system for the three months ended June 30, 2001 and 2002, respectively.

NOTE 7  ACQUISITION

On July 31, 2001, the Company acquired 100% of the common stock of Logistix
in exchange for 8,500 British pounds ($12,144 as of July 31, 2001) in cash
plus related transaction costs of $1,011. Potential additional cash
consideration may be paid based upon the results of operations of Logistix
during the three year period ended December 31, 2004. Any
additional consideration paid will be recorded as additional
purchase price. The acquisition was financed
through the Companys existing cash reserves.

The Logistix acquisition has been accounted 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
potentially could result in adjustments to goodwill of 10% or less. The
allocation of the purchase price may change based upon these valuations.
During the six months ended June 30, 2002, the preliminary allocation of
the purchase price was adjusted to revise the estimated value of the
deferred tax liabilities and certain accrued liabilities. These
adjustments resulted in a net reduction to Goodwill of $94. The Companys
preliminary allocation of purchase price for the acquisition, based upon
estimated fair values is as follows:

|                                          |  |   |        |  
|----------------------------------------- |  | - | ------ | -
|Net Current assets                        |  | $ | 6,280  |  
|Property, plant and equipment             |  |   | 430    |  
|Other non-current assets                  |  |   | 11     |  
|Net current liabilities                   |  |   | (6,246 | )
|Non-current liabilities                   |  |   | (285   | )
|                                          |  |   |        |  
|Estimated fair value, net assets acquired |  |   | 190    |  
|Goodwill                                  |  |   | 12,083 |  
|Other Intangible assets                   |  |   | 882    |  
|                                          |  |   |        |  
|Total Purchase Price                      |  | $ | 13,155 |  
|                                          |  |   |        |  

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##### Table of Contents



The above amounts are reported using the exchange rate in effect as of July
31, 2001. $522 of the $882 of acquired intangible assets was assigned to
the Logistix trademark, which is not subject to amortization. The
remaining $360 of intangible assets is being amortized over estimated
useful lives ranging from 0.4 to 3 years. Intangible assets associated with
the Logistix 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 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 companies 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 |        | Six Months Ended
|                                   |  | June 30, 2001      |        | June 30, 2001   
|                                   |  |                    |        |                 
|Pro forma revenues                 |  | $                  | 31,583 |                  |  | $ | 63,663 | 
|Pro forma net income               |  | $                  | 452    |                  |  | $ | 1,071  | 
|Pro forma basic income per share   |  | $                  | 0.01   |                  |  | $ | 0.05   | 
|Pro forma diluted income per share |  | $                  | 0.01   |                  |  | $ | 0.05   | 

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

NOTE 8  SUBSEQUENT EVENT

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 a cash
purchase price of $10.25 million less the amount of UPSHOTs net working
capital deficit. 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. HA-LO, which is the
parent company of Promotional Marketing, is currently in Chapter 11 bankruptcy
proceedings, and the Companys acquisition of the UPSHOT business was approved
by the United States bankruptcy court.

The foregoing description of the Purchase Agreement and related transactions
does not purport to be complete and is qualified in its entirety by reference
to the Purchase Agreement and the press release issued by the Company on July
18, 2002 which were attached as exhibits to a Current Report on Form 8-K filed
with the SEC on July 24, 2002.

In connection with the UPSHOT acquisition, the Company is currently formulating
its integration plan. In connection with this integration plan, the Company is
evaluating the current cost structure at both the Company and at UPSHOT.
Furthermore, in order to combine and streamline the operations of the two
companies, the Company may incur certain one-time integration costs, such as
training UPSHOT personnel, upgrading the Companys computer system,
consolidating and restructuring certain functions, and severance and other
expenses relating to personnel performing duplicative functions.

