##### Table of Contents



United States
Securities and Exchange CommissionWashington, 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, 2001

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          |  | (I.R.S. Employer   
|incorporation or organization)           |  | 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, 6,045,895 shares as of August 9, 2001.





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TABLE OF CONTENTS



|                              |                                                                                                |                                                      |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                  
|                              |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF 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 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 10.0                 



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##### Table of Contents



EQUITY MARKETING, INC.

Index To Quarterly Report on Form 10-Q
Filed with the Securities and Exchange Commission
June 30, 2001

|         |  |                       |  |                                                                                       |  |     
|-------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  |                       |  |                                                                                       |  | Page
|         |  |                       |  |                                                                                       |  |     
|Part I.  |  | Financial Information |  |                                                                                      
|        
|        
|        
|        
|         |  | Item 1.               |  | Financial Statements                                                                  |  | 3   
|        
|        
|        
|        
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  | 13  
|        
|Part II. |  | Other Information     |  |                                                                                      
|        
|        
|        
|        
|         |  | Item 1.               |  | Legal Proceedings                                                                     |  | 20  
|        
|        
|        
|        
|         |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                      |  | 20  











2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

|                       |                                                                                                                     |                      |        |              |         |          |        |             |        | 
|---------------------- | ------------------------------------------------------------------------------------------------------------------- | -------------------- | ------ | ------------ | ------- | -------- | ------ | ----------- | ------ | 
|                       |                                                                                                                     |                      |        | December 31, |         | June 30,
|                       |                                                                                                                     |                      |        | 2000         |         | 2001    
|                       |                                                                                                                     |                      |        |              |         |         
|                       |                                                                                                                     |                      |        |              |         |          |        | (Unaudited)
|CURRENT ASSETS:        |                                                                                                                     |                      |        |              |         |          |        |            
|                      
|                      
|                      
|                      
|                       | Cash and cash equivalents                                                                                           |                      | $      | 32,405       |         |          | $      | 40,304      |       
|                      
|                      
|                      
|                      
|                       | Marketable securities                                                                                               |                      |        | 5,100        |         |          |        |            |       
|                      
|                      
|                      
|                      
|                       | Accounts receivable (net of allowances of $3,090 and
$2,029 as ofDecember 31, 2000 and June 30, 2001, respectively) |                      |        | 30,137       |         |          |        | 18,239      |       
|                      
|                      
|                      
|                      
|                       | Note receivable                                                                                                     |                      |        | 8,322        |         |          |        | 4,254       |       
|                      
|                      
|                      
|                      
|                       | Inventory                                                                                                           |                      |        | 11,744       |         |          |        | 8,407       |       
|                      
|                      
|                      
|                      
|                       | Prepaid expenses and other current assets                                                                           |                      |        | 4,828        |         |          |        | 5,928       |       
|                       |                                                                                                                     |                      |        |              |         |          |        |            
|                       |                                                                                                                     | Total current assets |        |              | 92,536  |          |        |             | 77,132 | 
|                      
|                      
|                      
|                      
|FIXED ASSETS, net      |                                                                                                                     |                      | 4,263  |              |         |          | 4,111  |            
|                      
|                      
|                      
|                      
|INTANGIBLE ASSETS, net |                                                                                                                     |                      | 12,459 |              |         |          | 12,645 |            
|                      
|                      
|                      
|                      
|OTHER ASSETS           |                                                                                                                     |                      | 1,284  |              |         |          | 1,897  |            
|                       |                                                                                                                     |                      |        |              |         |          |        |            
|                       |                                                                                                                     | Total assets         |        | $            | 110,542 |          |        | $           | 95,785 | 
|                       |                                                                                                                     |                      |        |              |         |          |        |            

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

3



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##### Table of Contents



EQUITY MARKETING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        |              |         |          |        |             |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- | -------- | ------ | ----------- | ------ | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        | December 31, |         | June 30,
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        | 2000         |         | 2001    
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        |              |         |         
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        |              |         |          |        | (Unaudited)
|CURRENT LIABILITIES:                                                                                                                                                                                                              |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                  | Accounts payable                                                                                                                                                          |                                            | $      | 18,421       |         |          | $      | 15,226      |       
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                  | Accrued liabilities                                                                                                                                                       |                                            |        | 21,975       |         |          |        | 10,870      |       
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                  |                                                                                                                                                                           | Total current liabilities                  |        |              | 40,396  |          |        |             | 26,096 | 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|LONG-TERM LIABILITIES                                                                                                                                                                                                             |                                                                                                                                                                           |                                            | 1,856  |              |         |          | 1,816  |            
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                  |                                                                                                                                                                           | Total liabilities                          |        |              | 42,252  |          |        |             | 27,912 | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                     |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                 
|Mandatory redeemable preferred stock, Series A senior cumulative participating
convertible, $.001 par value, 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, par value $.001 per share, 20,000,000
shares authorized, 6,141,396 and 6,048,995 shares outstanding
as of December 31, 2000 and June 30, 2001, respectively |                                            |        |             |         |          |        |            |       
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                  | Additional paid-in capital                                                                                                                                                |                                            |        | 18,209       |         |          |        | 19,550      |       
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                  | Retained earnings                                                                                                                                                         |                                            |        | 32,863       |         |          |        | 33,888      |       
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            | 51,072 |              |         |          | 53,438 |            
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|Less                                                                                                                                                                                                                             |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                  | Treasury stock, 2,207,083 and 2,452,193 shares, at cost, as of
December 31, 2000 and
June 30, 2001, respectively                                                          |                                            |        | (5,777       | )       |          |        | (8,560      | )     
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                  | Stock subscription receivable                                                                                                                                             |                                            |        | (11          | )       |          |        | (11         | )     
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                  | Unearned compensation                                                                                                                                                     |                                            |        | (43          | )       |          |        | (43         | )     
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                  |                                                                                                                                                                           | Total stockholders equity                 |        |              | 45,241  |          |        |             | 44,824 | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        |              |         |          |        |            
|                                                                                                                                                                                                                                  |                                                                                                                                                                           | Total liabilities and stockholders equity |        | $            | 110,542 |          |        | $           | 95,785 | 
|                                                                                                                                                                                                                                  |                                                                                                                                                                           |                                            |        |              |         |          |        |            

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

4



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##### Table of Contents






EQUITY MARKETING, INC.