NOTE 9    LEGAL PROCEEDINGS

The Perper Matter

On February 1, 2002, Alan Perper filed a complaint (No. BC 267 408) against the
Company, Donald A. Kurz (Chairman of the Board and Chief Executive Officer of
the Company) and Gaetano Mastropasqua (Executive Vice President, Client
Services, of the Company) in the Superior Court of the State of California,
County of Los Angeles. The plaintiff is a former employee of the Company who
was terminated in November 2001. The complaint alleges that the plaintiff was
wrongfully terminated and seeks $2,000,000 in compensatory damages plus
punitive damages, interest and attorneys fees for (i) breach of written
contract; (ii) breach of covenant of good faith and fair dealing; (iii)
fraudulent deceit; (iv) intentional infliction of emotional distress; and (v)
negligent infliction of emotional distress. Pursuant to indemnification
agreements between the Company and each of Messrs. Kurz and Mastropasqua, the
Company is obligated to defend and indemnify them in this matter. The Company
believes the allegations of the complaint are without merit and is currently
defending the action vigorously. Discovery is ongoing and hearings have been
held on various law and motion issues in the case.

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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 you that the following factors, among others, could cause the
Companys actual consolidated results of operations and financial position in
2002 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                                                                                                  
| 
| |  | 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                                                                                                                                                                                                                                                                                                        

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, 2001, under the
heading Managements Discussion and Analysis of Financial Condition and
Results of Operations  Cautionary Statements and Risk Factors.

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##### Table of Contents



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, Richmond, London, Paris and Hong
Kong. The Company focuses on the design and execution of strategy-based
marketing programs, with particular 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, The Coca-Cola Company, CVS/pharmacy, Hallmark Cards, Kelloggs, Morgan Stanley, Procter & Gamble and
J.E. Seagram & Sons, among others. The Company complements its core promotions
business by developing and marketing distinctive consumer products, based on
trademarks it owns or classic licensed properties, which are sold through
specialty and mass-market retailers. The Company primarily sells to customers
in the United States and Europe.

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.

On July 31, 2001, the Company acquired 100% of the common stock of Logistix
Limited, a United Kingdom corporation (Logistix). 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,
collaborative and environmental marketing. UPSHOT has a reputation for
creating highly successful integrated marketing programs for world
class brands such as The Coca-Cola Company, Hallmark Cards, The Minute Maid Company, Morgan Stanley, Proctor
&
Gamble and J.E. Seagram & Sons.

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   |      | Six Months    
|                                                                 |                                     |                                                                    |                   |      | Ended June 30, |      | Ended June 30,
|                                                                 |                                     |                                                                    |                   |      |                |      |               
|                                                                 |                                     |                                                                    |                   |      | 2001           |      | 2002           |      | 2001 |      | 2002 
|                                                                 |                                     |                                                                    |                   |      |                |      |                |      |      |      |      
|Revenues                                                         |                                     |                                                                    | 100.0             | %    |                |      | 100.0          | %    |      |      | 100.0 | %    |      |      | 100.0 | %   
|Cost of sales                                                    |                                     |                                                                    | 71.7              |      |                |      | 74.0           |      |      |      | 71.2  |      |      |      | 74.2  |     
|Forgiveness of note receivable                                   |                                     |                                                                    |                  |      |                |      | 3.5            |      |      |      |      |      |      |      | 2.0   |     
|                                                                 |                                     |                                                                    |                   |      |                |      |                |      |      |      |       |      |      |      |       |     
|                                                                 |                                     |                                                                    | Gross profit      |      |                | 28.3 |                |      |      | 22.5 |       |      |      | 28.8 |       |      |      | 23.8 |   
|                                                                 |                                     |                                                                    |                   |      |                |      |                |      |      |      |       |      |      |      |       |     
|Operating Expenses:                                              |                                     |                                                                    |                   |      |                |      |                |      |      |      |       |      |      |      |       |     
|                                                                 | Salaries, wages and benefits        |                                                                    |                   | 12.6 |                |      |                | 9.9  |      |      |       | 12.9 |      |      |       | 10.7 |     
|                                                                 | Selling, general and administrative |                                                                    |                   | 12.6 |                |      |                | 10.7 |      |      |       | 12.9 |      |      |       | 11.0 |     
|                                                                 |                                     |                                                                    |                   |      |                |      |                |      |      |      |       |      |      |      |       |     
|                                                                 |                                     | Total operating expenses                                           |                   |      | 25.2           |      |                |      | 20.6 |      |       |      | 25.8 |      |       |      | 21.7 |     
|                                                                 |                                     |                                                                    |                   |      |                |      |                |      |      |      |       |      |      |      |       |     
|                                                                 |                                     | Income from operations                                             |                   |      | 3.1            |      |                |      | 1.9  |      |       |      | 3.0  |      |       |      | 2.1  |     
|Other income, net                                                |                                     |                                                                    | 1.5               |      |                |      | 0.1            |      |      |      | 2.1   |      |      |      | 0.1   |     
|                                                                 |                                     |                                                                    |                   |      |                |      |                |      |      |      |       |      |      |      |       |     
|                                                                 |                                     | Income before provision for income taxes                           |                   |      | 4.6            |      |                |      | 2.0  |      |       |      | 5.1  |      |       |      | 2.2  |     
|Provision for income taxes                                       |                                     |                                                                    | 1.6               |      |                |      | 0.8            |      |      |      | 1.9   |      |      |      | 0.7   |     
|                                                                 |                                     |                                                                    |                   |      |                |      |                |      |      |      |       |      |      |      |       |     
|                                                                 |                                     | Income before cumulative effect of change
in accounting principles |                   |      | 3.0            |      |                |      | 1.2  |      |       |      | 3.2  |      |       |      | 1.5  |     
|                                                                 |                                     |                                                                    |                   |      |                |      |                |      |      |      |       |      |      |      |       |     
|Cumulative effect of change in accounting principles, net of tax |                                     |                                                                    |                  |      |                |      |               |      |      |      |      |      |      |      | (3.0  | )   
|                                                                 |                                     |                                                                    |                   |      |                |      |                |      |      |      |       |      |      |      |       |     
|                                                                 |                                     |                                                                    | Net income (loss) |      |                | 3.0  | %              |      |      | 1.2  | %     |      |      | 3.2  | %     |      |      | (1.5 | )%
|                                                                 |                                     |                                                                    |                   |      |                |      |                |      |      |      |       |      |      |      |       |     

EBITDA

While many in the financial community consider
earnings before other income,
taxes, depreciation and amortization (EBITDA) to be an important measure of comparative operating performance, it
should be considered in addition to, but not as a substitute for or

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superior to, operating income, net earnings,
cash flow and other measures of financial performance prepared in accordance
with accounting principles generally accepted in the United States. EBITDA
does not reflect cash available to fund cash requirements, and the items
excluded from EBITDA, such as depreciation and amortization, are significant
components in assessing the Companys financial performance. Other significant
uses of cash flows are required before cash will be available to the Company,
including debt service, taxes and cash expenditures for various long-term
assets. The Companys calculation of EBITDA may be different from the
calculation used by other companies and, therefore, comparability may be
limited. The Companys calculation of EBITDA excludes the impact
of forgiveness of note receivable. The following table sets forth EBITDA for the periods indicated:

|                                    |                                                                           |   |                                 |      |                               |   |       |     |      |   |       |        |   |   |        |       |  
|----------------------------------- | ------------------------------------------------------------------------- | - | ------------------------------- | ---- | ----------------------------- | - | ----- | --- | ---- | - | ----- | ------ | - | - | ------ | ----- | -
|                                    |                                                                           |   | For Three Months Ended June 30, |      | For Six Months Ended June 30,
|                                    |                                                                           |   |                                 |      |                              
|                                    |                                                                           |   | 2001                            |      | 2002                          |   | 2001  |     | 2002
|                                    |                                                                           |   |                                 |      |                               |   |       |     |     
|Net income (loss)                   |                                                                           | $ | 860                             |      |                               | $ | 545   |     |      | $ | 1,775 |        |   | $ | (1,281 | )    
|Add: Forgiveness of note receivable |                                                                           |   |                                |      |                               |   | 1,685 |     |      |   |      |        |   |   | 1,685  |      
|                                    | Depreciation and amortization                                             |   |                                 | 549  |                               |   |       | 406 |      |   |       | 1,102  |   |   |        | 803   |  
|                                    | Other income, net                                                         |   |                                 | (415 | )                             |   |       | (22 | )    |   |       | (1,194 | ) |   |        | (70   | )
|                                    | Provision for income taxes                                                |   |                                 | 450  |                               |   |       | 375 |      |   |       | 1,060  |   |   |        | 610   |  
|                                    | Cumulative effect of change in accounting principles,      
   net of tax |   |                                 |     |                               |   |       |    |      |   |       |       |   |   |        | 2,496 |  
|                                    |                                                                           |   |                                 |      |                               |   |       |     |      |   |       |        |   |   |        |      
|EBITDA                              |                                                                           | $ | 1,444                           |      |                               | $ | 2,989 |     |      | $ | 2,743 |        |   | $ | 4,243  |      
|                                    |                                                                           |   |                                 |      |                               |   |       |     |      |   |       |        |   |   |        |      