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

|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |       |        | 
|------------------------------------------- | -------------------------------------- | ---------------------------------------- | --------- | ------------------ | ------ | ---------------- | --------- | ----- | ----- | ---- | --------- | ----- | ------ | - | --------- | ----- | ------ | 
|                                            |                                        |                                          |           | Three Months Ended |        | Six Months Ended
|                                            |                                        |                                          |           | June 30,           |        | June 30,        
|                                            |                                        |                                          |           |                    |        |                 
|                                            |                                        |                                          |           | 2000               |        | 2001             |           | 2000  |       | 2001
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |     
|REVENUES                                    |                                        | $                                        | 55,314    |                    |        | $                | 28,237    |       |       | $    | 98,791    |       |        | $ | 56,264    |      
|                                           
|                                           
|                                           
|                                           
|COST OF SALES                               |                                        |                                          | 41,487    |                    |        |                  | 20,234    |       |       |      | 74,690    |       |        |   | 40,071    |      
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|                                            |                                        | Gross profit                             |           |                    | 13,827 |                  |           |       | 8,003 |      |           |       | 24,101 |   |           |       | 16,193 | 
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|OPERATING EXPENSES:                         |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|                                           
|                                           
|                                           
|                                           
|                                            | Salaries, wages and benefits           |                                          |           | 3,746              |        |                  |           | 3,547 |       |      |           | 7,147 |        |   |           | 7,276 |       
|                                           
|                                           
|                                           
|                                           
|                                            | Selling, general and administrative    |                                          |           | 5,242              |        |                  |           | 3,561 |       |      |           | 9,579 |        |   |           | 7,276 |       
|                                           
|                                           
|                                           
|                                           
|                                            | AmeriServe bankruptcy bad debt expense |                                          |           |                   |        |                  |           |      |       |      |           | 482   |        |   |           |      |       
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|                                            |                                        | Total operating expenses                 |           |                    | 8,988  |                  |           |       | 7,108 |      |           |       | 17,208 |   |           |       | 14,552 | 
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|                                            |                                        | Income from operations                   |           |                    | 4,839  |                  |           |       | 895   |      |           |       | 6,893  |   |           |       | 1,641  | 
|                                           
|                                           
|                                           
|                                           
|INTEREST INCOME, net                        |                                        |                                          | 270       |                    |        |                  | 415       |       |       |      | 355       |       |        |   | 1,194     |      
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|                                            |                                        | Income before provision for income taxes |           |                    | 5,109  |                  |           |       | 1,310 |      |           |       | 7,248  |   |           |       | 2,835  | 
|                                           
|                                           
|                                           
|                                           
|PROVISION FOR INCOME TAXES                  |                                        |                                          | 2,043     |                    |        |                  | 450       |       |       |      | 2,888     |       |        |   | 1,060     |      
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|                                            |                                        | Net income                               |           | $                  | 3,066  |                  |           | $     | 860   |      |           | $     | 4,360  |   |           | $     | 1,775  | 
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|NET INCOME                                  |                                        | $                                        | 3,066     |                    |        | $                | 860       |       |       | $    | 4,360     |       |        | $ | 1,775     |      
|                                           
|                                           
|                                           
|                                           
|PREFERRED STOCK DIVIDENDS                   |                                        |                                          | 201       |                    |        |                  | 375       |       |       |      | 207       |       |        |   | 750       |      
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|NET INCOME AVAILABLE TO COMMON STOCKHOLDERS |                                        | $                                        | 2,865     |                    |        | $                | 485       |       |       | $    | 4,153     |       |        | $ | 1,025     |      
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|BASIC NET INCOME PER SHARE                  |                                        | $                                        | 0.46      |                    |        | $                | 0.08      |       |       | $    | 0.66      |       |        | $ | 0.17      |      
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|BASIC WEIGHTED AVERAGE SHARES OUTSTANDING   |                                        |                                          | 6,291,180 |                    |        |                  | 6,061,811 |       |       |      | 6,263,949 |       |        |   | 6,084,228 |      
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|DILUTED NET INCOME PER SHARE                |                                        | $                                        | 0.41      |                    |        | $                | 0.08      |       |       | $    | 0.63      |       |        | $ | 0.16      |      
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      
|DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING |                                        |                                          | 7,412,498 |                    |        |                  | 6,175,984 |       |       |      | 6,956,283 |       |        |   | 6,243,296 |      
|                                            |                                        |                                          |           |                    |        |                  |           |       |       |      |           |       |        |   |           |      

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

5



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##### Table of Contents






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

|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |        |       |        |         |  
|------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------ | ---------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------- | ----------------------------------------- | ------ | ---------------- | ------- | ------ | ----- | ------ | ------- | -
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        | Six Months Ended
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        | June 30,        
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        | 2000             |         | 2001  
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|CASH FLOWS FROM OPERATING ACTIVITIES:             |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net income                                                                                  |              | $                                                                                                                                  | 4,360                                        |                                                     |                                           | $      | 1,775            |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    | Depreciation and amortization                |                                                     |                                           | 1,316  |                  |         |        | 1,102 |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    | Provision for doubtful accounts              |                                                     |                                           | 674    |                  |         |        | 35    |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    | Loss on asset disposal                       |                                                     |                                           |       |                  |         |        | 3     |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    | Tax benefit from exercise of stock options   |                                                     |                                           | 137    |                  |         |        | 230   |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    | Changes in operating assets and liabilities: |                                                     |                                           |        |                  |         |        |       |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              | Increase (decrease) in cash and cash equivalents:   |                                           |        |                  |         |        |       |        |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     | Accounts receivable                       |        |                  | 6,833   |        |       |        | 11,863  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     | Note receivable                           |        |                  | (1,696  | )      |       |        | 4,068   |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     | Inventory                                 |        |                  | 2,060   |        |       |        | 3,337   |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     | Prepaid expenses and other current assets |        |                  | (763    | )      |       |        | (1,100  | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     | Other assets                              |        |                  | 84      |        |       |        | (613    | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     | Accounts payable                          |        |                  | (10,422 | )      |       |        | (3,195  | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     | Accrued liabilities                       |        |                  | (7,179  | )      |       |        | (11,105 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     | Long-term liabilities                     |        |                  | 80      |        |       |        | (40     | )
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|                                                  |                                                                                             |              |                                                                                                                                    |                                              | Net cash provided by (used in) operating activities |                                           |        | (4,516           | )       |        |       | 6,360  |        
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|CASH FLOWS FROM INVESTING ACTIVITIES:             |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              | Purchases of fixed assets                                                                                                          |                                              |                                                     | (344                                      | )      |                  |         | (583   | )    
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              | Proceeds from sale of fixed assets                                                                                                 |                                              |                                                     | 21                                        |        |                  |         |       |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              | Proceeds from sale of marketable securities                                                                                        |                                              |                                                     |                                          |        |                  |         | 5,100  |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              | Payment for purchase of Contract Marketing, Inc. and U.S. Import and Promotions Co.                                                |                                              |                                                     | (349                                      | )      |                  |         | (556   | )    
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|                                                  |                                                                                             |              |                                                                                                                                    |                                              | Net cash provided by (used in) investing activities |                                           |        | (672             | )       |        |       | 3,961  |        
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|CASH FLOWS FROM FINANCING ACTIVITIES:             |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              | Repayments on line of credit                                                                                                       |                                              |                                                     | (12,500                                   | )      |                  |         |       |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              | Proceeds from issuance of preferred stock and warrants including $1,004 of
accrued offering costs not yet paid as of June 30, 2000 |                                              |                                                     | 24,454                                    |        |                  |         |       |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              | Purchase of treasury stock                                                                                                         |                                              |                                                     |                                          |        |                  |         | (2,783 | )    
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              | Preferred stock dividends paid                                                                                                     |                                              |                                                     |                                          |        |                  |         | (750   | )    
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             |              | Proceeds from exercise of stock options                                                                                            |                                              |                                                     | 564                                       |        |                  |         | 1,111  |      
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|                                                  |                                                                                             |              |                                                                                                                                    |                                              | Net cash provided by (used in) financing activities |                                           |        | 12,518           |         |        |       | (2,422 | )      
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|                                                  |                                                                                             |              |                                                                                                                                    |                                              | Net increase in cash and cash equivalents           |                                           |        | 7,330            |         |        |       | 7,899  |        
|                                                 
|                                                 
|                                                 
|                                                 
|CASH AND CASH EQUIVALENTS, beginning of period    |                                                                                             |              | 7,131                                                                                                                              |                                              |                                                     |                                           | 32,405 |                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|CASH AND CASH EQUIVALENTS, end of period          |                                                                                             | $            | 14,461                                                                                                                             |                                              |                                                     | $                                         | 40,304 |                 
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | CASH PAID FOR:                                                                              |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |        |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                             | Interest     |                                                                                                                                    | $                                            | 415                                                 |                                           |        | $                | 80      |       
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       
|                                                  |                                                                                             | Income taxes |                                                                                                                                    | $                                            | 4,949                                               |                                           |        | $                | 2,397   |       
|                                                  |                                                                                             |              |                                                                                                                                    |                                              |                                                     |                                           |        |                  |         |       

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

6



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##### Table of Contents






EQUITY MARKETING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(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 marketing services company, providing a wide range of
custom promotional programs that build sales and brand awareness for retailers,
restaurant chains and consumer goods companies such as Burger King Corporation,
The Coca-Cola Company, CVS/pharmacy and others. The Company is also a
developer and marketer of distinctive, branded consumer products that
complement its core promotions business and are based on trademarks it owns or
classic licensed properties. The Company primarily sells to customers in the
United States. The Companys functional currency is United States dollars.

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

In July 1998, the Company acquired substantially all of the assets of Contract
Marketing, Inc. (CMI), a Massachusetts corporation, and U.S. Import and
Promotions Co. (USI), a Florida corporation, (CMI and USI are collectively
referred to herein as USI). USI focuses primarily on promotions for oil and
gas and other retailers. In May 2001, the Company paid $556 to the former
stockholders of USI as additional cash consideration related to the Companys
purchase of USI. This amount was allocated to goodwill.

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, 2000.

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 assumed conversion of preferred
stock using the if-converted method. Options and warrants to purchase
1,481,666, and 1,846,166 shares of common stock, $.001 par value per share (the
Common Stock), as of June 30, 2000 and 2001, respectively, were excluded from
the computation of diluted EPS as they would have been anti-dilutive. For the
quarter ended June 30, 2001 preferred stock convertible into 1,694,915 shares
of common stock, respectively, was excluded from the computation of diluted
EPS as they 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 stockholders
and other disclosures required by SFAS No. 128, Earnings per Share:

7



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##### Table of Contents



|                                        |                                                                |                             |       |                                     |   |               |           |           |         |             |     |               |  |           |     |     |   |  |           |           |         |   |     |     |  | 
|--------------------------------------- | -------------------------------------------------------------- | --------------------------- | ----- | ----------------------------------- | - | ------------- | --------- | --------- | ------- | ----------- | --- | ------------- |  | --------- | --- | --- | - |  | --------- | --------- | ------- | - | --- | --- |  | 
|                                        |                                                                |                             |       | For the Three Months Ended June 30,
|                                        |                                                                |                             |       |                                    
|                                        |                                                                |                             |       | 2000                                |   | 2001         
|                                        |                                                                |                             |       |                                     |   |              
|                                        |                                                                |                             |       | Income                              |   | Shares        |           | Per Share |         | Income      |     | Share         |  | Per Share
|                                        |                                                                |                             |       | (Numerator)                         |   | (Denominator) |           | Amount    |         | (Numerator) |     | (Denominator) |  | Amount   
|                                        |                                                                |                             |       |                                     |   |               |           |           |         |             |     |               |  |          
|Basic EPS:                              |                                                                |                             |       |                                     |   |               |           |           |         |             |     |               |  |           |     |     |   |  |           |           |         |   |     |    
|                                       
|                                       
|                                       
|                                       
|Income available to common stockholders |                                                                | $                           | 2,865 |                                     |   |               | 6,291,180 |           |         | $           | .46 |               |  | $         | 485 |     |   |  | 6,061,811 |           |         | $ | .08 |    
|                                        |                                                                |                             |       |                                     |   |               |           |           |         |             |     |               |  |           |     |     |   |  |           |           |         |   |     |    
|Preferred stock dividends               |                                                                |                             | 201   |                                     |   |               |          |           |         |             |     |               |  |           |    |     |   |  |          |           |         |   |     |    
|                                       
|                                       
|                                       
|                                       
|Effect of Dilutive Securities:          |                                                                |                             |       |                                     |   |               |           |           |         |             |     |               |  |           |     |     |   |  |           |           |         |   |     |    
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                | Options and warrants        |       |                                     |  |               |           |           | 216,941 |             |     |               |  |           |     |     |  |  |           |           | 114,173 |   |     |     |  | 
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                | Convertible preferred stock |       |                                     |  |               |           |           | 904,377 |             |     |               |  |           |     |     |  |  |           |           |        |   |     |     |  | 
|                                        |                                                                |                             |       |                                     |   |               |           |           |         |             |     |               |  |           |     |     |   |  |           |           |         |   |     |    
|Dilutive EPS:                           |                                                                |                             |       |                                     |   |               |           |           |         |             |     |               |  |           |     |     |   |  |           |           |         |   |     |    
|                                       
|                                       
|                                       
|                                       
|                                        | Income available to common
stockholders and assumed conversion |                             | $     | 3,066                               |   |               |           | 7,412,498 |         |             | $   | .41           |  |           | $   | 485 |   |  |           | 6,175,984 |         |   | $   | .08 | 
|                                        |                                                                |                             |       |                                     |   |               |           |           |         |             |     |               |  |           |     |     |   |  |           |           |         |   |     |    

|                                        |                                                                |                             |       |                                   |   |               |           |           |         |             |     |               |  |           |       |       |   |  |           |           |         |   |     |     |  | 
|--------------------------------------- | -------------------------------------------------------------- | --------------------------- | ----- | --------------------------------- | - | ------------- | --------- | --------- | ------- | ----------- | --- | ------------- |  | --------- | ----- | ----- | - |  | --------- | --------- | ------- | - | --- | --- |  | 
|                                        |                                                                |                             |       | For the Six Months Ended June 30,
|                                        |                                                                |                             |       |                                  
|                                        |                                                                |                             |       | 2000                              |   | 2001         
|                                        |                                                                |                             |       |                                   |   |              
|                                        |                                                                |                             |       | Income                            |   | Shares        |           | Per Share |         | Income      |     | Share         |  | Per Share
|                                        |                                                                |                             |       | (Numerator)                       |   | (Denominator) |           | Amount    |         | (Numerator) |     | (Denominator) |  | Amount   
|                                        |                                                                |                             |       |                                   |   |               |           |           |         |             |     |               |  |          
|Basic EPS:                              |                                                                |                             |       |                                   |   |               |           |           |         |             |     |               |  |           |       |       |   |  |           |           |         |   |     |    
|                                       
|                                       
|                                       
|                                       
|Income available to common stockholders |                                                                | $                           | 4,153 |                                   |   |               | 6,263,949 |           |         | $           | .66 |               |  | $         | 1,025 |       |   |  | 6,084,228 |           |         | $ | .17 |    
|                                        |                                                                |                             |       |                                   |   |               |           |           |         |             |     |               |  |           |       |       |   |  |           |           |         |   |     |    
|Preferred stock dividends               |                                                                |                             | 207   |                                   |   |               |          |           |         |             |     |               |  |           |      |       |   |  |          |           |         |   |     |    
|                                       
|                                       
|                                       
|                                       
|Effect of Dilutive Securities:          |                                                                |                             |       |                                   |   |               |           |           |         |             |     |               |  |           |       |       |   |  |           |           |         |   |     |    
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                | Options and warrants        |       |                                   |  |               |           |           | 226,847 |             |     |               |  |           |       |       |  |  |           |           | 159,068 |   |     |     |  | 
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                | Convertible preferred stock |       |                                   |  |               |           |           | 465,487 |             |     |               |  |           |       |       |  |  |           |           |        |   |     |     |  | 
|                                        |                                                                |                             |       |                                   |   |               |           |           |         |             |     |               |  |           |       |       |   |  |           |           |         |   |     |    
|Dilutive EPS:                           |                                                                |                             |       |                                   |   |               |           |           |         |             |     |               |  |           |       |       |   |  |           |           |         |   |     |    
|                                       
|                                       
|                                       
|                                       
|                                        | Income available to common
stockholders and assumed conversion |                             | $     | 4,360                             |   |               |           | 6,956,283 |         |             | $   | .63           |  |           | $     | 1,025 |   |  |           | 6,243,296 |         |   | $   | .16 | 
|                                        |                                                                |                             |       |                                   |   |               |           |           |         |             |     |               |  |           |       |       |   |  |           |           |         |   |     |    

INVENTORY

Inventory consists of production-in-process which primarily represents tooling
costs which are deferred and amortized over the life of the products and
purchased finished goods held for sale to customers and purchased finished
goods in transit to customers distribution centers. Inventory is stated at
the lower of average cost or market. As of December 31, 2000 and June 30,
2001, inventory consisted of the following:

|                      |  |              |        |          |  |   |       | 
|--------------------- |  | ------------ | ------ | -------- |  | - | ----- | 
|                      |  | December 31, |        | June 30,
|                      |  | 2000         |        | 2001    
|                      |  |              |        |         
|Production-in-process |  | $            | 1,742  |          |  | $ | 2,318 | 
|                     
|                     
|                     
|                     
|Finished goods        |  |              | 10,002 |          |  |   | 6,089 | 
|                      |  |              |        |          |  |   |       | 
|                      |  | $            | 11,744 |          |  | $ | 8,407 | 
|                      |  |              |        |          |  |   |       | 

RECENT ACCOUNTING PRONOUNCEMENTS

Statements of Financial Accounting Standards (SFAS) No. 141 Business
Combinations and No. 142 Goodwill and Other Intangible Assets were approved
by the Financial Accounting Standards Board effective 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 from an amortization approach to a non-amortization (impairment)
approach, and 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 Company is
currently studying the impact of SFAS No. 141 and No. 142 on its
financial position and results of operations.