THREE MONTHS ENDED JUNE 30, 2002
COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS):

Revenues for the three months ended June 30, 2002 increased $18,914, or 67.0%,
to $47,151 from $28,237 in the comparable period in 2001. Promotions revenues
increased $15,529, or 63.5%, to $39,971 primarily as a result of increased
revenues associated with Burger King programs in 2002 compared to the same
period in 2001. This increase was also attributable to additional promotions
revenues generated by Logistix following its acquisition by the Company in July
2001. Consumer Product revenues increased $3,385, or 89.2%, to $7,180
primarily due to increased sales of Scooby-Dooproduct both domestically and
internationally. The revenue increase was also partially attributable to
revenues from Robot Wars® subsequent to the Logistix acquisition, and was
partially offset by decreased sales of Tub Tints® product.

Cost of sales increased $14,643 to $34,877 (74.0% of revenues) for the three
months ended June 30, 2002 from $20,234 (71.7% of revenues) in the comparable
period in 2001 due to the higher sales volume in 2002. The gross margin
percentage decreased to 22.5% for the three months ended June 30, 2002 from
28.3% in the comparable period for 2001. This decrease is primarily the result
of a charge for the forgiveness of the note receivable from RSI for $1,685
(3.5% of revenues) (see Note Receivable) as well as lower
Consumer Product margins as a result of an increased mix of lower
margin product.

Salaries, wages and benefits increased $1,101, or 31.0%, to $4,648, (9.9% of
revenues) for the three months ended June 30, 2002 from $3,547
(12.6% of revenues) in the
comparable period for 2001. This increase was primarily attributable to the
addition of employees from the acquisition of Logistix. Salaries,
wages and benefits decreased as a percentage of revenues from 12.6%
to 9.9%, as a result of revenues increasing at a greater rate.

Selling, general and administrative expenses increased $1,482, or 41.6%, to
$5,043 (10.7% of revenues) for the three months ended June 30,
2002 from $3,561 (12.6% of revenues) in the comparable period for 2001. The increase is primarily the result of
higher selling expenses associated with increased sales in 2002. This
increase was also attributable to additional operating expenses resulting from
the acquisition of Logistix, partially offset by a decrease in
amortization expense. Selling, general and administrative expenses decreased
as a percentage of revenues from 12.6% to 10.7% as a result of
revenues increasing at a greater rate.

Net other income decreased $393 to $22 for the three months ended June 30, 2002
from $415 in the comparable period for 2001. This decrease was attributable to
a decline in interest rates as well as to the reduced level of cash, cash
equivalents and marketable securities as a result of cash utilized for the acquisition of Logistix and the stock buyback
program.

The effective tax rate for the three months ended June 30, 2002 was 40.8%
compared to 34.4% for the same period in 2001. The increase was primarily due
to significantly lower tax free municipal interest income in 2002
as compared to 2001.

Net income decreased $315, or 36.6%, to $545 (1.2% of revenues) from $860 (3.0%
of revenues) in 2001 due to the forgiveness of the note receivable
from RSI, the increase in salaries, wages and benefits, selling, general and
administrative expenses, as well as decreased net other income. The
decrease was partially offset by the increase in gross profit earned on higher revenues in
2002.