8



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##### Table of Contents



NOTE 3    SHORT-TERM DEBT

At December 31, 2000 and through April 24, 2001 the Company was party to a
revolving credit agreement with two commercial banks. The agreement, as
amended on July 27, 2000, provided for a line of credit up to $25,000 through
June 30, 2001 with borrowing availability determined by a formula based on
qualified assets. As of December 31, 2000 there were no
amounts outstanding under the agreement.

On April 24, 2001, the Company entered into a credit facility (the Facility)
with Bank of America, replacing the agreement discussed above. The new
facility is secured by substantially all of the Companys assets and provides
for borrowings up to $35,000 for three years from the date of closing.
Borrowing availability is determined by a formula based on qualified assets.
Interest on outstanding borrowings is 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 financial covenants. As of June 30, 2001 the Company
was in compliance with these requirements. The Facility may be used for
working capital and acquisition financing purposes. As of June 30, 2001 there
were no amounts outstanding under the Facility.

Letters of credit outstanding as of December 31, 2000 and June 30, 2001 totaled
$414 and $478, respectively.

NOTE 4   MANDATORY REDEEMABLE PREFERRED STOCK

On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability
company (Crown), invested $11,900 in the Company in exchange for preferred
stock and warrants to purchase additional preferred stock. Under the terms of
the investment, Crown acquired 11,900 shares of Series A mandatory redeemable
senior cumulative participating convertible preferred stock, par value $.001
per share, of the Company (the Series A Stock) with a conversion price of
$14.75 per share. In connection with such purchase, the Company granted to
Crown five year warrants (collectively, the Warrants) to purchase 5,712
shares of Series B senior cumulative participating convertible preferred stock,
par value $.001 per share, of the Company (the Series B Stock) at an exercise
price of $1,000 per share, and 1,428 shares of Series C senior cumulative
participating convertible preferred stock, par value $.001 per share, of the
Company (the Series C Stock) at an exercise price of $1,000 per share. The
Warrants are immediately exercisable. The conversion prices of the Series B
Stock and the Series C Stock are $16.00 and $18.00, respectively. On June 20,
2000, Crown paid an additional $13,100 to the Company in exchange for an
additional 13,100 shares of Series A Stock with a conversion price of $14.75
per share. In connection with such purchase, the Company granted to Crown
Warrants to purchase an additional 6,288 shares of Series B Stock and an
additional 1,572 shares of Series C Stock. Each share of Series A Stock is
convertible into 67.7966 shares of Common Stock, representing 1,694,915 shares
of Common Stock in aggregate. Each share of Series B Stock and Series C Stock
is convertible into 62.5 and 55.5556 shares of Common Stock, respectively,
representing 916,666 shares of Common Stock in aggregate. Also in connection
with such purchase, the Company agreed to pay Crown a commitment fee in the
aggregate amount of $1,250, paid in equal quarterly installments of $62.5
commencing on June 30, 2000 and ending on March 30, 2005. A payment of $62.5
was made for the quarter ended June 30, 2001.

Upon any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Company, Crown, as holder of the preferred stock, will be
entitled to payment out of the assets of the Company available for distribution
of an amount equal to the greater of (a) the liquidation preference of $1,000
per share (the Liquidation Preference) plus all accrued and unpaid dividends
or (b) the aggregate amount of payment that the outstanding preferred stock
holder would have received assuming conversion to Common Stock immediately
prior to the date of liquidation of capital stock, before any payment is made
to other stockholders.

The Series A Stock, Series B Stock and Series C Stock are subject to mandatory
redemption at 101% of the aggregate Liquidation Preference plus accrued and
unpaid dividends if a change in control of the Company occurs.

Crown has voting rights equivalent to the number of shares of Common Stock into
which their preferred stock is convertible on the relevant record date. Crown
is also entitled to receive a quarterly dividend equal to 6% of the Liquidation
Preference per share outstanding, payable in cash. The dividends for the
quarter ended June 30, 2001 totaled $375 and were paid in July 2001. These
dividends were recorded in accounts payable in the accompanying consolidated
balance sheets.

Crown currently holds 100% of the outstanding shares of Series A Stock, and
consequently, has designated two individuals to the Board of Directors of the
Company.

9



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##### Table of Contents



The Series A Stock is recorded in the accompanying condensed consolidated
balance sheets at its Liquidation Preference net of issuance costs. The
issuance costs totaled approximately $1,951 and included an accrual of
approximately $1,000 for the present value of the commitment fee discussed
above.

NOTE 5    STOCK REPURCHASE

The Companys Board of Directors has authorized up to $10,000 for the
repurchase of the Companys common stock over a twelve month period. The
repurchase program commenced on July 21, 2000 and expired July 21, 2001. As of
June 30, 2001, the Company has purchased an aggregate of 530,894 shares at an
average price of $12.11 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. Purchases
will be 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 will be
funded through a combination of working capital and bank debt.

NOTE 6    LEGAL PROCEEDINGS

AmeriServe Food Distribution, Inc. (AmeriServe) filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code on January 31, 2000 (see
Note 8  AmeriServe Bankruptcy). On or about November 30, 2000, substantially
all of AmeriServes business assets were sold. On or about December 1, 2000,
AmeriServes Confirmed Plan of Reorganization (the Plan) became effective.
The Plan provided for the creation of the AFD Fund to, among other things,
recover transfers made to non-insider creditors during the ninety day period
prior to the January 31, 2000 bankruptcy filing. In April 2001, the Company
received a letter from the AFD Fund seeking a negotiated resolution to claims
for alleged preferential payments made during the ninety days prior to the
bankruptcy petition. In the letter, the AFD Fund calculates the Companys
exposure after application of one of several possible defenses as $6,601,
recognizes that at least one other defense may apply, and requests a proposal
from the Company to settle the preference claim. In June 2001, the Company
settled the preference claim with the AFD Fund. The settlement was not
material to the Companys financial position or results of operations.

General Litigation

The Company is involved in various other legal proceedings generally incidental
to its business. While the result of any litigation contains an element of
uncertainty, management presently believes that the outcome of any other known,
pending or threatened legal proceeding or claim, individually or combined, will
not have a material adverse effect on the Companys financial position or
results of operations.

NOTE 7    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 and produces promotional products used as
free premiums or sold in conjunction with the purchase of other items at a
retailer or quick service restaurant. 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 inventory, receivables, goodwill and other
intangibles. Corporate assets consist of cash, certain corporate receivables,
fixed assets, and certain trademarks.