For the three months ended June 30, 2002, EBITDA increased $1,545, or 107.0%,
to $2,989 from $1,444 in 2001 primarily due to the increase in gross profit
offset by the increase in salaries, wages and benefits and selling, general and
administrative expenses in 2002.

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SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS):

Revenues for the six months ended June 30, 2002 increased $27,002, or 48.0%, to
$83,266 from $56,264 in the comparable period in 2001. Promotions revenues
increased $22,306 to $69,897 primarily as a result of increased revenues
associated with Burger King programs in 2002 compared to the same period in
2001. This increase was also attributable to additional promotions revenues
generated by Logistix following its acquisition by the Company in July
2001. Consumer Product revenues increased $4,696, or 54.1%, to $13,369 primarily
due to increased sales of Scooby-Dooproduct both domestically and
internationally. The revenue increase was also partially attributable to
revenues from Robot Wars® subsequent to the Logistix acquisition, partially offset by decreased sales of Tub Tints®
product.

Cost of sales increased $21,710 to $61,781 (74.2% of revenues) for the six
months ended June 30, 2002 from $40,071 (71.2% of revenues) in the comparable
period in 2001 primarily due to the higher sales volume in 2002. The gross margin
percentage decreased to 23.8% for the six months ended June 30, 2002 from 28.8%
in the comparable period for 2001. This decrease is primarily the result of a
charge for the forgiveness of the note receivable from RSI for $1,685 (2.0% of
revenues) (see Note Receivable) and margin pressure in the promotions
business as a result of shorter program lead times which resulted in increased
tooling and freight costs. This decrease was also partially the result of lower Consumer Product margins as a result of an increased mix of lower margin product.

Salaries, wages and benefits increased $1,649, or 22.7%, to $8,925, (10.7% of
revenues) for the six months ended June 30, 2002 from $7,276
(12.9% of revenues) in the comparable
period in 2001. This increase was primarily attributable to the addition of
employees from the acquisition of Logistix. Salaries,
wages and benefits decreased as a percentage of revenues from 12.9%
to 10.7%, as a result of revenues increasing at a greater rate.

Selling, general and administrative expenses increased $1,844, or 25.3%, to
$9,120 (11.0% of revenues) for the six months ended June 30,
2002 from $7,276 (12.9% of revenues) in the comparable period in 2001. The increase is primarily the result of
higher selling expenses associated with increased sales in 2002. This increase was
also attributable to additional operating expenses resulting from the
acquisition of Logistix, partially offset by a decrease in
amortization expense. Selling, general and administrative expenses decreased
as a percentage of revenues from 12.9% to 11.0% as a result of
revenues increasing at a greater rate.

Net other income decreased $1,124, or 94.1%, to $70 for the
six months ended June 30, 2002 from $1,194 in the comparable period for 2001.
This decrease was attributable to a decline in interest rates as well as to the
reduced level of cash, cash equivalents and marketable securities as a result of cash
utilized for the acquisition of
Logistix and the stock buyback program.

The effective tax rate for the six months ended June 30, 2002 was 33.4%
compared to 37.4% for the same period in 2001. The decrease was primarily due
to an increased percentage of the Companys earnings being generated
internationally in territories which have more favorable tax rates,
partially offset by significantly lower tax free municipal interest income.

The cumulative effect of change in accounting principles is due to the adoption
of Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and
Other Intangible Assets. SFAS 142 requires that companies no longer amortize
goodwill and indefinite life intangible assets, such as trademarks. SFAS 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,
and therefore results for the quarter ended March 31, 2002 have been adjusted
retroactively.

Net income decreased $3,056, or 172.2%, to $(1,281) ((1.5)% of revenues) from
$1,775 (3.2% of revenues) in 2001. The decrease was primarily due to the
cumulative effect of change in accounting principles of $2,496, net
of tax, a charge for the forgiveness
of the note receivable from RSI, increased salaries, wages and benefits
and selling, general and administrative expenses and decreased net
other income, partially offset by the
increased gross profit earned on higher revenues and a reduced
effective tax rate in 2002.