10



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##### Table of Contents



Industry Segments

|                                                          |  |                                                    |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|--------------------------------------------------------- |  | -------------------------------------------------- | ------ | -------- |  | --------- | ------ | ----- |  | - | ------ | - |  | - | ------ | 
|                                                          |  | As of and For the Three Months Ended June 30, 2000
|                                                          |  |                                                   
|                                                          |  |                                                    |        |          |  | Consumer  |        |       |  |   |        |   |  |  
|                                                          |  | Promotions                                         |        | Products |  | Corporate |        | Total
|                                                          |  |                                                    |        |          |  |           |        |      
|Total revenues                                            |  | $                                                  | 50,628 |          |  | $         | 4,686  |       |  | $ |       |   |  | $ | 55,314 | 
|                                                          |  |                                                    |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|Income (loss) before provision (benefit)
for income taxes |  | $                                                  | 8,673  |          |  | $         | 510    |       |  | $ | (4,074 | ) |  | $ | 5,109  | 
|                                                         
|                                                         
|                                                         
|                                                         
|Provision (benefit) for income taxes                      |  |                                                    | 3,469  |          |  |           | 204    |       |  |   | (1,630 | ) |  |   | 2,043  | 
|                                                          |  |                                                    |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|Net income (loss)                                         |  | $                                                  | 5,204  |          |  | $         | 306    |       |  | $ | (2,444 | ) |  | $ | 3,066  | 
|                                                          |  |                                                    |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|Fixed asset additions, net                                |  | $                                                  |       |          |  | $         |       |       |  | $ | 207    |   |  | $ | 207    | 
|                                                          |  |                                                    |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|Depreciation and amortization                             |  | $                                                  | 183    |          |  | $         | 119    |       |  | $ | 355    |   |  | $ | 657    | 
|                                                          |  |                                                    |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|Total assets                                              |  | $                                                  | 55,640 |          |  | $         | 14,678 |       |  | $ | 26,420 |   |  | $ | 96,738 | 
|                                                          |  |                                                    |        |          |  |           |        |       |  |   |        |   |  |   |        | 

|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|--------------------------------------------------------- |  | -------------------------------------------------- | ------ | -------- |  | --------- | ----- | ----- |  | - | ------ | - |  | - | ------ | 
|                                                          |  | 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, net                                |  | $                                                  |       |          |  | $         |      |       |  | $ | 335    |   |  | $ | 335    | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Depreciation and amortization                             |  | $                                                  | 185    |          |  | $         |      |       |  | $ | 364    |   |  | $ | 549    | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Total assets                                              |  | $                                                  | 38,941 |          |  | $         | 4,577 |       |  | $ | 52,267 |   |  | $ | 95,785 | 
|                                                          |  |                                                    |        |          |  |           |       |       |  |   |        |   |  |   |        | 

|                                                          |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|--------------------------------------------------------- |  | ------------------------------------------------ | ------ | -------- |  | --------- | ------ | ----- |  | - | ------ | - |  | - | ------ | 
|                                                          |  | As of and For the Six Months Ended June 30, 2000
|                                                          |  |                                                 
|                                                          |  |                                                  |        |          |  | Consumer  |        |       |  |   |        |   |  |  
|                                                          |  | Promotions                                       |        | Products |  | Corporate |        | Total
|                                                          |  |                                                  |        |          |  |           |        |      
|Total revenues                                            |  | $                                                | 90,830 |          |  | $         | 7,961  |       |  | $ |       |   |  | $ | 98,791 | 
|                                                          |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|Income (loss) before provision (benefit)
for income taxes |  | $                                                | 14,336 |          |  | $         | 767    |       |  | $ | (7,855 | ) |  | $ | 7,248  | 
|                                                         
|                                                         
|                                                         
|                                                         
|Provision (benefit) for income taxes                      |  |                                                  | 5,713  |          |  |           | 305    |       |  |   | (3,130 | ) |  |   | 2,888  | 
|                                                          |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|Net income (loss)                                         |  | $                                                | 8,623  |          |  | $         | 462    |       |  | $ | (4,725 | ) |  | $ | 4,360  | 
|                                                          |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|Fixed asset additions, net                                |  | $                                                |       |          |  | $         |       |       |  | $ | 344    |   |  | $ | 344    | 
|                                                          |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|Depreciation and amortization                             |  | $                                                | 365    |          |  | $         | 237    |       |  | $ | 714    |   |  | $ | 1,316  | 
|                                                          |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |        | 
|Total assets                                              |  | $                                                | 55,640 |          |  | $         | 14,678 |       |  | $ | 26,420 |   |  | $ | 96,738 | 
|                                                          |  |                                                  |        |          |  |           |        |       |  |   |        |   |  |   |        | 

|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|--------------------------------------------------------- |  | ------------------------------------------------ | ------ | -------- |  | --------- | ----- | ----- |  | - | ------ | - |  | - | ------ | 
|                                                          |  | 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, net                                |  | $                                                |       |          |  | $         |      |       |  | $ | 583    |   |  | $ | 583    | 
|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Depreciation and amortization                             |  | $                                                | 367    |          |  | $         |      |       |  | $ | 735    |   |  | $ | 1,102  | 
|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 
|Total assets                                              |  | $                                                | 38,941 |          |  | $         | 4,577 |       |  | $ | 52,267 |   |  | $ | 95,785 | 
|                                                          |  |                                                  |        |          |  |           |       |       |  |   |        |   |  |   |        | 

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NOTE 8  AMERISERVE BANKRUPTCY

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. AmeriServe was able to secure temporary debtor in
possession funding to enable it to continue operating in the short-term post
bankruptcy.

Restaurant Services, Inc. (RSI), a not-for-profit purchasing cooperative that
has as its members Burger King franchisees and Burger King, 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 six months ended June 30,
2000. This charge was offset by $607 of imputed interest income, at 9% per
annum, recorded on the note receivable for the same period in 2000. The
balance of the note receivable as of June 30, 2001 was $4,254, which was
recorded as a current asset as the note is due by December 2001. For the
quarter ended June 30, 2000 and 2001, the Company recorded $303 and $127,
respectively, of imputed interest income on the note receivable.

As of July 2000, the Burger King system completed a transition to alternative
distributors. Following such transition, the largest distribution company
accounted for approximately 18.4% and 23.0% of the products purchased from the Company by
the Burger King system as of December 31, 2000 and June 30,
2001, respectively.

NOTE 9    SUBSEQUENT EVENT

On July 31, 2001, the Company acquired 100% of
the ordinary shares of Logistix
Limited, a United Kingdom corporation (Logistix), in exchange for 8,500
British pounds (approximately $12,100 as of July 31, 2001) in cash plus
potential additional cash consideration based upon the results of operations of
Logistix during each year through July 31, 2004. 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 certain licenses for Robot Wars® and
Rugrats entertainment properties, among others. The acquisition will be
accounted for as a purchase and was financed through the Companys existing
cash reserves.

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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
2001 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                                                  
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | 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 the popularity of licensed entertainment properties, which may adversely affect the Companys financial
condition and results of operations                             
| 
| |  | Dependence on the ability to license, develop and market new products, 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 foreign manufacturers, which may increase the costs of the Companys products and affect the demand for
such products                                                   
| 
| |  | Concentration risk associated
with accounts receivable. The Company regularly extends credit to
several distribution companies in connection with its business with
Burger King.      

Financing Risks



| |  | Currency fluctuations, which may affect the Companys suppliers and the Companys reportable income                                      
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Need for additional working capital to fund the Companys business, which may not be available at all or on favorable
terms when required

Other Risks



| |  | Potential negative impact of past or future acquisitions, which may disrupt the Companys ongoing business, distract
senior management and increase expenses                                                                                                                                          
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | 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                                                                                               
| 
| |  | 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

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, 2000, under the
heading Managements Discussion and Analysis of Financial Condition and
Results of Operations  Cautionary Statements and Risk Factors.