For the six months ended June 30, 2002, EBITDA increased $1,500, or 54.7 %, to
$4,243 from $2,743 in 2001. The increase is primarily due to the
increase in gross profit offset by the increase in salaries, wages
and benefits and selling, general and administrative expenses in 2002.

FINANCIAL CONDITION AND LIQUIDITY

The Companys financial position remained strong in the second quarter of 2002.
At June 30, 2002, the Company had no debt and its cash, cash equivalents
and marketable securities were $28,606, compared to $29,135 as of December 31,
2001.

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As of June 30, 2002, the Companys net accounts receivable increased $4,551 to
$27,246 from $22,695 at December 31, 2001. This increase was attributable to
increased Promotions and Consumer Product revenues in June 2002. As of June
30, 2002, inventories increased $3,545 to $12,882 from $9,337 in December 31,
2001. This increase in inventories is primarily the result of increased
promotional programs expected to be delivered in the third quarter
relative to the first quarter. Promotions inventories represent 92%
and 80% of total inventories as of June 30, 2002 and
December 31, 2001, respectively.

As of June 30, 2002, accounts payable increased $2,909 to $25,023 from $22,114
at December 31, 2001. This increase is primarily associated with the increase
in inventory.

As of June 30, 2002, accrued liabilities increased $826 to $12,217 from $11,391
at December 31, 2001. This increase is primarily attributable to
administrative fees collected from distribution companies during the second
quarter of 2002 on behalf of promotional customers.

As of June 30, 2002, working capital was $38,805 compared to $36,620 at
December 31, 2001. Cash flows from operations for the six months
ended June 30, 2002 were $758 compared to $6,360 in the prior
year. This decrease is the result of increased working capital needs
resulting from higher revenues and the timing of promotional
programs. With the exception of a sale of marketable securities, the
Company did not have any significant investing activities in the
quarter. On July 17, 2002, the Company acquired the principal assets
of UPSHOT, in exchange for $10.25 million in cash plus additional
consideration contingent upon the results of certain performance
targets attained in the twelve month ending July 31, 2003. The acquisition was financed through the Companys
existing cash reserves. As of the date hereof, the
Company believes that its cash from operations, cash, cash
equivalents and marketable securities at June 30, 2002
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.

CREDIT FACILITIES

On April 24, 2001, the Company signed a credit facility (the Facility) with
Bank of America. The credit 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 and February 8, 2002 certain
covenants under the facility were amended. As of June 30, 2002, 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 June
30, 2002, there were no amounts outstanding under the Facility.

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 $6,448 to
purchase an aggregate of 525,094 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 June 30, 2002, the Company spent $5,587 to purchase 453,215 shares at
an average price of $12.33 per share including commissions. Since initiating
the overall buyback program on July 20, 2000, the Company has spent $12,035 to
purchase a total of 978,309 shares at an average price of $12.30 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 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. This
repurchase program is being funded through working capital.

NOTE RECEIVABLE

The Company regularly extends credit to several distribution companies in
connection with its business with Burger King. One of these distribution
companies, AmeriServe, accounted for more than 50 percent of the products
purchased from the Company by the Burger King system in 1999. AmeriServe
filed a voluntary petition under Chapter 11 of the United States Bankruptcy
Code on January 31, 2000. As of January 31, 2000, AmeriServe owed the
Company $28,774 in trade receivables.

Restaurant Services, Inc. (RSI), a not-for-profit purchasing cooperative
that has as its members Burger King franchisees and Burger King
Corporation, is the
exclusive purchasing agent for the Burger King system of franchisee-owned
and company-owned restaurants located in the United States. Subsequent to
January 31, 2000, the Company reached an agreement with RSI in which RSI
purchased all pre-petition trade receivables owed to the Company by
AmeriServe in exchange for a two-year non-interest-bearing note valued at