ORGANIZATION AND BUSINESS

Equity Marketing, Inc., a Delaware corporation and subsidiaries (the
Company), is a leading marketing services company, providing a wide range of
custom promotional programs that build sales and brand awareness for retailers,
restaurant chains and consumer goods companies such as Burger King Corporation,
The Coca-Cola Company, CVS/pharmacy and others. The Company is also a
developer and marketer of distinctive, branded consumer products that
complement its core promotions business and are based on trademarks it owns or
classic licensed properties. The Company primarily sells to customers in the
United States. The Companys functional currency is United States dollars.

13



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##### Table of Contents



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.

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,
|                           |                                        |                                          |              |     |                |      |               
|                           |                                        |                                          |              |     | 2000           |      | 2001           |      | 2000 |      | 2001 
|                           |                                        |                                          |              |     |                |      |                |      |      |      |      
|Revenues                   |                                        |                                          | 100.0        | %   |                |      | 100.0          | %    |      |      | 100.0 | %   |      |      | 100.0 | %   
|                          
|                          
|                          
|                          
|Cost of sales              |                                        |                                          | 75.0         |     |                |      | 71.7           |      |      |      | 75.6  |     |      |      | 71.2  |     
|                           |                                        |                                          |              |     |                |      |                |      |      |      |       |     |      |      |       |     
|                           |                                        |                                          | Gross profit |     |                | 25.0 |                |      |      | 28.3 |       |     |      | 24.4 |       |      |      | 28.8 |  
|                           |                                        |                                          |              |     |                |      |                |      |      |      |       |     |      |      |       |     
|Operating Expenses:        |                                        |                                          |              |     |                |      |                |      |      |      |       |     |      |      |       |     
|                          
|                          
|                          
|                          
|                           | Salaries, wages and benefits           |                                          |              | 6.8 |                |      |                | 12.6 |      |      |       | 7.2 |      |      |       | 12.9 |     
|                          
|                          
|                          
|                          
|                           | Selling, general and administrative    |                                          |              | 9.5 |                |      |                | 12.6 |      |      |       | 9.7 |      |      |       | 12.9 |     
|                          
|                          
|                          
|                          
|                           | AmeriServe bankruptcy bad debt expense |                                          |              |    |                |      |                |     |      |      |       | 0.5 |      |      |       |     |     
|                           |                                        |                                          |              |     |                |      |                |      |      |      |       |     |      |      |       |     
|                           |                                        | Total operating expenses                 |              |     | 16.3           |      |                |      | 25.2 |      |       |     | 17.4 |      |       |      | 25.8 |     
|                           |                                        |                                          |              |     |                |      |                |      |      |      |       |     |      |      |       |     
|                           |                                        | Income from operations                   |              |     | 8.7            |      |                |      | 3.1  |      |       |     | 7.0  |      |       |      | 3.0  |     
|                          
|                          
|                          
|                          
|Interest income, net       |                                        |                                          | 0.5          |     |                |      | 1.5            |      |      |      | 0.3   |     |      |      | 2.1   |     
|                           |                                        |                                          |              |     |                |      |                |      |      |      |       |     |      |      |       |     
|                           |                                        | Income before provision for income taxes |              |     | 9.2            |      |                |      | 4.6  |      |       |     | 7.3  |      |       |      | 5.1  |     
|                          
|                          
|                          
|                          
|Provision for income taxes |                                        |                                          | 3.7          |     |                |      | 1.6            |      |      |      | 2.9   |     |      |      | 1.9   |     
|                           |                                        |                                          |              |     |                |      |                |      |      |      |       |     |      |      |       |     
|                           |                                        |                                          | Net income   |     |                | 5.5  | %              |      |      | 3.0  | %     |     |      | 4.4  | %     |      |      | 3.2  | %
|                           |                                        |                                          |              |     |                |      |                |      |      |      |       |     |      |      |       |     

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EBITDA

While many in the financial community consider earnings before interest, 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 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 following
table sets forth EBITDA for the periods indicated:

|                                     |                            |   |                                 |       |                               |   |       |      |      |   |       |       |   |   |       |        |  
|------------------------------------ | -------------------------- | - | ------------------------------- | ----- | ----------------------------- | - | ----- | ---- | ---- | - | ----- | ----- | - | - | ----- | ------ | -
|                                     |                            |   | For Three Months Ended June 30, |       | For Six Months Ended June 30,
|                                     |                            |   |                                 |       |                              
|                                     |                            |   | 2000                            |       | 2001                          |   | 2000  |      | 2001
|                                     |                            |   |                                 |       |                               |   |       |      |     
|Net income                           |                            | $ | 3,066                           |       |                               | $ | 860   |      |      | $ | 4,360 |       |   | $ | 1,775 |       
|                                    
|                                    
|                                    
|                                    
|Add:   Depreciation and amortization |                            |   | 657                             |       |                               |   | 549   |      |      |   | 1,316 |       |   |   | 1,102 |       
|                                    
|                                    
|                                    
|                                    
|                                     | Interest
income, net       |   |                                 | (270  | )                             |   |       | (415 | )    |   |       | (355  | ) |   |       | (1,194 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Provision for income taxes |   |                                 | 2,043 |                               |   |       | 450  |      |   |       | 2,888 |   |   |       | 1,060  |  
|                                     |                            |   |                                 |       |                               |   |       |      |      |   |       |       |   |   |       |       
|EBITDA                               |                            | $ | 5,496                           |       |                               | $ | 1,444 |      |      | $ | 8,209 |       |   | $ | 2,743 |       
|                                     |                            |   |                                 |       |                               |   |       |      |      |   |       |       |   |   |       |       

THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
(000s omitted):

Revenues for the three months ended June 30, 2001 decreased $27,077, or 49.0%,
to $28,237 from $55,314 in the comparable period in 2000. Promotions revenues
decreased $26,186, or 51.7%, to $24,442 primarily as a result of decreased
revenues associated with Burger King programs in 2001 compared to the same
period in 2000. This decrease was partially offset by growth in
the non-Burger King promotions business, which grew 35.1%. Consumer Product
revenues decreased $891, or 19.0%, to $3,795 primarily due to decreased sales
of Scooby-Dooand the discontinued Headliners®
product line, partially offset by increased sales of
Tub Tints® product.

Although the Company believes that its share of Burger Kings custom
promotional products business in 2001 will remain consistent with 2000 levels,
based on program awards received to date, the Company anticipates that the
dollar volume of custom promotional product purchases by Burger King from the
Company will decline in 2001 by approximately 40% to 50%. The Company believes
that sales to Burger King reached their low point for 2001 in the second
quarter. Based on its understanding of the factors contributing to the
decline, management believes that the dollar volume of purchases
by Burger King of custom promotional product in 2002 will return to levels
consistent with periods prior to 2001 and that its relationship with Burger
King and its purchasing cooperative, RSI, remains strong. Management further
believes that the decline in 2001 Burger King revenue will be partially offset
by new business development efforts and strategic growth initiatives. The
statements set forth herein are forward looking and actual results could differ
materially.

Cost of sales decreased $21,253 to $20,234 (71.7% of revenues) for the three
months ended June 30, 2001 from $41,487 (75.0% of revenues) in the comparable
period in 2000 due to the lower sales volume in 2001. The gross margin
percentage increased to 28.3% for the three months ended June 30, 2001 from
25.0% in the comparable period for 2000. This increase is primarily the result
of lower than expected returns and lower than expected freight and duty costs
for promotional programs which were closed in prior quarters. This increase was
also due to a shift in the Companys revenue mix, resulting from a higher
relative mix in 2001 of Consumer Product revenues and international promotion
revenues, which tend to carry higher gross margins.

Salaries, wages and benefits decreased $199, or 5.3%, to $3,547, (12.6% of
revenues) for the three months ended June 30, 2001 from $3,746 in the
comparable period for 2000. This decrease was primarily attributable to a
reduction in recruiting expenses and was partially offset by increased salaries
due to staffing additions resulting from the Companys current growth
initiatives.