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$15,970 and satisfaction of certain contractual obligations
owed by the Company to RSI. This agreement resulted in a net pre-tax
charge of $1,014 for the quarter ended December 31, 1999. A note
receivable of $10,515 was recorded on the consolidated balance sheet as of
December 31, 1999. $6,642 of the $28,774 pre-petition trade receivables
related to sales made in January 2000. Accordingly, the remaining $5,455
portion of the note receivable was recorded in January 2000, and resulted
in a net pre-tax charge of $482 for the year ended December 31, 2000. This
charge was offset by $1,084 of imputed interest income, at 9% per annum,
recorded on the note receivable for 2000. In December 2001, the due date
for the final payment on the note was extended from December 1, 2001 to
September 30, 2002 due to ongoing discussions between the Company and RSI.
On May 15, 2002, the Company agreed to forgive the remaining balance of
$1,685 as consideration for a new interim Master Supply Agreement with RSI. The
Company recorded the forgiveness in the condensed consolidated statement of
operations for the quarter ended June 30, 2002. Simultaneously with the
execution of the new interim Master Supply Agreement, the Company and RSI also
executed a Release and Settlement Agreement pursuant to which the parties
resolved certain outstanding issues that have arisen between the two
organizations over the last three years. In connection with the Release
and Settlement Agreement, the Company is released from any liability incurred by RSI and associated with the
December 1999 recall of Pokémon balls included with Burger King kids
meals. The Company expects to negotiate a revised longer-term
contract with RSI before the end of the year.

As of July 2000, the Burger King system completed a transition to
alternative distributors. The largest distribution company accounted for
approximately 23% and 21% of the products purchased from the Company by the
Burger King system for the three months ended June 30, 2001 and 2002, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards (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 which are 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 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, is required 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,
and therefore, results for the quarter ended March 31, 2002 have been adjusted
retroactively. 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 amortization expense, which totaled
$112 and $222, net of tax effect, for the three and six months ended June
30, 2001, respectively.

Prior to implementing SFAS No. 142, the Company reviewed all goodwill assets
for impairment under the methodology of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
The undiscounted cash flows associated with all goodwill assets were in excess
of the book value of the related goodwill assets, including USI goodwill.
Therefore, no goodwill assets, including USI goodwill, were considered impaired
under SFAS No. 121.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 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 143 is effective for 2003. The impact of such adoption
is not anticipated to have a material effect on Companys financial position
and results of operations.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets
be measured at the lower of the carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
SFAS 144 is effective for 2002 and generally is to be applied prospectively.
The Company adopted SFAS No. 144 beginning January 1, 2002. 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 Accounting
Principles Board 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 Company does not expect a
material impact on the consolidated financial statements as a result of the
adoption of SFAS No. 145.

In July 2002, the Financial Accounting Standards Board 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 that are 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 is in the process of determining the impact SFAS No. 146 may have on
its financial position and results of operations when it becomes effective.

SUBSEQUENT EVENT

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 a cash
purchase price of $10.25 million less the amount of UPSHOTs net working
capital deficit. 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. HA-LO, which is the
parent company of Promotional Marketing, is currently in Chapter 11 bankruptcy
proceedings, and the Companys acquisition of the UPSHOT business was approved
by the United States bankruptcy court.

The foregoing description of the Purchase Agreement and related transactions
does not purport to be complete and is qualified in its entirety by reference
to the Purchase Agreement and the press release issued by the Company on July
18, 2002 which were attached as exhibits to a Current Report on Form 8-K filed
with the SEC on July 24, 2002.

In connection with the UPSHOT acquisition, the Company is currently formulating
its integration plan. In connection with this integration plan, the Company is
evaluating the current cost structure at both the Company and at UPSHOT.
Furthermore, in order to combine and streamline the operations of the two
companies, the Company may incur certain one-time integration costs, such as
training UPSHOT personnel, upgrading the Companys computer system,
consolidating and restructuring certain functions, and severance and other
expenses relating to personnel performing duplicative functions.

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##### Table of Contents






PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

The Perper Matter

On February 1, 2002, Alan Perper filed a complaint (No. BC 267 408) against the
Company, Donald A. Kurz (Chairman of the Board and Chief Executive Officer of
the Company) and Gaetano Mastropasqua (Executive Vice President, Client
Services, of the Company) in the Superior Court of the State of California,
County of Los Angeles. The plaintiff is a former employee of the Company who
was terminated in November 2001. The complaint alleges that the plaintiff was
wrongfully terminated and seeks
$2,000,000 in compensatory damages plus
punitive damages, interest and attorneys fees for (i) breach of written
contract; (ii) breach of covenant of good faith and fair dealing; (iii)
fraudulent deceit; (iv) intentional infliction of emotional distress; and (v)
negligent infliction of emotional distress. Pursuant to indemnification
agreements between the Company and each of Messrs. Kurz and Mastropasqua, the
Company is obligated to defend and indemnify them in this matter. The Company
believes the allegations of the complaint are without merit and is currently defending the action
vigorously. Discovery is ongoing and hearings have been held on various law
and motion issues in the case.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders of the Company was held on May 23, 2002.
Proxies for the Annual Meeting were solicited pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, and there was no solicitation in
opposition to that of management. All of managements nominees for directors
as listed in the proxy statement were elected. At the Annual Meeting, the
following matters were approved by the Stockholders:

| |    |  |  |                                                                                |  |           |           |          |  |                  |         |                 |  |  |           | 
| | -- |  |  | ------------------------------------------------------------------------------ |  | --------- | --------- | -------- |  | ---------------- | ------- | --------------- |  |  | --------- | 
| |    |  |  |                                                                                |  |           |           |          |  | Votes Against or |         | Abstentions and
| |    |  |  |                                                                                |  | Votes For |           | Withheld |  | Broker Non-Votes
| |    |  |  |                                                                                |  |           |           |          |  |                 
| | 1. |  |  | Election of
Directors by holders
of Common Stock                               |  |           |           |          |  |                  |         |                 |  |  |           | 
| |    |  |  | Stephen P. Robeck                                                              |  |           | 5,633,414 |          |  |                  | 20,837  |                 |  |  |          | 
| |    |  |  | Donald A. Kurz                                                                 |  |           | 5,633,394 |          |  |                  | 20,857  |                 |  |  |          | 
| |    |  |  | Mitchell H. Kurz                                                               |  |           | 5,633,394 |          |  |                  | 20,857  |                 |  |  |          | 
| |    |  |  | Bruce Raben                                                                    |  |           | 5,633,319 |          |  |                  | 20,932  |                 |  |  |          | 
| |    |  |  | Alfred E. Osborne Jr                                                           |  |           | 5,633,719 |          |  |                  | 20,532  |                 |  |  |          | 
| |    |  |  | Jonathan D. Kaufelt                                                            |  |           | 5,631,119 |          |  |                  | 23,132  |                 |  |  |          | 
| |    |  |  | Sanford R. Climan                                                              |  |           | 5,633,716 |          |  |                  | 20,535  |                 |  |  |          | 
| | 2. |  |  | Election of
Directors by holders
of Series A
Preferred Stock                   |  |           |           |          |  |                  |         |                 |  |  |           | 
| |    |  |  | Jason Ackerman                                                                 |  |           | 25,000    |          |  |                  |        |                 |  |  |          | 
| |    |  |  | Jeffrey S. Deutschman                                                          |  |           | 25,000    |          |  |                  |        |                 |  |  |          | 
| | 3. |  |  | Approval of the amendment to the Equity
Marketing, Inc. 2000 Stock Option Plan |  |           | 4,640,232 |          |  |                  | 374,955 |                 |  |  | 2,333,979 | 
| | 4. |  |  | Approval of the amendment to Equity
Marketings Certificate of Incorporation   |  |           | 7,110,290 |          |  |                  | 223,526 |                 |  |  | 15,350    | 




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits:                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------
|   
|    |  | None                                                                                                  
|   
|(b) |  | Reports on Form 8-K:                                                                                  
|   
|    |  | Report on Form 8-K filed with the Securities and Exchange Commission on
April 25, 2002 (Item 7).      
|   
|    |  | Report on Form 8-K filed with the Securities and Exchange Commission on
May 28, 2002 (Item 7).        
|   
|    |  | Report on Form 8-K filed with the Securities and Exchange Commission on
June 19, 2002 (Items 4 and 7).

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles and State of California on the 14th day of August, 2002

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

23