Selling, general and administrative expenses decreased $1,681, or 32.1%, to
$3,561 (12.6% of revenues) for the three months ended June 30, 2001 from $5,242
in the comparable period for 2000. This decrease is due primarily to a decline
in warehousing and freight out as a result of the lower sales volume. This
decrease is also attributable to a decline in travel & entertainment expenses
and outside services costs, partially offset by an increase in insurance
expense. The decrease was also attributable to a reduction in amortization
expense resulting from the write-off of the goodwill and trademark in December
2000 associated with the acquisition of Corinthian Marketing, Inc. in April
1998. Selling, general and administrative expenses increased as a percentage
of revenues from 9.5% to 12.6% as a result of revenues, which decreased at a
greater rate.

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Net interest income increased $145, or 53.7%, to $415 (1.5% of revenues) for
the three months ended June 30, 2001 from $270 in the comparable period for
2000. This increase was attributable to interest income generated by the
significantly increased level of cash and cash equivalents. This increase was
partially offset by a reduction in imputed interest income on a note receivable
(see AmeriServe Bankruptcy).

The effective tax rate for the three months ended June 30, 2001 was 34.4%
compared to 40.0% for the same period in 2000. The reduction in the effective
tax rate is the result of non-taxable interest income generated in 2001 from
municipal securities.

Net income decreased $2,206, or 72.0%, to $860 (3.0% of revenues) from $3,066
(5.5% of revenues) in 2000 primarily due to lower gross margin earned on
decreased revenues partially offset by a decrease in salaries, wages and
benefits, selling, general and administrative expenses, as well as increased
net interest income, and a lower effective tax rate in 2001.

For the three months ended June 30, 2001, EBITDA decreased $4,052, or 73.7%, to
$1,444 from $5,496 in 2000 primarily due to lower gross margins earned on
decreased revenues partially offset by the decrease in salaries, wages and
benefits and selling, general and administrative expenses in 2001.

SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
(000s omitted):

Revenues for the six months ended June 30, 2001 decreased $42,527, or 43.0%, to
$56,264 from $98,791 in the comparable period in 2000. Promotions revenues
decreased $43,239 to $47,591 primarily as a result of decreased revenues
associated with Burger King programs in 2001 compared to the same period in
2000. Consumer Product revenues increased $712, or 8.9%, to $8,673
primarily due to increased sales of Tub Tints® product,
partially offset by reduced sales of Scooby-Dooand the
discontinued Headliners® product line.

Although the Company believes that its share of Burger Kings custom
promotional products business in 2001 will remain consistent with 2000 levels,
based on program awards received to date, the Company anticipates that the
dollar volume of custom promotional product purchases by Burger King from the
Company will decline in 2001 by approximately 40% to 50%. The Company believes
that sales to Burger King reached their low point for 2001 in the second
quarter. Based on its understanding of the factors contributing to the
decline, management believes that the dollar volume of purchases
by Burger King of custom promotional product in 2002 will return to levels
consistent with periods prior to 2001 and that its relationship with Burger
King and its purchasing cooperative, RSI, remains strong. Management further
believes that the decline in 2001 Burger King revenue will be partially offset
by new business development efforts and strategic growth initiatives. The
statements set forth herein are forward looking and actual results could differ
materially.

Cost of sales decreased $34,619 to $40,071 (71.2% of revenues) for the six
months ended June 30, 2001 from $74,690 (75.6% of revenues) in the comparable
period in 2000 due to the lower sales volume in 2001. The gross margin
percentage increased to 28.8% for the six months ended June 30, 2001 from 24.4%
in the comparable period for 2000. This increase is partially the result of
lower than expected returns and lower than expected freight and duty costs in
the second quarter of 2001 for promotional programs which were closed in prior
quarters. This increase was also due to a shift in the Companys revenue mix,
resulting from a higher relative mix in 2001 of Consumer Product revenues and
international promotion revenues, which tend to carry higher gross margins.

Salaries, wages and benefits increased $129, or 1.8%, to $7,276, (12.9% of
revenues) for the six months ended June 30, 2001 from $7,147 in the comparable
period in 2000. This increase was primarily attributable to staffing additions
resulting from the Companys current growth initiatives, partially offset by a
reduction in recruiting expenses.

Selling, general and administrative expenses decreased $2,303, or 24.0%, to
$7,276 (12.9% of revenues) for the six months ended June 30, 2001 from $9,579
in the comparable period in 2000. This decrease is due primarily to decreased
freight out and warehousing costs resulting from the decrease in sales volume.
This decrease is also attributable to a decline in travel and entertainment
expenses and outside services costs, partially offset by an increase in
advertising expense and insurance expense. The decrease was also attributable
to a reduction in amortization expense resulting from the write-off of the
goodwill and trademark in December 2000 associated with the acquisition of
Corinthian Marketing, Inc. in April 1998. Selling, general and administrative
expenses increased as a percentage of revenues from 9.7% to 12.9% as a result
of revenues which decreased at a greater rate.

The AmeriServe bad debt expense recorded in the six months ended June 30, 2000
represents a charge resulting from the bankruptcy of AmeriServe. (see
AmeriServe Bankruptcy)

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Net interest income increased $839, or 236.3%, to $1,194 (2.1% of revenues) for
the six months ended June 30, 2001 from $355 in the comparable period for 2000.
This increase was attributable to interest income generated by the
significantly increased level of cash and cash equivalents. This increase was
partially offset by a reduction in imputed interest income on a note receivable
(see AmeriServe Bankruptcy).

The effective tax rate for the six months ended June 30, 2001 was 37.4% compared
to 39.8% for the same period in 2000. The reduction in the effective tax rate
is the result of non-taxable interest income generated in 2001 from municipal
securities.

Net income decreased $2,585, or 59.3%, to $1,775 (3.2% of revenues) from $4,360
(4.4% of revenues) in 2000 primarily due to lower gross margin earned on
decreased revenues and to the increase in salaries, wages and benefits
partially offset by a decrease in selling, general and administrative expenses,
as well as increased net interest income, and a lower effective tax rate in
2001.

For the six months ended June 30, 2001, EBITDA decreased $5,466, or 66.6 %, to
$2,743 from $8,209 in 2000 primarily due to lower gross margins earned on
decreased revenues and to the increase in salaries, wages and benefits
partially offset by the decrease in selling, general and administrative
expenses in 2001.

FINANCIAL CONDITION AND LIQUIDITY

The Companys financial position remained strong in the second quarter of 2001.
At June 30, 2001, the Company had no debt and its cash and cash equivalents
and marketable securities were $40,304, compared to $37,505 as of December 31,
2000.

As of June 30, 2001, the Companys net accounts receivable decreased $11,898 to
$18,239 from $30,137 at December 31, 2000. This decrease is a result of the
lower level of sales volume in the second quarter compared to the fourth
quarter of 2000. As of June 30, 2001, inventory decreased $3,337 to $8,407
from $11,744 from December 31, 2000. The decrease in inventory is primarily a
result of the decrease in Burger King order volumes discussed above.

As of June 30, 2001, accounts payable decreased $3,195 to $15,226 from $18,421
at December 31, 2000. This decrease is associated with the reduction in
inventory levels along with the paydown of liabilities related to large fourth
quarter 2000 promotional programs.

As of June 30, 2001, accrued liabilities decreased $11,105 to $10,870 from
$21,975 at December 31, 2000. This decrease is primarily attributable to the payment of federal and state
income taxes related to 2000 net income, the
payment of employee bonuses related to 2000, and payment of royalty and
administrative fees collected from distribution companies related to the fourth
quarter of 2000 on behalf of promotional customers.

As of June 30, 2001, working capital was $51,036 compared to $52,140 at
December 31, 2000. The decrease in working capital was primarily as a result
of cash used to repurchase shares of the Companys common stock (see Stock
Repurchase), partially offset by cash generated by operating activities in
2001. The Company believes that its cash from operations, cash on hand at June
30, 2001 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

At December 31, 2000 and through April 24, 2001 the Company was party to a
revolving credit agreement with two commercial banks. The agreement, as
amended on July 27, 2000, provided for a line of credit up to $25,000 through
June 30, 2001 with borrowing availability determined by a formula based on
qualified assets. As of December 31, 2000 there were no
amounts outstanding under the agreement.

On April 24, 2001, the Company entered into a credit facility (the Facility)
with Bank of America, replacing the agreement discussed above. The new
facility is secured by substantially all of the Companys assets and provides
for borrowings up to $35,000 for three years from the date of closing.
Borrowing availability is determined by a formula based on qualified assets.
Interest on outstanding borrowings is 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 financial covenants. As of June 30, 2001 the Company
was in compliance with these requirements. The Facility may be used for
working capital and acquisition financing purposes. As of June 30, 2001 there
were no amounts outstanding under the Facility.

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ISSUANCE OF PREFERRED STOCK

On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability
company (Crown), invested $11,900 in the Company in exchange for preferred
stock and warrants to purchase additional preferred stock. Under the terms of
the investment, Crown acquired 11,900 shares of Series A mandatory redeemable
senior cumulative participating convertible preferred stock, par value $.001
per share, of the Company (the Series A Stock) with a conversion price of
$14.75 per share. In connection with such purchase, the Company granted to
Crown five year warrants (collectively, the Warrants) to purchase 5,712
shares of Series B senior cumulative participating convertible preferred stock,
par value $.001 per share, of the Company (the Series B Stock) at an exercise
price of $1,000 per share, and 1,428 shares of Series C senior cumulative
participating convertible preferred stock, par value $.001 per share, of the
Company (the Series C Stock) at an exercise price of $1,000 per share. The
Warrants are immediately exercisable. The conversion prices of the Series B
Stock and the Series C Stock are $16.00 and $18.00, respectively. On June 20,
2000, Crown paid an additional $13,100 to the Company in exchange for an
additional 13,100 shares of Series A Stock with a conversion price of $14.75
per share. In connection with such purchase, the Company granted to Crown
Warrants to purchase an additional 6,288 shares of Series B Stock and an
additional 1,572 shares of Series C Stock. Each share of Series A Stock is
convertible into 67.7966 shares of Common Stock, representing 1,694,915 shares
of Common Stock in aggregate. Each share of Series B Stock and Series C Stock
is convertible into 62.5 and 55.5556 shares of Common Stock, respectively,
representing 916,666 shares of Common Stock in aggregate. Also in connection
with such purchase, the Company agreed to pay Crown a commitment fee in the
aggregate amount of $1,250, paid in equal quarterly installments of $62.5
commencing on June 30, 2000 and ending on March 30, 2005. A payment of $62.5
was made for the quarter ended June 30, 2001.

Upon any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Company, Crown, as holder of the preferred stock, will be
entitled to payment out of the assets of the Company available for distribution
of an amount equal to the greater of (a) the liquidation preference of $1,000
per share (the Liquidation Preference) plus all accrued and unpaid dividends
or (b) the aggregate amount of payment that the outstanding preferred stock
holder would have received assuming conversion to Common Stock immediately
prior to the date of liquidation of capital stock, before any payment is made
to other stockholders.

The Series A Stock, Series B Stock and Series C Stock are subject to mandatory
redemption at 101% of the aggregate Liquidation Preference plus accrued and
unpaid dividends if a change in control of the Company occurs.

Crown has voting rights equivalent to the number of shares of Common Stock into
which their preferred stock is convertible on the relevant record date. Crown
is also entitled to receive a quarterly dividend equal to 6% of the Liquidation
Preference per share outstanding, payable in cash. The dividends for the
quarter ended June 30, 2001 totaled $375 and were paid in July 2001. These
dividends were recorded in accounts payable in the accompanying consolidated
balance sheets.

Crown currently holds 100% of the outstanding shares of Series A Stock, and
consequently, has designated two individuals to the Board of Directors of the
Company.

The Series A Stock is recorded in the accompanying condensed consolidated
balance sheets at its Liquidation Preference net of issuance costs. The
issuance costs totaled approximately $1,951 and included an accrual of
approximately $1,000 for the present value of the commitment fee discussed
above.

STOCK REPURCHASE

The Companys Board of Directors has authorized up to $10,000 for the
repurchase of the Companys common stock over a twelve month period. The
repurchase program commenced on July 21, 2000 and expired July 21, 2001. As of
June 30, 2001, the Company has purchased an aggregate of 530,894 shares at an
average price of $12.11 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. Purchases
will be 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 will be
funded through a combination of working capital and bank debt.

AMERISERVE BANKRUPTCY

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. AmeriServe was able to secure temporary debtor in
possession funding to enable it to continue operating in the short-term post
bankruptcy.

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Restaurant Services, Inc. (RSI), a not-for-profit purchasing cooperative that
has as its members Burger King franchisees and Burger King, 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 six months ended June 30,
2000. This charge was offset by $607 of imputed interest income, at 9% per
annum, recorded on the note receivable for the same period in 2000. The
balance of the note receivable as of June 30, 2001 was $4,254, which was
recorded as a current asset as the note is due by December 2001. For the
quarter ended June 30, 2000 and 2001, the Company recorded $303 and $127,
respectively, of imputed interest income on the note receivable.

As of July 2000, the Burger King system completed a transition to alternative
distributors. Following such transition, the largest distribution company
accounted for approximately 18.4% and 23.0% of the products purchased from the Company by
the Burger King system as of December 31, 2000 and June 30,
2001, respectively.

SUBSEQUENT EVENT

On July 31, 2001, the Company acquired 100% of the
ordinary shares of Logistix Limited, a United Kingdom corporation
("Logistix"), in exchange for 8,500 British pounds (approximately
$12,100 as of July 31, 2001) in cash plus potential additional cash
consideration based upon the results of operations of Logistix during
each year through July 31, 2004. 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 certain licenses for Robot Wars® and
Rugrats entertainment properties, among others. The acquisition
will be accounted for as a purchase and was financed through the
Company's existing cash reserves.

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PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

AmeriServe Food Distribution, Inc. (AmeriServe) filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code on January 31, 2000 (see
AmeriServe Bankruptcy). On or about November 30, 2000, substantially all of
AmeriServes business assets were sold. On or about December 1, 2000,
AmeriServes Confirmed Plan of Reorganization (the Plan) became effective.
The Plan provided for the creation of the AFD Fund to, among other things,
recover transfers made to non-insider creditors during the ninety day period
prior to the January 31, 2000 bankruptcy filing. In April 2001, the Company
received a letter from the AFD Fund seeking a negotiated resolution to claims
for alleged preferential payments made during the ninety days prior to the
bankruptcy petition. In the letter, the AFD Fund calculates the Companys
exposure after application of one of several possible defenses as $6,601,
recognizes that at least one other defense may apply, and requests a proposal
from the Company to settle the preference claim. In June 2001, the Company
settled the preference claim with the AFD Fund. The settlement was not
material to the Companys financial position or results of operations.

General Litigation

The Company is involved in various other legal proceedings generally incidental
to its business. While the result of any litigation contains an element of
uncertainty, management presently believes that the outcome of any other known,
pending or threatened legal proceeding or claim, individually or combined, will
not have a material adverse effect on the Companys financial position or
results of operations.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

10.0    Amendment to Equity Marketing, Inc. 2000 Stock Option Plan

(b)  Reports on Form 8-K:

Report on Form 8-K filed with the Securities and Exchange Commission on
April 27, 2001 (Item 5).

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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, 2001

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



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EXHIBIT INDEX

|        |  |                                                           
|------- |  | ----------------------------------------------------------
|EXHIBIT |  |                                                           
|        |  |                                                           
|10.0    |  | Amendment to Equity Marketing, Inc. 2000 Stock Option Plan



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